As filed with the Securities and Exchange Commission on June 5, 1998
Securities Act File No. 333-23017
Investment Company Act File No. 811-08085
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under The Securities Act of 1933
Post-Effective Amendment No. 3
and
Registration Statement Under The Investment Company Act of 1940
Amendment No. 6
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
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
_____ on _______ pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
[X] 75 days after filing pursuant to paragraph (a)(2).
_____ on _______ pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Shares of the Various Classes of American Skandia Advisor Funds, Inc.
(Title of Securities Being Registered)
This Registration Statement has also been executed by
American Skandia Master Trust.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Post-Effective Amendment No. 3 to Registration Statement on Form N-1A
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Form N-1A Item Number: Part A Prospectus Caption:
<S> <C> <C> <C>
1. Cover Page
2. Expense Information
3. (a) Financial Highlights
(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)(b)(c) Portfolio Transactions
(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
August , 1998
---------------------------------
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND
ASAF JANUS OVERSEAS GROWTH FUND
ASAF FOUNDERS SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND
ASAF NEUBERGER&BERMAN MID-CAP GROWTH FUND
ASAF NEUBERGER&BERMAN MID-CAP VALUE FUND
ASAF ROBERTSON STEPHENS VALUE + GROWTH FUND
ASAF MARSICO CAPITAL GROWTH FUND
ASAF JANUS CAPITAL GROWTH FUND
ASAF LORD ABBETT GROWTH AND INCOME FUND
ASAF INVESCO EQUITY INCOME FUND
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND
ASAF FEDERATED HIGH YIELD BOND FUND
ASAF TOTAL RETURN BOND FUND
ASAF JPM MONEY MARKET FUND
------------------------------------------------------------------------
This Prospectus explains the basic information you should know before investing
in the above funds. Five of the funds seek their respective investment
objectives by investing all of their investable assets in a corresponding
portfolio of American Skandia Master Trust which has an investment objective
identical to that of the investing fund. The investment experience of each of
these funds directly corresponds with the investment experience of its
corresponding portfolio. Please read this Prospectus carefully and keep it for
future reference. Additional information about the funds has been filed with the
Securities and Exchange Commission (the "Commission") in a Statement of
Additional Information ("SAI"), dated August , 1998, which is incorporated by
reference into this Prospectus. To obtain a copy of the SAI without charge, call
1-800-SKANDIA or write to "American Skandia Advisor Funds, Inc." at P.O. Box
8012, Boston, Massachusetts 02266-8012. The Commission maintains a Web site
(http:/ /www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding American Skandia Advisor Funds, Inc. and
American Skandia Master Trust.
An investment in the ASAF JPM Money Market Fund is neither insured nor
guaranteed by the U.S. Government. While the ASAF JPM Money Market Fund seeks to
maintain a stable net asset value of $1.00 per share, there can be no assurance
that the fund will be able to achieve this goal.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank or other depository institution. Shares are not insured by the FDIC, the
Federal Reserve Board, or any other agency, and are subject to investment risk,
including the possible loss of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company comprised of sixteen diversified investment
portfolios (each a "Fund" and together the "Funds"). Five of the Funds -- ASAF
T. Rowe Price International Equity Fund, ASAF Janus Capital Growth Fund, ASAF
INVESCO Equity Income Fund, ASAF Total Return Bond Fund and ASAF JPM Money
Market Fund (each a "Feeder Fund" and together the "Feeder Funds") -- invest all
of their investable assets in a corresponding portfolio (each a "Portfolio" and
together the "Portfolios") of American Skandia Master Trust (the "Trust"), an
open-end management investment company comprised of five diversified investment
portfolios. Each Portfolio invests in securities in accordance with an
investment objective, investment policies and limitations identical to those of
its corresponding Feeder Fund. This "master/feeder" fund structure differs from
that of the other Funds of the Company and many other investment companies which
directly invest and manage their own portfolio of securities. Those Funds of the
Company which currently are not organized under a "master/feeder" fund structure
(the "Non-Feeder Funds") retain the right to invest all of their investable
assets in a corresponding Portfolio of the Trust in the future. For additional
information regarding the "master/feeder" fund structure, see this Prospectus
under "Special Information on the 'Master/Feeder' Fund Structure."
American Skandia Investment Services, Incorporated ("ASISI" or the
"Investment Manager") acts as the investment manager for both the Non-Feeder
Funds and the Portfolios. Currently, ASISI engages a sub-advisor ("Sub-advisor")
for the investment management of each Non-Feeder Fund and Portfolio. The
following table highlights certain features of each Fund (and corresponding
Portfolio, where applicable):
<TABLE>
<CAPTION>
Fund/Portfolio: Sub-Advisor: Investment Goal: Investment Style:
<S> <C> <C> <C>
Int'l Small Founders Asset Capital growth Invests primarily in securities of foreign
Capitalization Management LLC 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.
Overseas Growth Janus Capital Capital growth Invests primarily in common stocks of companies
Corporation located outside the United States.
Small Capitalization Founders Asset Capital growth Invests primarily in common stocks of U.S.
Management LLC companies with market capitalizations or
annual revenues of $1.5 billion or less.
Small Company Value T. Rowe Price Long-term capital growth Invests primarily in common stocks of U.S.
Associates, Inc. companies with market capitalizations of $1
billion or less that appear to be
undervalued.
Mid-Cap Growth Neuberger&Berman Capital growth Invests primarily in common stocks of companies
Management with market capitalization $300 million and $10
Incorporated billion.
Mid-Cap Value Neuberger&Berman Capital growth Invests primarily in common stocks of
Management medium to large capitalization established
Incorporated companies, using a value-oriented
investment approach.
Value + Growth Robertson, Stephens & Capital growth Invests primarily in growth companies
Company Investment believed to have favorable relationships
Management, L.P. between price/earnings ratios and growth
rates.
Marsico Capital Marsico Capital Capital growth Invests primarily in common stocks, with
Growth Management, LLC the majority of the fund's assets in the
common stocks of larger companies.
Janus Capital Growth Janus Capital Capital growth Invests primarily in common stocks.
Corporation
Growth and Income Lord, Abbett & Co. Long term capital growth Invests primarily in securities which are
and income selling at reasonable prices in relation to
value.
Equity Income INVESCO Funds Group, High current income and, Invests in securities which will provide a
Inc. secondarily, capital growth relatively high yield and stable return and
which, over a period of years, may also
provide capital appreciation.
Strategic Balanced American Century Capital growth and current Invests in common stocks that are
Investment income considered to have better-than-average
Management, Inc. prospects for appreciation and the
remainder in bonds and other fixed income
securities.
High Yield Bond Federated Investment High current income Invests primarily in lower-rated fixed
Counseling income securities.
Total Return Bond Pacific Investment Maximize total return, Invests in fixed-income securities of
Management Company consistent with varying maturities with an expected average
preservation of capital portfolio duration from three to six years.
Money Market J.P. Morgan Maximize current income Maintains a dollar-weighted average
Investment Management and maintain high levels portfolio maturity of not more than 90 days
Inc. of liquidity and invests in high quality U.S.
dollar-denominated money market instruments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T A B L E O F C O N T E N T S
<S> <C> <C>
EXPENSE INFORMATION........................................................................................................
Shareholder Transaction Expenses..................................................................................
Annual Fund Operating Expenses....................................................................................
Expense Examples..................................................................................................
FINANCIAL HIGHLIGHTS.......................................................................................................
INVESTMENT PROGRAMS OF THE FUNDS...........................................................................................
ASAF Founders International Small Capitalization Fund.............................................................
ASAF T. Rowe Price International Equity Fund......................................................................
ASAF Janus Overseas Growth Fund...................................................................................
ASAF Founders Small Capitalization Fund...........................................................................
ASAF T. Rowe Price Small Company Value Fund.......................................................................
ASAF Neuberger&Berman Mid-Cap Growth Fund.........................................................................
ASAF Neuberger&Berman Mid-Cap Value Fund..........................................................................
ASAF Robertson Stephens Value + Growth Fund.......................................................................
ASAF Marsico Capital Growth Fund..................................................................................
ASAF Janus Capital Growth Fund....................................................................................
ASAF Lord Abbett Growth and Income Fund...........................................................................
ASAF INVESCO Equity Income Fund...................................................................................
ASAF American Century Strategic Balanced Fund.....................................................................
ASAF Federated High Yield Bond Fund...............................................................................
ASAF Total Return Bond Fund.......................................................................................
ASAF JPM Money Market Fund........................................................................................
CERTAIN RISK FACTORS AND INVESTMENT METHODS................................................................................
PERFORMANCE OF THE FUNDS...................................................................................................
HOW TO BUY SHARES..........................................................................................................
SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES.................................................................................
HOW TO REDEEM SHARES.......................................................................................................
HOW TO EXCHANGE SHARES.....................................................................................................
DETERMINATION OF NET ASSET VALUE...........................................................................................
SHAREHOLDER ACCOUNT RULES AND POLICIES.....................................................................................
ORGANIZATION AND CAPITALIZATION OF THE COMPANY.............................................................................
SPECIAL INFORMATION ON THE "MASTER/FEEDER" FUND STRUCTURE..................................................................
MANAGEMENT OF THE FUNDS....................................................................................................
The Directors, Trustees and Officers..............................................................................
The Investment Manager............................................................................................
The Sub-Advisors..................................................................................................
Fees and Expenses.................................................................................................
The Administrator.................................................................................................
PORTFOLIO TRANSACTIONS.....................................................................................................
DIVIDENDS, CAPITAL GAINS AND TAXES.........................................................................................
OTHER INFORMATION..........................................................................................................
</TABLE>
<PAGE>
EXPENSE INFORMATION
The maximum transaction costs and anticipated aggregate operating expenses
associated with investing in Class A, Class B, Class C or Class X shares of each
Fund are reflected in the following tables:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
High Yield Bond & Total Return Bond All Other Funds:
Funds:
Class A Class B & X Class C Class A Class B & X Class C
<S> <C> <C> <C> <C> <C> <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):
Total Expenses
Management Fee 12b-1 Distribution Other Expenses (after any
ASAF Fund: (after any fee Fees(4) (after any reimbursement)(5)
waivers) reimbursement)(5)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Int'l Small
Capitalization
Class A 1.10 0.50 0.50 2.10
Class B, C & X 1.10 1.00 0.50 2.60
International Equity
Class A 1.00 0.50 0.60 2.10
Class B, C & X 1.00 1.00 0.60 2.60
Overseas Growth
Class A 1.00 0.50 0.60 2.10
Class B, C & X 1.00 1.00 0.60 2.60
Small Capitalization
Class A 0.90 0.50 0.30 1.70
Class B, C & X 0.90 1.00 0.30 2.20
Small Company Value
Class A 1.00 0.50 0.25 1.75
Class B, C & X 1.00 1.00 0.25 2.25
Mid-Cap Growth
Class A 0.90 0.50 0.35 1.75
Class B,C & X 0.90 1.00 0.35 2.25
Mid-Cap Value
Class A 0.90 0.50 0.35 1.75
Class B, C & X 0.90 1.00 0.35 2.25
Value + Growth
Class A 1.00 0.50 0.30 1.80
Class B, C & X 1.00 1.00 0.30 2.30
Marsico Capital Growth
Class A 1.00 0.50 0.25 1.75
Class B, C & X 1.00 1.00 0.25 2.25
Janus Capital Growth
Class A 1.00 0.50 0.20 1.70
Class B, C & X 1.00 1.00 0.20 2.20
Growth and Income
Class A 0.80 0.50 0.30 1.60
Class B, C & X 0.80 1.00 0.30 2.10
Equity Income
Class A 0.75 0.50 0.30 1.55
Class B, C & X 0.75 1.00 0.30 2.05
Strategic Balanced
Class A 0.90 0.50 0.20 1.60
Class B, C & X 0.90 1.00 0.20 2.10
High Yield Bond
Class A 0.70 0.50 0.30 1.50
Class B, C & X 0.70 1.00 0.30 2.00
Total Return Bond
Class A 0.65 0.50 0.25 1.40
Class B, C & X 0.65 1.00 0.25 1.90
Money Market
Class A 0.50 0.50 0.50 1.50
Class B, C & X 0.50 1.00 0.50 2.00
</TABLE>
(1) Under certain circumstances, purchases of Class A shares not subject to an
initial sales charge will be subject to a contingent deferred sales charge
("CDSC") if redeemed within 12 months of the calendar month of purchase. For an
additional discussion of the Class A CDSC, see this Prospectus under "How to Buy
Shares."
(2) If you purchase Class B or X shares, you do not pay an initial sales
charge but you may incur a CDSC if you redeem some or all of your Class B or X
shares before the end of the seventh year after which you purchased such shares.
The CDSC is 6%, 5%, 4%, 3%, 2%, 2% and 1% for redemptions occurring in years one
through seven, respectively. No CDSC is charged after the seventh year. If you
purchase Class C shares, you do not pay an initial sales charge but you may
incur a CDSC if you redeem some or all of your Class C shares within 12 months
of the calendar month of purchase. For a discussion of the Class B, X and C
CDSC, see this Prospectus under "How to Buy Shares."
(3) A $10 fee may be imposed for wire transfers of redemption proceeds. For
an additional discussion of wire redemptions, see this Prospectus under "How to
Redeem Shares."
(4) As a result of distribution fees, a long-term investor in the Fund may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the rules of the National Association of Securities Dealers, Inc.
(5) Expenses shown are based on estimated amounts for the current fiscal
year. The Investment Manager has voluntarily agreed to reimburse and/or waive
fees for each Fund until March 1, 1999 so that each Fund's operating expenses
(and, in the case of the Feeder Funds, the Feeder Fund's pro rata share of
operating expenses of the Fund's corresponding Portfolio), exclusive of taxes,
interest, brokerage commissions, distribution fees and extraordinary expenses,
do not exceed specified percentages of the Fund's average net assets as follows:
ASAF Founders International Small Capitalization Fund -- 1.60%; ASAF T. Rowe
Price International Equity Fund -- 1.60%; ASAF Janus Overseas Growth Fund -
1.60%; ASAF Founders Small Capitalization Fund -- 1.20%; ASAF T. Rowe Price
Small Company Value Fund -- 1.25%; ASAF Neuberger&Berman Mid-Cap Growth Fund -
1.25%; ASAF Neuberger&Berman Mid-Cap Value Fund - 1.25%; ASAF Robertson Stephens
Value + Growth Fund - 1.30%; ASAF Marsico Capital Growth Fund - 1.25%; ASAF
Janus Capital Growth Fund -- 1.20%; ASAF Lord Abbett Growth and Income Fund -
1.10%; ASAF INVESCO Equity Income Fund -- 1.05%; ASAF American Century Strategic
Balanced Fund -- 1.10%; ASAF Federated High Yield Bond Fund -- 1.00%; ASAF Total
Return Bond Fund -- 0.90%; and ASAF JPM Money Market Fund -- 1.00%. Such
voluntary agreements may be discontinued at any time after March 1, 1999. Absent
these reimbursements, the estimated "other expenses" for all classes of shares
of the Funds would be: ASAF Founders International Small Capitalization Fund -
1.08%; ASAF T. Rowe Price International Equity Fund - 0.95%; ASAF Janus Overseas
Growth Fund - 1.30%, ASAF Founders Small Capitalization Fund - .85%; ASAF T.
Rowe Price Small Company Value Fund - 0.84%; ASAF Neuberger&Berman Mid-Cap
Growth Fund - [insert]; ASAF Neuberger&Berman Mid-Cap Value Fund - [insert];
ASAF Robertson Stephens Value + Growth Fund - 1.20%; ASAF Marsico Capital Growth
Fund - [insert]; ASAF Janus Capital Growth Fund - 0.74%; ASAF Lord Abbett Growth
and Income Fund - 1.20%; ASAF INVESCO Equity Income Fund - 0.88%; ASAF American
Century Strategic Balanced Fund - 0.99%; ASAF Federated High Yield Bond Fund -
0.85%; ASAF Total Return Bond Fund - 0.88%; and ASAF JPM Money Market Fund -
1.18%. Absent investment management fee waivers, the investment management fee
for the ASAF Janus Overseas Growth Fund would be 1.10%, the investment
management fee for the ASAF Robertson Stephens Value + Growth Fund would be
1.10%, and the investment management fee for the ASAF Lord Abbett Growth and
Income Fund would be 1.00%. Absent these reimbursements and waivers, the
estimated "total expenses" for Class A shares and Class B, C and X shares,
respectively, of the Funds would be: ASAF Founders International Small
Capitalization Fund - 2.68% and 3.18%; ASAF T. Rowe Price International Equity
Fund - 2.45% and 2.95%; ASAF Janus Overseas Growth Fund - 2.90% and 3.40%; ASAF
Founders Small Capitalization Fund - 2.25% and 2.75%; ASAF T. Rowe Price Small
Company Value Fund - 2.34% and 2.84%; ASAF Neuberger&Berman Mid-Cap Growth Fund
- - [insert]; ASAF Neuberger&Berman Mid-Cap Value Fund - [insert]; ASAF Robertson
Stephens Value + Growth Fund - 2.80% and 3.30%; ASAF Marsico Capital Growth Fund
- - [insert]; ASAF Janus Capital Growth Fund - 2.24% and 2.74%; ASAF Lord Abbett
Growth and Income Fund - 2.70% and 3.20%; ASAF INVESCO Equity Income Fund -
2.13% and 2.63%; ASAF American Century Strategic Balanced Fund - 2.39% and
2.89%; ASAF Federated High Yield Bond Fund - 2.05% and 2.55%; ASAF Total Return
Bond Fund - 2.03% and 2.53%; and ASAF JPM Money Market Fund - 2.18% and 2.68%.
For an additional discussion of Fund expense limitations, see the Company's SAI
under "Fund Expenses."
Expenses shown for each of the Feeder Funds are based upon
distribution and administration fees for the Fund and management fees and other
expenses for the Fund's corresponding Portfolio. The Directors of the Company
believe that the aggregate per share expenses of the Feeder Funds and their
corresponding Portfolios over the long term will be approximately equal to the
expenses the Funds would incur if their assets were invested directly in the
type of securities held by their corresponding Portfolios. The Directors of the
Company also believe that investment in the Portfolios by investors in addition
to the Feeder Funds may enable the Portfolios to achieve economies of scale
which could reduce expenses. The expenses and, accordingly, the returns of other
funds that may invest in the Portfolios may differ from the expenses and returns
of the Feeder Funds. For additional information regarding the "master/feeder"
fund structure, see this Prospectus under "Special Information on the
'Master/Feeder' Fund Structure."
<TABLE>
<CAPTION>
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:
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Int'l Small 70 87 37 87 113 122 82 124
Capitalization
International Equity 70 87 37 87 113 122 82 124
Overseas Growth 70 87 37 87 113 122 82 124
Small Capitalization 67 83 33 83 102 110 70 111
Small Company Value 67 83 33 84 103 111 71 113
Mid-Cap Growth
Mid-Cap Value
Value + Growth 68 84 34 84 105 113 73 114
Marsico Capital Growth
Janus Capital Growth 67 83 33 83 102 110 70 111
Growth and Income 66 82 32 82 99 107 67 108
Equity Income 65 81 31 82 97 105 65 107
Strategic Balanced 66 82 32 82 99 107 67 108
High Yield Bond 57 80 30 81 88 103 63 105
Total Return Bond 56 79 29 80 85 100 60 102
Money Market 65 80 30 81 96 103 63 105
</TABLE>
<TABLE>
<CAPTION>
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:
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Int'l Small 70 27 27 27 113 82 82 84
Capitalization
International Equity 70 27 27 27 113 82 82 84
Overseas Growth 70 27 27 27 113 82 82 84
Small Capitalization 67 23 23 23 102 70 70 71
Small Company Value 67 23 23 24 103 71 71 73
Mid-Cap Growth
Mid-Cap Value
Value + Growth 68 24 24 24 105 73 73 74
Marsico Capital Growth
Janus Capital Growth 67 23 23 23 102 70 70 71
Growth and Income 66 22 22 22 99 67 67 68
Equity Income 65 21 21 22 97 65 65 67
Strategic Balanced 66 22 22 22 99 67 67 68
High Yield Bond 57 20 20 21 88 63 63 65
Total Return Bond 56 19 19 20 85 60 60 62
Money Market 65 20 20 21 96 63 63 65
</TABLE>
(*) Expense examples for purchases of Class X shares of the Funds reflect
the shareholder's receipt of additional "bonus shares." For a discussion of the
issuance of "bonus shares," see this Prospectus under "How to Buy Shares:
Purchase of Class X Shares."
The above tables are provided to assist you in understanding the
various costs and expenses that you would bear directly or indirectly as an
investor in the Fund(s). THE EXAMPLES PROVIDED SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF THE FUNDS' PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. IN ADDITION, WHILE THE EXAMPLES ASSUME A 5%
ANNUAL RETURN, EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN THAT IS GREATER OR LESS THAN 5%.
<PAGE>
FINANCIAL HIGHLIGHTS (Selected per share data for an average share outstanding ,
and ratios throughout such period): The tables below contain unaudited financial
information and financial information which has been audited in conjunction with
the annual audit of the financial statements of the Company by Coopers & Lybrand
L.L.P., Independent Auditors. Audited Financial Statements for the period ended
October 31, 1997 and the Independent Auditors' Report thereon, and unaudited
Financial Statements for the period ended April 30, 1998, are included in the
Company's SAI, which is available without charge upon request to the Company at
P.O. Box 8012, Boston, Massachusetts 02266-8012 or by calling 1-800-SKANDIA. The
ASAF Janus Overseas Growth Fund, ASAF Robertson Stephens Value & Growth Fund,
and ASAF Lord Abbett and Income Fund commenced operations on January 2, 1998,
and the tables below contain only unaudited financial information for those
Funds. No financial information is included for the ASAF Neuberger&Berman
Mid-Cap Growth Fund, the ASAF Neuberger&Berman Mid-Cap ValueFund or the ASAF
Marsico Capital Growth Fund, as these Funds had not been offered prior to the
date of this Prospectus. For all other Funds, the tables below contain
information from July 28, 1997, the date shares were first sold subsequent to
the effective date of the Company's registration statement under the Securities
Act of 1933, through April 30, 1998. Further information about the performance
of the Funds is contained in the Company's annual report which also may be
obtained without charge upon request to the Company at the above address or
phone number. The information presented in these financial highlights is
historical and is not intended to indicate future performance of the Funds.
<PAGE>
INVESTMENT PROGRAMS OF THE FUNDS
The investment objective, policies and limitations for each of the
Funds are described below and should be considered separately. The investment
objective, policies and limitations of each Feeder Fund are identical to those
of its corresponding Portfolio. As such, the following discussion of the Feeder
Funds, including references to the Directors of the Company, apply equally to
the Funds' corresponding Portfolios and the Trustees of the Trust, respectively.
Each Feeder Fund seeks to meet its investment objective by investing all of its
investable assets in a corresponding Portfolio of the Trust, which in turn
invests directly in a portfolio of securities in accordance with the investment
objective, policies and limitations of its Feeder Fund.
While certain policies apply to all Funds and Portfolios, generally
each Fund and Portfolio has a different investment objective and certain
policies may vary. As a result, the risks, opportunities and returns of
investing in each Fund may differ. Those investment policies specifically
labeled as "fundamental" may not be changed without shareholder approval. The
investment objective of each Fund and Portfolio is not a fundamental policy and
may be changed by the Directors of the Company or the Trustees of the Trust,
where applicable, without shareholder approval. The investment policies and
limitations of the Funds and Portfolios, unless otherwise specified, are not
fundamental policies and may also be changed without shareholder approval.
There can be no assurance that the investment objective of any Fund
or Portfolio will be achieved. Risks relating to various securities and
instruments in which the Funds and Portfolios may invest are described in this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods." Additional information about the investment objectives, policies and
limitations, as well as certain fundamental investment restrictions, of each
Fund and Portfolio may be found in the Company's SAI under "Investment Programs
of the Funds" and "Fundamental Investment Restrictions."
Subject to the approval of the Directors of the Company, the
Company may add one or more Funds and may cease to offer any one or more Funds
in the future. Any such addition or cessation shall be subject to obtaining any
required regulatory approvals.
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
To achieve its objective, the Fund normally invests primarily in
securities issued by foreign companies which have market capitalizations or
annual revenues of $1 billion or less. These securities may represent companies
in both established and emerging economies throughout the world.
At least 65% of the Fund's total assets normally will be invested
in foreign securities representing a minimum of three countries. The Fund may
invest in larger foreign companies or in U.S.-based companies if, in the
Sub-advisor's opinion, they represent better prospects for capital appreciation.
Risks of Investments in Small and Medium-Sized Companies. The Fund
normally will invest a significant portion 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. In
addition, foreign securities may trade in the U.S. markets. For a discussion of
ADRs, see this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign investments of the Fund may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries may
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,
Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,
Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,
Portugal, Romania, Singapore, Slovak Republic, South Africa, South Korea, Spain,
Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and the countries of the former Soviet Union. Investments may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds.
Investments in foreign securities involve certain risks which are
not typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Fund is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund attempts to protect
itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Fund may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Fund may enter into forward contracts
to sell, for a fixed-dollar or other currency amount, foreign currency
approximating the value of some or all of the Fund's securities denominated in
that currency. The Fund also may engage in "proxy hedging," i.e., entering into
forward contracts to sell a different currency than the one in which the
underlying investments are denominated with the expectation that the value of
the hedged currency will correlate with the value of the underlying 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 or a proxy currency in excess of the value of the Fund's
securities or other assets denominated in the currency being hedged. 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 rated below investment grade as a result of a reduction in
rating after purchase or are unrated. For a description of securities ratings,
see the Appendix to the Company's SAI. For a discussion of the special risks
involved in investing in lower-rated debt securities, see this Prospectus and
the Company's SAI under "Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Fund may invest are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest or principal payments, or
both, as they come due. The ratings given a security by Moody's and S&P provide
a generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower-grade securities, while intended to increase
the yield produced by those assets, also will increase the credit risk to which
those assets are subject. Market risk relates to the fact that the market values
of securities in which the Fund may invest generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium- and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher-rated securities.
Medium-rated securities (those rated Baa or BBB) have speculative
characteristics while lower-rated securities are predominantly speculative. The
Fund is not required to dispose of straight debt securities whose ratings are
downgraded below Baa or BBB subsequent to the Fund's purchase of the securities,
unless such a disposition is necessary to reduce the Fund's holdings of such
securities to less than 5% of its total assets. Relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that fixed-income securities in which it invests will decline in value,
since credit ratings represent evaluations of the safety of principal, dividend
and interest payments on preferred stocks and debt securities, not the market
values of such securities, and such ratings may not be changed on a timely basis
to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Fund through diversification and consideration of relevant
factors affecting the value of securities. No assurance can be given, however,
regarding the degree of success that will be achieved in this regard or in the
Fund achieving its investment objective.
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of the market value of
its net assets, measured at the time of purchase, in securities which are not
readily marketable, including repurchase agreements maturing in more than seven
days. Securities which are not readily marketable are those that, for whatever
reason, cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Fund has valued the
investment.
The Fund may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. The Fund may borrow money from banks in amounts up to 33
1/3% of the Fund's total assets. If the Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is repaid. The Fund will
attempt to minimize such fluctuations by not purchasing securities when
borrowings are greater than 5% of the value of the Fund's total assets. For an
additional discussion of the Fund's limitations on borrowing and certain risks
involved in borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Fundamental Investment
Restrictions."
Futures Contracts and Options. The Fund may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Fund held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Fund may also enter into
interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Fund may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Fund's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Fund may purchase options on securities and stock indices.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. The purpose of these transactions is not
to generate gain, but to "hedge" against possible loss. Therefore, successful
hedging activity will not produce net gain to the Fund. The Fund may also
purchase put and call options on futures contracts. An option on a futures
contract provides the holder with the right to enter into a "long" position in
the underlying futures contract, in the case of a call option, or a "short"
position in the underlying futures contract, in the case of a put option, at a
fixed exercise price to a stated expiration date. Upon exercise of the option by
the holder, a contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Fund may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Fund may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, in cash, or in other cash equivalents, if the Sub-advisor
determines it to be appropriate for purposes of enhancing liquidity or
preserving capital in light of prevailing market or economic conditions. While
the Fund is in a defensive position, the opportunity to achieve capital growth
will be limited, and, to the extent that this assessment of market conditions is
incorrect, the Fund will be foregoing the opportunity to benefit from capital
growth resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and
bonds, and issues of United States agencies, authorities and instrumentalities.
Some government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Fund also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank"). Mortgage-related securities, which are interests in
pools of mortgage loans made to home buyers, pose the risk that borrowers may
prepay their mortgages faster than expected, which may adversely affect the
instruments' average life and yield.
The Fund may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Directors of the
Company, if any. A certificate of deposit is a short-term obligation of a bank.
A bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions
may be general obligations of the parent depository institution in addition to
being an obligation of the issuing branch. These obligations, and those of
foreign depository institutions, may be limited by the terms of the specific
obligation and by governmental regulation. The payment of these obligations,
both interest and principal, also may be affected by governmental action in the
country of domicile of the institution or branch, such as imposition of currency
controls and interest limitations. In connection with these investments, the
Fund will be subject to the risks associated with the holding of portfolio
securities overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch, or may be limited by the terms of a
specific foreign regulation applicable to the depository institutions and by
government regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
banks or well-established securities dealers. All repurchase agreements entered
into by the Fund will be fully collateralized and marked to market daily. The
Fund has not adopted any limits on the amount of its total assets that may be
invested in repurchase agreements which mature in less than seven days. For a
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Fund reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Fund. The Fund may engage in
short-term trading and therefore normally will have annual portfolio turnover
rates which are considered to be high and may be greater than those of other
investment companies seeking capital appreciation. Portfolio turnover rates may
also increase as a result of the need for the Fund to effect significant amounts
of purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's control. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek a total
return on its assets from long-term growth of capital and income, principally
through investments in common stocks of established, non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
Total return consists of capital appreciation or depreciation, dividend income,
and currency gains or losses.
Investment Policies:
The Fund intends to diversify investments broadly among countries
and to normally have at least three different countries represented in the Fund.
The Fund may invest in countries of the Far East and Western Europe as well as
South Africa, Australia, Canada and other areas (including developing
countries). Under unusual circumstances, the Fund may invest substantially all
of its assets in one or two countries.
In seeking its objective, the Fund will invest primarily in common
stocks of established foreign companies which have the potential for growth of
capital or income or both. However, the Fund may also invest in a variety of
other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as corporate and governmental debt securities,
when considered consistent with the Fund's investment objectives and program.
Under normal market conditions, the Fund's investment in securities other than
common stocks is limited to no more than 35% of total assets. Under exceptional
economic or market conditions abroad, the Fund may temporarily invest all or a
major portion of its assets in U.S. government obligations or debt obligations
of U.S. companies. The Fund will not purchase any debt security which at the
time of purchase is rated below investment grade. This would not prevent the
Fund from retaining a security downgraded to below investment grade after
purchase.
The Fund may also invest its reserves in domestic as well as
foreign money market instruments. Also, the Fund may enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the level
of future foreign exchange rates.
In addition to the investments described below, the Fund's
investments may include, but are not limited to, American Depositary Receipts
(ADRs), bonds, notes, other debt securities of foreign issuers, and the
securities of foreign investment funds or trusts (including passive foreign
investment companies).
Cash Reserves. While the Fund will remain primarily invested in
common stocks, it may, for temporary defensive measures, invest in cash reserves
without limitation. The Fund may establish and maintain reserves as the
Sub-advisor believes is advisable to facilitate the Fund's cash flow needs
(e.g., redemptions, expenses and purchases of portfolio securities) or for
temporary, defensive purposes. The Fund's reserves may be invested in domestic
and foreign money market instruments rated within the top two credit categories
by a national rating organization, or if unrated, of equivalent investment
quality as determined by the Sub-advisor.
Convertible Securities, Preferred Stocks, and Warrants. The Fund
may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with claims
on the company's earnings and assets before common stock owners, but after bond
owners. Warrants are options to buy a stated number of shares of common stock at
a specified price any time during the life of the warrants (generally, two or
more years).
Foreign Currency Transactions. The Fund will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The Fund
will generally not enter into a forward contract with a term of greater than one
year.
The Fund will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Fund enters
into a contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when the Sub-advisor believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency, it
may enter into a forward contract to sell or buy the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Under certain circumstances, the Fund may commit a substantial portion
or the entire value of its portfolio to the consummation of these contracts. The
Sub-advisor will consider the effect such a commitment of its portfolio to
forward contracts would have on the investment program of the Fund and the
flexibility of the Fund to purchase additional securities. For a discussion of
foreign currency contracts and the risks involved therein, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Fund may enter into stock index
or currency futures contracts (or options thereon) to hedge a portion of the
Fund, to provide an efficient means of regulating the Fund's exposure to the
equity markets, or as a hedge against changes in prevailing levels of currency
exchange rates. The Fund will not use futures contracts for leveraging purposes.
Such contracts may be traded on U.S. or foreign exchanges. The Fund may write
covered call options and purchase put and call options on foreign currencies,
securities, and stock indices. The aggregate market value of the Fund's
currencies or portfolio securities covering call or put options will not exceed
25% of the Fund's total assets. The Fund will not commit more than 5% of its
total assets to premiums when purchasing call or put options. For an additional
discussion of futures contracts and options and the risks involved therein, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Hybrid Investments. The Fund may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Fund may invest in these instruments, which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, security index or commodity
at a future point in time. The risks of such investments would reflect both the
risks of investing in futures, options, currencies, and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid investments and the
risks involved therein, see the Company's SAI under "Certain Risk Factors and
Investment Methods."
Passive Foreign Investment Companies. The Fund may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
Fund's expenses (management fees and operating expenses), shareholders will also
indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may acquire illiquid securities. The Fund
will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities do not include securities eligible for resale under Rule 144A of the
Securities Act of 1933 that have been determined by the Sub-advisor to be liquid
under guidelines promulgated by the Directors of the Company. For a discussion
of illiquid and restricted securities, and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. For a discussion of repurchase agreements and certain risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF JANUS OVERSEAS GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
long-term growth of capital.
Investment Policies:
The Fund pursues its objective primarily through investments in
common stocks of issuers located outside the United States. The Fund has the
flexibility to invest on a worldwide basis in companies and organizations of any
size, regardless of country of organization or place of principal business
activity.
The Fund normally invests at least 65% of its total assets in
securities of issuers from at least five different countries, excluding the
United States. Although the Fund intends to invest substantially all of its
assets in issuers located outside the United States, it may at times invest in
U.S. issuers and it may at times invest all of its assets in fewer than five
countries or even a single country.
The Fund invests primarily in common stocks of foreign issuers
selected for their growth potential. The Fund may invest to a lesser degree in
other types of securities, including preferred stocks, warrants, convertible
securities and debt securities. Debt securities that the Fund may purchase
include corporate bonds and debentures (not to exceed 35% of net assets in
high-yield/high-risk securities); government securities; mortgage- and
asset-backed securities (not to exceed 25% of assets); zero coupon bonds (not to
exceed 10% of assets); indexed/structured securities; high-grade commercial
paper; certificates of deposit; and repurchase agreements. Such securities may
offer growth potential because of anticipated changes in interest rates, credit
standing, currency relationships or other factors. The Fund may also invest in
short-term debt securities and money market funds managed by the Sub-advisor as
a means of receiving a return on idle cash.
When the Sub-advisor believes that market conditions are not
favorable for profitable investing or when the Sub-advisor is otherwise unable
to locate favorable investment opportunities, the Fund's investments may be
hedged to a greater degree and/or its cash or similar investments may increase.
In other words, the Fund does not always stay fully invested in stocks and
bonds. Cash or similar investments are a residual - they represent the assets
that remain after the Sub-advisor has committed available assets to desirable
investment opportunities. When the Fund's cash position increases, it may not
participate in stock market advances or declines to the extent that it would if
it remained more fully invested in common stocks.
The fundamental risk associated with any common stock fund is the
risk that the value of the stocks it holds might decrease. Stock values may
fluctuate in response to the activities of an individual company or in response
to general market and/or economic conditions. Historically, common stocks have
provided greater long-term returns and have entailed greater short-term risks
than other investment choices. Smaller or newer issuers are more likely to
realize more substantial growth as well as suffer more significant losses than
larger or more established issuers. Investments in such companies can be both
more volatile and more speculative.
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 issuer will be recognized and appreciate in value due to a
specific development with respect to that issuer. Developments creating a
special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary corporate
event, or differences in market supply of and demand for the security.
Investment in special situations may carry 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 invest without limit in foreign
securities. The Fund may invest substantially all of its assets in common stocks
of foreign issuers to the extent the Sub-advisor believes that the relevant
market environment favors profitable investing in those securities. The
Sub-advisor generally takes a "bottom up" approach to building the Fund. In
other words, the Sub-advisor seeks to identify individual companies with
earnings growth potential that may not be recognized by the market at large
regardless of country of organization or place of principal business activity.
Although themes may emerge in the Fund, securities are generally selected
without regard to any defined allocation among countries, geographic regions or
industry sectors, or other similarly defined selection procedure. Realization of
income is not a significant investment consideration. Any income realized on the
Fund's investments will be incidental to its objective. 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."
Futures, Options and Other Derivative Instruments. The Fund may use
options, futures and other types of derivatives for hedging purposes or as a
means of enhancing return. The Fund may enter into futures contracts on
securities, financial indices and foreign currencies and options on such
contracts ("futures contracts") and may invest in options on securities,
financial indices and foreign currencies ("options"), forward contracts and
interest rate swaps and swap-related products (collectively "derivative
instruments"). The Fund intends to use most derivative instruments primarily to
hedge the value of its portfolio 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 seeking to increase the Fund's income or otherwise seeking to enhance
return.
Although the Sub-advisor believes the use of derivative instruments
will benefit the Fund, the Fund's performance could be worse than if the Fund
had not used such instruments if the Sub-advisor's judgment proves incorrect.
When the Fund invests in a derivative instrument, it may be
required to segregate cash or other liquid assets with its custodian to "cover"
the Fund's position. Assets segregated or set aside generally may not be
disposed of so long as the Fund maintains the positions requiring segregation or
cover. Segregating assets could diminish the Fund's return due to the
opportunity losses of foregoing other potential investments with the segregated
assets.
The Fund may also use futures, options and other derivative
instruments to protect the portfolio from movements in securities prices and
interest rates. 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 under "Certain Risk Factors
and Investment Methods" and the Company's SAI under "Investment Objectives and
Policies" and "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."
Repurchase Agreements. The Fund may engage in a repurchase
agreement with respect to any security in which it is authorized to invest.
Repurchase agreements that mature in more than seven days will be subject to the
15% limit on illiquid investments. While it is not possible to eliminate all
risks from these transactions, it is the policy of the Fund to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Sub-advisor pursuant to guidelines adopted by the Directors
of the Company. Pursuant to an exemptive order granted by the Securities and
Exchange Commission, the Fund and other funds advised or sub-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 may use reverse repurchase
agreements to provide cash to satisfy unusually heavy redemption requests or for
other temporary or emergency purposes without the necessity of selling portfolio
securities, or to earn additional income on portfolio securities, such as
Treasury bills or notes. In a reverse repurchase agreement, the Fund sells a
security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Fund will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties that the Sub-advisor deems creditworthy. For a
discussion of reverse repurchase agreements and the risks involved therein, see
this Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Some securities
cannot be sold to the U.S. public because of their terms or because of SEC
regulations. The Sub-advisor may determine that securities eligible for resale
under Rule 144A under the Securities Act of 1933, which cannot be sold to the
U.S. public but can be sold to institutional investors, are liquid. The
Sub-advisor will follow guidelines established by the Directors of the Company
in making liquidity determinations for Rule 144A securities and other
securities, including privately placed commercial paper. For a discussion of
illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. Subject to the Fund's restrictions on borrowing as
described in general in this paragraph, the Fund may borrow money. The Fund may
borrow money for temporary or emergency purposes in amounts up to 33 1/3% of its
total assets. The Fund may mortgage or pledge securities as security for
borrowings in amounts up to 15% of its net assets.
Lower-Rated High-Yield Bonds. The Fund may invest up to 35% of its
net assets in corporate debt securities that are rated below investment grade
(securities rated BB or lower by Standard & Poor's Ratings Services ("Standard &
Poor's") or Ba or lower by Moody's Investors Services, Inc. ("Moody's")
(commonly referred to as "junk bonds")).
The Fund may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Unrated debt securities will
be included in the 35% limit of the Fund unless the Sub-advisor deems such
securities to be the equivalent of investment grade securities. 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."
Portfolio Turnover. The Fund generally intends to purchase
securities for long-term investment rather than short-term gains. However,
short-term transactions may result from liquidity needs, securities having
reached a price or yield objective, anticipated changes in interest rates or the
credit standing of an issuer, or by reason of economic or other developments not
foreseen at the time of the investment decision. Changes are made in the Fund
whenever the Sub-advisor believes such changes are desirable, and portfolio
turnover rates are generally not a factor in making buy and sell decisions.
To a limited extent, the Fund may purchase securities in
anticipation of relatively short-term price gains. The Fund may also sell one
security and simultaneously purchase the same or a comparable security to take
advantage of short-term differentials in bond yields or securities prices. For a
discussion of portfolio turnover and its effects, see this Prospectus and the
Company's SAI under "Portfolio Transactions."
ASAF FOUNDERS SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
To achieve its objective, the Fund normally will invest at least
65% of its total assets in common stocks of U.S. companies with market
capitalizations or annual revenues of $1.5 billion or less. Market
capitalization is a measure of the size of a company and is based upon the total
market value of a company's outstanding equity securities. Ordinarily, the
common stocks of the U.S. companies selected for this Fund will not be listed on
a national securities exchange but will be traded in the over-the-counter
market.
Risks of Investments in Small and Medium-Sized Companies. The Fund
normally will invest a significant portion of its assets in the securities of
small and medium-sized companies. As used with respect to this Fund, small and
medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting to achieve rapid growth in both sales and
earnings. Capable management and fertile operating areas are two of the most
important characteristics of such companies. In addition, these companies should
employ sound financial and accounting policies; demonstrate effective research
and successful product development and marketing; provide efficient service; and
possess pricing flexibility.
Investments in small and medium-sized companies involve greater
risk than is customarily associated with more established companies. These
companies often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Fund's shares may fluctuate more widely
than the popular market averages.
Fixed Income Securities. The Fund may invest in convertible
securities, preferred stocks, bonds, debentures, and other corporate obligations
when the Sub-advisor believes that these investments offer opportunities for
capital appreciation. Current income will not be a substantial factor in the
selection of these securities. Bonds, debentures, and corporate obligations
(other than convertible securities and preferred stock) purchased by the Fund
will be rated investment grade at the time of purchase (Baa or higher by Moody's
Investors Service, Inc. ("Moody's") or BBB or higher by Standard & Poor's
("S&P")). Bonds in the lowest investment grade category (Baa or BBB) may have
speculative characteristics, with changes in the economy or other circumstances
more likely to lead to a weakened capacity of the bonds' issuer 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 rated below investment
grade as a result of a reduction in rating after purchase or are unrated. For a
description of securities ratings, see the Appendix to the Company's SAI. For a
discussion of the special risks involved in lower-rated debt securities, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
The fixed-income securities in which the Fund may invest are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest or principal payments, or
both, as they come due. The ratings given a security by Moody's and S&P provide
a generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower-grade securities, while intended to increase
the yield produced by those assets, also will increase the credit risk to which
those assets are subject. Market risk relates to the fact that the market values
of securities in which the Fund may invest generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium- and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher-rated securities.
Medium-rated securities (those rated Baa or BBB) have speculative
characteristics while lower-rated securities are predominantly speculative. The
Fund is not required to dispose of straight debt securities whose ratings are
downgraded below Baa or BBB subsequent to the Fund's purchase of the securities,
unless such a disposition is necessary to reduce the Fund's holdings of such
securities to less than 5% of its total assets. Relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that fixed-income securities in which it invests will decline in value,
since credit ratings represent evaluations of the safety of principal, dividend
and interest payments on preferred stocks and debt securities, not the market
values of such securities, and such ratings may not be changed on a timely basis
to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Fund through diversification and consideration of relevant
factors affecting the value of securities. No assurance can be given, however,
regarding the degree of success that will be achieved in this regard or in the
Fund achieving its investment objective.
Foreign Securities. The Fund may invest in dollar-denominated
American Depositary Receipts ("ADRs") which are traded on exchanges or
over-the-counter in the United States without limit, and in foreign securities.
The term "foreign securities" refers to securities of issuers, wherever
organized, which, in the judgment of the Sub-advisor, have their principal
business activities outside of the United States. The determination of whether
an issuer's principal activities are outside of the United States will be based
on the location of the issuer's assets, personnel, sales, and earnings, and
specifically on whether more than 50% of the issuer's assets are located, or
more than 50% of the issuer's gross income is earned, outside of the United
States, or on whether the issuer's sole or principal stock exchange listing is
outside of the United States. Foreign securities typically will be traded on the
applicable country's principal stock exchange but may also be traded on regional
exchanges or over-the-counter. In addition, foreign securities may trade in the
U.S. markets. For a discussion of ADRs, see this Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign investments of the Fund may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries may
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,
Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,
Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,
Portugal, Romania, Singapore, Slovak Republic, South Africa, South Korea, Spain,
Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and the countries of the former Soviet Union. Investments may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds. Since the Fund
will pay dividends in dollars, it may incur currency conversion costs. The Fund
will not invest more than 25% of its total assets in any one foreign country.
Investments in foreign securities involve certain risks which are
not typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Fund is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund attempts to protect
itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Fund may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Fund may enter into forward contracts
to sell, for a fixed dollar or other currency amount, foreign currency
approximating the value of some or all of the Fund's securities denominated in
that currency. The Fund also may engage in "proxy hedging," i.e., entering into
forward contracts to sell a different foreign currency than the one in which the
underlying investments are denominated with the expectation that the value of
the hedged currency will correlate with the value of the underlying 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 or a proxy currency in excess of the value of the Fund's
securities or other assets denominated in the currency being hedged. Under
normal circumstances, consideration of the possibility of changes in currency
exchange rates will be incorporated into the Fund's long-term investment
strategies. In the event that forward contracts are considered to be illiquid,
the securities would be subject to the Fund's limitation on investing in
illiquid securities. For an additional discussion of foreign currency contracts
and the risks involved therein, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of the market value of
its net assets, measured at the time of purchase, in securities which are not
readily marketable, including repurchase agreements maturing in more than seven
days. Securities which are not readily marketable are those that, for whatever
reason, cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Fund has valued the
investment.
The Fund may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest,
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. The Fund may borrow money from banks in amounts up to 33
1/3% of the Fund's total assets. If the Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is repaid. The Fund will
attempt to minimize such fluctuations by not purchasing securities when
borrowings are greater than 5% of the value of the Fund's total assets. For an
additional discussion of the Fund's limitations on borrowing and certain risks
involved in borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Fundamental Investment
Restrictions."
Futures Contracts and Options. The Fund may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Fund held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Fund may also enter into
interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Fund may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Fund's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Fund may purchase options on securities and stock indices.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. The purpose of these transactions is not
to generate gain, but to "hedge" against possible loss. Therefore, successful
hedging activity will not produce net gain to the Fund. The Fund may also
purchase put and call options on futures contracts. An option on a futures
contract provides the holder with the right to enter into a "long" position in
the underlying futures contract, in the case of a call option, or a "short"
position in the underlying futures contract, in the case of a put option, at a
fixed exercise price to a stated expiration date. Upon exercise of the option by
the holder, a contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Fund may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Fund may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, cash, or in other cash equivalents, if the Sub-advisor determines
it to be appropriate for purposes of enhancing liquidity or preserving capital
in light of prevailing market or economic conditions. While the Fund is in a
defensive position, the opportunity to achieve capital growth will be limited,
and, to the extent that this assessment of market conditions is incorrect, the
Fund will be foregoing the opportunity to benefit from capital growth resulting
from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and
bonds, and issues of United States agencies, authorities and instrumentalities.
Some government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Fund also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank"). Mortgage-related securities, which are interests in
pools or mortgage loans made to home buyers, pose the risk that borrowers may
prepay their mortgages faster than expected, which may adversely affect the
instruments' average life and yield.
The Fund may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Directors of the
Company, if any. A certificate of deposit is a short-term obligation of a bank.
A bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions
may be general obligations of the parent depository institution in addition to
being an obligation of the issuing branch. These obligations, and those of
foreign depository institutions, may be limited by the terms of the specific
obligation and by governmental regulation. The payment of these obligations,
both interest and principal, also may be affected by governmental action in the
country of domicile of the institution or branch, such as imposition of currency
controls and interest limitations. In connection with these investments, the
Fund will be subject to the risks associated with the holding of portfolio
securities overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch, or may be limited by the terms of a
specific foreign regulation applicable to the depository institutions and by
government regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
banks or well-established securities dealers. All repurchase agreements entered
into by the Fund will be fully collateralized and marked to market daily. The
Fund has not adopted any limits on the amount of its total assets that may be
invested in repurchase agreements which mature in less than seven days. For a
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Fund reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Fund. The Fund may engage in
short-term trading and therefore normally will have annual portfolio turnover
rates which are considered to be high and may be greater than those of other
investment companies seeking capital appreciation. Portfolio turnover rates may
also increase as a result of the need for the Fund to effect significant amounts
of purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's control. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Fund is to provide
long-term capital growth by investing primarily in small-capitalization stocks
that appear to be undervalued.
Investment Policies:
Reflecting a value approach to investing, the Fund will seek the
stocks of companies whose current stock prices do not appear to adequately
reflect their underlying value as measured by assets, earnings, cash flow, or
business franchises. The Fund will invest at least 65% of its total assets in
companies with a market capitalization of $1 billion or less that appear
undervalued by various measures, such as price/earnings or price/book value
ratios.
Although the Fund will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants when considered consistent with the
Fund's investment objective and policies. The Fund may also engage in a variety
of investment management practices, such as buying and selling futures and
options.
In managing the Fund, the Sub-advisor will apply a value investment
approach. Value investors seek to buy a stock (or other security) when its price
is low relative to its perceived worth. They hope to identify companies whose
stocks are currently out of favor or are not followed closely by stock analysts.
Often these stocks have above-average yields and offer the potential for capital
appreciation as other investors recognize their intrinsic value and drive up
their prices. Some of the principal measures used to identify such stocks are:
(i) Price/Earnings Ratio. Dividing a stock's price by its earnings
per share generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
(ii) Price/Book Value Ratio. This ratio, calculated by dividing a
stock's price by its book value per share, indicates how a stock is priced
relative to the accounting (i.e., book) value of the company's assets. A ratio
below the market, that of its competitors, or its own historic norm could
indicate an undervalued situation.
(iii) Dividend Yield. Value investors look for undervalued assets.
A stock's dividend yield is found by dividing its annual dividend by its share
price. A yield significantly above a stock's own historic norm or that of its
peers may suggest an investment opportunity.
(iv) Price/Cash Flow. Dividing a stock's price by the company's
cash flow per share, rather than its earnings or book value, provides a more
useful measure of value in some cases. A ratio below that of the market or of
its peers suggests the market may be incorrectly valuing the company's cash flow
for reasons that may be temporary.
(v) Undervalued Assets. This analysis compares a company's stock
price with its underlying asset values, its projected value in the private (as
opposed to public) market, or its expected value if the company or parts of it
were sold or liquidated.
(vi) Restructuring Opportunities. The market can react favorably to
the announcement or the successful implementation of a corporate restructuring,
financial reengineering, or asset redeployment. Such events can result in an
increase in a company's stock price. A value investor may try to anticipate
these actions and invest before the market places an appropriate value on any
actual or expected changes.
Risks of a Value Approach to Small-Cap Investing. Small companies
- -- those with a capitalization (market value) of $1 billion or less -- may offer
greater potential for capital appreciation since they are often overlooked or
undervalued by investors. Small-capitalization stocks are less actively followed
by stock analysts than are larger-capitalization stocks, and less information is
available to evaluate small-cap stock prices. As a result, compared with
larger-capitalization stocks, there may be greater variations between the
current stock price and the estimated underlying value, which could represent
greater opportunity for appreciation.
Investing in small companies involves greater risk as well as
greater opportunity than is customarily associated with more established
companies. Stocks of small companies may be subject to more abrupt or erratic
price movements than larger company securities. Small companies often have
limited product lines, markets, or financial resources, and their management may
lack depth and experience. In addition, a value approach to investing includes
the risks that 1) the market will not recognize a security's intrinsic value for
an unexpectedly long time, and 2) a stock that is judged to be undervalued is
actually appropriately priced due to intractable or fundamental problems that
are not yet apparent.
Common and Preferred Stocks. Stocks represent shares of ownership
in a company. Generally, preferred stock has a specified dividend and ranks
after bonds and before common stocks in its claim on income for dividend
payments and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to help
it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest appreciation
and depreciation potential of all corporate securities. While most preferred
stocks pay a dividend, the Fund may purchase preferred stock where the issuer
has omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential.
Convertible Securities and Warrants. The Fund may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price anytime during the
life of the warrants (generally, two or more years).
Foreign Securities. The Fund may invest up to 20% of its total
assets (excluding reserves) in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Some of the countries in which the Fund may invest may be considered to
be developing and may involve special risks. For a discussion of these risks as
well as the risks involved in investing in foreign securities, in general, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. Investors in foreign securities may
"hedge" their exposure to potentially unfavorable currency changes by purchasing
a contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a strategy
known as "proxy hedging." For a discussion of foreign currency contracts,
certain risks involved therein, and the risks of currency fluctuations
generally, see this Prospectus and the Company's SAI under "Certain Risks
Factors and Investment Methods."
Fixed Income Securities. The Fund may invest in debt securities of
any type without regard to quality or rating. Such securities would be purchased
in companies that meet the investment criteria for the Fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
High-Yield/High-Risk Investing. The Fund will not purchase a
noninvestment-grade debt security (or junk bond) if immediately after such
purchase the Fund would have more than 5% of its total assets invested in such
securities. For a discussion of the risks involved in investing in high-yield
lower-rated debt securities, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Fund may invest up to 10% of its total
assets in hybrid instruments. Hybrids can have volatile prices and limited
liquidity and their use by the Fund may not be successful. These instruments (a
type of potentially high-risk derivative) can combine the characteristics of
securities, futures, and options. For example, the principal amount, redemption,
or conversion terms of a security could be related to the market price of some
commodity, currency, or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under certain
conditions, the redemption value of such an investment could be zero. For a
discussion of hybrid investments, see the Company's SAI under "Certain Risk
Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may acquire illiquid securities (no more than
15% of net assets). For a discussion of illiquid securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Private Placements (Restricted Securities). These securities are
sold directly to a small number of investors usually institutions. Unlike public
offerings, such securities are not registered with the Commission. Although
certain of these securities may be readily sold, for example under Rule 144A,
the sale of others may involve substantial delays and additional costs. Subject
to guidelines promulgated by the Directors of the Company, the Fund will not
invest more than 15% of its net assets in illiquid securities. Illiquid
securities do not include securities eligible for resale under Rule 144A that
have been determined by the Sub-advisor to be liquid under guidelines
promulgated by the Directors of the Company. 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 total 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."
ASAF NEUBERGER&BERMAN MID-CAP GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
The Fund invests in a diversified portfolio of common stocks believed
to have the maximum potential for long-term above-average capital appreciation.
Under normal conditions, the Fund primarily invests in the common stocks of
medium capitalization companies ("mid-cap companies"). Companies with equity
market capitalizations from $300 million to $10 billion at the time of
investment are considered mid-cap companies. The Company may revise this
definition based on market conditions. Although the Fund will invest primarily
in the common stocks of mid-cap companies, investments may be made in the
securities of larger, widely traded companies ("large-cap companies") as well as
smaller, less well-known companies ("small-cap companies"). At times, markets
may favor the relative safety of larger capitalization securities and the
greater growth potential of smaller capitalization securities over medium
capitalization securities. The Fund does not seek to invest in securities that
pay dividends or interest, and any such income is incidental.
Investments in small- and mid-cap company stocks may present greater
opportunities for capital appreciation than investments in stocks of large-cap
companies. However, small- and mid-cap company stocks may have higher risk and
volatility. These stocks generally are not as broadly traded as large-cap
company stocks and their prices may fluctuate more widely and abruptly. Any such
movements in stocks held by the Fund would be reflected in the Fund's net asset
value. Small- and mid-cap company stocks are also less researched than large-cap
company stocks and are often overlooked in the market.
The Fund is normally managed using a growth-oriented investment
approach. A growth approach seeks stocks of companies that the Sub-advisor
projects will grow at above-average rates and faster than others expect. The
Fund's growth investment program involves greater risks and share price
volatility than programs that invest in more undervalued securities. When the
Sub-advisor believes that particular securities have greater potential for
long-term capital appreciation, the Fund may purchase such securities at prices
with higher multiples to measures of economic value (such as earnings or cash
flow) than an investor focusing primarily on current fundamental value. These
multiples, however, tend to be reasonable relative to the Sub-advisor's
expectation of the company's earnings growth rate.
In selecting equity securities for the Fund, the Sub-advisor will
consider, among other factors, an issuer's financial strength, competitive
position, projected future earnings, management strength and experience,
reasonable valuations, and other investment criteria. The Fund diversifies its
investments among companies and industries.
An investment in the Fund involves certain risks, depending upon the
types of investments it makes. Although equity securities are normally the
Fund's primary investment, when market conditions warrant it may invest in
preferred stocks, securities convertible into or exchangeable for common stocks,
U.S. Government and Agency Securities, investment grade and non-investment grade
debt securities, or money market instruments, or may retain assets in cash or
cash equivalents. The Fund may not necessarily buy any or all of the types of
securities or use any or all of the investment techniques that are described
below. As discussed in more detail below, special risk factors apply to certain
investments that may be made by the Fund, including investments in foreign
securities, options and futures contracts, zero coupon bonds and debt securities
rated below investment grade. As part of its strategy to achieve long-term
capital appreciation, the Fund may invest up to 20% of its net assets in
securities of issuers organized and doing business principally outside the
United States. Up to 10% of the Fund's net assets, measured at the time of
investment, may be invested in corporate debt securities that are below
investment grade, but rated at least C by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Rating Group ("S&P"), or comparable unrated
securities. The use of hedging or other techniques is discretionary and no
representation is made that the risk of the Fund will be reduced by the
techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not
purchase securities with the intention of profiting from short-term trading, the
Fund may sell portfolio securities when the Sub-advisor believes that such
action is advisable. Therefore, the Fund may have higher portfolio turnover than
other mutual funds with similar objectives. For a discussion of portfolio
turnover and its effects, see this Prospectus and the Company's SAI under
"Portfolio Transactions."
Cash Investments. For temporary defensive purposes, the Fund may invest
up to 100% of its assets in cash or cash equivalents, U.S. Government and agency
securities, commercial paper and certain other money market instruments, as well
as repurchase agreements collateralized by the foregoing. To the extent that the
Fund is invested in these temporary defensive instruments, it will not be
pursuing its investment objective.
Fixed Income Securities. The Fund may invest in fixed income or debt
securities, the value of which are likely to decline in times of rising interest
rates and rise in times of falling interest rates. In general, the longer the
maturity of a fixed income security, the more pronounced is the effect of a
change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating
from at least one nationally recognized statistical rating organization
("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit
Rating Co. in one of the two highest rating categories (the highest category in
the case of commercial paper) or, if not rated by any NRSRO, such as U.S.
Government and Agency securities, have been determined by the Sub-advisor to be
of comparable quality. Investment grade debt securities are those receiving
ratings from at least one NRSRO in one of the four highest rating categories or,
if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities. Securities rated by Moody's in its fourth highest category (Baa) may
have speculative characteristics; a change in economic factors could lead to a
weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated below the
fourth highest category by all NRSROs that have rated them, and comparable
unrated securities, are considered to be below investment grade. The Fund may
invest up to 10% of its net assets, measured at the time of investment, in debt
securities that are below investment grade or comparable unrated securities, but
may not invest in securities rated below C by Moody's or S&P at the time of
investment. Securities rated below investment grade ("junk bonds") are judged to
be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
While such securities may be considered predominantly speculative, as debt
securities, they generally have priority over equity securities of the same
issuer and are generally better secured.
Debt securities in the lowest rating categories may involve a
substantial risk of default or may be in default. Changes in economic conditions
or developments regarding the individual issuer are more likely to cause price
volatility and weaken the capacity of the issuer of such securities to make
principal and interest payments than is the case for higher-grade debt
securities. An economic downturn affecting the issuer may result in an increased
incidence of default. In the case of lower-rated 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 that pay interest periodically and in cash. The Sub-advisor will
invest in such securities only when it concludes that the anticipated return to
the Fund on such an investment warrants exposure to the additional level of risk
If the quality of any fixed income securities held by the Fund
deteriorates so that they no longer are rated at least C by Moody's or S&P, or,
if unrated, are determined by the Sub-advisor to no longer be of comparable
quality, the Fund will engage in an orderly disposition of the securities to the
extent necessary to ensure that the Fund's holdings of such securities will not
exceed 5% of its net assets.
For an additional discussion of the risks involved in lower-rated
bonds, see this Prospectus and the Company's SAI under "Certain Risk Factors and
Investment Methods." For an additional description of the ratings services'
securities ratings, see the Appendix the Company's SAI.
Convertible Securities. The Fund may invest in convertible securities.
A convertible security is a bond, debenture, note, preferred stock, or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Many convertible securities are rated
below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest
currently; instead, they are sold at a discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are
obligations of the U.S. Treasury backed by the full faith and credit of the
United States. U.S. Government agency securities are issued or guaranteed by
U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored
enterprises, such as the Government National Mortgage Association (commonly
known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage
Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation,
Student Loan Marketing Association (commonly known as "Sallie Mae"), and
Tennessee Valley Authority. Agency securities may be backed by the full faith
and credit of the United States, the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government and agency securities include U.S.
Government and agency mortgage-backed securities. The market prices of U.S.
Government and agency securities are not guaranteed by the government and
generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Fund may not purchase
portfolio securities if its outstanding borrowings, including reverse repurchase
agreements, exceed 5% of its total assets. In addition, the Fund is subject to
the fundamental restriction on borrowing described in the Company's SAI under "
Fundamental Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines
established by the Board of Directors of the Company, the Fund may invest up to
15% of its net assets in illiquid securities, which are securities that cannot
be expected to be sold within seven days at approximately the price at which
they are valued. These may include unregistered or other restricted securities
and repurchase agreements maturing in greater than seven days. Illiquid
securities may also include Rule 144A securities (restricted securities that may
be traded freely among qualified institutional buyers pursuant to an exemption
from the registration requirements of the securities laws); these securities are
considered illiquid unless the Sub-advisor, acting pursuant to the guidelines
established by the Board of Directors, determines they are liquid. Generally,
foreign securities freely tradable in their principal market are not considered
restricted or illiquid. Illiquid securities may be difficult for a Fund to value
or dispose of due to the absence of an active trading market. The sale of some
illiquid securities by the Fund may be subject to legal restrictions which could
be costly to the Fund.
Foreign Securities. The Fund may invest in U.S. dollar-denominated foreign
securities. Foreign securities are those of issuers organized and doing business
principally outside the U.S., including non-U.S. governments, their agencies,
and instrumentalities. The Fund may invest in foreign securities denominated in
or indexed to foreign currencies, which may also be affected by the fluctuation
of the foreign currencies relative to the U.S. dollar. . The Fund may invest in
U.S. dollar-denominated and non-U.S. dollar-denominated corporate and government
debt securities of foreign issuers. In addition, the Fund may enter into forward
foreign currency contracts or futures contracts (agreements to exchange one
currency for another at a future date) and related options to manage currency
risks and to facilitate transactions in foreign securities.
The Fund may only invest up to 20% of the value of its total assets,
measured at the time of investment, in foreign securities. The 20% limitation
does not apply with respect to foreign securities that are denominated in U.S.
dollars.
The Fund may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
International Depositary Receipts ("IDRs"). ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company evidencing its
ownership of the underlying foreign securities. Most ADRs are denominated in
U.S. dollars and are traded on a U.S. stock exchange. Issuers of the securities
underlying unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR. EDRs and IDRs are
receipts typically issued by a European bank or trust company evidencing its
ownership of the underlying foreign securities. GDRs are receipts issued by
either a U.S. or non-U.S. banking institution evidencing its ownership of the
underlying foreign securities and are often denominated in U.S. dollars.
Investments in foreign securities could be affected by factors
generally not thought to be present in the U.S. Such factors include, but are
not limited to, varying custody, brokerage and settlement practices; difficulty
in pricing some foreign securities; and potentially adverse local, political,
economic, social, or diplomatic developments, the investment significance of
which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies
and governments include changes in currency exchange rates and currency exchange
control regulations or other foreign or U.S. laws or restrictions applicable to
such investments or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain portfolio securities
irrespective of the performance of the underlying investment. Investments in
depositary receipts (whether or not denominated in U.S. dollars) may be subject
to exchange controls and changes in rates of exchange with the U.S. dollar
because the underlying security is usually denominated in foreign currency. All
of the foregoing risks may be intensified in emerging industrialized and less
developed countries.
For an additional discussion of foreign securities and the risks
involved therein, including the risks of currency fluctuations, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Fund may enter into forward
contracts in order to protect against adverse changes in foreign currency
exchange rates, to facilitate transactions in foreign securities and to
repatriate dividend or interest income received in foreign currencies. The Fund
may enter into contracts to purchase foreign currencies to protect against an
anticipated rise in the U.S. dollar price of securities it intends to purchase.
The Fund may also enter into contracts to sell foreign currencies to protect
against a decline in value of its foreign currency denominated portfolio
securities due to a decline in the value of foreign currencies against the U.S.
dollar.
If the Fund enters into a forward contract to sell foreign currency, it
may be required to place cash, fixed income or equity securities in a segregated
account in an amount equal to the value of the Fund's total assets committed to
the consummation of the forward contract. Although these contracts can protect
the Fund from adverse exchange rates, they involve risk of loss if the
Sub-advisor fails to predict foreign currency values correctly. For an
additional discussion of forward contracts and their risks, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Put and Call Options, Futures Contracts, Options on Futures Contracts.
The Fund may try to reduce the risk of securities price or exchange rate changes
(hedge) or generate income by writing (selling) covered call options against
securities held in its portfolio, may purchase call options in related closing
transactions, and may also purchase put options on portfolio securities or
foreign currencies. When the Fund writes a covered call option against a
security, the Fund is obligated to sell that security to the purchaser of the
option at a fixed price at any time during a specified period if the purchaser
decides to exercise the option. The maximum price the seller may realize on the
security during the option period is the fixed price. The seller continues to
bear the risk of a decline in the security's price, although this risk is
reduced, at least in part, by the premium received for writing the option.
The Fund may enter into futures contracts on debt securities, interest
rates, and securities indices, and may purchase and sell options on such
contracts on both the U.S. and foreign exchanges for hedging and non-hedging
purposes.
The Fund may purchase and write put and call options on foreign
currencies to protect against declines in the dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. The Fund may also use options on foreign currencies to
cross-hedge. In addition, the Fund may purchase call or put options on
currencies for non-hedging purposes when the Sub-advisor expects that a currency
will appreciate or depreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not held by
the Fund. Options on foreign currencies may be traded on U.S. or foreign
exchanges or over-the-counter. Options on foreign currencies that are traded in
the over-the-counter market may be considered to be illiquid securities and
subject to the Fund's restrictions on illiquid securities.
The Fund will not write a call option on a security or currency unless
it owns the underlying security or currency or has the right to obtain it at no
additional cost. In addition to writing covered call options, the Fund may write
put options on any securities in which it may invest or options on any
securities index based on securities in which the Fund may invest.
The use of futures contracts and the writing and purchasing of options
are highly specialized activities that involve investment techniques and risks
different from those associated with ordinary securities transactions, including
transactional expense, price volatility and a high degree of leverage. The
writing of options could result in significant increases in the Fund's turnover
rate. When the Fund uses futures or writes options, the Fund will place cash,
fixed income or equity securities in a segregated account or will "cover" its
position to the extent required by SEC staff policy. The use of these techniques
therefore could result in the inability of the Fund to purchase or sell a
security at a time that would otherwise be favorable for it to do so, or the
need for the Fund to sell a security at a disadvantageous time, due to its need
to maintain "cover" or to segregate securities. .. Futures and options contracts
are considered derivatives.
For an additional discussion of options and their risks, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Forward Commitments and When-Issued Securities. In a when-issued or
forward commitment transaction, the Fund commits to purchase securities in order
to secure an advantageous price and yield at the time of the commitment and pays
for the securities when they are delivered at a future date (generally within
two months). If the seller fails to complete the sale, the Fund may lose the
opportunity to obtain a favorable price and yield. When issued securities or
securities subject to a forward commitment may decline or increase in value
during the period from the Fund's investment commitment to the settlement of the
purchase, which may magnify fluctuation in the Fund's net asset value.
Repurchase Agreements. Subject to guidelines established by the Board
of Directors of the Company, the Fund may enter into repurchase agreements. The
Fund may enter into repurchase agreements on up to 25% of its net assets. In a
repurchase agreement, the Fund buys a security from a Federal Reserve member
bank, or a securities dealer and simultaneously agrees to sell it back at a
higher price, at a specified date, usually less than a week later. The
underlying securities must fall within the Fund's investment policies and
limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors
the creditworthiness of repurchase agreement sellers. For an additional
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Investment Programs of the Funds."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Fund sells securities to a bank or a securities dealer and at the same time
agrees to repurchase the same securities at a higher price on a specific date.
During the period before the repurchase, the Fund continues to receive principal
and interest payments on the securities. The Fund is compensated by the interest
earned on the cash proceeds of the initial sale. Reverse repurchase agreements
may increase fluctuations in the Fund's net asset value and may be viewed as a
form of leverage. The Sub-advisor monitors the creditworthiness of parties to
reverse repurchase agreements. For an additional discussion of reverse
repurchase agreements and certain risks involved therein, see this Prospectus
under "Certain Risk Factors and Investment Methods" and the Company's SAI under
"Investment Programs of the Funds."
ASAF NEUBERGER&BERMAN MID-CAP VALUE FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
The Fund seeks capital growth through an investment approach that is
designed to increase capital with reasonable risk. The Fund invests principally
in common stocks of medium to large capitalization established companies, using
the value-oriented investment approach. A value-oriented portfolio manager buys
stocks that are selling at a price that is lower than what the manager believes
they are worth. These include stocks that are currently under-researched or are
temporarily out of favor on Wall Street.
Fund managers identify value stocks in several ways. One of the most
common identifiers is a low price-to-earnings ratio -- that is, stocks selling
at multiples of earnings per share that are lower than that of the market as a
whole. Other criteria are high dividend yield, a strong balance sheet and
financial position, a recent company restructuring with the potential to realize
hidden values, strong management, and low price-to-book value (net value of the
company's assets). The Sub-advisor looks for securities believed to be
undervalued based on strong fundamentals, including a low price-to-earnings
ratio, consistent cash flow, and the company's track record through all parts of
the market cycle.
The Sub-advisor believes that, over time, securities that are
undervalued are more likely to appreciate in price and be subject to less risk
of price decline than securities whose market prices have already reached their
perceived economic value. This approach also contemplates selling portfolio
securities when they are considered to have reached their potential.
The Sub-advisor considers additional factors when selecting securities
for the Fund, including ownership by a company's management of the company's
stock and the dominance of a company in its particular field.
In addition to investing in the stocks of medium capitalization
companies ("mid-cap companies") and large capitalization companies ("large-cap
companies"), investments may be made in smaller, less well-known companies
("small-cap companies"). Investments in small- and mid-cap company stocks may
present greater opportunities for capital appreciation than investments in
stocks of large-cap companies. However, small- and mid-cap company stocks may
have higher risk and volatility. These stocks generally are not as broadly
traded as large-cap company stocks and their prices may fluctuate more widely
and abruptly. Any such movements in stocks held by the Fund would be reflected
in the Fund's net asset value. Small- and mid-cap company stocks are also less
researched than large-cap company stocks and are often overlooked in the market.
An investment in the Fund involves certain risks, depending upon the
types of investments it makes. Although the Fund ordinarily invests primarily in
common stocks, when market conditions warrant it may invest in preferred stocks,
securities convertible into or exchangeable for common stocks, U.S. Government
and agency securities, debt securities, or money market instruments, or may
retain assets in cash or cash equivalents. The Fund may not necessarily buy any
or all of the types of securities or use any or all of the techniques that are
described below. As discussed in more detail below, special risk factors apply
to certain investments that may be made by the Fund, including investments in
foreign securities, options contracts, zero coupon bonds, and debt securities
rated below investment grade. Up to 15% of the Fund's net assets, measured at
the time of investment, may be invested in corporate debt securities that are
below investment grade or in comparable unrated securities. The use of hedging
or other techniques is discretionary and no representation is made that the risk
of the Fund will be reduced by the techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not
purchase securities with the intention of profiting from short-term trading, the
Fund may sell portfolio securities when the Sub-advisor believes that such
action is advisable. Therefore, the Fund may have higher portfolio turnover than
other mutual funds with similar objectives. For a discussion of portfolio
turnover and its effects, see this Prospectus and the Company's SAI under
"Portfolio Transactions."
Cash Investments. For temporary defensive purposes, the Fund may invest
up to 100% of its assets in cash or cash equivalents, U.S. Government and agency
securities, commercial paper and certain other money market instruments, as well
as repurchase agreements collateralized by the foregoing. To the extent that the
Fund is invested in these temporary defensive instruments, it will not be
pursuing its investment objective.
Fixed Income Securities. The Fund may invest in fixed income or debt
securities, the value of which are likely to decline in times of rising interest
rates and rise in times of falling interest rates. In general, the longer the
maturity of a fixed income security, the more pronounced is the effect of a
change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating
from at least one nationally recognized statistical rating organization
("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit
Rating Co. in one of the two highest rating categories (the highest category in
the case of commercial paper) or, if not rated by any NRSRO, such as U.S.
Government and Agency securities, have been determined by the Sub-advisor to be
of comparable quality. Investment grade debt securities are those receiving
ratings from at least one NRSRO in one of the four highest rating categories or,
if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities. Securities rated by Moody's in its fourth highest category (Baa) may
have speculative characteristics; a change in economic factors could lead to a
weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated below the
fourth highest category by all NRSROs that have rated them, and comparable
unrated securities, are considered to be below investment grade. The Fund may
invest up to 15% of its net assets, measured at the time of investment, in debt
securities that are below investment grade or comparable unrated securities.
Securities rated below investment grade ("junk bonds") are judged to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. While such
securities may be considered predominantly speculative, as debt securities, they
generally have priority over equity securities of the same issuer and are
generally better secured.
Debt securities in the lowest rating categories may involve a
substantial risk of default or may be in default. Changes in economic conditions
or developments regarding the individual issuer are more likely to cause price
volatility and weaken the capacity of the issuer of such securities to make
principal and interest payments than is the case for higher-grade debt
securities. An economic downturn affecting the issuer may result in an increased
incidence of default. In the case of lower-rated 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 that pay interest periodically and in cash. The Sub-advisor will
invest in such securities only when it concludes that the anticipated return to
the Fund on such an investment warrants exposure to the additional level of
risk.
For an additional discussion of the risks involved in lower-rated
bonds, see this Prospectus and the Company's SAI under "Certain Risk Factors and
Investment Methods." For an additional description of the ratings services'
securities ratings, see the Appendix to the Company's SAI.
Convertible Securities. The Fund may invest in convertible securities.
A convertible security is a bond, debenture, note, preferred stock, or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Many convertible securities are rated
below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest
currently; instead, they are sold at a discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are
obligations of the U.S. Treasury backed by the full faith and credit of the
United States. U.S. Government agency securities are issued or guaranteed by
U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored
enterprises, such as the Government National Mortgage Association (commonly
known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage
Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation,
Student Loan Marketing Association (commonly known as "Sallie Mae"), and
Tennessee Valley Authority. Agency securities may be backed by the full faith
and credit of the United States, the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government and agency securities include U.S.
Government and agency mortgage-backed securities. The market prices of U.S.
Government and agency securities are not guaranteed by the government and
generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Fund may not purchase
portfolio securities if its outstanding borrowings, including reverse repurchase
agreements, exceed 5% of its total assets. In addition, the Fund is subject to
the fundamental restriction on borrowing described in the Company's SAI under
"Fundamental Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines
established by the Board of Directors of the Company, the Fund may invest up to
15% of its net assets in illiquid securities, which are securities that cannot
be expected to be sold within seven days at approximately the price at which
they are valued. These may include unregistered or other restricted securities
and repurchase agreements maturing in greater than seven days. Illiquid
securities may also include Rule 144A securities (restricted securities that may
be traded freely among qualified institutional buyers pursuant to an exemption
from the registration requirements of the securities laws); these securities are
considered illiquid unless the Sub-advisor, acting pursuant to the guidelines
established by the Board of Directors, determines they are liquid. Generally,
foreign securities freely tradable in their principal market are not considered
restricted or illiquid. Illiquid securities may be difficult for a Fund to value
or dispose of due to the absence of an active trading market. The sale of some
illiquid securities by the Fund may be subject to legal restrictions which could
be costly to the Fund.
Foreign Securities. The Fund may invest in U.S. dollar-denominated foreign
securities. Foreign securities are those of issuers organized and doing business
principally outside the U.S., including non-U.S. governments, their agencies,
and instrumentalities. The Fund may invest in foreign securities denominated in
or indexed to foreign currencies, which may also be affected by the fluctuation
of the foreign currencies relative to the U.S. dollar. The Fund may invest in
U.S. dollar-denominated and non-U.S. dollar-denominated corporate and government
debt securities of foreign issuers. In addition, the Fund may enter into forward
foreign currency contracts (agreements to exchange one currency for another at a
future date) to manage currency risks and to facilitate transactions in foreign
securities.
The Fund may only invest up to 10% of the value of its total assets,
measured at the time of investment, in foreign securities. The 10% limitation
does not apply with respect to foreign securities that are denominated in U.S.
dollars.
The Fund may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
International Depositary Receipts ("IDRs"). ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company evidencing its
ownership of the underlying foreign securities. Most ADRs are denominated in
U.S. dollars and are traded on a U.S. stock exchange. Issuers of the securities
underlying unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR. EDRs and IDRs are
receipts typically issued by a European bank or trust company evidencing its
ownership of the underlying foreign securities. GDRs are receipts issued by
either a U.S. or non-U.S. banking institution evidencing its ownership of the
underlying foreign securities and are often denominated in U.S. dollars.
Investments in foreign securities could be affected by factors
generally not thought to be present in the U.S. Such factors include, but are
not limited to, varying custody, brokerage and settlement practices; difficulty
in pricing some foreign securities; and potentially adverse local, political,
economic, social, or diplomatic developments, the investment significance of
which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies
and governments include changes in currency exchange rates and currency exchange
control regulations or other foreign or U.S. laws or restrictions applicable to
such investments or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain portfolio securities
irrespective of the performance of the underlying investment. Investments in
depositary receipts (whether or not denominated in U.S. dollars) may be subject
to exchange controls and changes in rates of exchange with the U.S. dollar
because the underlying security is usually denominated in foreign currency. All
of the foregoing risks may be intensified in emerging industrialized and less
developed countries.
For an additional discussion of foreign securities and the risks
involved therein, including the risks of currency fluctuations, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Fund may enter into forward
contracts in order to protect against adverse changes in foreign currency
exchange rates, to facilitate transactions in foreign securities and to
repatriate dividend or interest income received in foreign currencies. The Fund
may enter into contracts to purchase foreign currencies to protect against an
anticipated rise in the U.S. dollar price of securities it intends to purchase.
The Fund may also enter into contracts to sell foreign currencies to protect
against a decline in value of its foreign currency denominated portfolio
securities due to a decline in the value of foreign currencies against the U.S.
dollar.
If the Fund enters into a forward contract to sell foreign currency, it
may be required to place cash, fixed income or equity securities in a segregated
account in an amount equal to the value of the Fund's total assets committed to
the consummation of the forward contract. Although these contracts can protect
the Fund from adverse exchange rates, they involve risk of loss if the
Sub-advisor fails to predict foreign currency values correctly. For an
additional discussion of forward contracts and their risks, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Covered Call Options. The Fund may try to reduce the risk of securities
price changes (hedge) or generate income by writing (selling) covered call
options against securities held in its portfolio having a market value not
exceeding 10% of its net assets and may purchase call options in related closing
transactions. When the Fund writes a covered call option against a security, the
Fund is obligated to sell that security to the purchaser of the option at a
fixed price at any time during a specified period if the purchaser decides to
exercise the option. The maximum price the seller may realize on the security
during the option period is the fixed price. The seller continues to bear the
risk of a decline in the security's price, although this risk is reduced, at
least in part, by the premium received for writing the option.
Options are considered derivatives. For an additional discussion of
options and their risks, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
When-Issued Securities. In a when-issued transaction, the Fund commits
to purchase securities in order to secure an advantageous price and yield at the
time of the commitment and pays for the securities when they are delivered at a
future date (generally within two months). If the seller fails to complete the
sale, the Fund may lose the opportunity to obtain a favorable price and yield.
When issued securities may decline or increase in value during the period from
the Fund's investment commitment to the settlement of the purchase, which may
magnify fluctuation in the Fund's net asset value.
Repurchase Agreements. Subject to guidelines established by the Board
of Directors of the Company, the Fund may enter into repurchase agreements. In a
repurchase agreement, the Fund buys a security from a Federal Reserve member
bank, or a securities dealer and simultaneously agrees to sell it back at a
higher price, at a specified date, usually less than a week later. The
underlying securities must fall within the Fund's investment policies and
limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors
the creditworthiness of repurchase agreement sellers. For an additional
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Investment Programs of the Funds."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Fund sells securities to a bank or a securities dealer and at the same time
agrees to repurchase the same securities at a higher price on a specific date.
During the period before the repurchase, the Fund continues to receive principal
and interest payments on the securities. The Fund is compensated by the interest
earned on the cash proceeds of the initial sale. Reverse repurchase agreements
may increase fluctuations in the Fund's net asset value and may be viewed as a
form of leverage. The Sub-advisor monitors the creditworthiness of parties to
reverse repurchase agreements. For an additional discussion of reverse
repurchase agreements and certain risks involved therein, see this Prospectus
under "Certain Risk Factors and Investment Methods" and the Company's SAI under
"Investment Programs of the Funds."
Short Sales Against-the-Box. The Fund may make short sales
against-the-box. To effect a short sale, the Fund will borrow a security from a
brokerage firm to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed at a later date. A short sale is "against-the-box"
when, at all times during which a short position is open, the Fund owns an equal
amount of such securities, or owns securities giving it the right, without
payment of additional consideration, to obtain an equal amount of securities
sold short. Short sales against-the-box allow the Fund to hedge against price
fluctuations by locking in a sale price for securities it does not wish to sell
immediately.
ASAF ROBERTSON STEPHENS VALUE + GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital appreciation.
Investment Policies:
The Fund will invest primarily in growth companies believed by the
Sub-advisor to have favorable relationships between price/earnings ratios and
growth rates in sectors offering the potential for above-average returns.
In selecting investments for the Fund, the Sub-advisor's primary
emphasis is typically on evaluating a company's management, growth prospects,
business operations, revenues, earnings, cash flows, and balance sheet in
relationship to its share price. The Sub-advisor may select stocks which it
believes are undervalued relative to the current stock price. Undervaluation of
a stock can result from a variety of factors, such as a lack of investor
recognition of (1) the value of a business franchise and continuing growth
potential, (2) a new, improved or upgraded product, service or business
operation, (3) a positive change in either the economic or business condition
for a company, (4) expanding or changing markets that provide a company with
either new earnings direction or acceleration, or (5) a catalyst, such as an
impending or potential asset sale or change in management, that could draw
increased investor attention to a company. The Sub-advisor also may use similar
factors to identify stocks which it believes to be overvalued, and may engage in
short sales of such securities.
The Fund may also engage in the following investment practices,
each of which involves certain special risks.
Investments in Smaller Companies. The Fund may invest a substantial
portion of its assets in securities issued by small companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. Such
companies may have limited product lines, markets, or financial resources and
may be dependent on a limited management group. While the markets in securities
of such companies have grown rapidly in recent years, such securities may trade
less frequently and in smaller volume than more widely held securities. The
values of these securities may fluctuate more sharply than those of other
securities, and the Fund may experience some difficulty in establishing or
closing out positions in these securities at prevailing market prices. There may
be less publicly available information about the issuers of these securities or
less market interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such securities to
reflect the full value of their issuers' underlying earnings potential or
assets.
Some securities of smaller issuers may be restricted as to resale
or may otherwise be highly illiquid. The ability of the Fund to dispose of such
securities may be greatly limited, and the Fund may have to continue to hold
such securities during periods when the Sub-advisor would otherwise have sold
the security. It is possible that the Sub-advisor or its affiliates or clients
may hold securities issued by the same issuers, and may in some cases have
acquired the securities at different times, on more favorable terms, or at more
favorable prices, than the Fund. The Fund will not invest, in the aggregate,
more than 15% of its net assets in illiquid securities. Securities eligible for
resale under Rule 144A of the Securities Act of 1933 could be deemed "liquid"
when saleable in a readily available market. For a discussion of illiquid and
restricted securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Short Sales. When the Sub-advisor anticipates that the price of a
security will decline, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. The Fund may
make a profit or incur a loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Fund must replace the borrowed security. All short sales must be
fully collateralized, and the Fund will not sell securities short if,
immediately after and as a result of the sale, the value of all securities sold
short by the Fund exceeds 25% of its total assets. The Fund limits short sales
of any one issuer's securities to 2% of the Fund's total assets and to 2% of any
one class of the issuer's securities.
Foreign Securities. The Fund may invest up to 35% of its net assets
in securities principally traded in foreign markets. The Fund may buy or sell
foreign currencies and options and futures contracts on foreign currencies for
hedging purposes in connection with its foreign investments.
The Fund may also at times invest a substantial portion of its
assets in securities of issuers in developing countries. Although many of the
securities in which the Fund may invest are traded on securities exchanges, the
Fund may trade in limited volume, and the exchanges may not provide all of the
conveniences or protections provided by securities exchanges in more developed
markets. The Fund may also invest a substantial portion of its assets in
securities traded in the over-the-counter markets in such countries and not on
any exchange, which may affect the liquidity of the investment and expose the
Fund to the credit risk of their counterparties in trading those investments.
For a discussion of the risks involved in investing in developing countries and
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."
Debt Securities. The Fund may invest in debt securities from time
to time, if the Sub-advisor believes that such investments might help achieve
the Fund's investment objective. The Sub-advisor expects that under normal
circumstances the Fund will not likely invest a substantial portion of its
assets in debt securities.
The Fund will invest only in securities rated "investment grade" or
considered by the Sub-advisor to be of comparable quality. Investment grade
securities are rated Baa or higher by Moody's Investors Service, Inc.
("Moody's") or BBB or higher by Standard & Poor's Corporation ("S&P").
Securities rated Baa or BBB lack outstanding investment characteristics, have
speculative characteristics, and are subject to greater credit and market risks
than higher-rated securities. For a description of Moody's and S&P's rating
categories, see the Appendix to the Company's SAI.
The Fund may also invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are
subject to greater fluctuation in response to changes in market interest rates
than bonds which pay interest currently, and may involve greater credit risk
than such bonds.
The Fund will not necessarily dispose of a security when its debt
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Fund's investment
objective.
Options and Futures. The Fund may buy and sell call and put options
to hedge against changes in net asset value or to attempt to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Fund may at times seek to hedge against fluctuations in
net asset value and to attempt to increase its investment return.
The Fund's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Fund will be able to utilize these instruments effectively for the purposes
stated above.
The Fund expects that its options and futures transactions
generally will be conducted on recognized exchanges. The Fund may in certain
instances purchase and sell options in the over-the-counter markets. The Fund's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options, and such transactions also involve the risk
that securities dealers participating in such transactions would be unable to
meet their obligations to the Fund. The Fund will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of the Sub-advisor, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
Index Futures and Options. The Fund may buy and sell index futures
contracts ("index futures") and options on index futures and on indices (or may
purchase warrants whose value is based on the value from time to time of one or
more foreign securities indices) for hedging purposes. An index future is a
contract to buy or sell units of a particular bond or stock index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time when the Fund enters into and terminates an index futures or
option transaction, the Fund realizes a gain or loss. The Fund may also buy and
sell index futures and options to increase its investment return.
LEAPs and BOUNDs. The Fund may purchase long-term exchange-traded equity
options called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Write
Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the opportunity
to participate in the underlying securities' appreciation in excess of a fixed
dollar amount, and BOUNDs provide a holder the opportunity to retain dividends
on the underlying securities while potentially participating in the underlying
securities' capital appreciation up to a fixed dollar amount. The Fund will not
purchase these options with respect to more than 25% of the value of its net
assets.
For a discussion of options and futures and the risks involved
therein, see this Prospectus and the Company's SAI under "Certain Risk Factors
and Investment Methods."
Sector Concentration. At times, the Fund may invest more than 25%
of its assets in securities of issuers in one or more market sectors such as,
for example, the technology sector. A market sector may be made up of companies
in a number of related industries. The Fund would only concentrate its
investments in a particular market sector if the Sub-advisor were to believe the
investment return available from concentration in that sector justifies any
additional risk associated with concentration in that sector. When the Fund
concentrates its investments in a market sector, financial, economic, business,
and other developments affecting issuers in that sector will have a greater
effect on the Fund than if it had not concentrated its assets in that sector.
The Fund may not concentrate its assets in securities of issuers having their
principal business activities in a single industry.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements. These
transactions must be fully collateralized at all times, but involve some risk to
the Fund if the other party should default on its obligations and the Fund is
delayed or prevented from recovering the collateral. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Defensive Strategies. At times, the Sub-advisor may judge that
market conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Sub-advisor may temporarily use alternative strategies, primarily designed to
reduce fluctuations in the values of the Fund's assets. In implementing these
"defensive" strategies, the Fund may invest in U.S. Government securities, other
high-quality debt instruments, and other securities the Sub-advisor believes to
be consistent with the Fund's best interests.
Portfolio Turnover. The Fund may have higher portfolio turnover than other
mutual funds with similar objectives. For a discussion of portfolio turnover and
its effects, see this Prospectus and the Company's SAI under "Portfolio
Transactions."
ASAF Marsico Capital Growth Fund:
Investment Objective: The investment objective of the Fund is to seek capital
growth. This is a fundamental objective of the Fund. Income realization is not
an investment objective 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. The Sub-advisor expects that the majority of the Fund's assets will
be invested in the common stocks of larger, more established companies. 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.
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. Fund
changes may be effected for other reasons. 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. 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.
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. 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."
Debt Securities. Debt securities that the Fund may purchase include
corporate bonds and debentures, government securities, mortgage- and
asset-backed securities, zero-coupon bonds, index/structured notes, high-grade
commercial paper, certificates of deposit and repurchase agreements. The Fund
will not invest more than 5% of its total assets in lower-rated high-yield bonds
. The Fund will not invest more than 25% of its total assets in mortgage- and
asset-backed securities. For a discussion of mortgage- and asset-backed
securities and their risks, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
Zero coupon, Pay-in-kind, and Step Coupon Securities. The Fund may
invest up to 10% of its total assets in zero coupon, pay-in-kind and step coupon
securities in the aggregate. Zero coupon bonds are debt securities that do not
pay periodic interest, but are issued at a discount from their face value. The
discount approximates the total amount of interest the security will accrue from
the date of issuance to maturity. Pay-in-kind bonds normally give the issuer the
option to pay cash at a coupon payment date or give the holder of the security a
similar bond with the same coupon rate and a face value equal to the amount of
the coupon payment that would have been made. Step coupon bonds begin to pay
coupon interest, or pay an increased rate of interest, at some time after they
are issued. The discount at which step coupon bonds trade depends on the time
remaining until cash payments begin, prevailing interest rates, the liquidity of
the security and the perceived credit quality of the issuer. The market value of
zero coupon, pay-in-kind and step coupon bonds generally will fluctuate more in
response to changes in interest rates than will conventional interest-paying
securities with comparable maturities.
Index/structured Securities. The Fund may invest without limit in
index/structured securities, which are debt securities, typically with short to
intermediate terms, whose value at maturity or interest rate is linked to
currencies, interest rates, equity securities, indices, commodity prices or
other financial indicators. Such securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the reference index or
instrument appreciates). Index/structured securities may have return
characteristics similar to direct investments in the underlying instruments, but
may be more volatile than the underlying instruments. The Fund bears the market
risk of an investment in the underlying instruments, as well as the credit risk
of the issuer of the index/structured security.
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."
Futures, Options and Other Derivative Instruments. 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 certain
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 Board
of Directors of the Company, the Fund may enter into repurchase agreements,
which involve the purchase of a security by the Fund and a simultaneous
agreement (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. 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 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 Board of
Directors of the Company, the Fund may also invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. Subject to the Fund's restrictions on borrowing, the Fund
may 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."
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek growth of
capital. Realization of income is not a significant investment consideration and
any income realized on the Fund's investments, therefore, will be incidental to
the Fund's objective.
Investment Policies:
The Fund will pursue its objective by investing primarily in common
stocks. Common stock investments will be in industries and companies that the
Sub-advisor believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Fund's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Fund may also invest to a lesser degree in preferred stocks,
convertible securities, warrants, and debt securities when the Fund perceives an
opportunity for capital growth from such securities or so that the Fund may
receive a return on its idle cash. The Fund may also invest in money market
funds managed by the Sub-advisor as a means of receiving a return on 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 other
investment companies (including money market funds), 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.
The Fund may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Fund may also purchase securities of
foreign issuers, including foreign equity and debt securities and depositary
receipts. Foreign securities are selected on a stock-by-stock basis without
regard to any defined allocation among countries or geographic regions. However,
certain factors such as expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships, and
prospects for economic growth among countries, regions or geographic areas may
warrant greater consideration in selecting foreign stocks. No more than 25% of
the Fund's assets may be invested in foreign securities denominated in foreign
currency and not publicly traded in the United States. For a discussion of
depositary receipts and the risks involved in investing in foreign securities,
including the risk of currency fluctuations, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. Subject to
certain limitations, the Fund may purchase and write options on securities,
financial indices, and foreign currencies, and may invest in futures contracts
on securities, financial indices, and foreign currencies ("futures contracts"),
options on futures contracts, forward contracts and swaps and swap-related
products. These instruments will be used primarily to hedge the Fund's positions
against potential adverse movements in securities prices, foreign currency
markets or interest rates. To a limited extent, the Fund may also use derivative
instruments for non-hedging purposes such as increasing the Fund's income or
otherwise enhancing return. The Fund will not use futures contracts and options
for leveraging purposes. There can be no assurance, however, that the use of
these instruments by the Fund will assist it in achieving its investment
objective. The use of futures, options, forward contracts and swaps involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. The Sub-advisor may, from time to time, at
its own expense, call upon the experience of experts to assist it in
implementing these strategies. The Fund may also use a variety of currency
hedging techniques, including forward currency contracts, to manage exchange
rate risk with respect to investments exposed to foreign currency fluctuations.
For an additional discussion of futures and options transactions and the risks
involved therein, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements, which
involve the purchase of a security by the Fund and a simultaneous agreement
(generally with a bank or dealer) to repurchase the security from the Fund at a
specified date or upon demand. The Fund's repurchase agreements will at all
times be fully collateralized. Pursuant to an exemptive order granted by the
Commission, the Fund and other funds advised by the Sub-advisor may invest in
repurchase agreements and other money market instruments through a joint trading
account. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements. The Fund is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells
a security and agrees to repurchase it at a mutually agreed upon date and price.
For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Fund
may purchase securities on a when-issued or delayed delivery basis, which
generally involves the purchase of a security with payment and delivery due at
some time in the future. The Fund does not earn interest on such securities
until settlement and bears the risk of market value fluctuations in between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Company's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may also invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Fund may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
For a discussion of these instruments and the risks involved therein, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Fund's restrictions on borrowing, the
Fund may also borrow money from banks. For a discussion of the Fund's
limitations on borrowing and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Fundamental Investment Restrictions."
Portfolio Turnover. 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. For a discussion of portfolio turnover and its
effects, see this Prospectus and the Company's SAI under "Portfolio
Transactions."
ASAF LORD ABBETT GROWTH AND INCOME FUND:
Investment Objective: The investment objective of the Fund is long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value.
Investment Policies:
The Sub-advisor will try to keep the Fund's assets invested in
those securities which are selling at reasonable prices in relation to value. To
do so, the Fund may forgo some opportunities for gains when, in the judgment of
the Sub-advisor, they carry excessive risk. The Sub-advisor will try to
anticipate major changes in the economy and select stocks for the Fund which it
believes will benefit most from these changes.
The Fund normally will invest in common stocks (including
securities convertible into common stocks) of seasoned companies which are
expected to show above-average growth and which the Sub-advisor believes to be
in sound financial condition. Although the prices of common stocks fluctuate and
their dividends vary, historically, common stocks held over long periods of time
have appreciated in value and their dividends have increased when the companies
they represent have prospered and grown.
The Sub-advisor will be constantly balancing the opportunity for
profit against the risk of loss for the Fund. In the past, very few industries
have continuously provided the best investment opportunities. The Sub-advisor
will take a flexible approach and adjust the Fund to reflect changes in the
opportunity for sound investments relative to the risks assumed. Therefore, the
Fund will sell securities that the Sub-advisor judges to be overpriced and
reinvest the proceeds in other securities which the Sub-advisor believes offer
better values.
At such times that the Sub-advisor deems appropriate and consistent
with this Fund's investment objective, the Fund may: (a) write covered call
options which are traded on a national securities exchange with respect to
securities in the Fund; (b) invest up to 10% of the Fund's net assets (at the
time of investment) in foreign securities; and (c) invest in straight bonds and
other debt securities, including lower-rated high-yield bonds. It is not
intended for the Fund to write covered call options with respect to securities
with an aggregate market value of more than 10% of the Fund's gross assets at
the time an option is written. For a discussion of the risks involved in options
transactions and in investing in lower-rated high-yield debt securities or
foreign securities, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods." For an additional description of covered
options, see the Company's SAI under "Investment Objectives and Policies."
The Fund will not purchase securities for trading purposes. To
create reserve purchasing power and also for temporary defensive purposes, the
Fund may invest in short-term debt and other high quality fixed-income
securities.
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 (BB/Ba or lower)
high-yield bonds. For a description of these instruments and the risks involved
therein, see this Prospectus and the Company's SAI under "Certain Risk Factors
and Investment Methods."
Illiquid Securities. 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. Subject to
guidelines promulgated by the Directors of the Company, the Sub-advisor may
determine that certain securities eligible for resale pursuant to Rule 144A of
the Securities Act of 1933 are liquid and therefore not subject to this
limitation. For a discussion of these instruments and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment Methods"
and the Company's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Fund and
risks involved in borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods."
ASAF INVESCO EQUITY INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income while following sound investment practices. Capital growth
potential is an additional, but secondary, consideration in the selection of
portfolio securities.
Investment Policies:
The Fund seeks to achieve its objective by investing in securities
which will provide a relatively high yield and stable return and which, over a
period of years, may also provide capital appreciation. The Fund normally will
invest at least 65% of its assets in dividend-paying, marketable common stocks
of domestic and foreign issuers. Up to 10% of the Fund's assets may be invested
in equity securities that do not pay regular dividends. The Fund also will
invest in convertible bonds, preferred stocks and debt securities. In periods of
uncertain market and economic conditions, as determined by the Directors of the
Company, the Fund may depart from the basic investment objective and assume a
defensive position with up to 100% of its assets temporarily invested in high
quality corporate bonds, or notes and government issues, or held in cash.
The Fund's investments in common stocks may, of course, decline in
value. To minimize the risk this presents, the Sub-advisor only invests in
common stocks and equity securities of domestic and foreign issuers which are
marketable; and will not invest more than 5% of the Fund's assets in the
securities of any one company or more than 25% of the Fund's assets in any one
industry.
Debt Securities. The Fund's investments in debt securities will
generally be subject to both credit risk and market risk. Credit risk relates to
the ability of the issuer to meet interest or principal payments, or both, as
they come due. Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of debt securities, whereas a decline in interest rates will
tend to increase their values. Although the Sub-advisor will limit the Fund's
debt security investments to securities it believes are not highly speculative,
both kinds of risk are increased by investing in debt securities rated below the
top four grades by Standard & Poor's Corporation ("Standard & Poor's) or Moody's
Investors Services, Inc. ("Moody's") and unrated debt securities, other than
Government National Mortgage Association modified pass-through certificates.
In order to decrease its risk in investing in debt securities, the
Fund will invest no more than 15% of its assets in debt securities rated below
AAA, AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's, and in
no event will the Fund ever invest in a debt security rated below Caa by Moody's
or CCC by Standard & Poor's. Lower rated bonds by Moody's (categories Ba, B,
Caa) are of poorer quality and may have speculative characteristics. Bonds rated
Caa may be in default or there may be present elements of danger with respect to
principal or interest. Lower rated bonds by Standard & Poor's (categories BB, B,
CCC) include those which are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; BB indicates the lowest degree of speculation and
CCC a high degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
For a description securities ratings, see the Appendix to the Company's SAI.
While the Sub-advisor will monitor all of the debt securities in
the Fund for the issuers' ability to make required principal and interest
payments and other quality factors, the Sub-advisor may retain in the Fund a
debt security whose rating is changed to one below the minimum rating required
for purchase of such a security. For a discussion of the special risks involved
in lower-rated bonds, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. There are no fixed limitations regarding
portfolio turnover. The rate of portfolio turnover may fluctuate as a result of
constantly changing economic conditions and market circumstances. Securities
initially satisfying the Fund's basic objectives and policies may be disposed of
when they are no longer suitable. As a result, the Fund's annual portfolio
turnover rate may be higher than that of other investment companies seeking
current income with capital growth as a secondary consideration. For a
discussion of portfolio turnover and its effects, see this Prospectus and the
Company's SAI under "Portfolio Transactions."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to debt instruments eligible for investment by the Fund. These
agreements are entered into with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers which
are deemed creditworthy. A repurchase agreement is a means of investing moneys
for a short period. In a repurchase agreement, the Fund acquires a debt
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
In the event that the original seller defaults on its obligation to repurchase
the security, the Fund could incur costs or delays in seeking to sell such
security. To minimize risk, the securities underlying each repurchase agreement
will be maintained with the Fund's custodian in an amount at least equal to the
repurchase price under the agreement (including accrued interest), and such
agreements will be effected only with parties that meet certain creditworthiness
standards established by the Directors of the Company. The Fund will not enter
into a repurchase agreement maturing in more than seven days if as a result more
than 15% of the Fund's net assets would be invested in such repurchase
agreements and other illiquid securities. The Fund has not adopted any limit on
the amount of its total assets that may be invested in repurchase agreements
maturing in seven days or less.
Lending Portfolio Securities. The Fund also may lend its securities
to qualified brokers, dealers, banks, or other financial institutions. This
practice permits the Fund to earn income, which, in turn, can be invested in
additional securities to pursue the Fund's investment objective. Loans of
securities by the Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies, equal to
at least 100% of the current market value of the loaned securities, determined
on a daily basis. Lending securities involves certain risks, the most
significant of which is the risk that a borrower may fail to return a portfolio
security. The Sub-advisor monitors the creditworthiness of borrowers in order to
minimize such risks. The Fund will not lend any security if, as a result of such
loan, the aggregate value of securities then on loan would exceed 33 1/3% of the
Fund's total net assets (taken at market value). For an additional discussion of
the Fund's limitations on lending and certain risks involved in lending, see
this Prospectus under "Certain Risk Factors and Investment Methods" and the
Company's SAI under "Fundamental Investment Restrictions."
Foreign Securities. The Fund may invest up to 25% of its total
assets in foreign securities. Investments in securities of foreign companies and
in foreign markets involve certain additional risks not associated with
investments in domestic companies and markets. The Fund may invest in countries
considered to be developing which may involve special risks. For a discussion of
these risks and the risks of investing in foreign securities, in general, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of its net assets in
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market. The Directors, or the
Investment Manager or the Sub-advisor acting pursuant to authority delegated by
the Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to that rule, and therefore that such securities are not
subject to the foregoing limitation. For a discussion of restricted securities
and the risks involved therein, see this Prospectus under "Certain Risk Factors
and Investment Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth and current income.
Investment Policies:
It is the Sub-advisor's intention to maintain approximately 60% of
the Fund's assets in common stocks that are considered by the Sub-advisor to
have better-than-average prospects for appreciation and the remainder in bonds
and other fixed income securities.
Equity Investments. With the equity portion of the Fund, the
Sub-advisor seeks capital growth by investing in securities, primarily common
stocks, that meet certain fundamental and technical standards of selection
(relating primarily to earnings and revenue acceleration) and have, in the
opinion of the Sub-advisor, better-than-average potential for appreciation. So
long as a sufficient number of such securities are available, the Sub-advisor
intends to keep the equity portion of the Fund fully invested in these
securities regardless of the movement of stock prices generally.
The 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."
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 of 1986 (the "Code") and Regulations.
Rule 144A Securities. The Fund may, from time to time, purchase
Rule 144A securities when they present attractive investment opportunities that
otherwise meet the Fund's criteria for selection. Rule 144A securities are
securities that are privately placed with and traded among qualified
institutional buyers rather than the general public. Although Rule 144A
securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the
Staff of the Commission has taken the position that the liquidity of such
securities in the portfolio of a fund offering redeemable securities is a
question of fact for the board of directors to determine, such determination to
be based upon a consideration of the readily available trading markets and the
review of any contractual restrictions. Accordingly, the Directors of the
Company are responsible for developing and establishing the guidelines and
procedures for determining the liquidity of Rule 144A securities. As allowed by
Rule 144A, the Directors of the Company have delegated the day-to-day function
of determining the liquidity of Rule 144A securities to the Sub-advisor. The
Directors retain the responsibility to monitor the implementation of the
guidelines and procedures they have adopted.
Since the secondary market for such securities is limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and the Fund may, from time to time, hold a Rule 144A
security that is illiquid. In such an event, the Sub-advisor will consider
appropriate remedies to minimize the effect on the Fund's liquidity. The Fund
may not invest more than 15% of its assets in illiquid securities (securities
that may not be sold within seven days at approximately the price used in
determining the net asset value of Fund shares). For an additional discussion of
Rule 144A securities and illiquid and restricted securities, and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF FEDERATED HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income by investing primarily in fixed income securities. The fixed
income securities in which the Fund intends to invest are lower-rated corporate
debt obligations. Lower-rated debt obligations are generally considered to be
high risk investments.
Investment Policies:
The Fund will invest at least 65% of its assets in lower-rated (BBB
or lower) corporate debt obligations. Under normal circumstances, the Fund will
not invest more than 10% of the value of its total assets in equity securities.
The fixed income securities in which the Fund may invest include, but are not
limited to: preferred stocks, convertible securities, bonds, debentures, notes,
equipment lease certificates and equipment trust certificates.
Other permitted investments for the Fund currently include, but are
not limited to, the following: commercial paper; obligations of the United
States; notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United
States, Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or National
Credit Union Administration; time and savings deposits (including certificates
of deposit) in commercial or savings banks whose deposits are insured by the
Bank Insurance Fund ("BIF"), or the Savings Association Insurance Fund ("SAIF"),
including certificates of deposit issued by and other time deposits in foreign
branches of BIF-insured banks; bankers' acceptances issued by a BIF-insured
bank, or issued by the bank's Edge Act subsidiary and guaranteed by the bank,
with remaining maturities of nine months or less. The total acceptances of any
bank held by the Fund cannot exceed 0.25 of 1% of such bank's total deposits
according to the bank's last published statement of condition preceding the date
of acceptance; and general obligations of any state, territory, or possession of
the United States, or their political subdivisions, so long as they are either
(1) rated in one of the four highest grades by nationally recognized statistical
rating organizations or (2) issued by a public housing agency and backed by the
full faith and credit of the United States.
The corporate debt obligations in which the Fund may invest are
generally rated BBB or lower by Standard & Poor's Corporation ("Standard &
Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are
not rated but are determined by the Sub-advisor to be of comparable quality. For
a description of securities ratings, see the Appendix to the Company's SAI.
There is no lower limit with respect to rating categories for securities in
which the Fund may invest.
Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." The
corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of a nationally recognized rating organization
(AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are in
the lower rating categories or are unrated but are of comparable quality and
have speculative characteristics or are speculative. Lower-rated or unrated
bonds are commonly referred to as "junk bonds." There is no minimal acceptable
rating for a security to be purchased or held in the Fund, and the Fund may,
from time to time, purchase or hold securities rated in the lowest rating
category or securities in default.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk of loss of principal and
interest associated with these investments. This is because of reduced
creditworthiness and increased risk of default. Lower-rated securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher-rated securities which react primarily to fluctuations in the
general level of interest rates. Short-term corporate and market developments
affecting the prices or liquidity of lower-rated securities could include
adverse news affecting major issuers, underwriters, or dealers in lower-rated
securities. In addition, since there are fewer investors in lower-rated
securities, it may be harder to sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have
more price volatility and carry more risk to principal and income than
higher-rated securities. An economic downturn may adversely affect the value of
some lower-rated bonds. Such a downturn may especially affect highly leveraged
companies or companies in cyclically sensitive industries, where deterioration
in a company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to time, as
a result of changing conditions, issuers of lower-rated bonds may seek or may be
required to restructure the terms and conditions of the securities they have
issued. As a result of these restructurings, holders of lower-rated securities
may receive less principal and interest than they had bargained for at the time
such bonds were purchased. In the event of a restructuring, the Fund may bear
additional legal or administrative expenses in order to maximize recovery from
an issuer.
The secondary trading market for lower-rated bonds is generally
less liquid than the secondary trading market for higher-rated bonds. Certain
institutions, including federally insured savings and loan associations, may not
legally purchase and hold lower-rated bonds, which could have an adverse impact
on the overall liquidity of the market. Adverse publicity and the perception of
investors relating to issuers, underwriters, dealers or underlying business
conditions, whether or not warranted by fundamental analysis, may also affect
the price or liquidity of lower-rated bonds. On occasion, therefore, it may
become difficult to price or dispose of a particular security in the Fund. For
an additional discussion of the risks involved in lower-rated securities, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid and Restricted Securities. Subject to guidelines
promulgated by the Directors of the Company, the Fund may acquire securities
which are subject to legal or contractual delays, restrictions and costs on
resale. As a matter of investment policy which can be changed without
shareholder approval, the Fund will not invest more than 15% of its net assets
in illiquid securities, which include certain private placements not determined
to be liquid under criteria established by the Directors of the Company and
repurchase agreements providing for settlement in more than seven days after
notice. Securities eligible for resale under Rule 144A of the Securities Act of
1933, and commercial paper issued under Section 4(2) of the Securities Act of
1933, could be deemed "liquid" when saleable in a readily available market. For
an additional discussion of illiquid and restricted securities, and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued or delayed delivery basis. In when-issued
and delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. For an additional
discussion of these transactions and certain risks involved therein, see the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. The Fund may also invest all or a part of
its assets temporarily in cash or cash items during time of unusual market
conditions for defensive purposes or to maintain liquidity. Cash items may
include, but are not limited to: certificates of deposit; commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities; and repurchase agreements.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements and
certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. For an additional discussion of repurchase agreements and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
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."
Convertible Securities. The Portfolio may invest in convertible
securities. Convertible securities include a spectrum of securities which can be
exchanged for or converted into common stock. Convertible securities may
include, but are not limited to: convertible bonds or debentures; convertible
preferred stock; units consisting of usable bonds and warrants; or securities
which cap or otherwise limit returns to the convertible security holder, such as
DECS (Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock
when issued as a debt security), LYONS (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock, an
equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES (Preferred Redeemable
Increased Dividend Securities, which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or
not rated because they fall below debt obligations and just above common equity
in order of preference or priority on the issuer's balance sheet. Hence, an
issuer with investment grade senior debt may issue convertible securities with
ratings less than investment grade or not rated. Convertible securities rated
below investment grade may be subject to some of the same risks as those
inherent in junk bonds. The Portfolio does not limit convertible securities by
rating, and there is no minimal acceptance rating for a convertible security to
be purchased or held by the Portfolio.
Real Estate Investment Trusts. The Portfolio may invest in
securities issued by real estate investment trusts, which may include
lower-rated debt obligations and the other types of securities in which the
Portfolio may invest. Risks associated with real estate investments include the
fact that equity and mortgage real estate investment trusts are dependent upon
management skill and are not diversified, and are, therefore, subject to the
risk of a single project or a limited number of projects. They are also subject
to heavy cash flow dependency, defaults by borrowers, and self-liquidation.
Additionally, equity real estate investment trusts may be affected by any
changes in the value of the underlying property owned by the trusts and by the
quality of any credit they extend.
Reducing Risks of Lower-Rated Securities. The Sub-advisor believes
that the risks of investing in lower-rated securities may be reduced. There can,
however, be no assurances that such risks will actually be reduced by the
following methods. The professional portfolio management techniques used by the
Sub-advisor to attempt to reduce these risks include:
Credit Research. The Sub-advisor will perform its own credit analysis in
addition to using nationally recognized rating organizations and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The Sub-advisor's credit
analysis will consider the issuer's financial soundness, its responsiveness to
changes in interest rates and business conditions, and its anticipated cash
flow, interest, or dividend coverage and earnings. In evaluating an issuer, the
Sub-advisor places special emphasis on the estimated current value of the
issuer's assets rather than historical cost.
Diversification. The Sub-advisor invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.
Economic Analysis. The Sub-advisor will analyze current developments and
trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of the
business cycle can be important.
ASAF TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Fund is to seek to
maximize total return, consistent with preservation of capital. The Sub-advisor
will seek to employ prudent investment management techniques, especially in
light of the broad range of investment instruments in which the Fund may invest.
Investment Policies:
In selecting securities for the Fund, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Fund's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Fund will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
variable and floating rate debt securities; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase agreements and reverse
repurchase agreements; obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies or supranational
entities; and foreign currency exchange-related securities, including foreign
currency warrants.
The Fund will invest in fixed-income securities of varying
maturities. The average portfolio duration of the Fund generally will vary
within a three- to six-year time frame based on the Sub-advisor's forecast for
interest rates. The Fund may invest up to 10% of its assets in fixed income
securities that are rated below investment grade but rated B or higher by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") (or, if unrated, determined by the Sub-advisor to be of comparable
quality). The Fund will maintain an overall dollar-weighted average quality of
at least A (as rated by Moody's or S&P). In the event that ratings services
assign different ratings to the same security, the Sub-advisor will determine
which rating it believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings. Securities rated
B are judged to be predominantly speculative with respect to their capacity to
pay interest and repay principal in accordance with the terms of the
obligations. The Sub-advisor will seek to reduce the risks associated with
investing in such securities by limiting the Fund's holdings in such securities
and by the depth of its own credit analysis. For a discussion of the risks
involved in lower-rated high-yield bonds, see this Prospectus and the Company's
SAI under "Certain Risk Factors and Investment Methods." For a description of
securities ratings, see the Appendix to the Company's SAI.
The Fund may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Fund holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Fund may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the Fund
owns or anticipates purchasing due to anticipated changes in interest rates. The
Fund may engage in foreign currency transactions. Foreign currency exchange
transactions may be entered into the purpose of hedging against foreign currency
exchange risk arising from the Fund's investment or anticipated investment in
securities denominated in foreign currencies.
The Fund may enter into swap agreements for the purposes of
attempting to obtain a particular investment return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that provided that
desired return. In addition, the Fund may purchase and sell securities on a
when-issued and delayed delivery basis and enter into forward commitments to
purchase securities; lend its securities to brokers, dealers and other financial
institutions to earn income; and borrow money for investment purposes.
The "total return" sought by the Fund will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return obtained by a portfolio investing primarily in fixed
income securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to the composition of any fixed-income portfolio, the longer the duration of the
portfolio, the greater the potential for total return, with, however, greater
attendant market risk and price volatility than for a portfolio with a shorter
duration. The market value of securities denominated in currencies other than
U.S. dollars also may be affected by movements in foreign currency exchange
rates.
The Fund's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities. Some U.S. Government securities, such as Treasury bills,
notes and bonds, and securities guaranteed by the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of the United
States; others, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association ("FNMA"), are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include
corporate bonds, debentures, notes and other similar corporate debt instruments,
including convertible securities. Debt securities may be acquired with warrants
attached. Corporate income-producing securities may also include forms of
preferred or preference stock. The rate of return or return of principal on some
debt obligations may be linked or indexed to the level of exchange rates between
the U.S. dollar and a foreign currency or currencies. Investment in corporate
debt securities that are below investment grade (rated below Baa (Moody's) or
BBB (S&P)) are described as "speculative" both by Moody's and S&P. For a
description of the special risks involved with lower-rated high-yield bonds, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Company's SAI.
Convertible Securities. The Fund may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Fund may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Fund may be required to permit the issuer of a convertible
security to redeem the security, convert it into the underlying common stock, or
sell it to a third party. Thus, the Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security. If the issuer
chooses to do so, this action could have an adverse effect on the Fund's ability
to achieve its investment objective.
While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be unattractive or limited due
to insufficient supply, legal or technical restrictions. In such cases, the Fund
may consider equity securities or convertible bonds to gain exposure to such
investments.
Loan Participation and Assignments. The Fund may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Fund's investments in loans are expected to take the form of loan
participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or
syndicated among several lenders, usually banks. The Fund may participate in
such syndicates, or can buy part of a loan, becoming a direct lender.
Participations and assignments involve special types of risk, including limited
marketability and the risks of being a lender. See "Illiquid Securities" below
for a discussion of the limits on the Fund's investments in loan participations
and assignments with limited marketability. If the Fund purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Fund's rights against the borrower may be more limited than
those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters").
The interest rate on a floater is a variable rate which is tied to another
interest rate, such as a money-market index or Treasury bill rate. The interest
rate on a floater resets periodically, typically every six months. While,
because of the interest rate reset feature, floaters provide the Fund with a
certain degree of protection against rises in interest rates, the Fund will
participate in any declines in interest rates as well.
The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Fund will
not invest more than 5% of its net assets in any combination of inverse floater,
interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Fund purchased an inflation-indexed bond with a
par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months was 1%, the mid-year par
value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted
for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed
bonds, even during a period of deflation. However, the current market value of
the bonds is not guaranteed, and will fluctuate. The Fund may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in
response to changes in real interest rates (which are nominal interest rates
adjusted for inflation). If inflation were to rise at a faster rate than nominal
interest rates, real interest rates would decline, leading to an increase in
value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates would rise,
leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Any increase in the principal amount of an inflation-indexed bond
will be considered taxable ordinary income, even though investors do not receive
their principal until maturity. For information about the possible tax
consequences of investing in inflation-indexed bonds, see this Prospectus under
"Dividends, Capital Gains and Taxes."
Mortgage-Related and Other Asset-Backed Securities. The Fund may
invest all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Sub-advisor to forecast interest rates and other economic factors correctly.
For a description of these securities and the special risks involved therein,
see this Prospectus and the Company's SAI under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Investment Programs of the
Funds."
Repurchase Agreements. For the purpose of achieving income, the
Fund may enter into repurchase agreements, subject to guidelines promulgated by
the Directors of the Company. The Fund will not invest more than 15% of its net
assets (taken at current market value) in repurchase agreements maturing in more
than seven days. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Fund and its
agreement to repurchase the instrument at a specified time and price, and for
some purposes may be considered a borrowing.
The Fund may also enter into dollar rolls, in which the Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. In the case of dollar rolls involving mortgage-backed
securities, the mortgage-backed securities that are purchased will be of the
same type and will have the same interest rate as those sold, but will be
supported by different pools of mortgages. The Fund forgoes principal and
interest paid during the roll period on the securities sold in a dollar roll,
but the Fund is compensated by the difference between the current sales price
and the lower price for the future purchase as well as by any interest earned on
the proceeds of the securities sold. The Fund also could be compensated through
the receipt of fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset
value of any increase or decrease in the value of the Fund and may cause the
Fund to liquidate portfolio positions when it would not be advantageous to do
so. The Fund will maintain a segregated account consisting of cash or other
liquid assets to cover its obligations under reverse repurchase agreements and
dollar rolls. Reverse repurchase agreements and dollar rolls will be subject o
the Portfolio's limitations on borrowing as discussed in this Prospectus under
"Certain Risk Factors and Investment Methods." Apart from transactions involving
reverse repurchase agreements and dollar rolls, the Fund will not borrow money,
except for temporary administrative purposes. For an additional discussion of
the risks involved in borrowing and in reverse repurchase agreements, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Fundamental Investment Restrictions."
When-Issued, Delayed-Delivery and Forward Commitment Transactions.
The Fund may purchase or sell securities on a when-issued, delayed delivery or
forward commitment 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 such
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 the Portfolio has committed to purchase 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 when-issued,
delayed delivery, or forward commitment 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 when-issued, delayed delivery, or forward commitment purchases are
outstanding, the purchases may result in a form of leverage. When the Fund has
sold a security on a when-issued, delayed delivery or forward commitment basis,
the Fund does not participate in future gains or losses with respect to the
security. If the other party to a transaction fails to deliver or pay for the
securities, the Fund could miss a favorable price or yield opportunity or could
suffer a loss. The Fund may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward committment 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 when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Fund may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale "against the box") is a transaction in which the Fund sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Fund engages in
short sales, it must (except in the case of short sales against the box)
maintain asset coverage in the form of cash or other liquid assets in a
segregated account. A short sale is "against the box" to the extent that the
Fund contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed
income securities of non-U.S. issuers. The Portfolio 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
Portfolio may invest up to 10% of its assets in securities of issuers based in
developing countries. The Sub-advisor has broad discretion to identify and
invest in countries that it considers to qualify as developing countries.
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 in general, and the special risks of investing in developing
countries, as well as the risks of currency fluctuations, see this Prospectus
and the Trust'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 Indices and Currencies. The Fund
may purchase and write call and put options on securities, securities indices
and on foreign currencies, and enter into futures contracts and use options on
futures contracts as further described below. The Fund may also enter into swap
agreements with respect to foreign currencies, interest rates and securities
indices. 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 longer 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 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."
Hybrid Instruments. The Fund may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Fund may invest up to 15% of its net assets in
illiquid securities. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Directors of the Company).
Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities laws.
Although certain of these securities may be readily sold, for example, under
Rule 144A, others may be illiquid, and their sale may involve substantial delays
and additional costs.
Portfolio Turnover. The Fund may have higher portfolio turnover than other
mutual funds with similar investment objectives. For a discussion of portfolio
turnover and its effects, see this Prospectus and the Company's SAI under
"Portfolio Transactions."
ASAF JPM MONEY MARKET FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income and maintain high levels of liquidity.
Investment Policies:
The Fund attempts to accomplish its objectives by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in the types of high quality U.S. dollar-denominated securities
described below which have effective maturities of not more than 397 days. The
Fund will invest in one or more of the types of investments described below.
United States Government Obligations. The Fund may invest in
obligations of the U.S. Government and its agencies ("U.S. Government
Obligations") and instrumentalities ("U.S. Government Instrumentalities")
maturing 397 days or less from the date of acquisition or purchased pursuant to
repurchase agreements that provide for repurchase by the seller within 397 days
from the date of acquisition. U.S. Government Obligations, for purposes of this
Fund, include: (i) direct obligations issued by the United States Treasury such
as Treasury bills, notes and bonds; and (ii) instruments issued or guaranteed by
government-sponsored agencies acting under authority of Congress, such as, but
not limited to, obligations of the Bank for Cooperatives, Federal Financing
Bank, Federal Intermediate Credit Banks, Federal Land Banks, and Tennessee
Valley Authority, Federal Home Loan Bank and Federal Farm Credit Bureau. U.S.
Government Instrumentalities are government agencies organized by Congress under
a Federal Charter and supervised and regulated by the U.S. Government, such as
the Federal National Mortgage Association and the Student Loan Mortgage
Association. Some of these U.S. Government Obligations are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Mortgage Association, are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to the U.S. Government-sponsored instrumentalities if
it is not obligated to do so by law.
Bank Obligations. The Fund may invest in high quality United States
dollar-denominated negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
United States federal or state law, (ii) foreign branches of these banks or
foreign banks of equivalent size (Euros), and (iii) United States branches of
foreign banks of equivalent size (Yankees). The Fund may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank). These obligations may be supported by
appropriated but unpaid commitments of their member countries, and there is no
assurance these commitments will be undertaken or met in the future.
Commercial Paper; Bonds. The Fund may invest in high quality
commercial paper and corporate bonds issued by United States corporations. The
Fund may also invest in bonds and commercial paper of foreign issuers if the
obligation is United States dollar-denominated and is not subject to foreign
withholding tax. For a discussion of the risks involved in foreign investments,
see this Prospectus and the Company's SAI under "Certain Risk Factors and
Investment Methods."
Asset-Backed Securities. As may be permitted by current laws and
regulations, 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. It is the current policy of the Fund not to invest more than 10% of
its net assets in asset-backed securities. For more information about these
instruments and the risks involved therein, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933. The Sub-advisor will review the structure of synthetic instruments
to identify credit and liquidity risks and will monitor such risks.
Quality Information. The Fund will limit its investments to those
securities which, in accordance with guidelines adopted by the Directors of the
Company, present minimal credit risks. In addition, the Fund will not purchase
any security (other than a United States Government security) unless: (i) if
rated by only one nationally recognized rating organization (such as Moody's and
Standard & Poor's), then such organization has rated it with the highest rating
assigned to short-term debt securities; (ii) if rated by more than one
nationally recognized rating organization, then at least two such rating
organizations have rated it with the highest rating assigned to short-term debt
securities; or (iii) it is not rated and is determined to be of comparable
quality. Determinations of comparable quality shall be made in accordance with
procedures established by the Directors of the Company. These standards must be
satisfied at the time an investment is made. If the quality of the investment
later declines, the Fund may continue to hold the investment, subject in certain
circumstances to a finding by the Directors that disposing of the investment
would not be in the Fund's best interest. For a description of securities
ratings, see the Appendix to the Company's SAI.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income accrues to the Fund
until settlement. The Fund maintains with the custodian a separate account with
a segregated portfolio of securities in an amount at least equal to these
commitments. When entering into a when-issued or delayed delivery transaction,
the Fund will rely on the other party to consummate the transaction; if the
other party fails to do so, the Fund may be disadvantaged. It is the current
policy of the Fund not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets less liabilities
other than the obligations created by these commitments. For an additional
discussion of when-issued securities and certain risks involved therein, see the
Company's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Directors
of the Company, the Fund is permitted to enter into repurchase agreements. For a
discussion of repurchase agreements and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Fund is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells
a security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Fund. If interest rates rise
during the term of a reverse repurchase agreement, entering into the reverse
repurchase agreement may have a negative impact on the Fund's ability to
maintain a net asset value of $1.00 per share. For a discussion of reverse
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, in general, see this Prospectus and
the Company's SAI under "Certain Risk Factors and Investment Methods."
Borrowing. The Fund may borrow money from banks for non-leveraging,
temporary or emergency purposes in amounts up to 33 1/3% of its total assets.
The Fund will not purchase securities while borrowings exceed 5% of the Fund's
total assets. For an additional discussion of the Fund's limitations on
borrowing and certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Company's SAI under
"Fundamental Investment Restrictions."
CERTAIN RISK FACTORS AND INVESTMENT METHODS
The following is a description of certain securities and investment
methods that the Funds and Portfolios may invest in or use, and certain of the
risks associated with such securities and investment methods. Whether a
particular Fund or Portfolio may invest in a specific security or use a type of
investment method, as well as other risk factors associated with the Fund or
Portfolio's investment program, are described in this Prospectus and the
Company's SAI under "Investment Programs of the Funds" and in the Company's SAI
under "Fundamental Investment Restrictions." The risk factors and investment
methods described below only apply to those Funds or Portfolios that may invest
in such securities or use such investment methods. Because the investment
objective, policies and limitations of each Feeder Fund are identical to those
of its corresponding Portfolio, the references below to the Feeder Funds and the
Directors of the Company apply equally to the Funds' corresponding Portfolios
and the Trustees of the Trust, respectively.
Derivative Instruments. To the extent permitted by the investment
objectives and policies of a Fund, a Fund may invest in securities and other
instruments that are commonly referred to as "derivatives." For instance, a Fund
may purchase and write call and put options on securities, securities indices
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 indices. 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. 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.
Risks of Options and Futures Contracts. 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 and options 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.
The expected introduction of a single currency, the euro, on January 1,
1999 for participating nations in the European Economic and Monetary Union
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the legal treatment of certain outstanding financial contracts that
refer to existing currencies rather than the euro; the establishment of exchange
rates for existing currencies and the euro; and the creation of suitable
clearing and settlement payment systems for the new currency. These or other
factors, including political and economic risks, could cause market disruptions
before or after the introduction of the euro, and could adversely affect the
value of securities held by the Funds.
Developing Countries. Investing in developing countries involves certain
risks not typically associated with investing in U.S. securities, and imposes
risks greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: the risk of nationalization or expropriation of
assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; social, economic and political uncertainty and
instability (including the risk of war); more substantial government involvement
in the economy; higher rates of inflation; less government supervision and
regulation of the securities markets and participants in those markets; controls
on foreign investment and limitations on repatriation of invested capital and on
a Fund's ability to exchange local currencies for U.S. dollars; unavailability
of currency hedging techniques in certain developing countries; the fact that
companies in developing countries may be smaller, less seasoned and newly
organized companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and Global Depositary Receipts ("GDRs"). ADRs are dollar-denominated
receipts generally issued by a domestic bank that represents the deposit of a
security of a foreign issuer. ADRs may be publicly traded on exchanges or
over-the-counter in the United States. EDRs are receipts similar to ADRs and are
issued and traded in Europe. GDRs may be offered privately in the United States
and also trade in public or private markets in other countries. Depositary
receipts may be issued as sponsored or unsponsored programs. In sponsored
programs, the issuer makes arrangements to have its securities traded in the
form of a depositary receipt. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, the issuers of unsponsored depositary receipts are not obligated to
disclose material information in the United States and, therefore, the import of
such information may not be reflected in the market value of such securities.
Forward Foreign Currency Exchange Contracts. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date, which may be any fixed number of days from
the date the contract is agreed upon by the parties, at a price set at the time
of the contract. By entering into a forward foreign currency contract, a Fund
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, a Fund
reduces its exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency into which it
will exchange. The effect on the value of a Fund is similar to selling
securities denominated in one currency and purchasing securities denominated in
another. The Funds may enter into these contracts for the purposes of hedging
against foreign exchange risk arising from such Fund's investment or anticipated
investment in securities denominated in or exposed to foreign currencies.
Although a Sub-advisor may, from time to time, seek to protect a Fund by using
forward contracts, anticipated currency movements may not be accurately
predicted and the Fund may incur a gain or a loss on a forward contract. A
forward contract may reduce a Fund's losses on securities denominated in foreign
currency, but it may also reduce the potential gain on the securities depending
on changes in the currency's value relative to the U.S. dollar or other
currencies.
Lower-Rated High-Yield Bonds. Lower-rated high-yield bonds
(commonly known as "junk bonds") are generally considered to be high risk
investments as they are subject to a higher risk of default than higher-rated
bonds. In addition, the market for lower-rated high-yield bonds generally is
more limited than the market for higher-rated bonds, and because their markets
may be thinner and less active, the market prices of lower-rated high-yield
bonds may fluctuate more than the prices of higher-rated bonds, particularly in
times of market stress. In addition, while the market for high-yield corporate
debt securities has been in existence for many years, the market in recent years
has experienced a dramatic increase in the large-scale use of such securities to
fund highly leveraged corporate acquisitions and restructurings. Accordingly,
past experience may not provide an accurate indication of future performance of
the high-yield bond market, especially during periods of economic recession.
Other risks which may be associated with lower-rated high-yield bonds include:
the exercise of any redemption or call provisions in a declining market may
result in their replacement by lower yielding bonds; and legislation, from time
to time, may adversely affect their market. Since the risk of default is higher
among lower-rated high-yield bonds, a Sub-advisor's research and analysis are an
important ingredient in the selection of lower-rated high-yield bonds. Through
portfolio diversification, good credit analysis and attention to current
developments and trends in interest rates and economic conditions, investment
risk may be reduced, although there is no assurance that losses will not occur.
Illiquid and Restricted Securities. The Directors of the Company
have promulgated guidelines with respect to illiquid securities. Illiquid
securities are deemed as such because they are subject to restrictions on their
resale ("restricted securities") or because, based upon their nature or the
market for such securities, they are not readily marketable. Restricted
securities are acquired through private placement transactions, directly from
the issuer or from security holders, generally at higher yields or on terms more
favorable to investors than comparable publicly traded securities. However, the
restrictions on resale may make it difficult for a Fund to dispose of such
securities at the time considered most advantageous by its Sub-advisor, and/or
may involve expenses that would not be incurred in the sale of securities that
were freely marketable. A Fund that may purchase restricted securities may
qualify for and trade restricted securities in the "institutional trading
market" pursuant to Rule 144A of the Securities Act of 1933. Trading in the
institutional trading market may enable a Sub-advisor to dispose of restricted
securities at a time the Sub-advisor considers advantageous and/or at a more
favorable price than would be available if such securities were not traded in
such market. However, the institutional trading market is relatively new and
liquidity of a Fund's investments in such market could be impaired if trading
does not develop or declines. Risks associated with restricted securities
include the potential obligation to pay all or part of the registration expenses
in order to sell certain restricted securities. A considerable period of time
may elapse between the time of the decision to sell a security and the time a
Fund may be permitted to sell it under an effective registration statement. If,
during such a period, adverse conditions were to develop, a Fund might obtain a
less favorable price than prevailing when it decided to sell.
Repurchase Agreements. The Directors of the Company have
promulgated guidelines with respect to repurchase agreements. Repurchase
agreements are agreements by which a Fund purchases a security and obtains a
simultaneous commitment from the seller to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. A repurchase transaction is usually accomplished either by
crediting the amount of securities purchased to the account of a Fund's
custodian maintained in a central depository or book-entry system or by physical
delivery of the securities to a Fund's custodian in return for delivery of the
purchase price to the seller. Repurchase transactions are intended to be
short-term transactions with the seller repurchasing the securities, usually
within seven days.
A Fund which enters into a repurchase agreement bears a risk of
loss in the event that the other party to such an agreement defaults on its
obligation and such Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in value of the underlying securities during the period such Fund seeks to
assert these rights, as well as the risk of incurring expenses in asserting
these rights and the risk of losing all or part of the income from such an
agreement. If the seller institution defaults, a Fund might incur a loss or
delay in the realization of proceeds if the value of the collateral securing the
repurchase agreement declines and it might incur disposition costs in
liquidating the collateral. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by a Fund might
be delayed pending court action.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a
Fund transfers possession of a portfolio instrument to another person, such as a
broker-dealer or financial institution in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future such Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. When effecting
reverse repurchase agreements, assets of a Fund, in a dollar amount sufficient
to make payment for the obligations to be repurchased, are segregated on such
Fund's records at the trade date and are maintained until the transaction is
settled. Reverse repurchase agreements involve the risk that the market value of
the securities retained by the Fund may decline below the repurchase price of
the securities which it is obligated to repurchase.
Borrowing. Each Fund's borrowings are limited so that immediately
after such borrowing the value of the Fund's assets (including borrowings) less
its liabilities (not including borrowings) is at least three times the amount of
the borrowings. Should a Fund, for any reason, have borrowings that do not meet
the above test then, within three business days, such Fund must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, such
Fund may have to liquidate securities at a time when it is disadvantageous to do
so. Gains made with additional funds borrowed will generally cause the net asset
value of such Fund's shares to rise faster than could be the case without
borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of such Fund could decrease faster than if there
had been no borrowings.
Convertible Securities and Warrants. Convertible securities
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. Warrants are
options to buy a stated number of shares of common stock at a specified price
any time during the life of the warrants. The value of warrants may fluctuate
more than the value of the securities underlying such warrants. The value of a
warrant detached from its underlying security will expire without value if the
rights under such warrant are not exercised prior to its expiration date.
Other Investment Companies: The Company has made arrangements with
certain money market mutual funds so that the Sub-advisors for the various Funds
can "sweep" excess cash balances of the Fund to those funds for temporary
investment purposes. Mutual funds pay their own operating expenses, and the
Funds, as shareholders in the money market funds, will indirectly pay their
proportionate share of such funds' expenses. Investments in other mutual funds
and investment companies will be made subject to the restrictions of the
Investment Company Act of 1940, as amended (the "1940 Act"), which, among other
restrictions, places certain limits on the proportion of a Fund's assets that
can be invested in other investment companies.
Year 2000 Risks:
Many services provided to the Company and its Funds by the Investment
Manager, the Sub-advisors, and the Company's other service providers
(collectively, the "Service Providers") rely on the functioning of their
respective computer systems. Many computer systems cannot distinguish the year
2000 from the year 1900, with resulting potential difficulty in performing
various systems functions (the "Year 2000 Issue"). The Year 2000 Issue could
potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Company
operations.
The Service Providers recognize the importance of the Year 2000 Issue
and have advised the Company that they are taking appropriate steps necessary in
preparation for the year 2000. At this time, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds, nor can
there be any assurance that the Year 2000 Issue will not have an adverse effect
on the Funds' investments or on global markets or economies generally. In
addition, it has been reported that foreign institutions have made less progress
in addressing the Year 2000 Issue than major U.S. entities, which could
adversely effect the Funds' foreign investments.
The Investment Manager and the Company have been informed that all
of the Service Providers anticipate that their systems will be adapted in time
for the year 2000. The Investment Manager will continue to monitor the Year 2000
Issue in an effort to confirm appropriate preparation by the Service Providers.
PERFORMANCE OF THE FUNDS
From time to time, a Fund's yield and total return may be included
in advertisements, sales literature, or shareholder reports. In addition, the
Company may advertise the effective yield of the ASAF JPM Money Market Fund. All
figures are based upon historical earnings and are not intended to indicate
future performance.
The "yield" of a Fund refers to the annualized net income generated
by an investment in that Fund over a specified 30-day period (7-day period for
the ASAF JPM Money Market Fund). The effective yield is calculated similarly,
but, when annualized, the income earned by an investment in that Fund is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The "total return" of a Fund refers to the average annual rate of
return of an investment in the Fund. This figure is computed by calculating the
percentage change in the value of an investment of $1,000, assuming reinvestment
of all income dividends and capital gains distributions, to the end of a
specified period. "Total return" quotations reflect the performance of the Fund
and include the effect of capital changes.
From time to time in advertisements or sales material, the Fund's
performance ratings or other information as published by recognized mutual fund
statistical or rating services, such as Lipper Analytical Services, Inc. or
Morningstar, or by publications of general interest, such as Forbes or Money,
may be discussed. The performance of the Funds may also be compared to that of
other selected mutual funds, mutual fund averages or recognized stock market
indicators, including the Standard & Poor's 500 Stock Index, the Standard & Poor
Midcap Index, the Dow Jones Industrial Average, the Russell 2000 and the NASDAQ
composite. In addition, the total return or yield of the Funds may be compared
to the yield on U.S. Treasury obligations and to the percentage change in the
Consumer Price Index. The performance of each of the ASAF Founders International
Small Capitalization Fund, ASAF T. Rowe Price International Equity Fund and ASAF
AST Janus Overseas Growth Fund may be compared to the record of global market
indicators such as Morgan Stanley Capital International Europe, Australia, Far
East Index (EAFE Index), an unmanaged index of foreign common stock prices
translated into U.S. dollars. Such performance ratings or comparisons may be
made with funds that may have different investment restrictions, objectives,
policies or techniques than the Funds and such other funds or market indicators
may be comprised of securities that differ significantly from the Funds'
investments.
Additional information about the performance of the Funds is
contained in the Company's SAI under "Additional Performance Information," and
is also contained in the Funds' annual reports to shareholders, both of which
you may obtain without charge by writing to "American Skandia Advisor Funds,
Inc." at P.O. Box 8012, Boston, Massachusetts 02266-8012 or by calling
1-800-SKANDIA.
HOW TO BUY SHARES
MINIMUM INVESTMENTS:
You can open a Fund account with a minimum initial investment of
$1,000 in a particular Fund and make additional investments to such account at
any time with as little as $50. The initial investment minimum is reduced to $50
per Fund through "Automatic Investment Plans" as discussed more fully in this
Prospectus under "Special Investment Programs and Privileges." Lower minimum
initial and additional investments may also be applicable in certain other
circumstances, including purchases by certain tax deferred retirement programs
and Education IRAs. There is no minimum investment requirement when you are
buying shares by reinvesting dividends and distributions from a Fund.
METHODS OF BUYING SHARES:
Each Fund offers 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.
You can purchase shares of the Funds through any dealer or
financial institution that has a sales agreement with American Skandia
Marketing, Incorporated (the "Distributor"), or directly through the Company.
Methods of purchasing shares include:
Buying Shares Through Your Dealer. Your dealer will place your order with
the Company on your behalf.
Buying Shares Through the Company. Make your check payable to
"American Skandia Advisor Funds, Inc." and mail your investment, along with your
completed account application, to the address indicated on the application.
Please include an investment dealer on the application. If a dealer is not
listed, the Distributor will act as your agent in buying the Shares.
Buying Shares Through Wire Transfer. You should instruct your bank to
transfer funds by wire to:
ABA # 011000028
State Street Bank & Trust Company
Boston, Massachusetts
DDA # 99052995
FBO: American Skandia Advisor Funds, Inc.
Fund Name and Class of Shares
Shareholder Name and Account Number
Buying Shares 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 electronically. Purchase minimums and sales charges will
apply.
PURCHASE ORDERS:
Purchase orders for all Funds are accepted only on a day on which
the New York Stock Exchange ("NYSE") is open for business (a "business day").
Orders for shares received by Boston Financial Data Services, Inc. (the
"Transfer Agent") on any business day prior to the close of trading on the NYSE
(normally 4:00 p.m. Eastern Time) will receive the offering price calculated at
the close of trading that day. Orders received by the Transfer Agent after such
time but prior to the close of business on the next business day will receive
the offering price calculated at the close of trading on that next business day.
The offering price is the net asset value ("NAV") plus any initial sales charge
that applies. For a discussion of how NAV is determined, see this Prospectus
under "Determination of Net Asset Value." If you purchase shares through a
dealer, your dealer is responsible for forwarding payment promptly to the
Transfer Agent. It is anticipated that the NYSE will be closed Saturdays and
Sundays and on days on which the NYSE observes New Year's Day, Martin Luther
King 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 (other than Class A shares of the ASAF JPM Money
Market Fund) are sold at their offering price, which is normally NAV plus an
initial sales charge that varies depending on the amount of your investment. In
certain instances described below, however, purchases are either not subject to
an initial sales charge (and the offering price will be at NAV) or will be
eligible for reduced initial sales charges. The Fund receives an amount equal to
the NAV to invest for your account. A portion of the sales charge may be
retained by the Distributor or allocated to your dealer. The current sales
charge rates and commissions paid to dealers and brokers are as follows:
<TABLE>
<CAPTION>
High Yield Bond & Total Return Bond Funds: All Other Funds (other than Money Market
Fund):
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> <C>
Less than $50,000 4.25% 4.44% 3.50% 5.00% 5.26% 4.25%
$50,000 up to $100,000 3.75% 3.90% 3.00% 4.25% 4.44% 3.50%
$100,000 up to $250,000 3.25% 3.36% 2.50% 3.25% 3.36% 2.50%
$250,000 up to $500,000 2.25% 2.30% 1.75% 2.25% 2.30% 1.75%
$500,000 up to $1 million 1.50% 1.52% 1.25% 1.50% 1.52% 1.25%
</TABLE>
The Distributor reserves the right to allocate up to the entire
amount of the initial sales charge to dealers for all sales with respect to
orders which are placed during a particular period. Dealers to whom
substantially the entire sales charge is allocated may be deemed to be
"underwriters" as that term is defined under the Securities Act of 1933 (the
"1933 Act"). In addition to amounts paid to dealers as a commission out of the
front-end sales charge, the Distributor may, at its own expense, provide
promotional incentives, including cash compensation in excess of the applicable
sales charge to certain dealers whose representatives have sold or are expected
to sell significant amounts of shares of one or more of the Funds.
Class A shares of the ASAF JPM Money Market Fund are sold at their
net asset value without an initial sales charge. However, holders of Class A
shares of this Fund may be charged a sales charge when they exchange those
shares for Class A shares of the other Funds. See "How to Exchange Shares"
below.
Purchases Subject to a Contingent Deferred Sales Charge ("CDSC").
There is no initial sales charge on purchases aggregating $1 million or more of
Class A shares of any one or more of the Funds. However, if such Class A shares
are redeemed within 12 months of the first business day of the calendar month of
their purchase, a CDSC ("Class A CDSC") will be deducted from the redemption
proceeds. The Class A CDSC will not apply to redemptions of shares purchased by
the reinvestment of dividends or capital gains distributions and may be waived
under certain circumstances described below under "Waiver of Class A CDSC." The
Class A CDSC will be equal to 1.0% of the lesser of the shares' NAV at the time
of redemption or the original amount invested. The Class A CDSC is not imposed
on the amount of any increase in your account value over the initial amount
invested. The Class A CDSC is paid to the Distributor to reimburse expenses
incurred in providing distribution-related services to the Fund in connection
with the sale of Class A shares. To determine whether the Class A CDSC applies
to a redemption, the Fund will first redeem shares acquired by reinvestment of
dividends and capital gains distributions, and then will redeem shares in the
order in which they were purchased (such that shares held the longest are
redeemed first).
The Distributor will pay the dealer of record a sales commission on these
purchases in an amount equal to 0.50% of the amount invested.
Reduction of Initial Sales Charges for Class A Shares. You may be
eligible to buy Class A shares at reduced initial sales charge rates in one or
more of the following ways:
Combined Purchases. Initial sales charge reductions are available by
combining into a single transaction the purchase of Class A shares with the
purchase of any other class of shares. Qualifying purchases include: (1) those
by you, your spouse and your children under the age of 21, if all parties are
purchasing shares for their own account(s), which may include tax qualified
plans such as an IRA, SIMPLE IRA, individual type 403(b)(7) plan, a single
participant Keogh type plan, or by a company controlled by such individuals as
defined in the 1940 Act; (2) individual purchases by a trustee (or other
fiduciary) if the investment is for a single trust estate or single fiduciary
account, including a employee benefit plan other than those described above; and
(3) purchases by qualified employee benefit plans, other than those described
above, of a single employer, or of affiliated employers as defined in the 1940
Act. Purchases made for nominee or street name accounts (securities held in the
name of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with purchases made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
Rights of Accumulation. The initial sales charge for your investment in
Fund shares may also be reduced by aggregating the amount of such investment
with the current value of all Fund shares currently owned by you at the time of
your current purchase. The rules described above under "Combined Purchases" may
apply.
Letter of Intent ("LOI"). You may reduce the initial sales charge rate that
applies to your purchases of Class A shares by meeting the terms of an LOI -- a
non-binding commitment to invest a certain amount within a thirteen-month period
from your initial purchase. The total amount of your intended purchases of Class
A, B, C and X shares will determine the reduced sales charge rate for Class A
shares purchased during that period. This can include purchases made up to 90
days before the date of the LOI. Up to 5% of the LOI amount will be held in
escrow to cover additional sales charges which may be due if your total
investments over the LOI period are not sufficient to qualify for a sales charge
reduction. The rules described above under "Combined Purchases" may apply. For
additional information regarding LOIs, see the account application and the
Company's SAI under "Additional Information on the Purchase and Redemption of
Shares."
Waiver of All Class A Sales Charges. No sales charge is imposed on
sales of Class A shares for the following investors: (1) the Investment Manager,
its parent company, any affiliate or subsidiary of the parent company; (2)
present or former officers, directors, trustees and employees (and their
parents, spouses and dependent children) of the Company, the Investment Manager
(including, its parent company or any affiliate or subsidiary of the parent
company) or the Sub-advisors, and any retirement plans established by such
entities for their employees; (3) accounts with respect to which any person
described in (2) above acts as a custodian on behalf of a minor (including
Uniform Gift to Minors Act and Uniform Transfer to Minors Act accounts); (4)
present partners and employees (and their parents, spouses and dependent
children) of the Transfer Agent and the Company's or the Trust's legal counsel
and administrator; (5) dealers that have a sales agreement with the Distributor,
if they purchase shares for their own accounts or for retirement plans for their
employees; (6) 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); (7) 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); (8) employees (and their parents, spouses and
dependent children) of firms providing the Company, the Trust or their
affiliates with regular legal, actuarial, auditing, underwriting, claims,
administrative, computer-support, marketing, office or other services; and (9)
any Sub-advisor of the Company or the Trust.
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 a defined
contribution plan under section 401(a) of the Code (including 401(k) plans) with
at least 25 eligible employees; (6) purchases by a 403(b)(7) plan subject to the
Employee Retirement Income Security Act of 1974, as amended; (7) purchases by
former participants in a qualified retirement plan, where a portion of the plan
was invested in the Company; (8) purchases by non-qualified deferred
compensation plans; and (9) purchases under arrangements between the Company and
organizations which make recommendations to or permit group solicitations of its
employees, members or participants.
In order for the above sales charge reductions or waivers to be
effective, the Transfer Agent must be notified of the reduction or waiver
request when the purchase order is placed. The Transfer Agent may require
evidence of your qualification for such reductions or waivers. Additional
information about the above sales charge reductions or waivers can be obtained
from the Transfer Agent by calling 1-800-SKANDIA.
Waiver of Class A CDSC. The Class A CDSC for purchases aggregating
$1 million or more is waived in the following cases if shares are redeemed and
the Transfer Agent is notified: (1) redemptions under a Systematic Withdrawal
Plan as described in this Prospectus under "Special Investment Programs and
Privileges"; (2) redemptions to pay premiums for optional insurance coverage
described in this Prospectus under "Special Investment Programs and Privileges";
(3) redemptions following death or post-purchase disability (as defined by
Section 72(m)(7) of the Code); (4) distributions or loans to participants of
qualified retirement plans and other employee benefit plans; (5) the portion of
a mandated minimum distribution from an IRA, SIMPLE IRA or 403(b)(7) plan equal
to the percentage of your plan assets held in Class A shares of the Company; (6)
the portion of any substantially equal periodic payments (as described in
Section 72(t) of the Code) equal to the percentage of your plan assets held in
class A shares of the Company; and (7) the return of excess contributions made
to your IRA, SIMPLE IRA, 403(b)(7) plan or 401(k) plan.
Class A Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class A
shares to compensate the Distributor for its services and costs in distributing
Class A shares and servicing Class A shareholder accounts (the "Class A Plan").
Under the Class A Plan, the Fund pays the Distributor 0.50% of the Fund's
average daily net assets attributable to Class A shares, half of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees received under the Class A Plan
to compensate qualified dealers, brokers, banks and other financial institutions
for services provided in connection with the sale of Class A shares and the
maintenance of shareholders accounts. Such compensation is paid by the
Distributor quarterly at an annual rate not to exceed 0.50% of the Fund's
average daily net assets attributable to Class A shares held in accounts of the
dealer or its customers. The calculation of such payment excludes, until one
year after purchase, shares purchased at NAV with a CDSC. NAV shares are not
subject to the one-year exclusion in cases where certain shareholders who
invested $1 million or more have made arrangements with the Company and the
dealer of record waives the sales commission.
PURCHASE OF CLASS B SHARES:
Class B shares are sold at NAV per share without an initial sales
charge. However, if Class B shares are redeemed within 7 years of their
purchase, a CDSC ("Class B CDSC") will be deducted from the redemption proceeds.
The Class B CDSC will not apply to redemptions of shares purchased by the
reinvestment of dividends or capital gains distributions and may be waived under
certain circumstances described below. The charge will be assessed on the lesser
of the shares' NAV at the time of redemption or the original amount invested.
The Class B CDSC is not imposed on the amount of any increase in your account
value over the initial amount invested. The Class B CDSC is paid to the
Distributor to reimburse expenses incurred in providing distribution-related
services to the Fund in connection with the sale of Class B shares. Although
Class B shares are sold without an initial sales charge, the Distributor
normally pays a sales commission of 5.50% (and may pay up to 6.00%) of the
purchase price of Class B shares to the dealer from its own resources at the
time of the sale. During the initial offering period of the Class B shares, the
Distributor intends to pay a 6.00% up-front sales commission to the dealer. The
Distributor has assigned its right to receive any Class B CDSC, as well as any
distribution and service fee discussed below under "Class B Distribution and
Service Plan," to an unaffiliated third party that provides funding for up-front
sales commission payments.
To determine whether the Class B CDSC applies to a redemption, the
Fund will first redeem shares acquired by reinvestment of dividends and capital
gains distributions, and then will redeem shares in the order in which they were
purchased (such that shares held the longest are redeemed first). The amount of
the Class B CDSC will depend on the number of years since the time you invested
and the dollar amount being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
Redemption During: Class B CDSC (as % of amount subject to charge):
<S> <C>
1st year after purchase 6.0%
2nd year after purchase 5.0%
3rd year after purchase 4.0%
4th year after purchase 3.0%
5th year after purchase 2.0%
6th year after purchase 2.0%
7th year after purchase 1.0%
8th year after purchase None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are
considered to have been made on the first business day of the month in which the
purchase was made. Because in most cases it is more advantageous for an investor
to purchase Class A shares for amounts in excess of $500,000, a request to
purchase Class B shares for $500,000 or more will normally be considered as a
purchase request for Class A shares or declined.
Waiver of Class B CDSC. The Class B CDSC will be waived in the
following cases if shares are redeemed and the Transfer Agent is notified: (1)
redemptions under a Systematic Withdrawal Plan as described in this Prospectus
under "Special Investment Programs and Privileges"; (2) redemptions to pay
premiums for optional insurance coverage described in this Prospectus under
"Special Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4) the
portion of a mandated minimum distribution from an IRA, SIMPLE IRA or an
individual type 403(b)(7) plan equal to the percentage of your plan assets held
in Class B shares of the Company; (5) the portion of any substantially equal
periodic payments (as described in Section 72(t) of the Code) equal to the
percentage of your plan assets held in Class B shares of the Company; and (6)
the return of excess contributions from an IRA or SIMPLE IRA.
Automatic Conversion of Class B Shares. Eight years after you
purchase Class B shares of a Fund, those shares will automatically convert to
Class A shares of that Fund. This conversion feature relieves Class B
shareholders of the higher asset-based distribution charge that applies to Class
B shares under the Class B Distribution and Service Plan described below. The
conversion is based on the relative NAV of the two classes, and no sales load or
other charge is imposed. At the time of conversion, a portion of the Class B
shares purchased through the reinvestment of dividends or capital gains
("Dividend Shares") will also convert to Class A shares. The portion of Dividend
Shares that will convert is determined by the ratio of your converting Class B
non-Dividend Shares to your total Class B non-Dividend Shares. Under Section
1036 of the Code, the automatic conversion of Class B shares will not result in
a gain or loss to the Fund or to affected shareholders.
Class B Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing Class B shareholder accounts (the "Class B Plan").
Under the Class B Plan, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class B shares that are outstanding for
8 years or less, a quarter of which is intended as a fee for services provided
to existing shareholders. The Distributor uses distribution and service fees
received under the Class B Plan to compensate qualified dealers, brokers, banks
and other financial institutions for services provided in connection with the
sale of Class B shares and the maintenance of shareholder accounts. Such
compensation is paid by the Distributor quarterly at an annual rate not to
exceed 0.50% of the Fund's average daily net assets attributable to Class B
shares (and any shares purchased by the reinvestment of dividends or capital
gains) held for over seven years.
PURCHASE OF CLASS X SHARES:
Class X shares are currently only offered to certain "Qualified"
purchasers (including, but not limited to, IRAs, Roth IRAs, Education IRAs, SEP
IRAs, SIMPLE IRAs and 403(b)(7) plans). Any request for "Non-Qualified"
purchases of Class X shares up to $500,000 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 $500,000 will be considered as a purchase
request for Class A shares or declined. Because it is more advantageous for an
investor to purchase Class A shares for amounts in excess of $1,000,000, a
request to purchase Class X shares for $1,000,000 or more will normally be
considered as a purchase request for Class A shares or declined.
Class X shares are sold at NAV per share without an initial sales
charge. In addition, investors purchasing Class X shares will receive, as a
bonus, additional shares having a value equal to 2.50% of the amount invested
("Bonus Shares"). The Distributor has undertaken to pay for Bonus Shares as part
of its services to the Funds. The Distributor expects to recover costs
associated with its purchases of Bonus Shares through fees received under the
Class X Distribution and Service Plan discussed below. Shares purchased by the
reinvestment of dividends or capital gains distributions are not eligible for
Bonus Shares.
Although Class X shares are sold without an initial sales charge,
if Class X shares are redeemed within 8 years of their purchase (7 years in the
case of Class X shares purchased prior to August ___, 1998), a CDSC ("Class X
CDSC") will be deducted from the redemption proceeds. The Class X CDSC will not
apply to redemptions of Bonus Shares or shares purchased by the reinvestment of
dividends or capital gains distributions and may be waived under certain
circumstances described below. The Class X CDSC will be assessed on the lesser
of the NAV of the shares at the time of redemption or the original amount
invested. The Class X CDSC is not imposed on the amount of any increase in your
account value over the initial amount invested. The Class X CDSC is paid to the
Distributor to reimburse expenses incurred in providing distribution-related
services to the Fund in connection with the sale of Class X shares. Although
Class X shares are sold without an initial sales charge, the Distributor
normally pays a sales commission of 3.00% (and may pay up to 3.50%) of the
purchase price of Class X shares to the dealer from its own resources at the
time of the sale. During the initial offering period of the Class X shares, the
Distributor intends to pay a 3.50% up-front sales commission to the dealer. The
Distributor has assigned its right to receive any Class X CDSC, as well as any
distribution and service fee discussed below under "Class X Distribution and
Service Plan," to an unaffiliated third party that provides funding for up-front
sales commission payments.
To determine whether the Class X CDSC applies to a redemption, the
Fund redeems shares in the following order: (1) shares acquired by reinvestment
of dividends and capital gains distributions; (2) shares (including Bonus
Shares) held for over 8 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 4.0%
5th year after purchase 3.0%
6th year after purchase 2.0%
7th year after purchase 2.0%
8th year after purchase 1.0%
9th or 10th 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. In the case of Class X shares purchased prior to August ___,
1998, the CDSC imposed will be 6% during the first year after purchase, 5%
during the second year, 4% during the third year, 3% during the fourth year, 2%
during the fifth and sixth years, 1% during the seventh year, and none
thereafter.
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 to pay premiums for optional insurance coverage described in this
Prospectus under "Special Investment Programs and Privileges"; (2) redemptions
following death or post-purchase disability (as defined by Section 72(m)(7) of
the Code); (3) the portion of a mandated minimum distribution from an IRA,
SIMPLE IRA or an individual type 403(b)(7) plan equal to the percentage of your
plan assets held in Class X shares of the Company; (4) the portion of any
substantially equal periodic payments (as described in Section 72(t) of the
Code) equal to the percentage of your plan assets held in Class X shares of the
Company; and (5) the return of excess contributions from an IRA or SIMPLE IRA.
Automatic Conversion of Class X Shares. Ten years after you
purchase Class X shares of a Fund (eight years in the case of Class X shares
purchased prior to August __, 1998), those shares will automatically convert to
Class A shares of that Fund. This conversion feature relieves Class X
shareholders of the higher asset-based distribution charge that applies to Class
X shares under the Class X Distribution and Service Plan described below. The
conversion is based on the relative NAV of the two classes, and no sales load or
other charge is imposed. At the time of conversion, a portion of the Class X
shares purchased through the reinvestment of dividends or capital gains
("Dividend Shares") will also convert to Class A shares. The portion of Dividend
Shares that will convert is determined by the ratio of your converting Class X
non-Dividend Shares to your total Class X non-Dividend Shares. Under Section
1036 of the Code, the automatic conversion of Class X shares will not result in
a gain or loss to the Fund or to affected shareholders.
Class X Distribution and Service Plan. The Company has adopted
Distribution and Service plans (commonly known as "12b-1 Plans") 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 Plans, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class X shares that are outstanding for
10 years or less (8 years in the case of Class X shares purchased prior to
August ___, 1998), a quarter of which is intended as a fee for services provided
to existing shareholders. The Distributor uses distribution and service fees
received under the Class X Plans as reimbursement for its purchases of Bonus
Shares, as well as to compensate qualified dealers, brokers, banks and other
financial institutions for services provided in connection with the sale of
Class X shares and the maintenance of shareholder accounts. Such latter
compensation is paid by the Distributor quarterly at an annual rate not to
exceed 0.50% of the Fund's average daily net assets attributable to Class X
shares (and any shares purchased by the reinvestment of dividends or capital
gains as such shares) held for over seven years.
PURCHASE OF CLASS C SHARES:
Because it is more advantageous for an investor to purchase Class A
shares for amounts in excess of $1,000,000, a request to purchase Class C shares
for $1,000,000 or more will be considered as a purchase request for Class A
shares or declined.
Class C shares are sold at NAV per share without an initial sales
charge. However, if Class C shares are redeemed within 12 months of the first
business day of the calendar month of their purchase, a CDSC ("Class C CDSC") of
1.0% will be deducted from the redemption proceeds. The Class C CDSC will not
apply to redemptions of shares purchased by the reinvestment of dividends or
capital gains distributions and may be waived under certain circumstances
described below. The charge will be assessed on the lesser of the NAV of the
shares at the time of redemption or the original amount invested. The Class C
CDSC is not imposed on the amount of any increase in your account value over the
initial amount invested. The Class C CDSC is paid to the Distributor to
reimburse its expenses of providing distribution-related services to the Fund in
connection with the sale of Class C shares.
To determine whether the Class C CDSC applies to a redemption, the
Fund will first redeem shares acquired by reinvestment of dividends and capital
gains distributions, and then will redeem shares in the order in which they were
purchased (such that shares held the longest are redeemed first).
Waiver of Class C CDSC. The Class C CDSC will be waived in the
following cases if shares are redeemed and the Transfer Agent is notified: (1)
redemptions under a Systematic Withdrawal Plan as described in this Prospectus
under "Special Investment Programs and Privileges"; (2) redemptions to pay
premiums for optional insurance coverage described in this Prospectus under
"Special Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4)
distributions or loans to participants of qualified retirement plans and other
employee benefit plans; (5) the portion of a mandated minimum distribution from
an IRA, SIMPLE IRA or an individual type 403(b)(7) plan equal to the percentage
of your plan assets held in Class C shares of the Company; (6) the portion of
any substantially equal periodic payments (as described in Section 72(f) of the
Code) equal to the percentage of your plan assets held in Class C shares of the
Company; and (7) the return of excess contributions from an IRA, SIMPLE IRA or
401(k) plan.
Class C Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class C
shares to compensate the Distributor for its services and costs in distributing
Class C shares and servicing Class C shareholder accounts (the "Class C Plan").
Under the Class C Plan, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class C shares, a quarter of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees received under the Class C Plan
to compensate qualified dealers, brokers, banks and other financial institutions
for services provided in connection with the sale of Class C shares and the
maintenance of shareholder accounts. The Distributor currently pays a 1.00% fee
to dealers in advance upon sale of Class C shares and retains the fee paid by
the Fund in the first year. After the shares have been held for a year, the
Distributor pays the fee to dealers on a quarterly basis. Class C shares are not
subject to a CDSC in cases where certain shareholders have made arrangements
with the Company and the dealer of record waives the 1.00% fee.
SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES
Automatic Investment Plans ("AIP"). You may make regular monthly
investments through an automatic withdrawal from your bank account ($50 minimum
per Fund). Sales charges will apply.
Automatic Dividend Reinvestment. Unless you indicate otherwise on
your account application, your dividend and capital gains distributions will
automatically be reinvested in additional shares at no sales charge.
Automatic Dividend Diversification ("ADD"). You may automatically
reinvest dividends and capital gains distributions paid by one Fund into shares
of the same class of another Fund, provided that you have already met that
Fund's minimum initial purchase requirement. No initial sales charge or CDSC
will apply to the purchased shares. The number of shares purchased through an
ADD investment program will be determined by using the NAV of the Fund in which
dividends will be reinvested next computed after the dividend payment is made.
All shareholder accounts involved in an ADD investment program must have
identical registrations.
Dollar Cost Averaging ("DCA"). You can set up monthly or quarterly
exchanges in amounts of $50 or more from one Fund to the same class of shares of
another Fund, provided that the latter is currently available for sale. You may
set up more than one of these programs simultaneously. You should consider the
investment objectives and policies of a Fund before electing to exchange money
into such Fund through the DCA investment program. All shareholder accounts
involved in a DCA investment program must have identical registrations.
Systematic Withdrawal Plan ("SWP"). You may set up monthly,
quarterly, semi-annual or annual redemptions from any account with a value of
$5,000 or more. You may direct a Fund to make regular payments in fixed dollar
amounts of $50 or more, in an amount equal to the value of a fixed number of
shares (5 shares or more) at the time of withdrawal, or in an amount equal to a
fixed percentage of your account value at the time of withdrawal. Any applicable
CDSC will be waived for shares redeemed under a SWP where: (i) in the case of
SWPs based on a fixed dollar amount or number of shares, SWP redemptions are
limited to no more than 10% annually of your account value or number of shares,
respectively, measured from the date the Transfer Agent receives your SWP
request; or (ii) in the case of SWPs based on a fixed percentage amount, each
SWP redemption is limited to a percentage amount that would not exceed 10% on an
annualized basis of your account value at the time of withdrawal.
Payments under a SWP can be directed to you or to someone other
than the registered owner(s) of the account subject to the Fund's approval. If
this privilege is requested when the account is established, no signature
guarantee is needed. If this privilege is added to an existing account and
payments are directed to someone other than the registered owners(s) of the
account, a signature guarantee is required on the SWP application. The Company
reserves the right to institute a charge for this service.
Exchange Privilege. You may exchange your shares of a Fund for
shares of the same class of any other Fund. You should consider the differences
in investment objectives and expenses of a Fund before making an exchange. For
complete policies and restrictions governing exchanges, including circumstances
under which a shareholder's exchange privilege may be suspended or revoked, see
this Prospectus under "How to Exchange Shares."
Reinvestment Privilege. If you redeem some or all of your Class A,
B or X Fund shares, you have up to 180 days to reinvest all or part of the
redemption proceeds in Class A shares of the Fund without paying a sales charge.
This privilege applies to redemptions of Class A shares on which an initial or
deferred sales charge was paid and to redemptions of Class B and Class X shares
on which you paid a CDSC when you redeemed them. You must ask the Transfer Agent
for this privilege when you send your payment.
Retirement Plans. Certain classes of Fund shares are available as
an investment option for your retirement plans. If you participate in a plan
sponsored by your employer, the plan trustee or administrator must make the
purchase of shares for your retirement plan account. A number of different
retirement plans can be used by individuals and employers including IRAs, Roth
IRAs, Education IRAs, SEP IRAs, SIMPLE IRAs, 401 plans and 403(b)(7) plans.
Please call 1-800-SKANDIA for the applicable plan documents, which contain
important information and applications.
The above programs and privileges may be selected at the time of
your initial investment or at a later date.
Optional Benefits. American Skandia Life Assurance Corporation
("ASLAC") -- an "affiliated person" of the Company, the Trust, the Investment
Manager and the Distributor within the meaning of the 1940 Act -- intends to
make certain life insurance coverage available to certain persons on whose
behalf shares of the Funds are purchased. The benefits of this coverage payable
at death will be related to the amounts paid to purchase shares and to the value
of the shares held for the benefit of the insured persons. Therefore, coverage
will terminate if all shares are redeemed.
Purchasers of the life insurance coverage are required to authorize
periodic redemptions of Fund shares to pay the premiums for such coverage. Such
redemptions will not be subject to contingent deferred sales charges, but will
have the same tax consequences as any other Fund redemptions.
The above life insurance coverage will be available to eligible
persons who enroll for the coverage within a limited time period after shares in
any Fund are initially purchased or transferred. In addition, coverage cannot be
made available unless ASLAC knows for whose benefit shares are purchased. For
instance, coverage cannot be made available for shares registered in the name of
your broker unless the broker provides ASLAC with information regarding the
beneficial owners of such shares. Other restrictions on the coverage will apply,
such as the age of the persons upon whose life the coverage is issued. This
insurance coverage may not be available in all states and may be subject to
additional restrictions or limitations on coverage. Purchasers of shares should
also make themselves familiar with the impact on the life coverage of purchasing
additional shares, reinvestment of dividends and capital gains distributions and
redemptions.
Please call 1-800-SKANDIA for more information and application
forms for any of the above programs and privileges.
HOW TO REDEEM SHARES
You can arrange to take money out of your Fund account on any business
day by redeeming some or all of your shares. Your shares will be sold at the
next NAV calculated after your order is received in good order and accepted by
the Transfer Agent. The Company offers you a number of ways to sell your shares:
in writing, by telephone, by Automated Clearing House ("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>
Send Requests by Regular Mail to: Send Requests by Courier or Express Mail to:
<S> <C>
American Skandia Advisor Funds, Inc. American Skandia Advisor Funds, Inc.
P.O. Box 8012 Two Heritage Drive
Boston, Massachusetts 02266-8012 North Quincy, Massachusetts 02171-2138
</TABLE>
REDEEMING SHARES BY TELEPHONE:
You may also redeem shares by telephone by calling 1-800-SKANDIA.
To receive the redemption price calculated on the business day that you call,
your call must be received by the Transfer Agent before the close of the NYSE
that day, which is normally 4:00 P.M. Eastern Time. Shares held in tax-qualified
retirement plans may not be redeemed by telephone. You may have a check sent to
the address on the account statement, or, if you have linked your Fund account
to your bank account, you may have the proceeds transferred to that bank
account.
Telephone Redemptions Paid By Check. You may make one redemption
request by telephone in any 7-day period for any amount up to $50,000. The check
must be payable to all owners of record of the shares and must be sent to the
address on the account. This service is not available within 30 days after
changing the address on an account.
Telephone Redemptions Through Bank-Linked Accounts. If you have
selected this option on your account application, you may link your Fund account
to your designated bank account electronically. You can initiate a redemption of
Fund shares for as little as $50 or as much as $50,000 using the ACH network to
have funds transferred to your bank account. Normally the 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.
CHECKWRITING:
After completing the appropriate authorization form, holders of
Class A and Class C shares of the ASAF JPM Money Market Fund may redeem those
shares by check. Checks must be written for at least $500. Shareholders with
joint accounts may authorize each owner to write checks. The payee of a check
may cash or deposit it in the same way as an ordinary bank check.
Of course, checks cannot be paid if they are written for more than
the account value of your ASAF JPM Money Market Fund shares. You may not write a
check that would require the Fund to redeem shares that were purchased by check
within the prior 15 days. To avoid dishonor of checks due to fluctuations in
account value, shareholders are advised against redeeming all or most of their
account by check. There is presently no charge to the shareholder for
checkwriting privileges, but the Fund and the Transfer Agent reserve the right
to impose such charges or to modify or terminate the privilege at anytime. Any
applicable CDSC will be deducted before a check is paid.
ADDITIONAL INFORMATION:
To protect you and the Fund from fraud, redemption requests under
the following situations must be in writing and must include a signature
guarantee (there may be other situations also requiring a signature guarantee at
the discretion of the Company or the Transfer Agent):
o You wish to redeem more than $50,000 worth of shares and receive a
check o A redemption check is not payable to all shareholders listed on
the account statement o A redemption check is not sent to the address
of record on your statement o Shares are being transferred to a Fund
account with a different owner or name o Shares are redeemed by someone
other than the owners (such as an Executor)
The Transfer Agent may delay forwarding a check or processing a payment
via bank-linked account for the sale of recently purchased shares, but only
until the purchase payment has cleared. Such delay may be as long as 15 calendar
days from the date the shares were purchased, and may be avoided if you purchase
shares by certified check. You may be charged a fee of up to $10 for wire
transfers of redemption proceeds, which will be deducted from such proceeds.
There is no fee for ACH wire transfers.
If you have any questions about any of the above procedures, and
especially if you are redeeming shares in a special situation, such as due to
the death of the owner, or from a retirement plan, please call 1-800-SKANDIA for
assistance.
HOW TO EXCHANGE SHARES
In most cases, shares of a Fund may be exchanged for shares of the
same class of other Funds at NAV per share at the time of exchange. Exchanges of
shares involve a redemption of the shares of the Fund you own and a purchase of
shares of another Fund. Shares are normally redeemed from one Fund and purchased
from the other Fund in the exchange transaction on the same business day on
which the Transfer Agent receives an exchange request that is in proper form by
the close of the NYSE that day. Exchanges may be taxable transactions and may be
subject to special tax rules about which you should consult your own tax
adviser.
You may exchange your Fund shares (other than Class A shares of the
ASAF JPM Money Market Fund) 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 and the date for automatic conversion of
Class B and Class X shares to Class A shares 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 of Class A shares of the ASAF JPM Money Market Fund on
which an initial sales charge has not been paid for Class A shares of any other
Fund are subject to the initial sales charge applicable to the other Fund. Class
A shares of the Money Market Fund acquired by exchange of Class A shares of
another Fund are exchanged at net asset value.
Exchanges may be requested in writing, by telephone or by other
means acceptable to the Company. For written exchange requests you should submit
a letter of instruction, signed by all owners of the account, to the Transfer
Agent at P.O. Box 8012, Boston, Massachusetts 02266-8012. To initiate a
telephone exchange, you should call 1-800-SKANDIA.
All exchanges are subject to the following restrictions:
o The Fund you are exchanging into must be registered for sale in your
state.
You may exchange only between Funds that are registered in the
same name, address and taxpayer identification number.
o You may only exchange for shares of the same class of another Fund.
o You must meet the minimum purchase requirements for the Fund you
purchase by exchange.
o You must hold the shares you purchase when you establish your Fund
account for at least 7 days before you can exchange them. There is
no holding period if you acquired the shares to be exchanged
through reinvestment of dividends or distributions.
Each Fund reserves the right to refuse or delay exchanges by any
person or group if, in the Investment Manager's judgment, a Fund would be unable
to invest the money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected. Your exchanges
may also be restricted or refused if a Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincides with a "market timing" strategy may be
disruptive to the Fund.
Although a Fund will attempt to give you prior notice whenever it
is reasonably able to do so, it may impose the above restrictions at any time.
Each Fund reserves the right to terminate or modify the exchange privilege in
the future.
DETERMINATION OF NET ASSET VALUE
The net asset value ("NAV") per share is determined for each class
of shares for each Fund as of the close of the NYSE (normally 4:00 p.m. Eastern
Time) on each business day (as previously defined under "How to Buy Shares:
Purchase Orders") by dividing the value of the Fund or Portfolio's total assets
attributable to a class, less any liabilities, by the number of total shares of
that class outstanding. The total assets of each Non-Feeder Fund and Portfolio
is determined by the 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 Directors of the Company and Trustees of the Trust have
established procedures for valuing Non-Feeder Fund and Portfolio assets, which
generally require that the assets of each Non-Feeder Fund and Portfolio (except
the ASMT JPM Money Market Portfolio) be valued on the basis of market
quotations. However, in certain circumstances where market quotations are not
readily available, assets are valued by methods specified in the procedures that
are believed to accurately reflect the assets' fair value. . The assets of the
ASMT JPM Money Market Portfolio are valued by the amortized cost method pursuant
to procedures established by the Directors of the Company and the Trustees of
the Trust. With respect to all Funds and Portfolios, short-term investments that
will mature in 60 days or less are valued at amortized cost, which is intended
to approximate market value.
SHAREHOLDER ACCOUNT RULES AND POLICIES
o The offering of any class of Fund shares may be suspended during any
period in which the determination of NAV is suspended, and may be suspended or
terminated by the Directors of the Company at any time they believe it is in the
Fund's best interest to do so.
o Telephone transaction privileges or privileges using electronic means
for purchases, redemptions or exchanges may be modified, suspended or terminated
by a Fund at any time. If an account has more than one owner, the Fund and the
Transfer Agent may rely on the instructions of any one owner. Telephone
privileges apply to each owner of the account and the dealer representative of
record for the account unless and until the Transfer Agent receives instructions
from an owner of the account indicating otherwise. The Transfer Agent will
record any telephone calls to verify data concerning transactions and has
adopted other procedures to confirm that telephone instructions or instructions
received by electronic means are genuine. If the Company does not use reasonable
procedures the Company or its agents may be liable for losses due to
unauthorized transactions, but otherwise the Company or its agents will not be
liable for losses or expenses arising out of telephone instructions or other
electronic means that are reasonably believed to be genuine. If you are unable
to reach the Transfer Agent during periods of unusual market activity, you may
not be able to complete a telephone transaction and should consider placing your
order by mail.
o Purchase, redemption or exchange requests will not be honored until
the Transfer Agent receives all required documents in proper form.
o Share certificates will not be issued for the Company's shares.
o Brokers that can perform account transactions for their clients
through the National Securities Clearing Corporation are responsible for
obtaining their clients' permission to perform those transactions and are
responsible to their clients who are shareholders of a Fund if the dealer
performs any transaction erroneously or improperly.
o All purchases must be made in U.S. dollars and checks must be drawn on
U.S. banks. You may not purchase shares with a third-party check.
o Payment for redeemed shares is forwarded ordinarily by check or
through the bank-linked service (as elected by the shareholder) within 7
calendar days after the business day on which the Transfer Agent receives
redemption instructions in proper form. Payment will be forwarded within 3
business days for accounts registered in the name of a dealer. Redemptions may
be suspended or payment dates postponed when the NYSE is closed (other than
weekends or holidays), when trading is restricted or as permitted by the
Commission.
o Involuntary redemptions of small accounts may be made by a Fund if
the account value has fallen below $500 (for reasons other than a drop in market
value of shares) and at least 30 days notice has been given to the shareholder.
Any applicable CDSC will be waived for such redemptions.
o Under unusual circumstances shares of a Fund may be redeemed "in
kind," which means that the redemption proceeds will be paid with securities
from the Fund's portfolio of securities. For additional information regarding
such redemptions, see the Company's SAI under "Additional Information on the
Purchase and Redemption of Shares."
o "Backup withholding" of Federal income tax may be applied at the rate
of 31% from dividends, distributions and redemption proceeds (including
exchanges) if you fail to furnish the Fund a certified Social Security or
Employer Identification Number when you sign your application, or if you violate
Internal Revenue Service regulations on the reporting of income.
o The Company does not charge a transaction fee, but if your broker
handles your redemption, your broker may charge a fee. Such fee can be avoided
by redeeming your Fund shares directly through the Transfer Agent. You may be
subject to a CDSC under the circumstances described in this Prospectus under
"How To Buy Shares."
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Funds are separate series of shares of the Company, a Maryland
Corporation established on March 5, 1997 and registered under the 1940 Act as an
open-end management investment company. Each Fund has its own investment
objective, policies and limitations, and operates as a diversified portfolio as
defined in the 1940 Act. The Funds each intend to be treated as a regulated
investment company for federal income tax purposes. For additional information
regarding the Funds' treatment as regulated investment companies, see this
Prospectus under "Dividends, Capital Gains and Taxes." Five of the Funds, the
Feeder Funds, currently invest all of their investable assets in a corresponding
Portfolio of the Trust, in each case receiving a beneficial interest in that
Portfolio. The Portfolios are separate series of shares of the Trust, a Delaware
business trust established on March 6, 1997, and intend to be treated as a
partnership for federal tax purposes. Those Funds which do not currently invest
all of their investable assets in a corresponding Portfolio of the Trust, the
Non-Feeder Funds, retain the right to do so in the future. Each Portfolio, as
well as the Trust, intends to comply with all applicable federal and state
securities laws. For additional information regarding the Feeder Funds'
investment in the Portfolios of the Trust, see this Prospectus under "Special
Information on the 'Master/Feeder' Fund Structure."
Capital Stock. The authorized capital stock of the Company consists
of the following shares (par value $.001 per share): ASAF Founders International
Small Capitalization Fund (250 million); ASAF T. Rowe Price International Equity
Fund (250 million); ASAF Janus Overseas Growth Fund (250 million); ASAF Founders
Small Capitalization Fund (250 million); ASAF T. Rowe Price Small Company Value
Fund (250 million); ASAF Neuberger&Berman Mid-Cap Growth Fund ([insert]); ASAF
Neuberger&Berman Mid-Cap Value Fund ([insert)]; ASAF Robertson Stephens Value +
Growth Fund (250 million); ASAF Marsico Capital Growth Fund ([insert]); ASAF
Janus Capital Growth Fund (250 million); ASAF Lord Abbett Growth and Income Fund
(250 million); ASAF INVESCO Equity Income Fund (250 million); ASAF American
Century Strategic Balanced Fund (250 million); ASAF Federated High Yield Bond
Fund (250 million); ASAF Total Return Bond Fund (250 million); and ASAF JPM
Money Market Fund (2.5 billion).
Description of Shares. The Company currently has sixteen separate
series of shares, each of which is divided into Class A, B, C and X shares. The
Directors of the Company are authorized to establish, from time to time and
without shareholder approval, additional series or classes of shares. The assets
of each series of shares belong only to that series, and the liabilities of each
series are borne solely by that series and no other. Shares of each Fund
represent equal proportionate interests in the assets of that Fund only and have
identical voting, dividend, redemption, liquidation, and other rights. Each
class of shares, however, bears different sales charges, distribution fees and
related expenses, and has exclusive voting rights with respect to its respective
12b-1 Distribution and Service Plan. All shares issued are fully paid,
non-assessable and freely transferable, and have no preference, preemptive or
similar rights.
Shareholder Voting and Meetings. Each shareholder is entitled to
one vote for each share (and to the appropriate fractional vote for each
fractional share) of the Funds held upon all matters submitted to the
shareholders generally. Shareholders of all Funds and classes will vote together
as a single class, except when otherwise required by applicable law or as
determined by the Directors of the Company; and provided that shareholders of a
particular Fund or class shall not be entitled to vote on any matter which does
not affect any interest of that Fund or class, except as otherwise required by
applicable law. The Directors of the Company do not intend to hold annual
meetings of shareholders of the Funds, and will call special meetings of
shareholders of a Fund only if required under the 1940 Act and other applicable
law, in their discretion or upon written request of holders of 10% or more of
the outstanding shares of that Fund entitled to vote.
Certain Provisions. Under the Maryland General Corporation Law, a
Director of the Company who is held liable for assenting to a distribution made
in violation of the Company's Articles of Incorporation is entitled to
contribution from each shareholder of the Company for the amount the shareholder
accepted knowing the distribution was made in violation of those provisions.
Absent such knowledge, a shareholder will not be obligated to the Company or its
creditors in respect of shares held in the Company except to the extent of any
unpaid portion of the subscription price or purchase price for such shares.
SPECIAL INFORMATION ON THE
"MASTER/FEEDER" FUND STRUCTURE
An investor in the Feeder Funds should be aware that these Funds,
unlike mutual funds which directly acquire and manage their own portfolios of
securities, seek to achieve their investment objectives by investing all of
their investable assets in a corresponding Portfolio of the Trust (although each
Feeder Fund may temporarily hold a de minimis amount of cash). The Portfolios of
the Trust, which have the same investment objective, policies and limitations as
their corresponding Feeder Fund, in turn invest their investable assets directly
in a portfolio of securities. Each of the Feeder Funds thus acquires an indirect
interest in the securities owned by its corresponding Portfolio.
Each Feeder Fund's investment in its corresponding Portfolio is in
the form of a non-transferable beneficial interest. Members of the general
public may not purchase a direct interest in a Portfolio of the Trust. However,
in addition to selling an interest to its corresponding Feeder Fund, each
Portfolio may sell interests to other affiliated and non-affiliated investment
companies and/or institutional investors. Such investors will invest in a
Portfolio on the same terms and conditions as its corresponding Feeder Fund and
will pay a proportionate share of the Portfolio's expenses. Other investors
investing in a Portfolio, however, are not required to sell their shares at the
same public offering price as the corresponding Feeder Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in each of
the Feeder Funds should be aware that these differences may result in
differences in returns experienced by investors in other investment companies
which may invest exclusively in the Portfolios. Such differences in returns are
also present in other mutual fund structures, including funds that have multiple
classes of shares. Currently, of the investment companies which may invest in
the Portfolios, only shares of the Feeder Funds are available for purchase by
the general public in the United States. Information regarding the availability
of shares of any other fund that may invest in a Portfolio in the future can be
obtained by calling 1-800-SKANDIA.
The Directors of the Company believe that the "master/feeder" fund
structure offers opportunities for substantial growth in the assets of the
Portfolios that may enable the Portfolios to realize economies of scale that
could reduce the Portfolios' operating expenses, thereby producing higher
returns and benefiting the shareholders of the Feeder Funds. A Feeder Fund's
investment in its corresponding Portfolio may, however, be adversely affected by
the actions of other investors in the Portfolio, if any. For example, if a large
investor withdraws from a Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, a Portfolio may become less diverse, resulting in increased
portfolio risk, and experience decreasing economies of scale. However, this
possibility exists as well for traditionally structured funds which have large
or institutional investors. Funds which invest all their assets in interests in
a separate investment company are a relatively new development in the mutual
fund industry and, therefore, may be subject to additional regulations than
traditionally structured mutual funds.
Each of the Feeder Funds may withdraw (completely redeem) all of
its assets from its corresponding Portfolio at any time if the Directors of the
Company determine that it is in the best interest of the Fund to do so. A Feeder
Fund might withdraw, for example, if other investors in the Fund's corresponding
Portfolio voted to, by a vote of all investors in the Portfolio (including the
Fund), change the investment objective, policies or limitations of the Portfolio
in a manner not acceptable to the Directors of the Company. The investment
performance of a Feeder Fund may be affected by a withdrawal of all its assets
from a corresponding Portfolio. A withdrawal could also result in a distribution
"in kind" of portfolio securities (as opposed to a cash distribution) by the
Portfolio to the Feeder Fund. If securities are distributed, the Feeder Fund
could incur brokerage, tax or other charges in converting the securities to cash
or purchasing other securities. In addition, a distribution "in kind" may result
in a less diversified portfolio of investments or adversely affect the liquidity
of the Feeder Fund's investment portfolio. In the event a Feeder Fund withdraws
all of its assets from its corresponding Portfolio, or the Directors of the
Company determines that the investment objective of a Portfolio is no longer
consistent with the investment objective of its corresponding Feeder Fund, such
Directors would consider what action might be taken, including investing all of
the Fund's investable assets in another pooled investment entity having
substantially the same investment objective as the Fund or retaining an
investment adviser to manage the Fund's assets directly in accordance with the
Fund's investment objective, policies and limitations.
The Trust's Agreement and Declaration of Trust provides that a
Portfolio will continue without limitation of time unless terminated by vote of
investors holding at least a majority of the interests of such Portfolio
entitled to vote or by the Trustees of the Trust by written notice to investors
of such Portfolio. This provision is consistent with treatment of each Portfolio
as a partnership for federal income tax purposes.
Investor Meetings and Voting. Each Portfolio normally will not hold
meetings of investors except as required by the 1940 Act. Each investor in a
Portfolio (including a Feeder Fund) will be entitled to vote in proportion to
its relative beneficial interest in the Portfolio. Whenever a Feeder Fund as an
investor in a Portfolio is requested to vote on matters pertaining to a
Portfolio (other than the termination of a Portfolio's business, which may be
determined by the Trustees of the Trust without investor approval), such Fund
will hold a meeting of Fund shareholders and will vote its interest in such
Portfolio for or against such matters proportionately to the instructions to
vote for or against such matters received from Fund shareholders. Other
investors in the Portfolio may alone or collectively acquire sufficient voting
interests in the Portfolio to control matters relating to the operation of the
Portfolio, which could cause or require the Fund to withdraw its investment in
the Portfolio or take other appropriate action.
Certain Provisions. The Trust's Agreement and Declaration of Trust
provides that the Feeder Funds and any other entities permitted to invest in a
Portfolio of the Trust (e.g., other U.S. and foreign investment companies, and
common and commingled trust funds) will each be liable for all obligations of
each such Portfolio in the event that the Trust fails to satisfy such
liabilities and obligations. However, the risk of an investor in a Portfolio
(including a Feeder Fund) incurring financial loss beyond the amount of its
investment on account of such liability is limited to circumstances in which the
Portfolio had inadequate insurance and was unable to meet its obligations out of
its assets. Accordingly, the Trustees of the Trust believe that neither a Feeder
Fund nor its shareholders will be adversely affected by reason of the Fund
investing in a corresponding Portfolio of the Trust.
MANAGEMENT OF THE FUNDS
THE DIRECTORS, TRUSTEES AND OFFICERS:
The Directors of the Company and the Trustees of the Trust have
oversight responsibility for the operations of each Fund and Portfolio,
respectively. As of the date of this Prospectus, each of the Directors of the
Company also serves as a Trustee of the Trust. The Directors of the Company and
the Trustees of the Trust, including a majority of the Directors and Trustees
who are not "interested persons" (as defined in the 1940 Act) of the Company or
the Trust, respectively, have adopted written procedures designed to identify
and reasonably address any potential conflicts of interest which might arise as
a result of an "overlap" of Directors and Trustees, including, if necessary, the
creation of a separate board of trustees of the Trust. For additional
information concerning the Directors and officers of the Company, see the
Company's SAI under "Management of the Company."
THE INVESTMENT MANAGER:
American Skandia Investment Services, Incorporated ("ASISI," as
previously defined), One Corporate Drive, Shelton, Connecticut 06484, acts as
investment manager to each of the Non-Feeder Funds and Portfolios pursuant to
separate investment management agreements with the Company and the Trust,
respectively (the "Management Agreements"). Unlike the Non-Feeder Funds, each of
the Feeder Funds invests all of its investable assets in a corresponding
Portfolio of the Trust and thus does not require an investment manager. ASISI, a
Connecticut corporation organized in 1991, is registered as an investment
adviser with the Commission and is a wholly-owned subsidiary of American Skandia
Investment Holding Corporation, whose indirect parent is Skandia Insurance
Company Ltd. ("Skandia"). Skandia is a Swedish company that owns, directly or
indirectly, a number of insurance companies in many countries.
In addition to serving as investment manager to the Company and the
Trust, ASISI currently serves as the investment manager to American Skandia
Trust, an open-end management investment company whose shares are made available
to life insurance companies writing variable annuity contracts and variable life
insurance policies. Shares of American Skandia Trust also may be offered
directly to qualified pension and retirement plans.
The Management Agreements provide that ASISI will furnish each
Non-Feeder Fund and Portfolio with investment advice and investment management
and administrative services subject to the supervision of the Directors of the
Company or the Trustees of the Trusts, where applicable, and in conformity with
the stated investment objectives, policies and limitations of the applicable
Fund or Portfolio. The Investment Manager is responsible for monitoring the
activities of the Sub-advisors it engages to manage the Non-Feeder Funds and
Portfolios and reporting on such activities to the Directors of the Company or
the Trustees of the Trust, where applicable. The Investment Manager must also
provide or obtain for the Non-Feeder Funds and the Portfolios, and thereafter
supervise, such executive, administrative, accounting custody, transfer agent
and shareholder servicing services as are deemed advisable by the Directors of
the Company or the Trustees of the Trust, where applicable.
THE SUB-ADVISORS:
ASISI currently engages the following Sub-advisors to conduct the
investment programs of each Non-Feeder Fund and Portfolio in accordance with the
Fund or Portfolio's investment objective, policies and limitations and any
investment guidelines established by the Investment Manager. Each Sub-advisor is
responsible for, subject to the supervision and control of the Investment
Manager, the purchase, retention and disposition of securities represented in
the Fund or Portfolio's investment portfolio.
Unless otherwise noted, each portfolio manager listed below has
managed his or her respective Fund or Portfolio since its inception.
Founders Asset Management, LLC ("Founders") serves as Sub-advisor
for the ASAF Founders International Small Capitalization Fund and the ASAF
Founders Small Capitalization Fund. Founders, located at Founders Financial
Center, 2930 East Third Avenue, Denver, Colorado 80206, and its predecessor
companies have acted as investment advisors 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 April 30, 1998. Founders is a 90%-owned subsidiary of Mellon Bank,
N.A., with the remaining 10% held by certain Founders executives and portfolio
managers. Mellon Bank is a wholly owned subsidiary of Mellon Bank Corporation, a
publicly owned multibank holding company which provides a comprehensive range of
financial products and services in domestic and selected international markets.
The portfolio manager responsible for the day-to-day management of the ASAF
Founders International Small Capitalization Fund is Michael W. Gerding, a Vice
President of Investments of Founders. Mr. Gerding is a chartered financial
analyst who has been part of Founders' investment department since 1990.
The portfolio manager responsible for the day-to-day management of
the ASAF Founders Small Capitalization Fund is Michael K. Haines, a Senior Vice
President of Investments of Founders. Mr. Haines has been associated with
Founders since 1985, serving as a lead portfolio manager and an assistant
portfolio manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming") serves as
Sub-advisor for the ASMT T. Rowe Price International Equity Portfolio.
Price-Fleming, located at 100 East Pratt Street, Baltimore, Maryland 21202, was
founded in 1979 as a joint venture between T. Rowe Price Associates, Inc. and
Robert Fleming Holdings Limited. Price-Fleming is one of the world's largest
international mutual fund asset managers with approximately $[insert] billion
under management as of April 30, 1998 in its offices in Baltimore, London,
Tokyo, Hong Kong, Singapore, and Buenos Aires.
An investment advisory group has responsibility for the day-to-day
management of the ASMT T. Rowe Price International Equity Portfolio. The
advisory group for the Portfolio consists of Martin G. Wade, Peter B. Askew,
Mark J.T. Edwards, John R. Ford, James B.M. Seddon, 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. Peter Askew joined Price-Fleming in 1988 and has 21 years
of experience managing multicurrency fixed income portfolios. Mark J.T. Edwards
joined Price-Fleming in 1986 and has 15 years of experience in financial
analysis. John R. Ford joined Price-Fleming in 1982 and has 16 years of
experience with Fleming Group in research and portfolio management. James B.M.
Seddon joined Price-Fleming in 1987 and has 11 years of experience in investment
management David J.L. Warren joined Price-Fleming in 1984 and has 16 years
experience in equity research, fixed income research and portfolio management.
Janus Capital Corporation ("Janus") serves as Sub-advisor for the
ASAF Janus Overseas Growth Fund and the ASMT Janus Capital Growth Portfolio.
Janus, located at 100 Fillmore Street, Denver, Colorado 80206-4923, serves as
the investment advisor to the Janus Funds, as well as advisor or sub-advisor to
several other mutual funds and individual, corporate, charitable and retirement
accounts. As of April 30, 1998, 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 management of the ASAF Janus
Overseas Growth Fund is Helen Young Hayes, Executive Vice President and
portfolio manager of the Janus Worldwide Fund and Janus Overseas Fund. Ms. Hayes
joined Janus in 1987. She has managed or co-managed Janus Worldwide Fund and
Janus Overseas Fund since their respective inceptions.
The portfolio manager responsible for management of the ASMT Janus Capital
Growth Portfolio is Scott W. Schoelzel. Mr. Schoelzel, a Senior Portfolio
Manager at Janus who has managed the Portfolio since August, 1997, joined Janus
in January, 1994 as Vice President of Investments. From 1991 to 1993, Mr.
Schoelzel was a Portfolio Manager with Founders Asset Management.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as Sub-advisor for
the ASAF T. Rowe Price Small Company Value Fund. T. Rowe Price, located at 100
East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late
Thomas Rowe Price, Jr. As of April 30, 1998, T. Rowe Price and its affiliates
managed approximately $[insert] billion for approximately [insert] million
individual and institutional accounts.
The ASAF T. Rowe Price Small Company Value Fund is managed by an Investment
Advisory Committee composed of the following members: Preston G. Athey,
Chairman, Hugh M. Evans III and Gregory A. McCrickard. The Committee Chairman
has day-to-day responsibility for managing the Portfolio and works with the
Committee in developing and executing the Portfolio's investment program. Mr.
Athey joined T. Rowe Price in 1978 and has been managing investments since 1982.
Neuberger&Berman Management, Incorporated ("N&B Management") serves as
sub-advisor for the ASAF Neuberger&Berman Mid-Cap Growth Fund and the ASAF
Neuberger&Berman Mid-Cap Value Fund. N&B Management and its predecessor firms
have specialized in the management of mutual funds since 1950. All of the voting
stock of N&B Management is owned by individuals who are principals of
Neuberger&Berman, LLC ("Neuberger&Berman"). Neuberger&Berman is a member firm of
the NYSE and other principal exchanges, acts as the Funds' principal broker in
the purchase and sale of portfolio securities and the sale of covered call
options, and provides N&B Management with certain assistance in the management
of the Funds without added cost to the Funds or ASISI. Neuberger&Berman and its
affiliates, including N&B Management, manage securities accounts, including
mutual funds, that had approximately $[insert] billion of assets as of April 30,
1998.
Michael M. Kassen and Robert I. Gendelman are primarily responsible for the
day-to-day management of the ASAF Neuberger&Berman Mid-Cap Value Fund. . Mr.
Kassen has been a Vice President of N&B Management and a principal of
Neuberger&Berman since December 1992, and was an employee of N&B Management from
1990 to December 1992. Mr. Gendelman is a principal of Neuberger&Berman and has
been an Assistant Vice President of N&B Management since 1994. He was a
portfolio manager for another mutual fund manager from 1992 to 1993.
Jennifer K. Silver and Brooke A. Cobb are primarily responsible for the
day-to-day management of the ASAF Neuberger&Berman Mid-Cap Growth Fund . Ms.
Silver is Director of the Neuberger&Berman Growth Equity Group, and both she and
Mr. Cobb are Vice Presidents of N&B Management. Ms. Silver is a principal of
Neuberger&Berman. Previously, Ms. Silver was a portfolio manager for several
large mutual funds managed by a prominent investment adviser. Previously, Mr.
Cobb was the chief investment officer for an investment advisory firm managing
individual accounts from 1995 to 1997 and, from 1992 to 1995, a portfolio
manager of a large mutual fund managed by a prominent adviser.
Robertson, Stephens & Company Investment Management, L.P.
("Robertson Stephens") serves as Sub-advisor for the ASAF Robertson Stephens
Value + Growth Fund. Robertson Stephens, a California limited partnership
located at 555 California Street, San Francisco, CA 94104, was formed in 1993
and is registered as an investment advisor with the Securities and Exchange
Commission. The sole limited partner of Robertson Stephens is Robertson,
Stephens & Company, L.L.C., a major investment banking firm specializing in
emerging growth companies that has developed substantial investment research,
underwriting, and venture capital expertise. As of April 30, 1998, Robertson
Stephens and its affiliates have in excess of $ [insert] billion under
management in public and private investment funds. Robertson, Stephens &
Company, L.L.C., is an indirect wholly-owned subsidiary of BankAmerica
Corporation, one of the four largest bank holding companies in the United
States.
Ronald Elijah is the portfolio manager responsible for management of the
ASAF Robertson Stephens Value + Growth Fund. Mr. Elijah joined Robertson
Stephens as a portfolio manager in 1992.
Marsico Capital Management, LLC ("Marsico Capital"), 1200 17th Street,
Suite 1300, Denver, CO 80202, serves as Sub-advisor for the ASAF Marsico Capital
Growth Fund. Thomas F. Marsico, who has managed the Fund since its inception,
has primary responsibility for management of the Fund. Mr. Marsico is Chairman
and Chief Executive Officer, and has sole voting control, of Marsico Capital.
Prior to forming Marsico Capital in September, 1997, Mr. Marsico served as
Executive Vice President and Portfolio Manager at Janus Capital Corporation
("Janus"). Mr. Marsico joined Janus in March, 1986 and served as Portfolio
Manager of the Janus Twenty Fund from February, 1988 to August, 1997 and the
Janus Growth and Income Fund from May, 1991 (inception) to August, 1997. As of
April 30, 1998, Marsico Capital managed approximately $1 billion in assets.
Lord, Abbett & Co. ("Lord Abbett") serves as Sub-advisor for the
ASAF Lord Abbett Growth and Income Fund. Lord Abbett, an investment manager for
over 68 years, is located at The General Motors Building, 767 Fifth Avenue, New
York, New York 10153-0203. As of April 30, 1998, Lord Abbett managed
approximately $[insert] billion in a family of mutual funds and other advisory
accounts.
The portfolio manager responsible for management of the ASAF Lord Abbett
Growth and Income Fund is W. Thomas Hudson, Jr., Executive Vice President. Mr.
Hudson has held certain positions in the equity research department of Lord
Abbett since 1982.
INVESCO Funds Group, Inc. ("INVESCO") serves as Sub-advisor for the
ASMT INVESCO Equity Income Portfolio. INVESCO, located at 7800 East Union
Avenue, P.O. Box 173706, Denver, Colorado 80217-3706, was established in 1932.
AMVESCAP PLC (formerly, "INVESCO PLC"), the parent of INVESCO, is one of the
largest independent investment management businesses in the world and managed
approximately $[insert] billion of assets as of April 30, 1998.
The portfolio managers responsible for the day-to-day management of the
ASMT INVESCO Equity Income Portfolio are Charles P. Mayer, Portfolio Co-Manager,
and Donovan J. (Jerry) Paul, Portfolio Co-Manager. Mr. Mayer began his
investment career in 1969 and is now a senior vice president of INVESCO. From
1993 to 1994, he was vice president of INVESCO, and from 1984 to 1993, he was a
portfolio manager with Westinghouse Pension. Mr. Paul entered the investment
management industry in 1976 and has been a senior vice president of INVESCO
since 1994. From 1993 to 1994, he was president of Quixote Investment
Management, Inc.
American Century Investment Management, Inc. ("American Century,"
formally known as, "Investors Research Corporation") serves as Sub-advisor for
the ASAF American Century Strategic Balanced Fund. American Century, located at
American Century Towers, 4500 Main Street, Kansas City, Missouri 64111, has been
providing investment advisory services to investment companies and institutional
clients since 1958. In June 1995, American Century Companies, Inc. ("ACC"), the
parent of American Century, acquired Benham Management International, Inc. In
the acquisition, Benham Management Corporation ("BMC"), the investment adviser
to The Benham Group of mutual funds, became a wholly owned subsidiary of ACC.
Certain employees of BMC will be providing investment management services to
American Century funds, while certain American Century employees will be
providing investment management services to Benham funds. As of April 30, 1998,
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 ASAF
American Century Strategic Balanced Fund. The portfolio manager members of the
portfolio team responsible for the day-to-day management of the equity portion
of the Fund are James E. Stowers III, Bruce A. Wimberly, and John Sykora. Mr.
Stowers, Chief Executive Officer and Portfolio Manager, joined American Century
in 1981. Mr. Wimberly, Portfolio Manager, joined American Century in September
1994 as an Investment Analyst. Prior to joining American Century, Mr. Wimberly
attended Kellogg Graduate School of Management, Northwestern University, from
August 1992 to August 1994, where he obtained his MBA degree. Mr. Sykora,
Portfolio Manager, joined American Century in May 1994 as an Investment Analyst,
a position he held until August 1997. Mr. Sykora served as a Financial Analyst
for business Men's Assurance Company of America from August 1993 to 1994. Prior
to that, Mr. Sykora attended Michigan State University. The portfolio manager
members of the portfolio team responsible for the day-to-day management of the
fixed income portion of the Fund are Casey Colton, Norman E. Hoops, Brian
Howell, Jeffrey L. Houston, and David Schroeder. Casey Colton joined BMC in 1990
as a Municipal Analyst. Norman Hoops joined American Century in November 1989 as
Vice President and Portfolio Manager and became Senior Vice President and Fixed
Income Portfolio Manager in April 1993. Brian Howell joined BMC in 1987 as a
research analyst and was promoted to his current position in January 1994.
Jeffrey Houston has worked for American Century as a Portfolio Manager since
November, 1990. David Schroeder joined BMC in 1990.
Federated Investment Counseling ("Federated Investment") serves as
Sub-advisor for the ASAF Federated High Yield Bond Fund. Federated Investment,
located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, was
organized as a Delaware business trust in 1989 and is a registered investment
advisor under the Investment Advisers Act of 1940. Federated Investment is a
wholly owned subsidiary of Federated Investors. Federated Investment and other
subsidiaries of Federated Investors serve as investment advisors to a number of
investment companies and private accounts. As of April 30, 1998, total assets
under management or administration by these and other subsidiaries of Federated
Investors was over $[insert] billion.
The portfolio managers responsible for the day-to-day management of the
ASAF Federated High Yield Bond Fund are Mark E. Durbiano, Stefanie L. Bachhuber,
and Constantine J. Kartsonas. Mr. Durbiano joined Federated Investors in 1982
and has been a Senior Vice President of an affiliate of Federated Investment
since January, 1996. From 1988 through 1995, Mr. Durbiano was a Vice President
of an affiliate of Federated Investment. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in finance from the University of Pittsburgh.
Ms. Bachhuber joined Federated Investors in 1993 as an Investment Analyst and
has been an Assistant Vice President of an affiliate of Federated Investment
since 1996. From 1990 to 1993, Ms. Bachhuber served as an Operations Analyst at
Lehman Brothers. Ms Bachhuber earned her M.B.A., with a concentration in
finance, from Duke University in 1993. Mr. Kartsonas joined Federated Investors
in 1994 as an Investment Analyst and has been an Assistant Vice President of
Federated Investments since March 1997. From 1996 to 1993, he served as an
Operations Analyst at Lehman Brothers.
Pacific Investment Management Company ("PIMCO") serves as
Sub-advisor for the ASMT PIMCO Total Return Bond Portfolio. PIMCO, located at
840 Newport Center Drive, Suite 360, Newport Beach, California 92660, is an
investment counseling firm founded in 1971. PIMCO is a subsidiary general
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Investment Management Corporation, a California corporation, and an
indirect wholly owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners, LLC, a California limited liability company controlled by the managing
directors of PIMCO. As of April 30, 1998, PIMCO had approximately $[insert]
billion of assets under management.
The portfolio manager responsible for the day-to-day management of the ASMT
PIMCO Total Return Bond Portfolio is William H. Gross. Mr. Gross is Managing
Director of PIMCO and has been associated with the firm since 1971.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") serves as
Sub-advisor for the ASMT JPM Money Market Portfolio. J.P. Morgan, with principal
offices at 522 Fifth Avenue, New York, New York 10036, is a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank
holding company organized under the laws of Delaware which is located at 60 Wall
Street, New York, New York 10260. J.P. Morgan & Co., through J.P. Morgan and
other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers, and acts as investment
adviser to individual and institutional clients with combined assets under
management of approximately $[insert] billion as of April 30, 1998. J.P. Morgan
has managed investments for clients for almost a century, since 1913. In
addition, J.P. Morgan has managed short-term fixed income assets for clients
since 1969. As of April 30, 1998, these short-term fixed assets under J.P.
Morgan's management totaled over $[insert] billion.
FEES AND EXPENSES:
Investment Management Fees. ASISI receives a monthly fee from each
Non-Feeder Fund and Portfolio for the performance of its services. ASISI pays
each Sub-advisor a portion of such fee for the performance of the sub-advisory
services at no additional cost to any Fund or Portfolio. The investment
management fee with respect to each Non-Feeder Fund and Portfolio may differ,
reflecting the investment objective, policies and limitations of each Fund or
Portfolio and the nature of each Management Agreement and Sub-advisory
Agreement. Each Non-Feeder Fund and Portfolio's investment management fee is
accrued daily for the purposes of determining the offering and redemption price
of the Fund's shares. The fees payable to ASISI, based on a stated percentage of
the Non-Feeder Fund or Portfolio's average daily net assets, are as follows:
<TABLE>
<CAPTION>
Fund/Portfolio: Annual Rate:
<S> <C> <C> <C>
ASAF Founders International Small Capitalization Fund: 1.10% of the first $100 million; plus 1.00
% of the amount over $100 million
ASMT T. Rowe Price International Equity Portfolio: 1.00%
ASAF Janus Overseas Growth Fund: 1.10%
ASAF Founders Small Capitalization Fund: 0.90%
ASAF T. Rowe Price Small Company Value Fund: 1.00%
ASAF Neuberger&Berman Mid-Cap Growth Fund: 0.90%
ASAF Neuberger&Berman Mid-Cap Value Fund: 0.90%
ASAF Robertson Stephens Value + Growth Fund: 1.10%
ASAF Marsico Capital Growth Fund: 1.00%
ASMT Janus Capital Growth Portfolio: 1.00%
ASAF Lord Abbett Growth and Income Fund: 1.00%
ASMT INVESCO Equity Income Portfolio: 0.75%
ASAF American Century Strategic Balanced Fund: 0.90%
ASAF Federated High Yield Bond Fund: 0.70%
ASMT PIMCO Total Return Bond Portfolio: 0.65%
ASMT JPM Money Market Portfolio: 0.50%
</TABLE>
Sub-Advisory Fees. ASISI pays each Sub-advisor on a monthly basis
for the performance of sub-advisory services. The fee payable to the
Sub-advisors with respect to each Non-Feeder Fund and Portfolio may differ,
reflecting, among other things, the investment objective, policies and
limitations of each Fund or Portfolio and the nature of each Sub-advisory
Agreement. Each Sub-advisor's fee is accrued daily for purposes of determining
the amount payable by the Investment Manager to the Sub-advisor. The fees
payable to the Sub-advisors, based on a stated percentage of the Non-Feeder Fund
or Portfolio's average daily net assets, are as follows:
Founders Asset Management LLC for the ASAF Founders International
Small Capitalization Fund: An annual rate of .60% of the portion of the average
daily net assets of the Fund not in excess of $100 million; plus .50% of the
portion over $100 million.
Rowe Price-Fleming International, Inc. for the ASMT T. Rowe Price
International Equity Portfolio: An annual rate of .75% of the portion of the
average daily net assets of the Portfolio not in excess of $20 million; plus
.60% of the portion over $20 million but not in excess of $50 million; plus .50%
of the portion over $50 million. When the average daily net assets of the
Portfolio equal or exceed $200 million, the annual rate will be .50% of the
entire average daily net assets of the Portfolio.
Janus Capital Corporation for the ASAF Janus Overseas Growth Fund:
An annual rate of .60% of the portion of the average daily net assets of the
Fund not in excess of $100 million; when the average daily net assets of the
Fund equal or exceed $100 million, the annual rate will be .50% of the entire
average daily net assets of the Fund.
Founders Asset Management LLC for the ASAF Founders Small
Capitalization Fund: An annual rate of .50% of the portion of the average daily
net assets of the Fund not in excess of $250 million; plus .45% of the portion
over $250 million.
T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small Company
Value Fund: An annual rate of .60% of the average daily net assets of the Fund.
Neuberger&Berman Management, Incorporated for the ASAF
Neuberger&Berman Mid-Cap Growth Fund: An annual rate of .40% of the average
daily net assets of the Fund.
Neuberger&Berman Management, Incorporated for the ASAF
Neuberger&Berman Mid-Cap Value Fund: An annual rate of .40% of the average daily
net assets of the Fund.
Robertson, Stephens & Company Investment Management, L.P. for the
ASAF Robertson Stephens Value + Growth Fund: An annual rate of .60% of the
portion of the average daily net assets of the Fund not in excess of $200
million; when the average daily net assets of the Fund equal or exceed $200
million, the annual rate will be .50% of the entire average daily net assets of
the Fund.
Marsico Capital Management, LLC for the ASAF Marsico Capital Growth
Fund: An annual rate of .45% of the average daily net assets of the Fund.
Janus Capital Corporation for the ASMT Janus Capital Growth Portfolio: An
annual rate of .45% of the average daily net assets of the Portfolio.
Lord, Abbett & Co. for the ASAF Lord Abbett Growth and Income Fund:
An annual rate of .50% of the portion of the average daily net assets of the
Fund not in excess of $200 million; plus .40% of the portion over $200 million
but not in excess of $500 million; plus .375% of the portion over $500 million
but not in excess of $700 million; plus .35% of the portion over $700 million
but not in excess of $900 million; when the average daily net assets of the Fund
equal or exceed $900 million, the annual rate will be .30% of the entire average
daily net assets of the Fund.
INVESCO Funds Group, Inc. for the ASMT INVESCO Equity Income Portfolio: An
annual rate of .35% of the average daily net assets of the Portfolio.
American Century Investment Management, Inc. for the ASAF American Century
Strategic Balanced Fund: An annual rate of .50% of the portion of the average
daily net assets of the Fund not in excess of $50 million; plus .45% of the
portion over $50 million.
Federated Investment Counseling for the ASAF Federated High Yield
Bond Fund: An annual rate of .25% of the portion of the average daily net assets
of the Fund not in excess of $200 million; plus .20% of the portion over $200
million.
Pacific Investment Management Company for the ASMT PIMCO Total Return Bond
Portfolio: An annual rate of .25% of the average daily net assets of the
Portfolio.
J.P. Morgan Investment Management Inc. for the ASMT JPM Money Market
Portfolio: An annual rate of .15% of the portion of the average daily net assets
of the Portfolio not in excess of $500 million; plus .09% of the portion over
$500 million but not in excess of $1 billion; plus .06% of the portion over $1
billion..
Fee Waivers. The Investment Manager and the Sub-advisors may from
time to time agree to voluntarily waive or reduce their respective fees, while
retaining their ability to be reimbursed for such fees prior to the end of each
fiscal year. Such voluntary fee waivers or reductions may be rescinded at any
time and without notice to investors.
The Investment Manager has voluntarily agreed to waive until
October 31, 1998 portions of its investment management fees equal to .10% of the
average daily net assets of the ASAF Janus Overseas Growth Fund, .10% of the
average daily net assets of the ASAF Robertson Stephens Value + Growth Fund, and
.20% of the average daily net assets of the ASAF Lord Abbett Growth and Income
Fund.
Commencing June 1, 1997, Rowe Price Fleming International, Inc.,
the Sub-advisor for the ASMT T. Rowe Price International Equity Portfolio, has
voluntarily agreed to waive a portion of its sub-advisory fee equal to .25% of
the portion of the average daily net assets of the Portfolio not in excess of
$20 million; plus .10% of the portion over $20 million but not in excess of $50
million. When the average daily net assets of the Portfolio equal or exceed $200
million, such voluntary fee waiver is no longer applicable, and the sub-advisory
annual fee rate of .50% of the average daily net assets of the Portfolio will be
applied.
Commencing January 1, 1998, Janus Capital Corporation, the
Sub-advisor for the ASAF Janus Overseas Growth Fund, has voluntarily agreed to
waive a portion of its sub-advisory fee equal to .10% of the portion of the
average daily net assets of the Fund not in excess of $100 million. When the
average daily net assets of the Fund equal or exceed $100 million, such
voluntary fee waiver is no longer applicable, and the sub-advisory annual fee
rate of .50% of the entire average daily net assets of the Fund will be applied.
Commencing January 1, 1998, Robertson, Stephens & Company
Investment Management, L.P., the Sub-advisor for the ASAF Robertson Stephens
Value + Growth Fund, has voluntarily agreed to waive a portion of its
sub-advisory fee equal to .10% of the portion of the average daily net assets of
the Fund not in excess of $200 million. When the average daily net assets of the
Fund equal or exceed $200 million, such voluntary fee waiver is no longer
applicable, and the sub-advisory annual fee rate of .50% of the entire average
daily net assets of the Fund will be applied.
Commencing January 1, 1998, Lord, Abbett & Co., the Sub-advisor for
the ASAF Lord Abbett Growth and Income Fund, has voluntarily agreed to waive a
portion of its sub-advisory fee equal to .20% of the portion of the average
daily net assets of the Fund not in excess of $200 million; plus .10% of the
portion over $200 million but not in excess of $500 million; plus .075% of the
portion over $500 million but not in excess of $700 million; plus .05% of the
portion over $700 million but not in excess of $900 million. When the average
daily net assets of the Fund equal or exceed $900 million, such voluntary fee
waiver is no longer applicable, and the sub-advisory annual fee rate of .30% of
the entire average daily net assets of the Fund will be applied.
Commencing June 1, 1997, J.P. Morgan Investment Management Inc.,
the Sub-advisor for the ASMT JPM Money Market Portfolio, has voluntarily agreed
to waive a portion of its sub-advisory fee equal to .06% of the portion of the
average daily net assets of the Portfolio not in excess of $500 million; plus
.03% of the portion over $500 million but not in excess of $1 billion.
Expenses. Each Fund and Portfolio pays all of its expenses,
including, but not limited to, the costs incurred in connection with the
maintenance of its registration, as applicable, under the 1933 Act and the 1940
Act, printing and mailing prospectuses and SAIs to shareholders, certain office
and financial accounting services, taxes or governmental fees, brokerage
commissions, Fund share pricing, custodial, transfer and shareholder servicing
agent costs, expenses of outside counsel and independent accountants,
preparation (including, printing and mailing) of shareholder reports and
expenses of director and shareholder meetings. Expenses incurred by the Funds or
Portfolios not directly attributable to any specific Fund(s) or Portfolio(s) are
allocated on the basis of the net assets of the respective Fund or Portfolio.
For additional information regarding Fund and Portfolio expenses, as well as any
voluntary agreements by the Investment Manager to limit such expenses, see this
Prospectus under "Expense Information" and the Company's SAI under "Fund
Expenses."
THE ADMINISTRATOR:
PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,
Delaware 19809, a Delaware corporation which is an indirect wholly-owned
subsidiary of PNC Financial Corp., serves as the administrator for both the
Company and the Trust pursuant to separate administration agreements with the
Company and the Trust, respectively (the "Administration Agreements"). The
Administrator provides certain fund accounting and administrative services to
the Company and the Trust, including, among other services, accounting relating
to the Company and the Trust and the investment transactions of the foregoing
and computing daily NAVs. The Administrator does not have any responsibility or
authority for the management of the assets of the Funds or Portfolios, the
determination of their investment policies, or for any matter pertaining to the
distribution of securities issued by the Company.
As compensation for the services and facilities provided by the
Administrator to the Company, the Company has agreed to pay the Administrator
its "out-of-pocket" expenses, plus a monthly multi-class fee of $3,000 per Fund,
plus a monthly feeder fee of $2,000 per Feeder Fund, plus the greater of the
following monthly fee based on the average daily net assets of the Non-Feeder
Funds -- 0.10% (first $200 million), 0.06% (next $200 million), 0.0275% (next
$200 million), 0.02% (next $400 million) and 0.01% (over $1 billion) -- or a
minimum monthly fee of $6,250 per Non-Feeder Fund. The Administrator has agreed
to waive the above monthly multi-class fee, the monthly feeder fee and the
minimum monthly fee for the first two months of each Fund's operations, and
thereafter will decrease such waiver by 10% increments for each of the remaining
ten months of the initial contract year.
In addition, as compensation for the services and facilities
provided by the Administrator to the Trust, the Trust has agreed to pay the
Administrator its "out-of-pocket" expenses, plus the greater of the following
monthly fee based on the average daily net assets of the Portfolios -- 0.12%
(first $200 million), 0.085% (next $200 million), 0.05% (next $200 million),
0.025% (next $400 million) and 0.02% ($1+ billion) -- or a minimum monthly fee
of $8,333 per Portfolio. The Administrator has agreed to waive the above minimum
monthly fee for the first two months of each Portfolio's operations, and
thereafter will decrease such waiver by 10% increments for each of the remaining
ten months of the initial contract year. For an additional discussion of the
services provided by the Administrator under the Administration Agreements, and
the Administrator's "out-of-pocket" expenses, see the Company's SAI under
"Investment Advisory & Administration Services."
QUALIFIED PLANS ADMINISTRATOR:
ASISI receives a fee from each Fund under an Administration
Agreement between ASISI and the Company with respect to services provided in
connection with investments in the Company by certain qualified retirement
plans. Pursuant to this agreement, ASISI selects and contracts with third
parties providing administrative services for such plans ("third-party
administrators") for the third-party administrator, among other matters, to
maintain records of the holdings in the Funds of individual plan participants.
As a result of the third-party administrators' services, the Company may realize
savings on costs that it would otherwise incur in maintaining shareholder
accounts.
ASISI uses its fee from each Fund to pay the third-party
administrators to reduce fees that would otherwise be payable by the qualified
plan to the third-party administrator. The fee is payable to ASISI at a maximum
annual rate of 0.20% of the assets of any plan the third-party administrator for
which has entered into an agreement with ASISI. ASISI does not receive any
compensation as qualified plans administrator in addition to amounts it pays to
third-party administrators and for other out-of -pocket expenses.
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 the following Portfolios and Non-Feeder Funds may have annual
rates of turnover exceeding 100%.
ASAF Founders International Small Capitalization Fund (not to exceed
150% under normal market conditions).
ASAF Janus Overseas Growth Fund (not to exceed 200% under normal market
conditions).
ASAF Founders Small Capitalization Fund (not to exceed 150% under
normal market conditions).
ASAF Neuberger&Berman Mid-Cap Growth Fund (not to exceed 200% under
normal market conditions).
ASAF Neuberger&Berman Mid-Cap Value Fund (not to exceed 150% under
normal market conditions).
ASAF Robertson Stephens Value + Growth Fund (not to exceed 250% under
normal market conditions).
ASMT Janus Capital Growth Portfolio (not to exceed 200% under normal
market conditions).
ASAF American Century Strategic Balanced Portfolio (not to exceed 150%
under normal market conditions).
ASMT PIMCO Total Return Bond Portfolio (not to exceed 350% under normal
market conditions).]
A 100% portfolio turnover rate would occur if all of the securities
in a portfolio of investments were replaced during a given period. A high rate
of portfolio turnover (generally in excess of 100%) involves correspondingly
higher brokerage commission expenses and other transaction costs, which must be
ultimately borne by a Fund's shareholders. Trading in fixed income securities
does not generally involve the payment of brokerage commissions, but does
involve indirect transaction costs. High portfolio turnover rates may also
generate larger taxable income and taxable capital gains than would result from
lower portfolio turnover rates and may create higher tax liability for a Fund's
shareholders. For additional information regarding tax liability, see this
Prospectus under "Dividends, Capital Gains and Taxes" and the Company's SAI
under "Additional Tax Considerations." For additional information regarding
portfolio turnover, in general, see the Company's SAI under "Portfolio
Transactions."
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing portfolio
securities transactions with broker-dealers for execution is to obtain, and
maintain the availability of, execution at the best net price available and in
the most effective manner possible. The Company's and the Trust's brokerage
allocation policy may permit a Fund or Portfolio, respectively, to pay a
broker-dealer which furnishes research services a higher commission than that
which might be charged by another broker-dealer which does not furnish research
services, provided that such commission is deemed reasonable in relation to the
value of the services provided by such broker-dealer. In addition, each Fund's
or Portfolio's Sub-advisor may consider the use of broker-dealers that are, or
might be deemed to be, their affiliates, and may consider sale of shares of the
Funds, or may consider or follow recommendations of the Investment Manager that
take such sales into account, as factors in the selection of broker-dealers to
effect transactions, subject to the requirements of best net price available and
most favorable execution. In this regard, the Investment Manager may direct
certain of the Sub-advisors to try to effect a portion of their Fund or
Portfolio's investment transactions through broker-dealers that sell shares of
the Fund (or corresponding Fund, in the case of the Portfolios), to the extent
consistent with best net price available and most favorable execution. For an
additional discussion of portfolio transactions and brokerage allocation, see
the Company's SAI under "Portfolio Transactions."
DIVIDENDS, CAPITAL GAINS AND TAXES
DIVIDENDS:
Each Fund intends to distribute substantially all of its net income
and capital gains to shareholders no less frequently than once a year. Normally,
dividends from net investment income of the ASAF Founders International Small
Capitalization Fund, ASAF T. Rowe Price International Equity Fund, ASAF Janus
Overseas Growth Fund, ASAF Founders Small Capitalization Fund, ASAF T. Rowe
Price Small Company Value Fund, ASAF Neuberger&Berman Mid-Cap Growth Fund, ASAF
Neuberger&Berman Mid-Cap Value Fund, ASAF Robertson Stephens Value + Growth
Fund, ASAF Marsico Capital Growth Fund, and ASAF Janus Capital Growth Fund will
be declared and paid annually; dividends from the net investment income of the
ASAF Lord Abbett Growth and Income Fund, ASAF INVESCO Equity Income Fund and
ASAF American Century Strategic Balanced Fund will be declared and paid
semi-annually; dividends from the net investment income of the ASAF Total Return
Bond Fund will be declared daily and paid quarterly; and dividends from net
investment income of the ASAF Federated High Yield Bond Fund and ASAF JPM Money
Market Fund will be declared daily and paid monthly. Dividends from the ASAF JPM
Money Market Fund are not paid on shares until the day following the date on
which the shares are issued.
DISTRIBUTION OPTIONS:
When you open your account, specify on your application how you
want to receive your distributions. Unless you specify otherwise, all dividends
and distributions will be automatically reinvested in additional full or
fractional shares of each Fund. You have the following five distribution
options:
Reinvest All Distributions in the Fund. You can elect to reinvest
all dividends and long term capital gains distributions in additional shares of
the applicable Fund.
Reinvest Income Dividends Only. You can elect to reinvest investment income
dividends in a Fund while receiving capital gains distributions.
Reinvest Long-Term Capital Gains Only. You can elect to reinvest long-term
capital gains in the Fund while receiving dividends.
Receive All Distributions in Cash. You can elect to receive a check for all
dividends and long-term capital gains distributions.
Reinvest Distributions in Another Fund of the Company. You can reinvest all
distributions in another Fund of the Company. For additional information about
reinvesting your distributions, see this Prospectus under "Special Investment
Programs and Privileges."
TAXES:
Each Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Code, including
requirements with respect to diversification of assets, distribution of income
and sources of income. It is the Company's policy to have each Fund distribute
to shareholders all of its investment income (net of expenses) and any capital
gains (net of capital losses) in accordance with the timing requirements imposed
by the Code so that the Fund will satisfy the distribution requirement of
Subchapter M and not be subject to federal income taxes or the 4% excise tax.
So long as a Fund qualifies as a regulated investment company for
federal income tax purposes, the Fund, in computing its income subject to
federal income tax, is entitled to deduct all dividends other than
"preferential" dividends paid by it to its shareholders during the taxable year.
"Preferential" dividends are dividends other than dividends which have been
distributed to shareholders pro rata without preference to any share of stock as
compared with other shares of the same class and without preference to one class
of stock as compared with another, except in accordance with the former's
dividend rights as a class. The Company has received separate opinions of
counsel (the "Opinions") from the law firms of Caplin & Drysdale, Chartered and
Rogers & Wells which, collectively, conclude that the multiple-class share
structure of the Funds would not cause dividends declared and paid by a Fund to
be treated as "preferential" dividends for this purpose. The Opinions are not
binding on the Internal Revenue Service (the "IRS") and no ruling has been
obtained by the Company from the IRS on the matter. The Company does not believe
that a multiple-class structure having all of the features of the multiple-class
structure of each of the Funds, including the Bonus Share feature applicable to
Class X shares of each of the Funds, has been considered by the IRS in other
rulings. Furthermore, the Opinions are based on the application of current
federal income tax law and relevant authorities, and subsequent changes in
federal tax law or judicial or administrative decisions or pronouncements may
supersede or affect the conclusions in the Opinions. If dividends declared and
paid by a Fund on any class of shares were to be treated as "preferential,"
dividends paid by the Fund to shareholders on all classes of shares during the
taxable year would become non-deductible. In this event, the Fund would not be
treated as a regulated investment company and the Fund would be taxed on its net
income, without any deductions for dividends paid to its shareholders. The
resulting federal and state income tax liability, and any related interest and
penalties, would be payable from and to the extent of such Fund's then available
assets and ultimately would be borne by all current shareholders. The treatment
of dividends declared and paid during the taxable year on any class of shares as
preferential, and the resulting failure of a Fund to be treated as a regulated
investment company, could have additional personal income tax consequences for
shareholders of the Fund, including the taxation of distributions as ordinary
income that otherwise would have been classified as net capital gains.
Upward adjustments in the principal value of inflation-indexed
bonds will be includable currently in a Fund's gross income notwithstanding the
absence of a corresponding cash payment. The Fund's need to distribute such
income may compel liquidation of investments under disadvantageous
circumstances.
Distributions by each Fund of its net investment income and the
excess, if any, of its net short-term capital gain over its net long-term
capital loss are taxable to shareholders as ordinary income. These distributions
are treated as dividends for federal income tax purposes, but will qualify for
the 70% dividends-received deduction for corporate shareholders only to the
extent designated in a notice from the Fund to its shareholders as being
attributable to dividends received by the Fund. Distributions by a Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss will be designated as capital gain dividends that are taxable to
shareholders as mid-term capital gains for the Company's fiscal year ending on
October 31, 1998 and as mid-term or long-term capital gains for later years,
regardless of the length of time shares are held by the shareholder.
Portions of certain Funds' investment income may be subject to
foreign income taxes withheld at source. The Company may, but is not required
to, elect to "pass-through" to the shareholders of any such Funds these foreign
taxes, in which event each shareholder will be required to include his pro rata
portion thereof in his gross income, but will be able to deduct or (subject to
various limitations) claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner
for federal income tax purposes whether received in cash or reinvested in
additional shares of the Funds. In general, distributions by the Funds are taken
into account by the shareholders in the year in which they are made. However,
certain distributions made during January will be treated as having been paid by
the Fund and received by the shareholders on December 31 of the preceding year.
A statement setting forth the federal income tax status of all distributions
made or deemed made during the year, including any amount of foreign taxes
"passed through," will be sent to shareholders promptly after the end of each
year. Notwithstanding the foregoing, distributions by the Funds to certain
qualified retirement plans may be exempt from federal income tax.
"Buying a Dividend." When a Fund pays a dividend, its share price
is reduced by the amount of the distribution. If you buy shares on or just
before the ex-dividend date (the date used for determining the record owners who
will receive the dividend), or just before a Fund declares a capital gains
distribution, you will pay the full price for the shares and then receive a
portion of the price back as a taxable dividend or capital gain.
Taxes on Transactions. Share redemptions, including redemptions for
exchanges, are subject to capital gains tax. A capital gain or loss is the
difference between the price you paid for the shares and the price you received
when you sold them.
Returns of Capital. In certain cases distributions made by the Fund
may be considered a non-taxable return of capital to shareholders. If that
occurs, it will be identified in notices to shareholders. A non-taxable return
of capital may reduce your tax basis in your Fund shares.
The above federal income tax information is based on tax laws and
regulations in effect as of the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds contained
in the Company's SAI under "Additional Tax Considerations." In addition, you
should consult with your own tax adviser as to the effect of an investment in
the Fund on your particular tax situation, including the application of state
and local taxes which may differ from the federal income tax consequences
described above.
OTHER INFORMATION
INVESTOR INFORMATION SERVICES:
The Company provides 24-hour information services via a toll-free
number on Fund yields and prices, dividends, account balances, and your latest
transaction as well as the ability to request prospectuses, account and tax
forms, and duplicate statements. In addition, telephone representatives are
available during normal business hours to provide the information and services
you need. Shareholder inquiries should be made by calling 1-800-SKANDIA or, if
in writing, to "American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston,
Massachusetts 02266-8012.
Statements and reports sent to you include the following:
confirmation statements (after every transaction, except reinvestments,
automatic investments and systematic withdrawals, that affect your account
balance or your account registration), quarterly consolidated account
statements, and financial reports (every six months). Call the above number if
you need additional copies of financial reports or historical account
information. There may be a small charge for historical account information for
prior years.
DISTRIBUTOR:
Shares of the Company are distributed through American Skandia
Marketing, Incorporated, the principal underwriter and distributor for the
Company (the "Distributor," as previously defined). The Distributor, located at
One Corporate Drive, Shelton, Connecticut 06484, is registered as a
broker-dealer with the Commission and the National Association of Securities
Dealers, Inc. It is an "affiliated person" (within the meaning of the 1940 Act)
of the Investment Manager, the Company, the Trust, American Skandia Trust,
American Skandia Life Assurance Corporation and American Skandia Information
Services and Technology Corporation, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation. The Distributor may offer shares of the
Funds directly to potential purchasers.
TRANSFER AGENT:
Boston Financial Data Services, Inc. (the "Transfer Agent," as
previously defined), located at Two Heritage Drive, Quincy, Massachusetts 02171,
serves as the transfer agent and dividend paying agent for the Company.
DOMESTIC AND FOREIGN CUSTODIANS:
PNC Bank, located at Airport Business Center, International Court
2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, serves as custodian for
all domestic cash and securities holdings of the Funds and Portfolios investing
primarily in domestic securities. Morgan Stanley Trust Company, located at One
Pierrepont Plaza, Brooklyn, New York 11201, serves as custodian for all cash and
securities holdings of the ASAF Founders International Small Capitalization
Fund, the ASAF T. Rowe Price International Equity Fund (and corresponding
Portfolio), and the ASAF Janus Overseas Growth Fund, and co-custodian for all
foreign securities holdings of the Funds and Portfolios which invest primarily
in domestic securities.
LEGAL COUNSEL AND INDEPENDENT ACCOUNTANTS:
Werner & Kennedy, located at 1633 Broadway, New York, New York
10019, serves as counsel to the Company. Caplin & Drysdale, located at One
Thomas Circle, N.W., Washington, D.C. 20005, and Rogers & Wells, located at 200
Park Avenue, New York, New York 10166, serve as special counsel to the Company
on certain tax matters. Coopers & Lybrand L.L.P., located at 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, has been selected as the independent
accountants of the Company.
REGISTRATION STATEMENT:
This Prospectus omits certain information contained in the
Registration Statement filed with the Commission. Copies of the Registration
Statement, including those items omitted herefrom, may be obtained from the
Commission by paying the charges prescribed under its rules and regulations.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION
OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE TRUST. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August , 1998
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AMERICAN SKANDIA ADVISOR FUNDS, INC.
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<TABLE>
<CAPTION>
Table of Contents Page
<S> <C> <C>
General Information........................................................................................................
Investment Programs of the Funds...........................................................................................
ASAF Founders International Small Capitalization Fund.............................................................
ASAF T. Rowe Price International Equity Fund......................................................................
ASAF Janus Overseas Growth Fund...................................................................................
ASAF Founders Small Capitalization Fund...........................................................................
ASAF T. Rowe Price Small Company Value Fund.......................................................................
ASAF Neuberger&Berman Mid-Cap Growth Fund.........................................................................
ASAF Neuberger&Berman Mid-Cap Value Fund..........................................................................
ASAF Robertson Stephens Value + Growth Fund.......................................................................
ASAF Marsico Capital Growth Fund..................................................................................
ASAF Janus Capital Growth Fund....................................................................................
ASAF Lord Abbett Growth & Income Fund.............................................................................
ASAF INVESCO Equity Income Fund...................................................................................
ASAF American Century Strategic Balanced Fund.....................................................................
ASAF Federated High Yield Bond Fund...............................................................................
ASAF Total Return Bond Fund.......................................................................................
ASAF JPM Money Market Fund........................................................................................
Fundamental Investment Restrictions........................................................................................
Certain Risk Factors and Investment Methods................................................................................
Additional Performance Information.........................................................................................
Management of the Company..................................................................................................
Investment Advisory & Administration Services..............................................................................
Fund Expenses..............................................................................................................
Distribution Arrangements..................................................................................................
Determination of Net Asset Value...........................................................................................
Additional Information on the Purchase and Redemption of Shares............................................................
Portfolio Transactions.....................................................................................................
Additional Tax Considerations..............................................................................................
Capital Stock of the Company & Principal Holders of Securities.............................................................
Other Information..........................................................................................................
Financial Statements.......................................................................................................
Appendix...................................................................................................................
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</TABLE>
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Company's current Prospectus, dated August ,
1998. A copy of the Company's Prospectus may be obtained by writing to "American
Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston, Massachusetts 02266-8012
or by calling 1-800-SKANDIA.
GENERAL INFORMATION
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company comprised of sixteen diversified investment
portfolios (each a "Fund" and together the "Funds"). The Company was established
as a Maryland corporation on March 5, 1997, and had no business history prior to
the Fund's commencement of operations on July 28, 1997. Five of the Funds --
ASAF T. Rowe Price International Equity Fund, ASAF Janus Capital Growth Fund,
ASAF INVESCO Equity Income Fund, ASAF Total Return Bond Fund and ASAF JPM Money
Market Fund (each a "Feeder Fund" and together the "Feeder Funds") -- invest all
of their investable assets in a corresponding portfolio (each a "Portfolio" and
together the "Portfolios") of American Skandia Master Trust (the "Trust"), an
open-end management investment company comprised of five diversified investment
portfolios. Each Portfolio of the Trust invests in securities in accordance with
an investment objective, investment policies and limitations identical to those
of its corresponding Feeder Fund. This "master/feeder" fund structure differs
from that of the other Funds of the Company and many other investment companies
which directly invest and manage their own portfolio of securities. Those Funds
of the Company which currently are not organized under a "master/feeder" fund
structure (the "Non-Feeder Funds") retain the right to invest their assets in a
corresponding Portfolio of the Trust in the future. For additional information
regarding the "master/feeder" fund structure, see the Company's Prospectus under
"Special Information on the 'Master Feeder' Fund Structure."
American Skandia Investment Services, Incorporated ("ASISI" or the
"Investment Manager") acts as the investment manager for both the Non-Feeder
Funds and the Portfolios. Currently, ASISI engages the following sub-advisors
("Sub-advisor(s)") for the investment management of each Non-Feeder Fund and
Portfolio: (a) ASAF Founders International Small Capitalization Fund: Founders
Asset Management LLC; (b) ASMT T. Rowe Price International Equity Portfolio:
Rowe Price-Fleming International, Inc.; (c) ASAF Janus Overseas Growth Fund:
Janus Capital Corporation; (d) ASAF Founders Small Capitalization Fund: Founders
Asset Management LLC; (e) ASAF T. Rowe Price Small Company Value Fund: T. Rowe
Price Associates, Inc.; (f) ASAF Robertson Stephens Value + Growth Fund:
Robertson, Stephens & Company Investment Management, L.P.; (g) ASAF
Neuberger&Berman Mid-Cap Growth Fund: Neuberger&Berman Management Incorporated;
(h) ASAF Neuberger&Berman Mid-Cap Value Fund: Neuberger&Berman Management
Incorporated; (i) ASMT Janus Capital Growth Portfolio: Janus Capital
Corporation; (j) ASAF Marsico Capital Growth Fund: Marsico Capital Management,
LLC; (j) ASAF Lord Abbett Growth & Income Fund: Lord, Abbett & Co.; (k) ASMT
INVESCO Equity Income Portfolio: INVESCO Funds Group, Inc.; (l) ASAF American
Century Strategic Balanced Fund: American Century Investment Management, Inc.;
(m) ASAF Federated High Yield Bond Fund: Federated Investment Counseling; (n)
ASMT PIMCO Total Return Bond Portfolio: Pacific Investment Management Company;
and (o) ASMT JPM Money Market Portfolio: J.P. Morgan Investment Management Inc.
INVESTMENT PROGRAMS OF THE FUNDS
The following information supplements, and should be read in conjunction
with, the discussion in the Prospectus of the investment objective and policies
of each Fund and Portfolio. The investment objective of each Fund or Portfolio
and supplemental information regarding its investment policies are described
below separately for each Fund or 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," including those
described in the "Fundamental Investment Restrictions" section of this SAI, may
not be changed without shareholder approval. Fundamental investment policies of
a Fund or Portfolio may be changed only with the approval of at least the lesser
of (1) 67% or more of the total units of beneficial interest ("shares") of the
Fund or Portfolio represented at a meeting at which more than 50% of the
outstanding shares of the Fund or Portfolio are represented, or (2) a majority
of the outstanding shares of the Fund or Portfolio.
.........Notwithstanding any other investment policy of a Fund, each Fund may
invest all of its investable assets (cash, securities, and receivables relating
to securities) in an open-end management investment company having substantially
the same investment objective, policies and limitations as the Fund. Those Funds
which currently invest all of their investable assets in such a manner, the
Feeder Funds, seek to meet their respective investment objectives by investing
all of their investable assets in a corresponding Portfolio of the Trust, which
in turn invests directly in a portfolio of securities in accordance with the
investment objective, policies and limitations of its Feeder Fund. The
investment objective, policies and limitations of each Feeder Fund are otherwise
identical to those of its corresponding Portfolio. As such, the following
discussion of the Feeder Funds, including references to the Directors of the
Company, apply equally to the Funds' corresponding Portfolios and the Trustees
of the Trust, respectively.
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or sell a
security at a specified price within a limited period of time. The Fund may
write ("sell") covered call options on any or all of its portfolio securities.
In addition, the Fund may purchase options on securities. The Fund may also
purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed on a
domestic exchange or quoted on the automatic quotation system of the National
Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on stock
exchanges are either broadly based, such as the Standard & Poor's 500 Stock
Index and 100 Stock Index, or involve stocks in a designated industry or group
of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each of
the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or options
thereon) for hedging purposes. U.S. futures contracts are traded on exchanges
which have been designated "contract markets" by the Commodity Futures Trading
Commission and must be executed through a futures commission merchant (an "FCM")
or brokerage firm which is a member of the relevant contract market. Although
futures contracts by their terms call for the delivery or acquisition of the
underlying commodities or a cash payment based on the value of the underlying
commodities, in most cases the contractual obligation is offset before the
delivery date of the contract by buying, in the case of a contractual obligation
to sell, or selling, in the case of a contractual obligation to buy, an
identical futures contract on a commodities exchange. Such a transaction cancels
the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example, if
the Fund held or considered purchasing equity securities and sought to protect
itself from fluctuations in prices without buying or selling those securities.
For example, if prices were expected to decrease, the Fund could sell equity
index futures contracts, thereby hoping to offset a potential decline in the
value of equity securities in the portfolio by a corresponding increase in the
value of the futures contract position held by the Fund and thereby prevent the
Fund's net asset value from declining as much as it otherwise would have. The
Fund also could protect against potential price declines by selling portfolio
securities and investing in money market instruments. However, since the futures
market is more liquid than the cash market, the use of futures contracts as an
investment technique would allow the Fund to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security, no
price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of three business days
for most types of securities, the futures markets can provide superior liquidity
to the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call options on
futures contracts. An option on a futures contract provides the holder with the
right to enter into a "long" position in the underlying futures contract, in the
case of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price to a stated expiration
date. Upon exercise of the option by the holder, a contract market clearing
house establishes a corresponding short position for the writer of the option,
in the case of a call option, or a corresponding long position, in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of futures contracts, such
as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge the Fund against the risk of falling prices. For an additional
discussion of options on futures contracts and certain risks involved therein,
see this SAI and the Company's Prospectus under "Certain Risks Factors and
Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on foreign
currencies for hedging purposes in a manner similar to that in which futures on
foreign currencies would be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated would
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remained constant. In order to protect against such diminutions
in the value of portfolio securities, the Fund could buy put options on the
foreign currency. If the value of the currency declines, the Fund would have the
right to sell such currency for a fixed amount in U.S. dollars and would thereby
offset, in whole or in part, the adverse effect on the Fund which otherwise
would have resulted. Conversely, when a rise is projected in the U.S. dollar
value of a currency in which securities to be acquired are denominated, thereby
increasing the cost of such securities, the Fund could buy call options thereon.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates.
.........Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Securities and Exchange Commission, as are
other securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, and options on securities indices, securities, and foreign
currencies draws upon skills and experience which are different from those
needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing instruments
will depend on the availability of liquid markets in the instruments. Markets in
a number of the instruments are relatively new and still developing and it is
impossible to predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to the use of
each of the foregoing instruments and could result in such adverse consequences
to the Fund as the possible loss of the entire premium paid for an option bought
by the Fund and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can be
given that the Fund will be able to use those instruments effectively for the
purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. In addition,
the Fund may engage in "proxy-hedging," i.e., entering into forward contracts to
sell a different foreign currency than the one in which the underlying
investments are denominated with the expectation that the value of the hedged
currency will correlate with the value of the underlying currency. The Fund 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 or a proxy currency in excess of the value of its
portfolio securities or other assets denominated in the currency being hedged.
Forward contracts may, from time to time, be considered illiquid, in which case
they would be subject to the Fund's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund may
invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect to
illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for securities
eligible for resale pursuant to Rule 144A under the 1933 Act, or any successor
to such rule, and that such securities are not subject to the Fund's limitations
on investing in securities that are not readily marketable. The Sub-advisor will
consider the following factors, among others, in making this determination: (1)
the unregistered nature of a Rule 144A security; (2) the frequency of trades and
quotes for the security; (3) the number of dealers willing to purchase or sell
the security and the number of additional potential purchasers; (4) dealer
undertakings to make a market in the security; and (5) the nature of the
security and the nature of market place trades (e.g., the time needed to dispose
of the security, the method of soliciting offers and the mechanics of
transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up to
5% of its total assets in fixed-income securities which are unrated or are rated
below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt securities
in which the Fund invests generally will be affected by changes in the level of
interest rates. An increase in interest rates will tend to reduce the market
values of such securities, whereas a decline in interest rates will tend to
increase their values. Medium and lower-rated securities (Baa or BBB and lower)
and non-rated securities of comparable quality tend to be subject to wider
fluctuations in yields and market values than higher rated securities and may
have speculative characteristics. In order to decrease the risk in investing in
debt securities, in no event will the Fund ever invest in a debt security rated
below B by Moody's or by S&P. Of course, relying in part on ratings assigned by
credit agencies in making investments will not protect the Fund from the risk
that the securities in which they invest will decline in value, since credit
ratings represent evaluations of the safety of principal, dividend, and interest
payments on debt securities, and not the market values of such securities, and
such ratings may not be changed on a timely basis to reflect subsequent events.
Because investment in medium and lower-rated securities involves greater
credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Directors
of the Company, the Fund may enter into repurchase agreements with respect to
money market instruments eligible for investment by the Fund with member banks
of the Federal Reserve system, registered broker-dealers, and registered
government securities dealers. A repurchase agreement may be considered a loan
collateralized by securities. Repurchase agreements maturing in more than seven
days are considered illiquid and will be subject to the Fund's limitation with
respect to illiquid securities.
The Fund has not adopted any limits on the amounts of its total assets that
may be invested in repurchase agreements which mature in less than seven days.
The Fund may invest up to 15% of the market value of its net assets, measured at
the time of purchase, in securities which are not readily marketable, including
repurchase agreements maturing in more than seven days. For an additional
discussion of repurchase agreements and certain risks involved therein, see the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Convertible Securities. The Fund may buy securities convertible into common
stock if, for example, the Sub-advisor believes that a company's convertible
securities are undervalued in the market. Convertible securities eligible for
purchase include convertible bonds, convertible preferred stocks, and warrants.
A warrant is an instrument issued by a corporation which gives the holder the
right to subscribe to a specific amount of the corporation's capital stock at a
set price for a specified period of time. Warrants do not represent ownership of
the securities, but only the right to buy the securities. The prices of warrants
do not necessarily move parallel to the prices of underlying securities.
Warrants may be considered speculative in that they have no voting rights, pay
no dividends, and have no rights with respect to the assets of a corporation
issuing them. Warrant positions will not be used to increase the leverage of the
Fund; consequently, warrant positions are generally accompanied by cash
positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of the market value of its net assets in
securities which are not readily marketable, including repurchase
agreements maturing in over seven days;
2........Purchase securities of other investment companies except in
compliance with the Investment Company Act of 1940;
3........Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions (and,
provided that margin payments and other deposits in connection with
transactions in options, futures and forward contracts shall not be deemed
to constitute purchasing securities on margin); or
4........Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek a total
return on its assets from long-term growth of capital and income principally
through investments in common stocks of established, non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
Investment Policies:
The Sub-advisor regularly analyzes a broad range of international equity
and fixed-income markets in order to assess the degree of risk and level of
return that can be expected from each market. Based upon its current assessment,
the Sub-advisor believes long-term growth of capital may be achieved by
investing in marketable securities of non-U.S. companies which have the
potential for growth of capital. Of course, there can be no assurance that the
Sub-advisor's forecasts of expected return will be reflected in the actual
returns achieved by the Fund.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when redeemed
than when purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock or foreign exchange
markets. The Fund is subject to risks unique to international investing.
Further, there is no assurance that the favorable trends discussed below will
continue, and the Fund cannot guarantee it will achieve its objective.
It is the present intention of the Sub-advisor to invest in companies based
in (or governments of or within) the Far East (for example, Japan, Hong Kong,
Singapore, and Malaysia), Western Europe (for example, United Kingdom, Germany,
Netherlands, France, Spain, and Switzerland), South Africa, Australia, Canada,
and such other areas and countries as the Sub-advisor may determine from time to
time.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Sub-advisor ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor ordinarily looks for
one or more of the following characteristics: an above-average earnings growth
per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Fund invests normally will have a record of paying dividends, and will generally
be expected to increase the amounts of such dividends in future years as
earnings increase.
It is expected that the Fund's investments will ordinarily be traded on
exchanges located at least in the respective countries in which the various
issuers of such securities are principally based.
The Fund will invest in securities denominated in currencies specified
elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Fund may invest in investment funds which have been authorized by the
governments of certain countries specifically to permit foreign investment in
securities of companies listed and traded on the stock exchanges in these
respective countries. The Fund's investment in these funds is subject to the
provisions of the Investment Company Act of 1940 discussed below. If the Fund
invests in such investment funds, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Investment Manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the securities
of these investment funds may trade at a premium over their net asset value.
Apart from the matters described herein, the Fund is not aware at this time
of the existence of any investment or exchange control regulations which might
substantially impair the operations of the Fund as described in the Company's
Prospectus and this SAI. It should be noted, however, that this situation could
change at any time.
The Fund may invest in companies located in Eastern Europe. The Fund will
only invest in a company located in, or a government of, Eastern Europe or
Russia, if the Sub-advisor believes the potential return justifies the risk. To
the extent any securities issued by companies in Eastern Europe and Russia are
considered illiquid, the Fund will be required to include such securities within
its 15% restriction on investing in illiquid securities.
Risk Factors of Foreign Investing. There are special risks in investing in
the Fund. Certain of these risks are inherent in any international mutual fund;
others relate more to the countries in which the Fund will invest. Many of the
risks are more pronounced for investments in developing or emerging countries.
Although there is no universally accepted definition, a developing country is
generally considered to be a country which is in the initial stages of its
industrialization cycle with a per capita gross national product of less than
$8,000.
Investors should understand that all investments have a risk factor. There
can be no guarantee against loss resulting from an investment in the Fund, and
there can be no assurance that the Fund's investment policies will be
successful, or that its investment objective will be attained. The Fund is
designed for individual and institutional investors seeking to diversify beyond
the United States in an actively researched and managed portfolio, and is
intended for long-term investors who can accept the risks entailed in investment
in foreign securities. For a discussion of certain risks involved in foreign
investing see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
In addition to the investments described in the Company's Prospectus, the
Fund may invest in the following:
Writing Covered Call Options. The Fund may write (sell) "covered" call
options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate additional
premium income which should serve to enhance the Fund's total return and reduce
the effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in the Sub-advisor's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long term,
are deemed to be attractive investments for the Fund.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash or other liquid assets having a value equal to the fluctuating market value
of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call "pledged" as that term is used
in the Fund's policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship of
the exercise price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option period. Once the
decision to write a call option has been made, the Sub-advisor, in determining
whether a particular call option should be written on a particular security or
currency, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability of the Fund. This liability will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of the New
York Stock Exchange), or, in the absence of such sale, the average of the latest
bid and asked price. The option will be terminated upon expiration of the
option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will effect closing transactions in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency. The
Fund will realize a profit or loss from a closing purchase transaction if the
cost of the transaction is less or more than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security
or currency, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security or
currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Fund has no current intention in
the foreseeable future of writing American or European style covered put options
and purchasing put options to close out options previously written by the Fund,
the Fund reserves the right to do so.
The Fund would write put options only on a covered basis, which means that
the Fund would maintain in a segregated account cash, U.S. government securities
or other liquid high-grade debt obligations in an amount not less than the
exercise price or the Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to or greater than
the exercise price of the "covered" options at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The Fund
would generally write covered put options in circumstances where the Sub-advisor
wishes to purchase the underlying security or currency for the Fund's portfolio
at a price lower than the current market price of the security or currency. In
such event the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Fund may purchase American or European style
put options. As the holder of a put option, the Fund has the right to sell the
underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
The premium paid by the Fund when purchasing a put option will be recorded
as an asset of the Fund. This asset will be adjusted daily to the option's
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of New York Stock
Exchange), or, in the absence of such sale, the latest bid price. This asset
will be terminated upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase American or European style
call options. As the holder of a call option, the Fund has the right to purchase
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided in this SAI under "Certain
Risk Factors and Investment Methods."
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would look
to a clearing corporation to exercise exchange-traded options, if the Fund were
to purchase a dealer option, it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. While the Fund will seek to
enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Failure by the
dealer to perform would result in the loss of the premium paid by the Fund as
well as loss of the expected benefit of the transaction.
Futures Contracts:
Transactions in Futures. The Fund may enter into financial futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"); however, the Fund has no current intention of entering
into interest rate futures. The Fund, however, reserves the right to trade in
financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a hedge for
a portion of the Fund, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. Stock index futures
contracts are currently traded with respect to the S&P 500 Index and other broad
stock market indices, such as the New York Stock Exchange Composite Stock Index
and the Value Line Composite Stock Index. The Fund may, however, purchase or
sell futures contracts with respect to any stock index whose movements will, in
its judgment, have a significant correlation with movements in the prices of all
or portions of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used to attempt to hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas. For a discussion of futures transactions and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Regulatory Limitations. The Fund will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.
The Fund may not enter into futures contracts or options thereon if, with
respect to positions which do not qualify as bona fide hedging under applicable
CFTC rules, the sum of the amounts of initial margin deposits on the Fund's
existing futures and premiums paid for options on futures would exceed 5% of the
net asset value of the Fund after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; provided however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
The Fund's use of futures contracts will not result in leverage. Therefore,
to the extent necessary, in instances involving the purchase of futures
contracts or call options thereon or the writing of put options thereon by the
Fund, an amount of cash, or other liquid assets, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified in an account with the Fund's custodian to cover the
position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain yield enhancement and risk management strategies. If the
CFTC or other regulatory authorities adopt different (including less stringent)
or additional restrictions, the Fund would comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or purchasing
call and put options on stock index futures, the Fund may write or purchase call
and put options on stock indices. Such options would be used in a manner similar
to the use of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf of
the Fund and other mutual funds or portfolios of mutual funds managed by the
Sub-advisor or T. Rowe Price Associates, Inc. Such aggregated orders would be
allocated among the Fund and such other portfolios in a fair and
non-discriminatory manner. See this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods" for a description of certain risks
involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Fund has no current
intention of engaging in financial futures or option transactions other than
those described above, it reserves the right to do so. Such futures or options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Fund is permitted to invest in foreign
futures and options. For a description of foreign futures and options and
certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Foreign Currency Transactions. The Fund will generally enter into forward
foreign currency exchange contracts under two circumstances. First, when the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when the Sub-advisor believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Fund's securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency. The
Fund, however, in order to avoid excess transactions and transaction costs, may
maintain a net exposure to forward contracts in excess of the value of the
Fund's securities or other assets to which the forward contracts relate
(including accrued interest to the maturity of the forward on such securities)
provided the excess amount is "covered" by liquid, high-grade debt securities,
denominated in any currency, at least equal at all times to the amount of such
excess. For these purposes "the securities or other assets to which the forward
contracts relate" may be securities or assets denominated in a single currency,
or where proxy forwards are used, securities denominated in more than one
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, the Sub-advisor
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to sell
on the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver. However, as noted, in order to avoid excessive
transactions and transaction costs, the Fund may use liquid, high-grade debt
securities denominated in any currency, to cover the amount by which the value
of a forward contract exceeds the value of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. For an additional discussion of certain
risks involved in foreign investing, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered
to have been closed at the end of the Fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from the
normal closing or settlement of such transactions will be characterized as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the instrument. The Fund will be required to
distribute net gains on such transactions to shareholders even though it may not
have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes in which case a
loss on any position in a straddle will be subject to deferral to the extent of
unrealized gain in an offsetting position. The holding period of the securities
or currencies comprising the straddle will be deemed not to begin until the
straddle is terminated. For securities offsetting a purchased put, this
adjustment of the holding period may increase the gain from sales of securities
held less than three months. The holding period of the security offsetting an
"in-the-money qualified covered call" option on an equity security will not
include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be long-term
capital loss, if the security covering the option was held for more than twelve
months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indices and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
Hybrid Commodity and Security Instruments. Instruments have been developed
which combine the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter "Hybrid Instruments").
Often these hybrid instruments are indexed to the price of a commodity or
particular currency or a domestic or foreign debt or equity securities index.
Hybrid instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity at a future
point in time, preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the conversion terms
related to a particular commodity. For a discussion of certain risks involved in
hybrid instruments, see this SAI under "Certain Risk Factors and Investment
Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Directors
of the Company, the Fund may enter into repurchase agreements through which an
investor (such as the Fund) purchases a security (known as the "underlying
security") from a well-established securities dealer or a bank that is a member
of the Federal Reserve System. Any such dealer or bank will be on T. Rowe Price
Associates, Inc. ("T. Rowe Price") approved list and have a credit rating with
respect to its short-term debt of at least A1 by Standard & Poor's Corporation,
P1 by Moody's Investors Service, Inc., or the equivalent rating by T. Rowe
Price. At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Illiquid and Restricted Securities. The Fund may not invest in illiquid
securities including repurchase agreements which do not provide for payment
within seven days, if as a result, they would comprise more than 15% of the
value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by the Directors of
the Company. If through the appreciation of illiquid securities or the
depreciation of liquid securities, the Fund should be in a position where more
than 15% of the value of its net assets are invested in illiquid assets,
including restricted securities, the Fund will take appropriate steps to protect
liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as the
Fund, to trade in privately placed securities even though such securities are
not registered under the 1933 Act. The Sub-advisor, under the supervision of the
Directors of the Company, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's restriction of investing no
more than 15% of its assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, the Sub-advisor could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Fund's holdings of
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15% of its assets in
illiquid securities. Investing in Rule 144A securities could have the effect of
increasing the amount of a Fund's assets invested in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
The Directors of the Company have promulgated guidelines with respect to
illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing additional
income, the Fund may make secured loans of portfolio securities amounting to not
more than 33 1/3% of its total assets. Securities loans are made to
broker-dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on a daily basis.
The collateral received will consist of cash, U.S. government securities,
letters of credit or such other collateral as may be permitted under its
investment program. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to persons deemed
by the Sub-advisor to be of good standing and will not be made unless, in the
judgment of the Sub-advisor, the consideration to be earned from such loans
would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange
Commission, the Fund may make loans to, or borrow funds from, other mutual funds
sponsored or advised by the Sub-advisor or T. Rowe Price Associates, Inc. The
Fund has no current intention of engaging in these practices at this time.
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 its commitments with respect to these securities by maintaining
cash and/or other liquid assets with its custodian bank equal in value to these
commitments 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
the Fund's total assets;
2........Invest in companies for the purpose of exercising management or
control;
3........Purchase illiquid securities if, as a result, more than 15% of its
net assets would be invested in such securities. Securities eligible for
resale under Rule 144A of the Securities Act of 1933 may be subject to this
15% limitation;
4........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
5........Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Company's Prospectus and
this SAI;
6........Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) the Fund may make margin deposits in connection with futures contracts
and other permissible investments;
7........Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as a security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then
such mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the
Fund's total assets at the time of borrowing or investment;
8........Effect short sales of securities;
9........Invest in warrants if, as a result thereof, more than 10% of the
value of the total assets of the Fund would be invested in warrants except
that this restriction does not apply to warrants acquired as a result of
the purchase of another security. For purposes of these percentage
limitations, the warrants will be valued at the lower of cost or market; or
10.......Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona
fide hedging, the aggregate initial margin and premiums on such positions
would exceed 5% of the Fund's net assets.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Fund is subject to certain percentage
limitations under the Investment Company Act of 1940 relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Fund's total assets may be invested in such
securities.
ASAF JANUS OVERSEAS GROWTH FUND:
Investment Objective: The investment objective of the ASAF Janus
Overseas Growth Fund is to seek long-term growth of capital.
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 contracts
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 by the
Sub-advisor, 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."
Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Swaps and Swap-Related Products. 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 entitlement 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 custodian of the Fund.
If the Fund enters into an interest rate swap on other than a net basis, it
would maintain a segregated account in the full amount accrued on a daily basis
of its 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 segregate cash or other
liquid assets having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of its 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 it contractually is entitled to receive. The Fund
may buy and sell (i.e., write) caps and floors without limitation, subject to
the segregation requirement described above. For an additional discussion of
these strategies, see this SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Investments. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of its net assets in
illiquid investments (i.e., securities that are not readily marketable). The
Sub-advisor will make liquidity determinations with respect to the Fund's
securities, including Rule 144A Securities and commercial paper. Under the
guidelines established by the Directors, the Sub-advisor will consider, among
others, the following factors in determining whether a Rule 144A Security is
liquid: 1) the frequency of trades and quoted prices for the obligation; 2) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; 3) the willingness of dealers to undertake to make a
market in the security; and 4) the nature of the security and the nature of
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. In the case of
commercial paper, the Sub-advisor will consider, among other factors, whether
the paper is traded flat or in default as to principal and interest and any
ratings of the paper by an NRSRO.
Zero-Coupon, Pay-In-Kind and Step Coupon Securities. The Fund may
invest up to 10% of its assets in zero-coupon, pay-in-kind and step coupon
securities. For a discussion of zero-coupon debt securities and the risks
involved therein, see this SAI under "Certain Risk Factors and Investment
Methods."
Pass-Through Securities. The Fund may invest in various types of
pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a bank or broker-dealer. The purchaser of a
pass-through security receives an undivided interest in the underlying pool of
securities. The issuers of the underlying securities make interest and principal
payments to the intermediary which are passed through to purchasers, such as the
Fund. For an additional discussion of pass-through securities and certain risks
involved therein, see this SAI and the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Depositary Receipts. The Fund may invest in sponsored and unsponsored
American Depositary Receipts ("ADRs"), which are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by a
foreign issuer. ADRs, in registered form, are designed for use in U.S.
securities markets. Unsponsored ADRs may be created without the participation of
the foreign issuer. Holders of these ADRs generally bear all the costs of the
ADR facility, whereas foreign issuers typically bear certain costs in a
sponsored ADR. The bank or trust company depositary of an unsponsored ADR may be
under no obligation to distribute shareholder communications received from the
foreign issuer or to pass through voting rights. The Fund may also invest in
European Depositary Receipts ("EDRs"), receipts issued by a European financial
institution evidencing an arrangement similar to that of ADRs, Global Depositary
Receipts ("GDRs") and in other similar instruments representing securities of
foreign companies. EDRs, in bearer form, are designed for use in European
securities markets. GDRs are securities convertible into equity securities of
foreign issuers.
OtherIncome-Producing Securities. Other types of income producing
securities that the Fund may purchase include, but are not limited to, the
following types of securities:
Variable and Floating Rate Obligations. These types of securities are
relatively long-term instruments that often carry demand features permitting the
holder to demand payment of principal at any time or at specified intervals
prior to maturity.
Standby Commitments. These instruments, which are similar to a put, give
the Fund the option to obligate a broker, dealer or bank to repurchase a
security held by that Fund at a specified price.
Tender Option Bonds. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker, dealer
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
Inverse Floaters. Inverse floaters are debt instruments whose interest
bears an inverse relationship to the interest rate on another security. The Fund
will not invest more than 5% of its assets in inverse floaters. The Fund will
purchase standby commitments, tender option bonds and instruments with demand
features primarily for the purpose of increasing the liquidity of the Fund.
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:
1........The Fund will not (i) enter into any futures contracts and
related options for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission ("CFTC")
regulations if the aggregate initial margin and premiums required to
establish positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions will
exceed 5% of the fair market value of the Fund's net assets, after
taking into account unrealized profits and unrealized losses on any
such contracts it has entered into; and (ii) enter into any futures
contracts if the aggregate amount of the Fund's commitments under
outstanding futures contracts positions would exceed the market value
of its total assets.
2........The Fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short without the payment of
any additional consideration therefor, and provided that transactions
in futures, options, swaps and forward contracts are not deemed to
constitute selling securities short.
3........The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments and other deposits in connection with transactions in
futures, options, swaps and forward contracts shall not be deemed to
constitute purchasing securities on margin.
4........The Fund does not currently intend to purchase securities of
other investment companies, except in compliance with the 1940 Act.
5........The Fund may not 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, deposits of assets to margin,
guarantee positions in futures, options, swaps or forward contracts,
or the segregation of assets in connection with such contracts.
6........The Fund does not currently intend to purchase any security
or enter into a repurchase agreement if, as a result, more than 15% of
its net assets would be invested in repurchase agreements not
entitling the holder to payment of principal and interest within seven
days and in securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily
available market. The Directors of the Company, or the Sub-advisor
acting pursuant to authority delegated by the Directors of the
Company, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities"), or any successor to
such rule, and Section 4(2) commercial paper. Accordingly, such
securities may not be subject to the foregoing limitation.
7........The Fund may not invest in companies for the purpose of
exercising control of management.
ASAF FOUNDERS SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The Fund
may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Fund may purchase options on securities. The Fund
may also purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed
on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Fund held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Fund could
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Fund and
thereby prevent the Fund's net asset value from declining as much as it
otherwise would have. The Fund also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Fund to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security,
no price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge its portfolio against the risk of falling prices. For an
additional discussion of options on futures contracts and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risks Factors
and Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on
foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Fund could buy put
options on the foreign currency. If the value of the currency declines, the Fund
would have the right to sell such currency for a fixed amount in U.S. dollars
and would thereby offset, in whole or in part, the adverse effect on the Fund
which otherwise would have resulted. Conversely, when a rise is projected in the
U.S. dollar value of a currency in which securities to be acquired are
denominated, thereby increasing the cost of such securities, the Fund could buy
call options thereon. The purchase of such options could offset, at least
partially, the effects of the adverse movements in exchange rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Securities and Exchange Commission, as are
other securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Fund as the possible loss of the entire premium paid
for an option bought by the Fund and the possible need to defer closing out
positions in certain instruments to avoid adverse tax consequences. As a result,
no assurance can be given that the Fund will be able to use those instruments
effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. In addition,
the Fund may engage in "proxy-hedging," i.e., entering into forward contracts to
sell a different foreign currency than the one in which the underlying
investments are denominated with the expectation that the value of the hedged
currency will correlate with the value of the underlying currency. The Fund 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 or a proxy currency in excess of the value of its
portfolio securities or other assets denominated in the currency being hedged.
Forward contracts may, from time to time, be considered illiquid, in which case
they would be subject to the Fund's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund
may invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the Fund's
limitations on investing in securities that are not readily marketable. The
Sub-advisor will consider the following factors, among others, in making this
determination: (1) the unregistered nature of a Rule 144A security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
willing to purchase or sell the security and the number of additional potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of market place trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up
to 5% of its total assets in fixed-income securities which are unrated or are
rated below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of such securities, whereas a decline in interest rates will
tend to increase their values. Medium and lower-rated securities (Baa or BBB and
lower) and non-rated securities of comparable quality tend to be subject to
wider fluctuations in yields and market values than higher rated securities and
may have speculative characteristics. In order to decrease the risk in investing
in debt securities, in no event will the Fund ever invest in a debt security
rated below B by Moody's or by S&P. Of course, relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that the securities in which they invest will decline in value, since
credit ratings represent evaluations of the safety of principal, dividend, and
interest payments on debt securities, and not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Fund with
member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Fund's limitation with respect to illiquid securities.
The Fund has not adopted any limits on the amounts of its total assets
that may be invested in repurchase agreements which mature in less than seven
days. The Fund may invest up to 15% of the market value of its net assets,
measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Fund may buy securities convertible into
common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Fund; consequently, warrant positions are generally accompanied
by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of the market value of its net
assets in securities which are not readily marketable,
including repurchase agreements maturing in over seven days;
2........Purchase securities of other investment companies
except in compliance with the Investment Company Act of
1940;
3........Purchase any securities on margin except to obtain
such short-term credits as may be necessary for the
clearance of transactions (and, provided that margin
payments and other deposits in connection with transactions
in options, futures and forward contracts shall not be
deemed to constitute purchasing securities on margin); or
4........Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Fund is to provide
long-term capital growth by investing primarily in small-capitalization stocks
that appear to be undervalued.
Investment Policies:
Although primarily all of the Fund's assets are invested in common
stocks, the Fund may invest in convertible securities, corporate debt securities
and preferred stocks. The fixed-income securities in which the Fund may invest
include, but are not limited to, those described below. See this SAI under
"Certain Risk Factors and Investment Methods," for an additional discussion of
debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The Fund
may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of
foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Fund may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Fund's investment program permits it
to purchase below investment grade securities, commonly referred to as "junk
bonds." Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default -- that is, the nonpayment of interest and principal by
the issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Fund will achieve its
investment objective.
After purchase by the Fund, a debt security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Sub-advisor will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Company's Prospectus.
Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. Because
investment in low and lower-medium quality bonds involves greater investment
risk, to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on the Sub-advisor's credit analysis
than would be the case if the Fund was investing in higher quality bonds. For a
discussion of the special risks involved in low-rated bonds, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. After purchase by the Fund, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, the Sub-advisor will consider such event in its
determination of whether the Fund should continue to hold the security. To the
extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in the Company's Prospectus. For a discussion of
mortgage-backed securities and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Fund will treat IOs and POs, other than government-issued IOs or
POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. The Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue; and the number of dealers
who make a market in the IO or PO. The Fund will treat non-government-issued IOs
and POs not backed by fixed or adjustable rate mortgages as illiquid unless and
until the Securities and Exchange Commission modifies its position.
Asset-Backed Securities. The Fund may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile Receivable
Securities").
Credit Card Receivable Securities. The Fund may invest in asset-backed
securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed securities
backed by assets other than those described above will be issued in the future.
The Fund may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies. For a
discussion of these securities, see this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Fund may write (sell) American or
European style "covered" call options and purchase options to close out options
previously written by the Fund. In writing covered call options, the Fund
expects to generate additional premium income which should serve to enhance the
Fund's total return and reduce the effect of any price decline of the security
or currency involved in the option. Covered call options will generally be
written on securities or currencies which, in the Sub-advisor's opinion, are not
expected to have any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive investments for the Fund.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash or other liquid assets having a value equal to the fluctuating market value
of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, a fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call to be "pledged" as that term
is used in the Fund's policy which limits the pledging or mortgaging of its
assets.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's total 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 total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
The premium paid by the Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided in this SAI under "Certain
Risk Factors and Investment Methods."
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Fund may engage in transactions
involving dealer options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise exchange-traded
options, if the Fund were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction. For a discussion of dealer options, see this SAI under "Certain
Risk Factors and Investment Methods."
Futures Contracts:
Transactions in Futures. The Fund may enter into futures contracts,
including stock index, interest rate and currency futures ("futures or futures
contracts"). The Fund may also enter into futures on commodities related to the
types of companies in which it invests, such as oil and gold futures. Otherwise
the nature of such futures and the regulatory limitations and risks to which
they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion of
the Fund, as a cash management tool, or as an efficient way for the Sub-advisor
to implement either an increase or decrease in portfolio market exposure in
response to changing market conditions. The Fund may purchase or sell futures
contracts with respect to any stock index. Nevertheless, to hedge the Fund
successfully, the Fund must sell futures contacts with respect to indices or
subindices whose movements will have a significant correlation with movements in
the prices of the Fund's securities.
Interest rate or currency futures contracts may be used to attempt to hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations. The Fund will engage in futures contracts and
options thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and regulations of
the CFTC.
The Fund may not purchase or sell futures contracts or related options if,
with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
premiums paid on those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Directors of the Company without a shareholder vote and does not
limit the percentage of the Fund's assets at risk to 5%.
The Fund's use of futures contracts will not result in leverage. Therefore,
to the extent necessary, in instances involving the purchase of futures
contracts or the writing of call or put options thereon by the Fund, an amount
of cash or other liquid assets equal to the market value of the futures
contracts and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the position, or
alternative cover (such as owning an offsetting position) will be employed.
Assets used as cover or held in an identified account cannot be sold while the
position in the corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large portion of the
Fund's assets to cover or identified accounts could impede portfolio management
or the Fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Options on Futures Contracts. The Fund may purchase and sell options on
the same types of futures in which it may invest. As an alternative to writing
or purchasing call and put options on stock index futures, the Fund may write or
purchase call and put options on stock indices. Such options would be used in a
manner similar to the use of options on futures contracts. From time to time, a
single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Fund and other mutual funds or portfolios of mutual funds
managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such
aggregated orders would be allocated among the Fund and such other portfolios
managed by the Sub-advisor in a fair and non-discriminatory manner. See this SAI
and Company's Prospectus under "Certain Risk Factors and Investment Methods" for
a description of certain risks in options and future contracts.
Additional Futures and Options Contracts. Although the Fund has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Fund is permitted to invest in foreign
futures and options. For a description of foreign futures and options and
certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated and
non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Fund will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following: First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when the Sub-advisor believes
that one currency may experience a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currency or currencies act as an effective proxy for other
currencies. In such a case, the Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Sub-advisor believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
The Fund may enter into forward contracts for any other purpose
consistent with the Fund's investment objective and policies. However, the Fund
will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Fund's holdings of liquid assets and currency
available for cover of the forward contract(s). In determining the amount to be
delivered under a contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. For a discussion of certain risk factors
involved in foreign currency transactions, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indices 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 its commitments with respect to these securities by maintaining
cash and/or other liquid assets with its custodian bank equal in value to these
commitments during the time between the purchase and the settlement. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date. For a discussion of these securities and the risks involved
therein, see this SAI under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Purchase additional securities when money borrowed
exceeds 5% of its total assets;
2........Invest in companies for the purpose of exercising
management or control;
3........Purchase a futures contract or an option thereon
if, with respect to positions in futures or options on
futures which do not represent bona fide hedging, the
aggregate initial margin and premiums on such options would
exceed 5% of the Fund's net asset value;
4........Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such
securities. Securities eligible for resale under Rule 144A
of the 1933 Act may be subject to this 15% limitation;
5........Purchase securities of open-end or closed-end
investment companies except in compliance with the
Investment Company Act of 1940;
6........Purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of
portfolio securities and (ii) the Fund may make margin
deposits in connection with futures contracts or other
permissible investments;
7........Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3%
of the Fund's total assets at the time of borrowing or
investment;
8........Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the
Company's Prospectus and this SAI;
9........Effect short sales of securities; or
10.......Invest in warrants if, as a result thereof, more
than 10% of the value of the net assets of the Fund would be
invested in warrants, except that this restriction does not
apply to warrants acquired as a result of the purchase of
another security. For purposes of these percentage
limitations, the warrants will be valued at the lower of
cost or market.
ASAF NEUBERGER&BERMAN MID-CAP GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Fund purchases
securities from a Federal Reserve member bank or a securities dealer deemed
creditworthy by the Sub-advisor under procedures established by the Board of
Directors of the Company. The bank or securities dealer agrees to repurchase the
securities from the Fund at a higher price on a designated future date.
Repurchase agreements generally are for a short period of time, usually less
than a week. Repurchase agreements with a maturity of more than seven business
days are considered to be illiquid securities; the Fund may not enter into such
a repurchase agreement if, as a result, more than 15% of the value of its net
assets would then be invested in such repurchase agreements and other illiquid
securities. The Fund will enter into a repurchase agreement only if (1) the
underlying securities are of the type (excluding maturity and duration
limitations) that the Fund's investment policies and limitations would allow it
to purchase directly, (2) the market value of the underlying securities,
including accrued interest, and any other collateral for the repurchase
agreement at all times equals or exceeds the repurchase price under the
agreement, and (3) payment for the underlying securities is made only upon
satisfactory evidence that the securities are being held for the Fund's account
by the custodian or a bank acting as the Fund's agent.
Securities Loans. In order to realize income, the Fund may lend
portfolio securities with a value not exceeding 33-1/3% of its total assets to
banks, brokerage firms, or institutional investors judged creditworthy by the
Sub-advisor. Borrowers are required continuously to secure their obligations to
return securities on loan from the Fund by depositing collateral, which will be
marked to market daily, in a form determined to be satisfactory by the Directors
and equal to at least 100% of the market value of the loaned securities, which
will also be marked to market daily. The Sub-advisor believes the risk of loss
on these transactions is slight because, if a borrower were to default for any
reason, the collateral should satisfy the obligation. However, as with other
extensions of secured credit, loans of portfolio securities involve some risk of
loss of rights in the collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Fund may invest in
restricted securities, which are securities that may not be sold to the public
without an effective registration statement under the 1933 Act. Before they are
registered, such securities may be sold only in a privately negotiated
transaction or pursuant to an exemption from registration. In recognition of the
increased size and liquidity of the institutional markets for unregistered
securities and the importance of institutional investors in the formation of
capital, the SEC has adopted Rule 144A under the 1933 Act, which is designed to
facilitate efficient trading among institutional investors by permitting the
sale of certain unregistered securities to qualified institutional buyers. To
the extent privately placed securities held by the Fund qualify under Rule 144A,
and an institutional market develops for those securities, the Fund likely will
be able to dispose of the securities without registering them under the 1933
Act. To the extent that institutional buyers become, for a time, uninterested in
purchasing these securities, investing in Rule 144A securities could have the
effect of reducing the Fund's liquidity. The Sub-advisor, acting under
guidelines established by the Board of Directors of the Company, may determine
that certain securities qualified for trading under Rule 144A are liquid.
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 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, excluding Rule
144A securities deemed liquid by the Sub-advisor, are considered illiquid, and
will be subject to the Fund's 15% limit on investments in illiquid securities.
Foreign securities that are freely tradable in their principal markets are not
considered by the Fund to be illiquid. Illiquid securities for which no market
exists are priced by a method that the Directors believe accurately reflects
fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Fund sells portfolio securities subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest; these agreements are considered borrowings for purposes of the Fund's
investment limitations and policies concerning borrowings. There is a risk that
the counterparty to a reverse repurchase agreement will be unable or unwilling
to complete the transaction as scheduled, which may result in losses to the
Fund.
Covered Call Options and Put Options on Securities. The Fund may write
and purchase put and call options on securities. Securities on which call and
put options may be written and purchased by the Fund are purchased solely on the
basis of investment considerations consistent with the Fund's investment
objectives.
The Fund may write call options and purchase put options on securities
in order to hedge (i.e., write or purchase options to reduce the effect of price
fluctuations of securities held by the Fund), and may also purchase or write put
options, purchase call options and write covered call options in an attempt to
enhance income.
When the Fund writes a put option, it receives a premium and becomes
obligated to acquire a certain security at a price at any time until a certain
date if the purchaser of the option decides to exercise the option. The writer
of the option may be obligated to purchase the security at more than its current
value.
When the Fund purchases a put option, it pays a premium to the writer
for the right to sell a security to the writer for a specified amount at any
time until a certain date. The Fund would purchase a put option in order to
protect itself against a decline in the market value of a security it owns.
When the Fund writes a call option, it is obligated to sell a security
to a purchaser at a specified price at any time until a certain date if the
purchaser decides to exercise the option. The Fund receives a premium for
writing the call option. The Fund writes only "covered" call options on
securities it owns. So long as the obligation of the writer of the call option
continues, the writer may be assigned an exercise notice, requiring it to
deliver the underlying security against payment of the exercise price. The Fund
may be obligated to deliver securities underlying a call option at less than the
market price thereby giving up any additional gain on the security.
When the Fund purchases a call option, it pays a premium for the right
to purchase a security from the writer at a specified price until a specified
date. A call option would be purchased by the Fund to offset a previously
written call option.
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 call options, which the Fund will not do), but is
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 above the exercise price, but
conversely retains the risk of loss should the price of the security decline.
When writing a put option, the Fund, in return for the premium, takes the risk
that it must purchase the underlying security at a price that may be more than
the current market price of the security. If a call or put option that the Fund
has written expires unexercised, the Fund will realize a gain in the amount of
the premium; however, in the case of a call option, that gain may be offset by a
decline in the market value of the underlying security during the option period.
If the call or put option is exercised, the Fund will realize a gain or loss
from the sale or purchase of the underlying security.
The exercise price of an option may be below, equal to, or above the
market value of the underlying security at the time the option is written.
Options normally have expiration dates between three and nine months from the
date written. The obligation under any option terminates upon expiration of the
option or, at an earlier time, when the writer offsets the option by entering
into a "closing purchase transaction" to purchase an option of the same series.
If an option is purchased by the Fund and is never exercised, the Fund will lose
the entire amount of the premium paid.
Options are traded both on national securities exchanges and in the
over-the-counter ("OTC") market. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on which the option is
listed; the clearing organization in effect guarantees completion of every
exchange-traded option. In contrast, OTC options are contracts between the Fund
and its counter-party with no clearing organization guarantee. Thus, when the
Fund sells or purchases an OTC 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 whom or from whom the Fund originally sold or
purchased the option. The Sub-advisor monitors the creditworthiness of dealers
with which the Fund may engage in OTC options, and will limit counterparties in
such transactions to dealers with a net worth of at least $20 million as
reported in their latest financial statements. For an additional discussion of
OTC options and their risks, see this Statement under "Certain Risk Factors and
Investment Methods."
The premium received (or paid) by the Fund when it writes (or
purchases) an option is the amount at which the option is currently traded on
the applicable exchange, less (or plus) a commission. The premium may reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to the market price, the historical price
volatility of the underlying security, the length of the option period, the
general supply of and demand for credit, and the general interest rate
environment. The premium received by the Fund for writing an option is recorded
as a liability on the Fund's statement of assets and liabilities. This liability
is adjusted daily to the option's current market value.
The Fund pays the brokerage commissions in connection with purchasing
or writing options, including those used to close out existing positions. These
brokerage commissions normally are higher than those applicable to purchases and
sales of portfolio securities.
From time to time, the Fund may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering the security from its portfolio. In those cases,
additional brokerage commissions are incurred.
For an additional discussion of options and their risks, see this
Statement and the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Options on Securities Indices. The Fund also may write or purchase put
and call options on securities indices for the purpose of hedging against the
risk of unfavorable price movements adversely affecting the value of the Fund's
securities or securities the Fund intends to buy. However, the Fund currently
does not expect to invest a substantial portion of its assets in securities
index options. Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date
multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market values of the
securities included in the index. Options on stock indexes are currently traded
on the Chicago Board Options Exchange, the NYSE, the AMex and foreign exchanges.
The Fund may purchase put options in order to hedge against an
anticipated decline in securities market prices that might adversely affect the
value of the Fund's portfolio securities. If the Fund purchases a put option on
a securities index, the amount of the payment it would receive upon exercising
the option would depend on the extent of any decline in the level of the
securities index below the exercise price. Such payments would tend to offset a
decline in the value of the Fund's portfolio securities. However, if the level
of the securities index increases and remains above the exercise price while the
put option is outstanding, the Fund will not be able to exercise the option
profitably and will lose the amount of the premium and any transaction costs.
Such loss may be partially offset by an increase in the value of the Fund's
securities.
The Fund may purchase call options on securities indices in order to
participate in an anticipated increase in securities market prices. If the Fund
purchases a call option on a securities index, the amount of the payment it
receives upon exercising the option depends on the extent of any increase in the
level of the securities index above the exercise price. Such payments would, in
effect, allow the Fund to benefit from securities market appreciation even
though it may not have had sufficient cash to purchase the underlying
securities. Such payments may also offset increases in the price of securities
that the Fund intends to purchase. If, however, the level of the securities
index declines and remains below the exercise price while the call option is
outstanding, the Fund will not be able to exercise the option profitably and
will lose the amount of the premium and transaction costs. In circumstances
where a securities index is declining, the Fund also may experience a loss in
the value of its portfolio securities. Such losses may be partially offset by a
reduction in the price the Fund pays to buy additional securities for its
portfolio.
The Fund may write securities index options in order to close out
positions in securities index options that it has purchased. These closing sale
transactions enable the Fund immediately to realize gains or minimize losses on
its options positions. If the Fund is unable to effect a closing sale
transaction with respect to options that it has purchased, it would have to
exercise the options in order to realize any profit and may incur transaction
costs upon the purchase or sale of underlying securities.
All securities index options purchased by the Fund will be listed and
traded on an exchange. While exchange-traded options may be more liquid than OTC
options, there is no assurance that a liquid secondary market on a domestic or
foreign options exchange will exist for any particular exchange-traded option at
any particular time. As is the case with options on securities, the Fund will
incur brokerage commissions and other transactions costs in connection with
purchasing and writing options on securities indices.
For an additional discussion of options on securities indices and their
risks, see this Statement and the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Futures Contracts and Options Thereon. The Fund may enter into futures
contracts for the purchase or sale of individual securities or futures contracts
on securities indices that are traded on exchanges licensed and regulated by the
Commodity Futures Trading Commission ("CFTC") or on foreign exchanges. Trading
on foreign exchanges is subject to the legal requirements of the jurisdiction in
which the exchange is located and the rules of such foreign exchange. The Fund
may purchase and sell futures for bona fide hedging purposes and for non-hedging
purposes (i.e., in an effort to enhance income) to the extent permitted in CFTC
regulations.
A "sale" of a futures contract (or a "short" futures position) entails
the assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) entails the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures, including bond index futures, are settled on a net cash payment basis
rather than by the sale and delivery of the securities underlying the futures.
U.S. futures (except certain currency futures) are traded on exchanges
that have been designated as "contract markets" by the CFTC; futures
transactions must be executed through a futures commission merchant that is a
member of the relevant contract market. The exchange's affiliated clearing
organization guarantees performance of the contracts between the clearing
members of the exchange.
"Margin" with respect to futures is the amount of assets that must be
deposited by the Fund with, or for the benefit of, a futures commission merchant
in order to initiate and maintain the Fund's futures positions. The margin
deposit made by the Fund when it enters into a futures contract ("initial
margin") is intended to assure its performance of the contract. If the price of
the futures contract changes -- increases in the case of a short (sale) position
or decreases in the case of a long (purchase) position -- so that the unrealized
loss on the contract causes the margin deposit not to satisfy margin
requirements, the Fund will be required to make an additional margin deposit
("variation margin"). However, if favorable price changes in the futures
contract cause the margin on deposit to exceed the required margin, the excess
will be paid to the Fund. In computing its daily net asset value, the Fund marks
to market the value of its open futures positions. The Fund also must make
margin deposits with respect to options on futures that it has written. If the
futures commission merchant holding the deposit goes bankrupt, the Fund could
suffer a delay in recovering its funds and could ultimately suffer a loss.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, 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 option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (it the option is a call) or a long futures position (if the option is
a put). Upon exercise of the option, the accumulated cash balance in the
writer's futures margin account is delivered to the holder of the option. That
balance 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.
Although the Sub-advisor believes that the use of futures contracts
will benefit the Fund, if the Sub-advisor's judgment about the general direction
of the markets is incorrect, the Fund's overall return would be lower than if it
had not entered into any such contracts. For an additional discussion of futures
contracts, related options and their risks, see this Statement and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated
equity and debt securities issued by foreign issuers (including governments,
quasi-governments and foreign banks) and foreign branches of U.S. banks,
including negotiable CDs and commercial paper. These investments are subject to
the Fund's quality standards. While investments in foreign securities are
intended to reduce risk by providing further diversification, such investments
involve sovereign and other risks, in addition to the credit and market risks
normally associated with domestic securities.
The Fund may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) warrants, (4) CDs, commercial paper, fixed-time deposits, and bankers'
acceptances issued by foreign banks, (5) obligations of other corporations, and
(6) obligations of foreign governments, or their subdivisions, agencies, and
instrumentalities, international agencies, and supranational entities. Risks of
investing in foreign currency denominated securities include (1)
nationalization, expropriation, or confiscatory taxation, (2) adverse changes in
investment or exchange control regulations (which could prevent cash from being
brought back to the U.S.), and (3) expropriation or nationalization of foreign
portfolio companies. Mail service between the U.S. and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. For an additional discussion of the risks associated with
foreign securities, whether denominated in U.S. dollars or foreign currencies,
see this Statement and the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Prices of foreign securities and exchange rates for foreign currencies
may be affected by the interest rates prevailing in other countries. The
interest rates in other countries are often affected by local factors, including
the strength of the local economy, the demand for borrowing, the government's
fiscal and monetary policies, and the international balance of payments.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Fund is uninvested and
no return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio securities, or, if the Fund has entered into
a contract to sell the securities, could result in possible liability to the
purchaser.
The Fund may invest in foreign corporate bonds and debentures and
sovereign debt instruments issued or guaranteed by foreign governments, their
agencies or instrumentalities. The Fund may invest in lower-rated foreign debt
securities subject to the Fund's 10% limitation on lower-rated debt securities.
Foreign debt securities are subject to risks similar to those of other foreign
securities, as well as risks similar to those of other debt securities, as
discussed in this Statement and in the Company's Prospectus under "Investment
Programs of the Funds" and "Certain Risk Factors and Investment Methods."
In order to limit the risk inherent in investing in foreign
currency-denominated securities, the Fund may not purchase any such security if
after such purchase more than 20% of its total assets (taken at market value)
would be invested in such securities. Within such limitation, however, the Fund
is not restricted in the amount it may invest in securities denominated in any
one foreign currency.
Foreign Currency Transactions. The Fund may engage in foreign currency
exchange transactions. Foreign currency exchange transactions will be conducted
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 ("forward contracts"). The Fund may enter into
forward contracts in order to protect against uncertainty in the level of future
foreign currency exchange rates. The Fund may also use forward contracts for
non-hedging purposes.
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
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between 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.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread) between the price at which
they are buying and selling various currencies.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may wish 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 security transactions, the Fund will be able
to protect itself against a possible loss. When the Sub-advisor believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may also enter into a forward contract to sell the
amount of foreign currency for a fixed amount of dollars which approximates the
value of some or all of a Fund's securities denominated in such foreign
currency.
The Fund may also engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency, when the Sub-advisor believes that there is
a pattern of correlation between the two currencies. The Fund may also purchase
and sell forward contracts for non-hedging purposes when the Sub-advisor
anticipates that the foreign currency will appreciate or depreciate in value,
but securities in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
When the Fund engages in forward contracts for hedging purposes, it
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if their consummation 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. At the consummation of
the forward contract, the Fund may either make delivery of the foreign currency
or terminate its contractual obligation to deliver by purchasing an offsetting
contract obligating it to purchase the same amount of such foreign currency at
the same maturity date. 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
assets into such currency. If the Fund engages in an offsetting transaction, it
will incur a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually made with the currency trader who is a party to the
original forward contract.
The Fund is not required to enter into such transactions and will not
do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Fund's portfolio
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. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of the Fund's foreign assets.
While the Fund may enter forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause the Fund to sustain losses which will prevent it
from achieving a complete hedge or expose it to risk of foreign exchange loss.
The Fund generally will not enter into a forward contract with a term
of greater than one year. The Fund may experience delays in the settlement of
its foreign currency transactions.
When the Fund engages in forward contracts for the sale or purchase of
currencies, the Fund will either cover its position or establish a segregated
account. [The Fund will consider its position covered if it has securities in
the currency subject to the forward contract, or otherwise has the right to
obtain that currency at no additional cost. In the alternative, the Fund will
place cash, fixed income, or equity securities (denominated in the foreign
currency subject to the forward contract) in a separate account.] The amounts in
such separate account will equal the value of the Fund's assets which are
committed to the consummation of foreign currency exchange contracts. If the
value of the securities placed in the separate account declines, the Fund will
place additional cash or securities in the account on a daily basis so that the
value of the account will equal the amount of its commitments with respect to
such contracts.
For an additional discussion of forward foreign currency exchange
contracts and their risks, see this Statement and the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Currency Futures and Related Options. The Fund may enter into currency
futures contracts and options on such futures contracts in domestic and foreign
markets. The Fund may sell a currency futures contract or a call option, or it
may purchase a put option on such futures contract, if the Sub-advisor
anticipates that exchange rates for a particular currency will fall. Such a
transaction will be used as a hedge (or, in the case of a sale of a call option,
a partial hedge) against a decrease in the value of the Fund's securities
denominated in such currency. If the Sub-advisor anticipates that exchange rates
will rise, the Fund may purchase a currency futures contract or a call option to
protect against an increase in the price of securities which are denominated in
a particular currency and which the Fund intends to purchase. The Fund will use
these futures contracts and related options for hedging purposes. The Fund may
also purchase a currency futures contract, or a call option thereon, for
non-hedging purposes (i.e., in an effort to enhance income) when the Sub-advisor
anticipates that a particular currency will appreciate in value, but securities
denominated in that currency do not present an attractive investment and are not
included in the Fund's portfolio.
The sale of a currency futures contract creates an obligation by the
Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time for a specified price. The purchase of a currency
futures contract creates an obligation by the 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. To close out a currency futures contract sold by the Fund, the
Fund may purchase a currency futures contract for the same aggregate amount of
currency and same delivery date. If the price in the sale exceeds the price in
the offsetting purchase, the Fund is immediately paid the difference. Similarly,
to close out a currency futures contract purchased by the Fund, the Fund sells a
currency futures contract. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain. Likewise, if the offsetting sale price is less
than the purchase price, the Fund realizes a loss.
Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a 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 lost. For the holder of an option, there are no daily payments
of cash for "variation" or "maintenance" margin payments to reflect the change
in the value of the underlying contract as there are by a purchaser or seller of
a currency futures contract.
A risk in employing currency futures contracts to protect against price
volatility of portfolio securities which are denominated in a particular
currency is that the prices of such securities [subject to currency futures
contracts] may not completely correlate with the behavior of the cash prices of
the Fund's securities. The correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
used for hedging purposes over a short-term period. Such distortions are
generally minor and would diminish as the contract approached maturity. Another
risk is that the Sub-advisor could be incorrect in its expectation as to the
direction or extent of various exchange rate movements or the time span within
which the movements take place. When the Fund engages in the purchase of
currency futures contracts, an amount equal to the market value of the currency
futures contract (minus any required margin) will be deposited in a segregated
account of securities, cash, or cash equivalents to collateralize the position
and thereby limit the use of such futures contracts.
Put and call options on currency futures have characteristics similar
to those of other options. In addition to the risks associated with investing in
options on securities, however, there are particular risks associated with
transactions in options on currency futures. In particular, the ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market for such options.
Options on Foreign Currencies. The Fund may write and purchase covered
call and put options on foreign currencies in amounts not exceeding 5% of its
net assets for the purpose of protecting against declines in the U.S. dollar
value of portfolio securities or increases in the U.S. dollar cost of securities
to be acquired, or to protect the dollar equivalent of dividend, interest, or
other payment on those securities. A decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such decreases in the value of portfolio
securities, the Fund may purchase put options on the foreign currency. If the
value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount of dollars which exceeds the market value of such
currency. This would result in a gain that may offset, in whole or in part, the
negative effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be
acquired by the Fund are denominated rises, thereby increasing the cost of such
securities, the Fund may purchase call options on such currency. If the value of
such currency increases sufficiently, the Fund will have the right to purchase
that currency for a fixed amount of dollars which is less than the market value
of that currency. Such a purchase would result in a gain that may offset, at
least partially, the effect of any currency-related increase in the price of
securities the Fund intends to acquire.
As in the case of other types of options transactions, however, the
benefit the Fund derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The Fund may also write options on foreign currencies for hedging
purposes. For example, if the Sub-advisor anticipates a decline in the dollar
value of foreign currency denominated securities because of declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the decrease in value of portfolio securities will be
offset, at least in part, by the amount of the premium received by the Fund.
Similarly, the Fund could write a put option on the relevant currency,
instead of purchasing a call option, to hedge against an anticipated increase in
the dollar cost of securities to be acquired. If exchange rates move in the
manner projected, the put option most likely will not be exercised, and such
increased cost will be offset, at least in part, by the amount of the premium
received. However, as in the case of other types of options transactions, the
writing of a foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected direction.
If unanticipated exchange rate fluctuations occur, a put or call option
may be exercised and the Fund could be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in currency exchange rates. Certain
options on foreign currencies are traded on the OTC market and involve liquidity
and credit risks that may not be present in the case of exchange-traded currency
options.
The Fund may purchase call options on currency for non-hedging purposes
when the Sub-advisor anticipates that the currency will appreciate in value, but
the securities denominated in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolio. The Fund may write
(sell) put and covered call options on any currency in order to realize greater
income than would be realized on portfolio securities alone. However, in writing
covered call options for additional income, the Fund may forego the opportunity
to profit from an increase in the market value of the underlying currency. Also,
when writing put options, the Fund accepts, in return for the option premium,
the risk that it may be required to purchase the underlying currency at a price
in excess of the currency's market value at the time of purchase.
The Fund would normally purchase call options for non-hedging purposes
in anticipation of an increase in the market value of a currency. The Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. Put options may be purchased by the Fund for
the purpose of benefiting from a decline in the value of currencies which it
does not own. The Fund would ordinarily realize a gain if, during the option
period, the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
A call option written on foreign currency by the Fund is "covered" if
the Fund owns the underlying foreign currency subject to the call, or if it has
an absolute and immediate right to acquire that foreign currency without
additional cash consideration. A call option is also covered if the Fund holds a
call on the same foreign currency for the same principal amount as the call
written where the exercise price of the call held is (a) equal to or less than
the exercise price of the call written or (b) greater than the exercise price of
the call written if the amount of the difference is maintained by the Fund in
cash, fixed income or equity securities in a segregated account with its
custodian.
The risks of currency options are similar to the risks of other
options, as discussed above and in this Statement under "Certain Risk Factors
and Investment Methods."
Cover for Futures, Options on Futures, Options on Securities and
Indices, Forward Contracts, and Options on Foreign Currencies ("Hedging
Instruments"). The Fund will comply with SEC staff guidelines regarding "cover"
for Hedging Instruments and, if the guidelines so require, set aside in a
segregated account with its custodian the prescribed amount of cash, fixed
income, or equity securities. Securities held in a segregated account cannot be
sold while the futures, option, or forward strategy covered by those securities
is outstanding, unless they are replaced with other suitable assets. As a
result, segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet current obligations. The Fund
may be unable promptly to dispose of assets that cover, or are segregated with
respect to, an illiquid options or forward position; this inability may result
in a loss to the Fund.
Forward Commitments and When-Issued Securities. The Fund may purchase
securities on a when-issued basis, that is, by committing to purchase securities
(to secure an advantageous price and yield at the time of the commitment) and
completing the purchase by making payment against delivery of the securities at
a future date. The Fund also may purchase or sell securities on a forward
commitment basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date (ordinarily within two months
although the Fund may agree to a longer settlement period). The price of the
underlying securities (usually expressed in terms of yield) and the date when
the securities will be delivered and paid for (the settlement date) are fixed at
the time the transaction is negotiated. When-issued purchases and forward
commitment transactions are negotiated directly with the other party, and such
commitments are not traded on exchanges.
When-issued purchases and forward commitment transactions enable the
Fund to "lock in" what the Sub-advisor believes to be an attractive price or
yield on a particular security for a period of time, regardless of future
changes in interest rates. For instance, in periods of rising interest rates and
falling prices, the Fund might sell securities it owns on a forward commitment
basis to limit its exposure to falling prices. In periods of failing interest
rates and rising prices, the Fund might purchase a security on a when-issued or
forward commitment basis and sell a similar security to settle such purchase,
thereby obtaining the benefit of currently higher yields.
The value of securities purchased on a when-issued or forward
commitment basis and any subsequent fluctuations in their value are reflected in
the computation of the Fund's net asset value starting on the date of the
agreement to purchase the securities. Because the Fund has not yet paid for the
securities, this produces an effect similar to leverage. The Fund does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date. When the Fund makes a forward commitment
to sell securities it owns, the proceeds to be received upon settlement are
included in the Fund's assets. Fluctuations in the market value of the
underlying securities are not reflected in the Fund's net asset value as long as
the commitment to sell remains in effect.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it has been entered into. The Fund
also may sell securities it has committed to purchase before those securities
are delivered to the Fund on the settlement date. The Fund may realize a capital
gain or loss in connection with these transactions.
When the Fund purchases securities on a when-issued basis, it will
deposit, in a segregated account with its custodian, until payment is made,
cash, fixed income, or equity securities having an aggregate market value
(determined daily to the extent required by SEC staff policy) at least equal to
the amount of the Fund's purchase commitments. In the case of a forward
commitment to sell portfolio securities, the custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that the Fund will maintain
sufficient assets at all times to cover its obligations under when-issued
purchases and forward commitments.
Short Sales Against-the-Box. The Fund may make short sales
against-the-box. To effect a short sale, the Fund will borrow a security from a
brokerage firm to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed at a later date. A short sale is "against-the-box"
when, at all times during which a short position is open, the Fund owns an equal
amount of such securities, or owns securities giving it the right, without
payment of future consideration, to obtain an equal amount of securities sold
short. Short sales against-the-box allow the Fund to hedge against price
fluctuations by locking in a sale price for securities it does not wish to sell
immediately.
Preferred Stock. The Fund may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors, although preferred
shareholders may have certain rights if dividends are not paid. Shareholders may
suffer a loss of value if dividends are not paid, and generally have no legal
recourse against the issuer. The market prices of preferred stocks are generally
more sensitive to changes in the issuer's creditworthiness than are the prices
of debt securities.
Fixed Income Securities. The Fund may invest in money market
instruments, U.S. Government or Agency securities, and corporate bonds and
debentures receiving one of the four highest ratings from Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities ("Comparable Unrated Securities"). In addition, the Fund may invest
up to 10% of its net assets, measured at the time of investment, in corporate
debt securities rated below investment grade or Comparable Unrated Securities,
but may not invest in securities rated below C by Moody's or S&P or Comparable
Unrated Securities. The ratings of an NRSRO represent its opinion as to the
quality of securities it undertakes to rate. Ratings are not absolute standards
of quality; consequently, securities with the same maturity, coupon, and rating
may have different yields. Although the Fund may rely on the ratings of any
NRSRO, the Fund mainly refers to ratings assigned by S&P and Moody's, which are
described in Appendix A to this Statement.
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations ("credit
risk") and also may be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity ("market risk"). Lower-rated securities are
more likely to react to developments affecting market and credit risk than are
more highly rated securities, which react primarily to movements in the general
level of interest rates.
Changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuer of such securities to make principal and interest payments than is the
case for higher-grade debt securities. An economic downturn affecting the issuer
may result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
Pricing of thinly traded securities requires greater judgment than pricing of
securities for which market transactions are regularly reported.
If the quality of any fixed income securities held by the Fund
deteriorates so that they are no longer rated at least C by Moody's or S&P, or,
if unrated, are determined by the Sub-advisor to no longer be of comparable
quality, the Fund will engage in an orderly disposition of the securities to the
extent necessary to ensure that the Fund's holding of such securities will not
exceed 5% of its net assets.
Convertible Securities. The Fund may invest in convertible securities
of any quality. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation's capital structure. The value
of a convertible security is a function of (1) its yield in comparison with the
yields of other securities of comparable maturity and quality that do not have a
conversion privilege, and (2) its worth, at market value, if converted into the
underlying common stock. Convertible debt securities are subject to the Fund's
investment policies and limitations concerning fixed-income investments.
Convertible securities are typically issued by smaller companies whose
stock prices may be volatile. The price of a convertible security often reflects
such variations in the price of the underlying common stock in a way that
nonconvertible debt does not. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the underlying common
stock, sell it to a third party or permit the issuer to redeem the security. Any
of these actions could have an adverse effect on the Fund's ability to achieve
its investment objective.
Zero Coupon Securities. The Fund may invest in zero coupon securities,
which are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or specify a future date when the
securities begin paying current interest. Rather, they are issued and traded at
a discount from their face amount or par value, which discount varies depending
on prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do other types of
debt securities having similar maturities and credit quality. For a discussion
of potential tax consequences of investing in zero coupon securities, see this
SAI under "Additional Tax Considerations."
Commercial Paper. Commercial paper is a short-term debt security issued
by a corporation, bank, municipality, or other issuer, usually for purposes such
as financing current operations. The Fund may invest only in commercial paper
receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by the
Sub-advisor to be of equivalent quality.
The Fund may invest in commercial paper that cannot be resold to the
public because it was issued under the exception for private offerings in
Section 4(2) of the Securities Act of 1933. While such securities normally will
be considered illiquid and subject to the Fund's 15% limitation on investments
in illiquid securities, the Sub-advisor may in certain cases determine that such
paper is liquid under guidelines established by the Board of Directors.
Banking and Savings Institution Securities. The Fund may invest in
banking and savings institution obligations, which include CDs, time deposits,
bankers' acceptances, and other short-term debt obligations issued by savings
institutions. CDs are receipts for funds deposited for a specified period of
time at a specified rate of return; time deposits generally are similar to CDs,
but are uncertificated; and bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
commercial transactions. The CDs, time deposits, and bankers' acceptances in
which the Fund invests typically are not covered by deposit insurance.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the ASAF Neuberger&Berman Mid-Cap
Growth Fund. These limitations are not fundamental restrictions and can be
changed without shareholder approval.
1. The Fund may not purchase securities if outstanding borrowings,
including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in
repurchase agreements, the Fund may not make any loans other than securities
loans.
3. The Fund may not purchase securities on margin from brokers, except
that the Fund may obtain such short-term credits as are necessary for the
clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin and shall not be deemed to
violate the foregoing limitation.
4. The Fund may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
without payment of additional consideration. Transactions in futures contracts
and options shall not constitute selling securities short.
5. The Fund may not purchase any security if, as a result, more than
15% of its net assets would be invested in illiquid securities. Illiquid
securities include securities that cannot be sold within seven days in the
ordinary course of business for approximately the amount at which the Fund has
valued the securities, such as repurchase agreements maturing in more than seven
days.
ASAF NEUBERGER&BERMAN MID-CAP VALUE FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Fund purchases
securities from a Federal Reserve member bank or a securities dealer deemed
creditworthy by the Sub-advisor under procedures established by the Board of
Directors of the Company. The bank or securities dealer agrees to repurchase the
securities from the Fund at a higher price on a designated future date.
Repurchase agreements generally are for a short period of time, usually less
than a week. Repurchase agreements with a maturity of more than seven business
days are considered to be illiquid securities; the Fund may not enter into such
a repurchase agreement if, as a result, more than 15% of the value of its net
assets would then be invested in such repurchase agreements and other illiquid
securities. The Fund will enter into a repurchase agreement only if (1) the
underlying securities are of the type (excluding maturity and duration
limitations) that the Fund's investment policies and limitations would allow it
to purchase directly, (2) the market value of the underlying securities,
including accrued interest, and any other collateral for the repurchase
agreement at all times equals or exceeds the repurchase price under the
agreement, and (3) payment for the underlying securities is made only upon
satisfactory evidence that the securities are being held for the Fund's account
by the custodian or a bank acting as the Fund's agent.
Securities Loans. In order to realize income, the Fund may lend
portfolio securities with a value not exceeding 33-1/3% of its total assets to
banks, brokerage firms, or institutional investors judged creditworthy by the
Sub-advisor. Borrowers are required continuously to secure their obligations to
return securities on loan from the Fund by depositing collateral, which will be
marked to market daily, in a form determined to be satisfactory by the Directors
and equal to at least 100% of the market value of the loaned securities, which
will also be marked to market daily. The Sub-advisor believes the risk of loss
on these transactions is slight because, if a borrower were to default for any
reason, the collateral should satisfy the obligation. However, as with other
extensions of secured credit, loans of portfolio securities involve some risk of
loss of rights in the collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Fund may invest in
restricted securities, which are securities that may not be sold to the public
without an effective registration statement under the 1933 Act. Before they are
registered, such securities may be sold only in a privately negotiated
transaction or pursuant to an exemption from registration. In recognition of the
increased size and liquidity of the institutional markets for unregistered
securities and the importance of institutional investors in the formation of
capital, the SEC has adopted Rule 144A under the 1933 Act, which is designed to
facilitate efficient trading among institutional investors by permitting the
sale of certain unregistered securities to qualified institutional buyers. To
the extent privately placed securities held by the Fund qualify under Rule 144A,
and an institutional market develops for those securities, the Fund likely will
be able to dispose of the securities without registering them under the 1933
Act. To the extent that institutional buyers become, for a time, uninterested in
purchasing these securities, investing in Rule 144A securities could have the
effect of reducing the Fund's liquidity. The Sub-advisor, acting under
guidelines established by the Board of Directors of the Company, may determine
that certain securities qualified for trading under Rule 144A are liquid.
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 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, excluding Rule
144A securities deemed liquid by the Sub-advisor, are considered illiquid, and
will be subject to the Fund's 15% limit on investments in illiquid securities.
Foreign securities that are freely tradable in their principal markets are not
considered by the Fund to be illiquid. Illiquid securities for which no market
exists are priced by a method that the Directors believe accurately reflects
fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Fund sells portfolio securities subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest; these agreements are considered borrowings for purposes of the Fund's
investment limitations and policies concerning borrowings. There is a risk that
the counterparty to a reverse repurchase agreement will be unable or unwilling
to complete the transaction as scheduled, which may result in losses to the
Fund.
Covered Call Options. The Fund may write covered call options on
securities it owns valued at up to 10% of its net assets and may purchase call
options in related closing transactions. Generally, the purpose of writing these
options is to reduce the effect of price fluctuations of securities held by the
Fund on the Fund's net asset value. Securities on which call options may be
written by the Fund are purchased solely on the basis of investment
considerations consistent with the Fund's investment objectives.
When the Fund writes a call option, it is obligated to sell a security
to a purchaser at a specified price at any time until a certain date if the
purchaser decides to exercise the option. The Fund receives a premium for
writing the call option. The Fund writes only "covered" call options on
securities it owns. So long as the obligation of the writer of the call option
continues, the writer may be assigned an exercise notice, requiring it to
deliver the underlying security against payment of the exercise price. The Fund
may be obligated to deliver securities underlying a call option at less than the
market price thereby giving up any additional gain on the security.
When the Fund purchases a call option, it pays a premium for the right
to purchase a security from the writer at a specified price until a specified
date. A call option would be purchased by the Fund to offset a previously
written call option.
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 call options, which the Fund will not do), but is
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 above the exercise price, but
conversely retains the risk of loss should the price of the security decline. If
a call option that the Fund has written expires unexercised, the Fund will
realize a gain in the amount of the premium; however, that gain may be offset by
a decline in the market value of the underlying security during the option
period. If the call or put option is exercised, the Fund will realize a gain or
loss from the sale or purchase of the underlying security.
The exercise price of an option may be below, equal to, or above the
market value of the underlying security at the time the option is written.
Options normally have expiration dates between three and nine months from the
date written. The obligation under any option terminates upon expiration of the
option or, at an earlier time, when the writer offsets the option by entering
into a "closing purchase transaction" to purchase an option of the same series.
Options are traded both on national securities exchanges and in the
over-the-counter ("OTC") market. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on which the option is
listed; the clearing organization in effect guarantees completion of, every
exchange-traded option. In contrast, OTC options are contracts between the Fund
and its counter-party with no clearing organization guarantee. Thus, when the
Fund sells or purchases an OTC 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 whom or from whom the Fund originally sold or
purchased the option. The Sub-advisor monitors the creditworthiness of dealers
with which the Fund may engage in OTC options, and will limit counterparties in
such transactions to dealers with a net worth of at least $20 million as
reported in their latest financial statements. For an additional discussion of
OTC options and their risks, see this Statement under "Certain Risk Factors and
Investment Methods."
The premium received (or paid) by the Fund when it writes (or
purchases) an option is the amount at which the option is currently traded on
the applicable exchange, less (or plus) a commission. The premium may reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to the market price, the historical price
volatility of the underlying security, the length of the option period, the
general supply of and demand for credit, and the general interest rate
environment. The premium received by the Fund for writing an option is recorded
as a liability on the Fund's statement of assets and liabilities. This liability
is adjusted daily to the option's current market value.
The Fund pays the brokerage commissions in connection with purchasing
or writing options, including those used to close out existing positions. These
brokerage commissions normally are higher than those applicable to purchases and
sales of portfolio securities.
From time to time, the Fund may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering the security from its portfolio. In those cases,
additional brokerage commissions are incurred.
For an additional discussion of options and their risks, see this
Statement and the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated
equity and debt securities issued by foreign issuers (including governments and
quasi-governments) and foreign branches of U.S. banks, including negotiable CDs
and commercial paper. These investments are subject to the Fund's quality
standards. While investments in foreign securities are intended to reduce risk
by providing further diversification, such investments involve sovereign and
other risks, in addition to the credit and market risks normally associated with
domestic securities.
The Fund may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) CDs, commercial paper, fixed-time deposits, and bankers' acceptances issued
by foreign banks, (4) obligations of other corporations, and (5) obligations of
foreign governments, or their subdivisions, agencies, and instrumentalities,
international agencies, and supranational entities. Risks of investing in
foreign currency denominated securities include (1) nationalization,
expropriation, or confiscatory taxation, (2) adverse changes in investment or
exchange control regulations (which could prevent cash from being brought back
to the U.S.), and (3) expropriation or nationalization of foreign portfolio
companies. Mail service between the U.S. and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. For an additional discussion of the risks associated with foreign
securities, whether denominated in U.S. dollars or foreign currencies, see this
Statement and the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Prices of foreign securities and exchange rates for foreign currencies
may be affected by the interest rates prevailing in other countries. The
interest rates in other countries are often affected by local factors, including
the strength of the local economy, the demand for borrowing, the government's
fiscal and monetary policies, and the international balance of payments.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Fund is uninvested and
no return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio securities, or, if the Fund has entered into
a contract to sell the securities, could result in possible liability to the
purchaser.
The Fund may invest in foreign corporate bonds and debentures and
sovereign debt instruments issued or guaranteed by foreign governments, their
agencies or instrumentalities. The Fund may invest in lower-rated foreign debt
securities subject to the Fund's 15% limitation on lower-rated debt securities.
Foreign debt securities are subject to risks similar to those of other foreign
securities, as well as risks similar to those of other debt securities, as
discussed in this Statement and in the Company's Prospectus under "Investment
Programs of the Funds" and "Certain Risk Factors and Investment Methods."
In order to limit the risk inherent in investing in foreign
currency-denominated securities, the Fund may not purchase any such security if
after such purchase more than 10% of its total assets (taken at market value)
would be invested in such securities. Within such limitation, however, the Fund
is not restricted in the amount it may invest in securities denominated in any
one foreign currency.
Foreign Currency Transactions. The Fund may engage in foreign currency
exchange transactions. Foreign currency exchange transactions will be conducted
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 ("forward contracts"). The Fund may enter into
forward contracts in order to protect against uncertainty in the level of future
foreign currency exchange rates, and only in amounts not exceeding 5% of the
Fund's net assets.
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
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between 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.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread) between the price at which
they are buying and selling various currencies.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may wish 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 security transactions, the Fund will be able
to protect itself against a possible loss. When the Sub-advisor believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may also enter into a forward contract to sell the
amount of foreign currency for a fixed amount of dollars which approximates the
value of some or all of a Fund's securities denominated in such foreign
currency. The Fund may also engage in cross-hedging by using forward contracts
in one currency to hedge against fluctuations in the value of securities
denominated in a different currency, when the Sub-advisor believes that there is
a pattern of correlation between the two currencies.
When the Fund engages in forward contracts for hedging purposes, it
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if their consummation 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. At the consummation of
the forward contract, the Fund may either make delivery of the foreign currency
or terminate its contractual obligation to deliver by purchasing an offsetting
contract obligating it to purchase the same amount of such foreign currency at
the same maturity date. 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
assets into such currency. If the Fund engages in an offsetting transaction, it
will incur a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually made with the currency trader who is a party to the
original forward contract.
The Fund is not required to enter into such transactions and will not
do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Fund's portfolio
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. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of the Fund's foreign assets.
While the Fund may enter forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause the Fund to sustain losses which will prevent it
from achieving a complete hedge or expose it to risk of foreign exchange loss.
The Fund generally will not enter into a forward contract with a term
of greater than one year. The Fund may experience delays in the settlement of
its foreign currency transactions.
When the Fund engages in forward contracts for the sale or purchase of
currencies, the Fund will either cover its position or establish a segregated
account. [The Fund will consider its position covered if it has securities in
the currency subject to the forward contract, or otherwise has the right to
obtain that currency at no additional cost. In the alternative, the Fund will
place cash, fixed income, or equity securities (denominated in the foreign
currency subject to the forward contract) in a separate account.] The amounts in
such separate account will equal the value of the Fund's assets which are
committed to the consummation of foreign currency exchange contracts. If the
value of the securities placed in the separate account declines, the Fund will
place additional cash or securities in the account on a daily basis so that the
value of the account will equal the amount of its commitments with respect to
such contracts.
For an additional discussion of forward foreign currency exchange
contracts and their risks, see this Statement and the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Options on Foreign Currencies. The Fund may write and purchase covered
call and put options on foreign currencies in amounts not exceeding 5% of its
net assets for the purpose of protecting against declines in the U.S. dollar
value of portfolio securities or increases in the U.S. dollar cost of securities
to be acquired, or to protect the dollar equivalent of dividend, interest, or
other payment on those securities. A decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such decreases in the value of portfolio
securities, the Fund may purchase put options on the foreign currency. If the
value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount of dollars which exceeds the market value of such
currency. This would result in a gain that may offset, in whole or in part, the
negative effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be
acquired by the Fund are denominated rises, thereby increasing the cost of such
securities, the Fund may purchase call options on such currency. If the value of
such currency increases sufficiently, the Fund will have the right to purchase
that currency for a fixed amount of dollars which is less than the market value
of that currency. Such a purchase would result in a gain that may offset, at
least partially, the effect of any currency-related increase in the price of
securities the Fund intends to acquire.
As in the case of other types of options transactions, however, the
benefit the Fund derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The Fund may also write options on foreign currencies for hedging
purposes. For example, if the Sub-advisor anticipates a decline in the dollar
value of foreign currency denominated securities because of declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the decrease in value of portfolio securities will be
offset, at least in part, by the amount of the premium received by the Fund.
Similarly, the Fund could write a put option on the relevant currency,
instead of purchasing a call option, to hedge against an anticipated increase in
the dollar cost of securities to be acquired. If exchange rates move in the
manner projected, the put option most likely will not be exercised, and such
increased cost will be offset, at least in part, by the amount of the premium
received. However, as in the case of other types of options transactions, the
writing of a foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected direction.
If unanticipated exchange rate fluctuations occur, a put or call option
may be exercised and the Fund could be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in currency exchange rates. Certain
options on foreign currencies are traded on the OTC market and involve liquidity
and credit risks that may not be present in the case of exchange-traded currency
options.
A call option written on foreign currency by the Fund is "covered" if
the Fund owns the underlying foreign currency subject to the call, or if it has
an absolute and immediate right to acquire that foreign currency without
additional cash consideration. A call option is also covered if the Fund holds a
call on the same foreign currency for the same principal amount as the call
written where the exercise price of the call held is (a) equal to or less than
the exercise price of the call written or (b) greater than the exercise price of
the call written if the amount of the difference is maintained by the Fund in
cash, fixed income or equity securities in a segregated account with its
custodian.
The risks of currency options are similar to the risks of other
options, as discussed above and in this Statement under "Certain Risk Factors
and Investment Methods."
Cover for Options on Securities, Forward Contracts, and Options on
Foreign Currencies ("Hedging Instruments"). The Fund will comply with SEC staff
guidelines regarding "cover" for Hedging Instruments and, if the guidelines so
require, set aside in a segregated account with its custodian the prescribed
amount of cash, fixed income, or equity securities. Securities held in a
segregated account cannot be sold while the futures, option, or forward strategy
covered by those securities is outstanding, unless they are replaced with other
suitable assets. As a result, segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet current
obligations. The Fund may be unable promptly to dispose of assets that cover, or
are segregated with respect to, an illiquid options or forward position; this
inability may result in a loss to the Fund.
When-Issued Securities. The Fund may purchase securities on a
when-issued basis, that is, by committing to purchase securities and completing
the purchase by making payment against delivery of the securities at a future
date. The price of the underlying securities (usually expressed in terms of
yield) and the date when the securities will be delivered and paid for (the
settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases are negotiated directly with the other party, and are not
traded on exchanges. When-issued purchases enable the Fund to "lock in" what the
Sub-advisor believes to be an attractive price or yield on a particular security
for a period of time, regardless of future changes in interest rates. For
instance, in periods of falling interest rates and rising prices, the Fund might
purchase a security on a when-issued basis and sell a similar security to settle
such purchase, thereby obtaining the benefit of currently higher yields.
The value of securities purchased on a when-issued basis and any
subsequent fluctuations in their value are reflected in the computation of a
Fund's net asset value starting on the date of the agreement to purchase the
securities. Because the Fund has not yet paid for the securities, this produces
an effect similar to leverage. The Fund does not earn interest on the securities
it has committed to purchase until they are paid for and delivered on the
settlement date.
The Fund will purchase securities on a when-issued basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it has been entered into. The Fund
also may sell securities it has committed to purchase before those securities
are delivered to the Fund on the settlement date. The Fund may realize a gain or
loss in connection with these transactions.
When the Fund purchases securities on a when-issued basis, it will
deposit, in a segregated account with its custodian, until payment is made,
cash, fixed income, or equity securities having an aggregate market value
(determined daily to the extent required by SEC staff policy) at least equal to
the amount of the Fund's purchase commitments. These procedures are designed to
ensure that a Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases.
Preferred Stock. The Fund may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors, although preferred
shareholders may have certain rights if dividends are not paid. Shareholders may
suffer a loss of value if dividends are not paid, and generally have no legal
recourse against the issuer. The market prices of preferred stocks are generally
more sensitive to changes in the issuer's creditworthiness than are the prices
of debt securities.
Fixed Income Securities. The Fund may invest in money market
instruments, U.S. Government or Agency securities, and corporate bonds and
debentures receiving one of the four highest ratings from Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities ("Comparable Unrated Securities"). In addition, the Fund may invest
up to 15% of its net assets, measured at the time of investment, in corporate
debt securities rated below investment grade or Comparable Unrated Securities.
The ratings of an NRSRO represent its opinion as to the quality of securities it
undertakes to rate. Ratings are not absolute standards of quality; consequently,
securities with the same maturity, coupon, and rating may have different yields.
Although the Fund may rely on the ratings of any NRSRO, the Fund mainly refers
to ratings assigned by S&P and Moody's, which are described in Appendix A to
this Statement.
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations ("credit
risk") and also may be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity ("market risk"). Lower-rated securities are
more likely to react to developments affecting market and credit risk than are
more highly rated securities, which react primarily to movements in the general
level of interest rates.
Changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuer of such securities to make principal and interest payments than is the
case for higher-grade debt securities. An economic downturn affecting the issuer
may result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
Pricing of thinly traded securities requires greater judgment than pricing of
securities for which market transactions are regularly reported.
Convertible Securities. The Fund may invest in convertible securities.
A convertible security entitles the holder to receive interest paid or accrued
on debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities ordinarily provide a stream of income with generally higher yields
than those of common stocks of the same or similar issuers, but lower than the
yield on non-convertible debt. Convertible securities are usually subordinated
to comparable-tier nonconvertible securities but rank senior to common stock in
a corporation's capital structure. The value of a convertible security is a
function of (1) its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege, and (2)
its worth, at market value, if converted into the underlying common stock.
Convertible debt securities are subject to the Fund's investment policies and
limitations concerning fixed-income investments.
Convertible securities are typically issued by smaller companies whose
stock prices may be volatile. The price of a convertible security often reflects
such variations in the price of the underlying common stock in a way that
nonconvertible debt does not. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the underlying common
stock, sell it to a third party or permit the issuer to redeem the security. Any
of these actions could have an adverse effect on the Fund's ability to achieve
its investment objective.
Commercial Paper. Commercial paper is a short-term debt security issued
by a corporation, bank, municipality, or other issuer, usually for purposes such
as financing current operations. The Fund may invest only in commercial paper
receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by the
Sub-advisor to be of equivalent quality.
The Fund may invest in commercial paper that cannot be resold to the
public because it was issued under the exception for private offerings in
Section 4(2) of the Securities Act of 1933. While such securities normally will
be considered illiquid and subject to the Fund's 15% limitation on investments
in illiquid securities, the Sub-advisor may in certain cases determine that such
paper is liquid under guidelines established by the Board of Directors.
Zero Coupon Securities. The Fund may invest up to 5% of its net assets
in zero coupon securities, which are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or specify a future
date when the securities begin paying current interest. Rather, they are issued
and traded at a discount from their face amount or par value, which discount
varies depending on prevailing interest rates, the time remaining until cash
payments begin, the liquidity of the security, and the perceived credit quality
of the issuer.
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do other types of
debt securities having similar maturities and credit quality. For a discussion
of potential tax consequences of investing in zero coupon securities, see this
SAI under "Additional Tax Considerations."
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the ASAF Neuberger&Berman Mid-Cap
Value Fund. These limitations are not fundamental restrictions, and can be
changed without shareholder approval.
1. The Fund may not purchase securities if outstanding borrowings,
including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in
repurchase agreements, the Fund may not make any loans other than securities
loans.
3. The Fund may not purchase securities on margin from brokers, except
that the Fund may obtain such short-term credits as are necessary for the
clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin and shall not be deemed to
violate the foregoing limitation.
4. The Fund may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
without payment of additional consideration. Transactions in futures contracts
and options shall not constitute selling securities short.
5. The Fund may not purchase any security if, as a result, more than
15% of its net assets would be invested in illiquid securities. Illiquid
securities include securities that cannot be sold within seven days in the
ordinary course of business for approximately the amount at which the Fund has
valued the securities, such as repurchase agreements maturing in more than seven
days.
6. The Fund may not invest in puts, calls, straddles, spreads, or any
combination thereof, except that the Fund may (i) write (sell) covered call
options against portfolio securities having a market value not exceeding 10% of
its net assets and (ii) purchase call options in related closing transactions.
The Fund does not construe the foregoing limitation to preclude it from
purchasing or writing options on futures contracts.
7. The Fund may not invest more than 10% of the value of its total
assets in securities of foreign issuers, provided that this limitation shall not
apply to foreign securities denominated in U.S. dollars.
ASAF ROBERTSON STEPHENS VALUE + GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital appreciation.
Investment Policies:
Options. The Fund may purchase and sell put and call options on its
securities to enhance performance and to protect against changes in market
prices. There is no assurance that the Fund's use of put and call options will
achieve its desired objective, and the Fund's use of options may result in
losses to the Fund.
Writing Covered Call Options. The Fund may write covered call
options on its securities to realize a greater current return through the
receipt of premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a decline in
the price of securities owned by the Fund.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, the Fund gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Fund retains the risk of loss should the price of
such securities decline. If the option expires unexercised, the Fund realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Fund realizes a gain or
loss equal to the difference between the Fund's cost for the underlying security
and the proceeds of sale (exercise price minus commissions) plus the amount of
the premium.
The Fund may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Fund may enter into
closing purchase transactions in order to free itself to sell the underlying
security or to write another call on the security, realize a profit on a
previously written call option, or protect a security from being called in an
unexpected market rise. Any profits from a closing purchase transaction may be
offset by a decline in the value of the underlying security. Conversely, 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 a
closing purchase transaction is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Fund.
Writing Covered Put Options. The Fund may write covered put
options in order to enhance its current return. Such options transactions may
also be used as a limited form of hedging against an increase in the price of
securities that the Fund plans to purchase. A put option gives the holder the
right to sell, and obligates the writer to buy, a security at the exercise price
at any time before the expiration date. A put option is "covered" if the writer
segregates cash or other liquid assets equal to the price to be paid if the
option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Fund also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the 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 unless the security later appreciates in value.
The Fund may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing Put and Call Options. The Fund may also purchase
put options to protect portfolio holdings against a decline in market value.
This protection lasts for the life of the put option because the Fund, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Fund must pay. These costs will reduce any profit the Fund might have
realized had it sold the underlying security instead of buying the put option.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.
The Fund may also purchase put and call options to attempt to enhance
its current return.
Options on Foreign Securities. The Fund may purchase and sell
options on foreign securities if the Sub-advisor believes that the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Fund's investment objectives. It is expected
that risks related to such options will not differ materially from risks related
to options on U.S. securities. However, position limits and other rules of
foreign exchanges may differ from those in the U.S. In addition, options markets
in some countries, many of which are relatively new, may be less liquid than
comparable markets in the U.S.
For an additional discussion of options transactions and the risks
involved therein, see this SAI and the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Special Expiration Price Options. The Fund may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Fund in effect may
create a custom index relating to a particular industry or sector that the
Sub-advisor believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed by a
broker-dealer, agrees to purchase (or sell) a specified number of shares of a
particular stock at a specified price and further agrees to cancel the option at
a specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value of
the underlying security increases (or decreases) by a prenegotiated amount, the
special expiration price option is canceled and becomes worthless. A portion of
the dividends during the term of the option are applied to reduce the exercise
price if the options are exercised. Brokerage commissions and other transaction
costs will reduce the Fund's profits if the special expiration price options are
exercised. The Fund will not purchase special expiration price options with
respect to more than 25% of the value of its net assets.
LEAPs and BOUNDs. The Fund may purchase certain long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount. The
Fund will not purchase these options with respect to more than 25% of the value
of its net assets.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
BOUNDs are long-term options which are expected to have the same
economic characteristics as covered call options, with the added benefits that
BOUNDs can be traded in a single transaction and are not subject to early
exercise. Covered call writing is a strategy by which an investor sells a call
option while simultaneously owning the number of shares of the stock underlying
the call. BOUND holders are able to participate in a stock's price appreciation
up to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at expiration
the underlying stock closes above the strike price, the BOUND holder will
receive a payment equal to a multiple of the BOUND's strike price for each BOUND
held. The terms of a BOUND are not adjusted because of cash distributions to the
shareholders of the underlying security. BOUNDs are subject to the position
limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that
of the corresponding LEAPs. For example, if at expiration the underlying stock
closes at or below the strike price, the LEAP will expire worthless, and the
holder of a corresponding BOUND will receive a specified number of shares of
stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a specified
number of shares of the underlying stock from the LEAP writer upon payment of
the strike price, and the holder of a BOUND on such stock is entitled to the
cash equivalent of a multiple of the strike price from the writer of the BOUND.
An investor holding both a LEAP and a corresponding BOUND, where the underlying
stock closes above the strike price at expiration, would be entitled to receive
a multiple of the strike price from the writer of the BOUND and, upon exercise
of the LEAP, would be obligated to pay the same amount to receive shares of the
underlying stock. LEAPs are American-style options (exercisable at any time
prior to expiration), whereas BOUNDs are European-style options (exercisable
only on the expiration date).
Futures Contracts.
Index Futures Contracts and Options. The Fund may buy and sell
futures contracts and related options for hedging purposes or to attempt to
increase investment return. The Fund currently expects that it will only
purchase and sell stock index futures contracts and related options. A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index. The Fund may purchase or sell futures
contracts with respect to any securities indices.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Fund will gain
$400 (100 units x gain of $4). If the Fund enters into a futures contract to
sell 100 units of the stock index at a specified future date at a contract price
of $180 and the S&P 100 Index is at $182 on that future date, the Fund will lose
$200 (100 units x loss of $2).
In order to hedge its investments successfully using futures contracts
and related options, the Fund must invest in futures contracts with respect to
indices or sub-indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Fund's securities.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures 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.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, the Fund may purchase and sell call and put options on
the underlying indices themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount." This
amount is equal to the amount by which the fixed exercise price of the option
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 date of the exercise, multiplied by
a fixed "index multiplier."
The Fund may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Fund may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options plus transaction
costs. The writing of a put or call option on an index involves risks similar to
those risks relating to the purchase or sale of index futures contracts.
Margin Payments. When the Fund purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin."
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Fund upon termination of the contract,
assuming the Fund satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Fund sells a futures contract and the price of the
underlying index rises above the delivery price, the Fund's position declines in
value. The Fund then pays the broker a variation margin payment equal to the
difference between the delivery price of the futures contract and the value of
the index underlying the futures contract. Conversely, if the price of the
underlying index falls below the delivery price of the contract, the Fund's
futures position increases in value. The broker then must make a variation
margin payment equal to the difference between the delivery price of the futures
contract and the value of the index underlying the futures contract.
When the Fund terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a loss or a gain. Such closing transactions involve
additional commission costs.
For an additional discussion of futures contracts and related options
and the risks involved therein, see the Company's Prospectus and this SAI under
"Certain Risk Factors and Investment Methods."
Indexed Securities. The Fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies. Repurchase Agreements. The Fund may enter into repurchase
agreements. A repurchase agreement is a contract under which the Fund acquires a
security for a relatively short period (usually not more than one week) subject
to the obligation of the seller to repurchase and the Fund to resell such
security at a fixed time and price (representing the Fund's cost plus interest).
Under guidelines established by the Board of Directors of the Company, the Fund
may enter into repurchase agreements only with banks and securities dealers
meeting certain criteria as to credit-worthiness and financial condition. It is
the Sub-advisor's present intention that the Fund enter into repurchase
agreements only with respect to obligations of the U.S. government or its
agencies or instrumentalities or other high-quality, short-term debt
obligations. Repurchase agreements may be viewed as loans made by the Fund which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For a discussion of repurchase
agreements and the risks involved therein, see the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Securities Lending. The Fund may lend its securities, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) the Fund
may at any time call the loan and regain the securities loaned; (3) the Fund
will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Directors of the Company may establish) of
the total assets of the Fund. In addition, it is anticipated that the Fund may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan.
Before the Fund enters into a loan, the Sub-advisor considers all
relevant facts and circumstances, including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund will not lend portfolio
securities to borrowers affiliated with the Fund.
Short Sales. The Fund may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker (or by
the Fund's custodian in a special custody account), to the extent necessary to
meet margin requirements, until the short position is closed out. The Fund also
will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale.
Foreign Investments. The Fund may invest in foreign securities,
securities denominated in or indexed to foreign currencies, and certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks. For a discussion of the risks involved in foreign
currency fluctuations and investing in foreign securities in general, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The considerations associated with foreign investments generally are
intensified for investments in developing countries. For a discussion of the
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Foreign Currency Transactions. The Fund may engage in currency exchange
transactions to protect against uncertainty in the level of future foreign
currency exchange rates and to increase current return. The Fund may engage in
both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables of the
Fund generally arising in connection with the purchase or sale of its portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging, the Fund will attempt to protect against a
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 or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (i.e., cash)
basis at the prevailing spot rate in connection with transaction hedging. The
Fund may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes, the Fund may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Fund the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Fund the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option. The Fund will
engage in over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Sub-advisor, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.
When it engages in position hedging, the Fund enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Fund are denominated or are
quoted in their principle trading markets or an increase in the value of
currency for securities which the Fund expects to purchase. In connection with
position hedging, the Fund may purchase put or call options on foreign currency
and foreign currency futures contracts and buy or sell forward contracts and
foreign currency futures contracts. The Fund may also purchase or sell foreign
currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio 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 values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Fund's securities at the expiration or maturity of a forward or futures
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 or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security or securities 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 or securities
of the Fund if the market value of such security or securities exceeds the
amount of foreign currency the Fund is obligated to deliver.
To offset some of the costs to the Fund of hedging against fluctuations
in currency exchange rates, the Fund may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
The Fund may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, by purchasing and selling options on
foreign currencies and on foreign currency futures contracts, and by purchasing
and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. 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 as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are 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. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Fund will normally purchase or
sell foreign currency futures contracts and related options only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or option or at any particular time. In such event,
it may not be possible to close a futures or related option position and, in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin on its futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Sub-advisor believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell 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.
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Fund may
invest in zero-coupon securities. Zero-coupon securities are debt obligations
which are generally issued at a discount from their value at maturity and are
payable in full at maturity, and which do not provide for current payments of
interest prior to maturity. Zero-coupon securities allow an issuer to avoid the
need to generate cash to meet current interest payments. For a discussion of
zero-coupon debt securities and the risks involved therein, see this SAI under
"Certain Risk Factors and Investment Methods."
Even though zero-coupon securities do not pay current interest in cash,
the Fund is nonetheless required to accrue interest income on them and to
distribute the amount of that interest at least annually to shareholders. Thus,
the Fund could be required at times to liquidate other investments in order to
satisfy its distribution requirement.
The Fund also may purchase pay-in-kind securities. Pay-in-kind
securities pay all or a portion of their interest or dividends in the form of
additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b), and (c) above;
2. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions;
3. Invest in securities of other investment companies, except in
compliance with the 1940 Act;
4. Invest in real estate limited partnerships;
5. Acquire more than 10% of the voting securities of any issuer;
6. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities which
are secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Fund in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.);
7. Make investments for the purpose of exercising control or
management;
8. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs.
In addition, the Fund will only sell short securities that are traded
on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
ASAF MARSICO CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek capital
growth. Realization of income is not an investment objective 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 and forward contracts. 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. 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 on 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 by the
Sub-advisor, 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 Statement 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 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 Statement under "Certain Risk Factors
and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Board of Directors of the Company, the Fund may
enter into repurchase agreements. The Fund may also enter into reverse
repurchase agreements. For a description of these investment techniques, see the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
High-Yield/High-Risk Securities. High-yield/high-risk securities (or
"junk" bonds) are debt securities rated below investment grade by the primary
rating agencies such as Standard & Poor's Rating Services ("Standard & Poor's")
and Moody's Investors Service, Inc. ("Moody's"). The Fund will not invest more
than 5% of its total assets in these securities.
The value of lower quality securities generally is more dependent on
the ability of the issuer to meet interest and principal payments (i.e. credit
risk) than is the case for higher quality securities. Conversely, the value of
higher quality securities may be more sensitive to interest rate movements than
lower quality securities. The Fund will not purchase debt securities rated below
"CCC-" by Standard & Poor's or "Caa" by Moody's. The Fund may also purchase
unrated bonds of foreign and domestic issuers. For an additional discussion of
high-yield/high-risk securities, see this Statement 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 applicable to the ASAF Marsico Capital Growth
Fund. These limitations are not "fundamental" restrictions, and may be changed
by the Directors without shareholder approval.
1. The Fund does not currently intend to sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short without the payment of any additional consideration
therefor, and provided that transactions in futures, options, swaps and forward
contracts are not deemed to constitute selling securities short.
2. The Fund does not currently intend to purchase securities on margin,
except that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other deposits
in connection with transactions in futures, options, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.
3. The Fund may not 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 (i) reverse repurchase
agreements; [(ii) deposits of assets on margin;] (iii) guaranteed positions in
futures, options, swaps or forward contracts; or (iv) the segregation of assets
in connection with such contracts.
4. The Fund does not currently intend to purchase any securities or
enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. The Directors of the Company, or the Sub-advisor
acting pursuant to authority delegated by the Directors, may determine that a
readily available market exists for securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended, or any successor to such
rule, and Section 4(2) commercial paper. Accordingly, such securities may not be
subject to the foregoing limitation.
5. The Fund may not invest in companies for the purpose of exercising control or
management.
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek growth of
capital. Realization of income is not a significant investment consideration and
any income realized on the Fund's investments, therefore, will be incidental to
the Fund's objective.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Fund may enter
into futures contracts on securities, financial indices, and foreign currencies
and options on such contracts, and may invest in options on securities,
financial indices and foreign currencies, forward contracts and swaps. The Fund
will not enter into any futures contracts or options on futures contracts if the
aggregate amount of the Fund's commitments under outstanding futures contract
positions and options on futures contracts written by the Fund would exceed the
market value of the total assets of the Fund (i.e., no leveraging). The Fund may
invest in forward currency contracts with stated values of up to the value of
the Fund's assets.
The Fund may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Fund is permitted to invest directly. The Fund will effect such transactions
only with investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed creditworthy by the
Sub-advisor, and only pursuant to procedures adopted by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Fund in a negotiated transaction is illiquid, the value
of an option bought or the amount of the Fund's obligations under an option
written by the Fund, as the case may be, will be subject to the Fund's
limitation on illiquid investments. In the case of illiquid options, it may not
be possible for the Fund to effect an offsetting transaction at a time when the
Sub-advisor believes it would be advantageous for the Fund to do so. For a
description of these strategies and instruments and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Fund, in order to attempt
to protect the value of its investments from interest rate or currency exchange
rate fluctuations, may enter into interest rate swaps and may buy or sell
interest rate caps and floors. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its investments. The Fund also may enter into these transactions to protect
against any increase in the price of securities the Fund may consider buying at
a later date. The Fund does not intend to use these transactions as a
speculative investments. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. The
exchange commitments can involve payments to be made in the same currency or in
different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or its liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. If the Fund enters into an interest
rate swap on other than a net basis, the Fund would maintain a segregated
account in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. The Fund will not enter into any interest rate swap,
cap or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest rating
categories of at least one nationally recognized statistical rating organization
at the time of entering into such transaction. The Sub-advisor will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or other liquid assets having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the Fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Fund would risk the loss of the net
amount of the payments that the Fund contractually is entitled to receive. The
Fund may buy and sell (i.e., write) caps and floors without limitation, subject
to the segregated account requirement described above. For an additional
discussion of these strategies, see this SAI under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Directors of the Company, the Fund may enter into
repurchase agreements. The Fund may also enter into reverse repurchase
agreements. For a description of these investment techniques, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are not "fundamental" investment restrictions and may
be changed by the Directors of the Company without shareholder approval.
The Fund will not:
1. Purchase a security if as a result, more than 15% of its net assets
in the aggregate, at market value, would be invested in securities which cannot
be readily resold because of legal or contractual restrictions on resale or for
which there is no readily available market, or repurchase agreements maturing in
more than seven days or securities used as a cover for written over-the-counter
options, if any. The Directors of the Company, the Investment Manager or the
Sub-advisor acting pursuant to authority delegated by the Directors, may
determine that a readily available market exists for securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, or any successor
to such rule, and therefore that such securities are not subject to the
foregoing limitation;
2. Enter into any futures contracts or options on futures contracts for
purposes other than bona fide hedging transactions (as defined by the CFTC) if
as a result the sum of the initial margin deposits and premium required to
establish positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions would exceed 5% of the
fair market value of the Fund's net assets;
3. Enter into any futures contracts if the aggregate amount of the
Fund's commitments under outstanding futures contracts positions of the Fund
would exceed the market value of the total assets of the Fund;
4. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short;
5. Mortgage or pledge any securities owned or held by the Fund in
amounts that exceed, in the aggregate, 15% of the Fund's net asset value,
provided that this limitation does not apply to reverse repurchase agreements or
in the case of assets deposited to margin or guarantee positions in futures,
options, swaps or forward contracts or placed in a segregated account in
connection with such contracts;
6. Invest in companies for the purpose of exercising management or control;
7. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940; or
8. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Fund may make margin deposits in connection with futures contracts or other
permissible investments.
ASAF LORD ABBETT GROWTH AND INCOME FUND:
Investment Objective: The investment objective of the Fund is long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value.
Investment Policies:
Covered Call Options. The Fund may write covered call options which are
traded on a national securities exchange with respect to its securities in an
attempt to increase income and to provide greater flexibility in the disposition
of securities. A "call option" is a contract sold for a price (the "premium")
giving its holder the right to buy a specific number of shares of stock at a
specific price prior to a specified date. A "covered call option" is a call
option issued on securities already owned by the writer of the call option for
delivery to the holder upon the exercise of the option. During the period of the
option, the Fund forgoes the opportunity to profit from any increase in the
market price of the underlying security above the exercise price of the option
(to the extent that the increase exceeds the net premium). The Fund may also
enter into "closing purchase transactions" in order to terminate its obligation
to deliver the underlying security (this may result in a short-term gain or
loss). A closing purchase transaction is the purchase of a call option (at a
cost which may be more or less than the premium received for writing the
original call option) on the same security with the same exercise price and call
period as the option previously written. If the Fund is unable to enter into a
closing purchase transaction, it may be required to hold a security that it
might otherwise have sold to protect against depreciation. The Sub-advisor does
not intend to have the Fund write covered call options with respect to
securities with an aggregate market value of more than 10% of the Fund's gross
assets at the time an option is written. For an additional discussion of call
options, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. The Fund may engage in the lending of its
securities. It is expected that no more that 5% of the Fund's gross assets will
be committed to securities lending. For a discussion of the Fund's limitations
on lending, see this SAI under "Fundamental Investment Restrictions."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may invest in illiquid securities. Investments in
illiquid securities are limited to a maximum of 15% of Fund net assets. Illiquid
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A of the Securities Act of 1933 which
have been determined to be liquid by the Sub-advisor under the supervision of
the Directors of the Company. Examples of factors which the Sub-advisor may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security, and the nature of the security
and the nature of the marketplace (e.g., the time period needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
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."
ASAF INVESCO EQUITY INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income while following sound investment practices.
Investment Policies:
The Fund will pursue its objective by investing its assets in
securities which will provide a relatively high-yield and stable return and
which, over a period of years, may also provide capital appreciation. Capital
growth potential is an additional consideration in the selection of portfolio
securities. The Fund invests in common stocks, as well as convertible bonds and
preferred stocks.
In pursuing its investment objective, the Fund normally invests at
least 65% of its total assets in dividend paying common stocks. Up to 10% of the
Fund's assets may be invested in equity securities that do not pay regular
dividends. The remaining assets are invested in other income producing
securities, such as corporate bonds. Sometimes warrants are acquired when
offered with income-producing securities, but the warrants are disposed of at
the first favorable opportunity. Acquiring warrants involves a risk that the
Fund will lose the premium it pays to acquire warrants if the Fund does not
exercise a warrant before it expires. The major portion of the investment
portfolio normally consists of common stocks, convertible bonds and debentures,
and preferred stocks; however, there may also be substantial holdings of debt
securities, including non-investment grade and unrated debt securities.
Debt Securities. The debt securities in which the Fund invests are
generally subject to two kinds of risk, credit risk and market risk. The ratings
given a debt security by Moody's and Standard & Poor's ("S&P") provide a
generally useful guide as to such credit risk. The lower the rating given a debt
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower grade (Ba or less by Moody's, BB or less by
S&P) debt securities, while intended to increase the yield produced by the
Fund's debt securities, will also increase the credit risk to which those debt
securities are subject.
Lower-rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Fund may invest in debt securities assigned lower grade ratings by
S&P or Moody's, the Fund's investments have generally been limited to debt
securities rated B or higher by either S&P or Moody's. Debt securities rated
lower than B by either S&P or Moody's may be highly speculative. The Sub-advisor
intends to limit such portfolio investments to debt securities which are not
believed by the Sub-advisor to be highly speculative and which are rated at
least CCC or Caa, respectively, by S&P or Moody's. In addition, a significant
economic downturn or major increase in interest rates may well result in issuers
of lower-rated debt securities experiencing increased financial stress which
would adversely affect their ability to service their principal and interest
obligations, to meet projected business goals, and to obtain additional
financing. While the Sub-advisor attempts to limit purchases of lower-rated debt
securities to securities having an established retail secondary market, the
market for such securities may not be as liquid as the market for higher rated
debt securities. For an additional discussion of certain risks involved in
lower-rated or unrated securities, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. As discussed in the Company's Prospectus, the
Fund may enter into repurchase agreements with respect to debt instruments
eligible for investment by the Fund, with member banks of the Federal Reserve
System, registered broker-dealers, and registered government securities dealers.
A repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the period
the instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement, and are held by the Fund's
Custodian Bank until repurchased. For an additional discussion of repurchase
agreements and certain risks involved therein, see this SAI under "Certain Risk
Factors and Investment Methods."
The Directors of the Company have promulgated guidelines with respect
to repurchase agreements.
Lending Portfolio Securities. The Fund may lend its securities to
qualified brokers, dealers, banks, or other financial institutions. While voting
rights may pass with the loaned securities, if a material event (e.g., proposed
merger, sale of assets, or liquidation) is to occur affecting an investment on
loan, the loan must be called and the securities voted. Loans of securities made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange and the requirements of the
Investment Company Act of 1940 and the Rules of the Securities and Exchange
Commission thereunder.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest in companies for the purpose of exercising
management or control;
2. Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act of 1940;
3. Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of
portfolio securities and (ii) the Fund may make margin
deposits in connection with futures contracts or other
permissible investments;
4. Effect short sales of securities; or
5. Purchase any security or enter into a repurchase
agreement, if as a result, more than 15% of its net assets
would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven
days and in securities that are illiquid by virtue of legal
or contractual restrictions on resale or the absence of a
readily available market. The Directors of the Company, or
the Investment Manager or the Sub-advisor acting pursuant to
authority delegated by the Directors, may determine that a
readily available market exists for securities eligible for
resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to that rule, and therefore that such
securities are not subject to the foregoing limitation.
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth and current income.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor
has broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the policy of the Sub-advisor to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held subject to the investment
restrictions described below. However, the Sub-advisor may invest the assets of
the Fund in varying amounts in other instruments and in senior securities, such
as bonds, debentures, preferred stocks and convertible issues, when such a
course is deemed appropriate in order to attempt to attain its financial
objectives. Senior securities that, in the opinion of the Sub-advisor, are
high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor
authority to invest in securities other than common stocks and traditional debt
and convertible issues. The Sub-advisor may invest in master limited
partnerships (other than real estate partnerships) and royalty trusts which are
traded on domestic stock exchanges when such investments are deemed appropriate
for the attainment of the Fund's investment objectives.
The Sub-advisor will invest approximately 60% of the Fund in common
stocks and the balance in fixed income securities. Common stock investments are
described above. The fixed income assets will be invested primarily in
investment grade securities. The Fund may invest in securities of the United
States government and its agencies and instrumentalities, corporate, sovereign
government, municipal, mortgage-backed, and other asset-backed securities. It
can be expected that the Sub-advisor will invest from time to time in bonds and
preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Fund conducts its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency exchange contracts to purchase or sell foreign
currencies.
The Fund expects to use forward contracts under two circumstances: (1)
when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Fund is purchasing or selling a security denominated in a foreign
currency, the Fund would be able to enter into a forward contract to do so; (2)
when the Sub-advisor believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund would be able
to enter into a forward contract to sell foreign currency for a fixed U.S.
dollar amount approximating the value of some or all of the Fund's securities
either denominated in, or whose value is tied to, such foreign currency.
As to the first circumstance, when the Fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into forward contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the Fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar at
the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Fund could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Fund will place cash or high-grade liquid
securities in a separate account with its custodian in an amount sufficient to
cover its obligation under the contract. If the value of the securities placed
in the separate account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account equals the
amount of the Fund's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Fund 's best interests may be
served.
Generally, the Fund will not enter into a forward contract with a term
of greater than one year. At the maturity of the forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" forward contract with the same currency
trader obligating the Fund to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Fund's securities at the expiration of the forward contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver. For an additional discussion
of forward currency exchange contracts and certain risks involved therein, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. As described in the Company's Prospectus, the Fund
may enter into futures contracts. Unlike when the Fund purchases securities, no
purchase price for the underlying securities is paid by the Fund at the time it
purchases a futures contract. When a futures contract is entered into, both the
buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the Fund's custodian for the benefit of the FCM in the event of any default by
the Fund in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities. This is a process known
as marking the contract to market. If the value of a party's position declines,
that party is required to make additional "variation margin" payments to the FCM
to settle the change in value. The party that has a gain is generally entitled
to receive all or a portion of this amount.
The Fund maintains from time to time a percentage of its assets in cash
or high-grade liquid securities to provide for redemptions or to hold for future
investment in securities consistent with the Fund's investment objectives. The
Fund may enter into index futures contracts as an efficient means to expose the
Fund's cash position to the domestic equity market. The Sub-advisor believes
that the purchase of futures contracts is an efficient means to effectively be
fully invested in equity securities.
The principal risks generally associated with the use of futures
include: (i) the possible absence of a liquid secondary market for any
particular instrument may make it difficult or impossible to close out a
position when desired (liquidity risk); (ii) the risk that the counter party to
the contract may fail to perform its obligations or the risk of bankruptcy of
the FCM holding margin deposits (counter-party risk); (iii) the risk that the
securities to which the futures contract relates may go down in value (market
risk); and (iv) adverse price movements in the underlying securities can result
in losses substantially greater than the value of the Fund's investment in that
instrument because only a fraction of a contract's value is required to be
deposited as initial margin (leverage risk); provided, however, that the Fund
may not purchase leveraged futures, so there is no leverage risk involved in the
Fund's use of futures.
A liquid secondary market is necessary to close out a contract. The
Fund may seek to manage liquidity risk by investing in exchange-traded futures.
Exchange-traded futures pose less risk that there will not be a liquid secondary
market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they
are closed out, as compared to three days for most types of equity securities.
As a result, futures contracts can provide more liquidity than an investment in
the actual underlying securities. Nevertheless, there is no assurance that a
liquid secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, the Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until liquidity in the market is re-established. As a result, the
Fund's access to other assets held to cover its futures positions also could be
impaired until liquidity in the market is re-established.
The Fund manages counter-party risk by investing in exchange-traded
index futures. In the event of the bankruptcy of the FCM that holds margin on
behalf of the Fund, the Fund may be entitled to the return of margin owed to the
Fund only in proportion to the amount received by the FCM's other customers. The
Sub-advisor will attempt to minimize the risk by monitoring the creditworthiness
of the FCMs with which the Fund does business.
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 by the Sub-advisor. 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 three 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).
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.
When the Fund makes a short sale as described above, any future losses
in the Fund's long position should be reduced by a gain in the short position.
The extent to which such gains or losses are reduced would depend upon the
amount of the security sold short relative to the amount the Fund owns. There
will be certain additional transaction costs associated with short sales, but
the Fund will endeavor to offset these costs with income from the investment of
the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the Fund,
even if the same security has only recently been sold. The Fund will sell a
given security, no matter for how long or for how short a period it has been
held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that it is not fulfilling its purpose, either because,
among other things, it did not live up to the Sub-advisor's expectations, or
because it may be replaced with another security holding greater promise, or
because it has reached its optimum potential, or because of a change in the
circumstances of a particular company or industry or in general economic
conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity
portion of the Fund may decrease or eliminate entirely its equity position and
increase its cash position, and when a rise in price levels is anticipated, it
may increase its equity position and decrease its cash position. However, it
should be expected that the Fund will, under most circumstances, be essentially
fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Fund's annual portfolio turnover rate cannot
be anticipated and may be comparatively high. Since the Sub-advisor does not
take portfolio turnover rate into account in making investment decisions, (1)
the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future. For an additional discussion of portfolio turnover, see
this SAI and the Company's Prospectus under "Portfolio Transactions."
Interest Rate Futures Contracts and Related Options. The Fund may buy
and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indices on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Fund will not purchase or sell futures contracts and options
thereon for speculative purposes but rather only for the purpose of hedging
against changes in the market value of its portfolio securities or changes in
the market value of securities that the Sub-advisor anticipates it may wish to
include in the Fund. The Fund may sell a future or write a call or purchase a
put on a future if the Sub-advisor anticipates that a general market or market
sector decline may adversely affect the market value of any or all of the Fund's
holdings. The Fund may buy a future or purchase a call or sell a put on a future
if the Sub-advisor anticipates a significant market advance in the type of
securities it intends to purchase for the Fund at a time when the Fund is not
invested in debt securities to the extent permitted by its investment policies.
The Fund may purchase a future or a call option thereon as a temporary
substitute for the purchase of individual securities which may then be purchased
in an orderly fashion. As securities are purchased, corresponding futures
positions would be terminated by offsetting sales.
The "sale" of a debt future means the acquisition by the Fund of an
obligation to deliver the related debt securities (i.e., those called for by the
contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the Fund of an obligation to acquire the related
debt securities at a specified time on a specified date. The "sale" of a bond
index future means the acquisition by the Fund of an obligation to deliver an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the future and the price
at which the future is originally struck. No physical delivery of the bonds
making up the index is expected to be made. The "purchase" of a bond index
future means the acquisition by the Fund of an obligation to take delivery of
such an amount of cash.
Unlike when the Fund purchases or sells a bond, no price is paid or
received by the Fund upon the purchase or sale of the future. Initially, the
Fund will be required to deposit an amount of cash or securities equal to a
varying specified percentage of the contract amount. This amount is known as
initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying debt securities or index
fluctuates, making the future more or less valuable, a process known as mark to
the market. Changes in variation margin are recorded by the Fund as unrealized
gains or losses. At any time prior to expiration of the future, the Fund may
elect to close the position by taking an opposite position that will operate to
terminate its position in the future. A final determination of variation margin
is then made; additional cash is required to be paid by or released to the Fund
and the Fund realizes a loss or a gain.
When the Fund writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the term of the
option. If the Fund has written a call, it becomes obligated to assume a "long"
position in a futures contract, which means that it is required to take delivery
of the underlying securities. If it has written a put, it is obligated to assume
a "short" position in a futures contract, which means that it is required to
deliver the underlying securities. When the Fund purchases an option on a
futures contract it acquires a right in return for the premium it pays to assume
a position in a futures contract.
If the Fund writes an option on a futures contract it will be required
to deposit initial and variation margin pursuant to requirements similar to
those applicable to futures contracts. Premiums received from the writing of an
option on a future are included in the initial margin deposit. For options sold,
the Fund will segregate cash or high-quality debt securities equal to the value
of securities underlying the option unless the option is otherwise covered. The
Fund will deposit in a segregated account with its custodian bank cash or other
liquid assets, in an amount equal to the fluctuating market value of long
futures contracts it has purchased less any margin deposited on its long
position. It may hold cash or acquire such other assets for the purpose of
making these deposits.
Changes in variation margin are recorded by the Fund as unrealized
gains or losses. Initial margin payments will be deposited in the Fund's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of a futures contract or an option
thereon, the Fund may elect to close the position by taking an opposite position
that will operate to terminate its position in the futures contract or option. A
final determination of variation margin is made at that time; additional cash is
required to be paid by or released to it and it realizes a loss or gain.
Although futures contracts by their terms call for the actual delivery
or acquisition of the underlying securities or cash, in most cases the
contractual obligation is so fulfilled without having to make or take delivery.
The Sub-advisor does not intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the instruments are traded. Although the Sub-advisor intends to buy and
sell futures contracts only on exchanges where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular future at any particular time. In such event, it may
not be possible to close a futures contract position.
Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the Fund
might not be fully invested at a time when the value of the securities in which
it invests is increasing is referred to as having a "long futures position." The
Fund must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (CFTC Rule) adopted by the
CFTC under the Commodity Exchange Act (CEA) to be eligible for the exclusion
provided by the CFTC Rule from registration by the Fund with the CFTC as a
"commodity pool operator" (as defined under the CEA), and must represent to the
CFTC that it will operate within such restrictions. Under these restrictions the
Fund will not, as to any positions that do not qualify as "bona fide hedging"
under the CFTC Rule, whether long, short or a combination thereof, enter into
futures contracts and options thereon for which the aggregate initial margins
and premiums exceed 5% of the fair market value of the Fund's assets after
taking into account unrealized profits and losses on options the Fund has
entered into; in the case of an option that is "in-the-money" (as defined under
the CEA), the in-the-money amount may be excluded in computing such 5%. (In
general, a call option on a futures contract is in-the-money if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
futures contract is in-the-money if the value of the futures contract that is
the subject of the put is exceeded by the strike price of the put.) As to its
long positions that are used as part of the Fund's strategy and are incidental
to the Fund's activities in the underlying cash market, the "underlying
commodity value" (see below) of the Fund's futures contract and options thereon
must not exceed the sum of (i) cash set aside in an identifiable manner, or
short-term U.S. debt obligations or other U.S. dollar-denominated, high-quality,
short-term money market instruments so set aside, plus any funds deposited as
margin; (ii) cash proceeds from existing investments due in 30 days; and (iii)
accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Fund must
maintain with its custodian bank as to its options and futures contracts
activities due to Securities and Exchange Commission requirements. The Fund
will, as to its long positions, be required to abide by the more restrictive of
these SEC and CFTC requirements. The underlying commodity value of a futures
contract is computed by multiplying the size (dollar amount) of the futures
contract by the daily settlement price of the futures contract. For an option on
a futures contract, that value is the underlying commodity value of the future
underlying the option.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which the Fund invests without the large
cash investments required for dealing in such markets, they may subject the Fund
to greater and more volatile risks than might otherwise be the case. The
principal risks related to the use of such instruments are (i) the offsetting
correlation between movements in the market price of the portfolio investments
(held or intended) being hedged and in the price of the futures contract or
option may be imperfect; (ii) possible lack of a liquid secondary market for
closing out futures or options positions; (iii) the need for additional
portfolio management skills and techniques; (iv) losses due to unanticipated
market price movements; and (v) the bankruptcy or failure of a futures
commission merchant holding margin deposits made by the Fund and the Fund's
inability to obtain repayment of all or part of such deposits. For a hedge to be
completely effective, the price change of the hedging instrument should equal
the price change of the security being hedged. Such equal price changes are not
always possible because the investment underlying the hedging instrument may not
be the same investment that is being hedged. The Sub-advisor will attempt to
create a closely correlated hedge, but hedging activity may not be completely
successful in eliminating market value fluctuation. The ordinary spreads between
prices in the cash and futures markets, due to the differences in the natures of
those markets, are subject to the following factors which may create
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest trends by the Sub-advisor may still not result in a successful
transaction. The Sub-advisor may be incorrect in its expectations as to the
extent of various interest rate movements or the time span within which the
movements take place.
The risk of imperfect correlation between movements in the price of a
bond index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Fund diverges from the
securities included in the applicable index. The price of the bond index future
may move more than or less than the price of the securities being hedged. If the
price of the bond index future moves less than the price of the securities that
are the subject of the hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the futures contract. If the price of the
futures contract moves more than the price of the security, the Fund will
experience either a loss or a gain on the futures contract that will not be
completely offset by movements in the price of the securities that are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of the securities being hedged and movements in the price of the
bond index futures, the Fund may buy or sell bond index futures in a greater
dollar amount than the dollar amount of securities being hedged if the
historical volatility of the prices of such securities being hedged is less than
the historical volatility of the bond index. It is also possible that, where the
Fund has sold futures contracts to hedge its securities against a decline in the
market, the market may advance and the value of securities held in the Fund may
decline. If this occurred, the Fund would lose money on the futures contract and
also experience a decline in value in its portfolio securities. However, while
this could occur for a brief period or to a very small degree, over time the
value of a portfolio of debt securities will tend to move in the same direction
as the market indices 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 indices may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when the Fund writes a call on a bond index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of its writing position by
holding a portfolio of bonds similar to those on which the underlying index is
based. However, the Fund cannot, as a practical matter, acquire and hold a
portfolio containing exactly the same securities as the underlying index and, as
a result, bears a risk that the value of the securities held will vary from the
value of the index. Even if the Fund could assemble a portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund, as the call writer, will
not learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security because there, the
writer's obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value of the
exercise date; and by the time it learns that it has been assigned, the index
may have declined with a corresponding decline in the value of its portfolio.
This "timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund must pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of its assets in illiquid investments; or
2. Buy securities on margin or sell short (unless it owns, or by virtue
of its ownership of, other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Fund may
make margin deposits in connection with the use of any financial instrument or
any transaction in securities permitted under its investment policies;
3. Invest for control or for management; or
4. Invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940. Duplicate fees may result
from such purchases.
ASAF FEDERATED HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income by investing primarily in fixed income securities. The fixed
income securities in which the Fund intends to invest are lower-rated corporate
debt obligations.
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 Programs of the Funds."
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. The collateral received when the
Fund lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are on loan, the
borrower pays the Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of the Fund or the borrower. The Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or cash
equivalent collateral to the borrower or placing broker. The Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements. When effecting reverse repurchase agreements, liquid
assets of the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to ensure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. For a discussion of reverse repurchase agreements and certain risks
involved therein, see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Portfolio Turnover. The Fund may experience greater portfolio turnover than
would be expected with a portfolio of higher-rated securities. For an additional
discussion of portfolio turnover, see this SAI and the Company's Prospectus
under "Portfolio Transactions."
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which disposed of a substantial portion of lower-rated
bonds held by failed savings and loan associations. The reduction of the number
of institutions empowered to purchase and hold lower-rated bonds, and the
divestiture of bonds by these institutions and the RTC, have had an adverse
impact on the overall liquidity of the market for such bonds. Federal and state
legislatures and regulators have and may continue to propose new laws and
regulations designed to limit the number or type of institutions that may
purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or
otherwise adversely impact the liquidity of such bonds. The Fund cannot predict
the likelihood that any of these proposals will be adopted, or their potential
impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with
investing in foreign securities, including currency risks, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restriction and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the value of its net assets in securities
that are not readily marketable, including repurchase agreements providing for
settlement in more than seven days after notice. The Directors of the Company,
or the Investment Manager or the Sub-advisor acting pursuant to authority
delegated by the Directors, may determine that a readily available market exists
for certain securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, or any successor to such rule, and therefore that such
securities are not subject to the foregoing limitation;
2. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3. Purchase any securities on margin but may obtain such short-term
credits as may be necessary for the clearance of transactions;
4. Invest more than 10% of the value of its total assets in foreign
securities which are not publicly traded in the United States;
5. Make short sales of securities or maintain short positions, unless:
during the time the short position is open, it owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for securities of the
same issue as, and equal in amount to, the securities sold short; and not more
than 10% of the Fund's net assets (taken at current value) is held as collateral
for such sales at any one time; or
6. Purchase securities of a company for the purpose of exercising
control or management. However, the Fund may invest in up to 10% of the voting
securities of any one issuer and may exercise its voting powers consistent with
the best interests of the Fund. From time to time, the Fund, together with other
investment companies advised by subsidiaries or affiliates of the Sub-advisor,
may together buy and hold substantial amounts of a company's voting stock. All
such stock may be voted together. In some such cases, the Fund and the other
investment companies might collectively be considered to be in control of the
company in which they have invested. In some cases, directors, agents,
employees, officers, or others affiliated with or acting for the Fund, the
Sub-advisor, or affiliated companies might possibly become directors of
companies in which the Fund holds stock.
ASAF TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Fund is to seek to
maximize total return, consistent with preservation of capital. The Sub-advisor
will seek to employ prudent investment management techniques, especially in
light of the broad range of investment instruments in which the Fund may invest.
Investment Policies:
Borrowing. The Fund may borrow for temporary administrative purposes.
This borrowing may be unsecured. The Investment Company Act of 1940 requires the
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
In addition to the above, the Fund may enter into reverse repurchase
agreements and mortgage dollar rolls. A reverse repurchase agreement involves
the sale of a portfolio-eligible security by the Fund, coupled with its
agreement to repurchase the instrument at a specified time and price. In a
"dollar roll" transaction the Fund sells a mortgage-related security (such as a
GNMA security) to a dealer and simultaneously agrees to repurchase a similar
security (but not the same security) in the future at a pre-determined price. A
"dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which the Fund pledges a mortgage-related security
to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which the Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are "substantially identical." To be considered
"substantially identical," the securities returned to the Fund generally must:
(1) be collateralized by the same types of underlying mortgages; (2) be issued
by the same agency and be part of the same program; (3) have a similar original
stated maturity; (4) have identical net coupon rates; (5) have similar maturity:
(4) have identical net coupon rates; (5) have similar market yields (and
therefore price); and (6) satisfy "good delivery" requirements, meaning that the
aggregate principal amounts of the securities delivered and received back must
be within 2.5% of the initial amount delivered. The Fund's obligations under a
dollar roll agreement must be covered by cash or other liquid assets equal in
value to the securities subject to repurchase by the Fund, maintained in a
segregated account.
Both dollar roll and reverse repurchase agreements will be subject to
the Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to the Fund's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Fund, or,
if unrated, are in the Sub-advisor's opinion comparable in quality to corporate
debt securities in which the Fund may invest. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Among the corporate bonds in which the Fund may invest are convertible
securities. A convertible security is a bond, debenture, note, or other security
that entitles the holder to acquire common stock or other equity securities of
the same or a different issuer. A convertible security generally entitles the
holder to receive interest paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities.
Convertible securities rank senior to common stock in a corporation's capital
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed-income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the Fund
is called for redemption, the Fund will be required to permit the issuer to
redeem the security and convert it to underlying common stock, or will sell the
convertible security to a third party. The Fund generally would invest in
convertible securities for their favorable price characteristics and total
return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Fund (i.e., rated B or better by Moody's or S&P)
are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Fund may incur additional expenses
to seek recovery. In the case of high yield securities structured as zero-coupon
or pay-in-kind securities, their market prices are affected to a greater extent
by interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Fund could sell a high yield security, and could adversely affect the
daily net asset value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield securities especially in a thinly-traded market. When
secondary markets for high yield securities are less liquid than the market for
higher grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable, objective
data available. The Sub-advisor seeks to minimize the risks of investing in all
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions. For an additional
discussion of certain risks involved in lower-rated debt securities, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Objectives."
Participation on Creditors Committees. The Fund may from time to time
participate on committees formed by creditors to negotiate with the management
of financially troubled issuers of securities held by the Fund. Such
participation may subject the Fund to expenses such as legal fees and may make
the Fund an "insider" of the issuer for purposes of the federal securities laws,
and therefore may restrict the Fund's ability to trade in or acquire additional
positions in a particular security when it might otherwise desire to do so.
Participation by the Fund on such committees also may expose the Fund to
potential liabilities under the federal bankruptcy laws or other laws governing
the rights of creditors and debtors. The Fund will participate on such
committees only when the Sub-advisor believes that such participation is
necessary or desirable to enforce the Fund's rights as a creditor or to protect
the value of securities held by the Fund.
Mortgage-Related Securities. The Fund may invest in mortgage-backed
securities. Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Fund may also invest in debt securities which are
secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Company's and the Trust's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund may
buy mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Company's and
the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. The Fund will not purchase mortgage-related
securities or any other assets which in the Sub-advisor's opinion are illiquid
if, as a result, more than 15% of the value of the Fund's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions, set forth in this SAI under "Fundamental
Investment Restrictions," by virtue of the exclusion from that test available to
all U.S. Government securities. In the case of privately issued mortgage-related
securities, the Fund takes the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
that other comparable securities in the event of adverse economic, political or
business developments that may affect such region and ultimately, the ability of
residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the
Bond offering are used to purchase mortgages or mortgage pass-through
certificates ("Collateral"). The Collateral is pledged to a third party trustee
as security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B,
and C Bonds all bear current interest. Interest on the Series Z Bond is accrued
and added to principal and a like amount is paid as principal on the Series A,
B, or C Bond currently being paid off. When the Series A, B, and C Bonds are
paid in full, interest and principal on the Series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the
mortgage loans during any semiannual payment period is not sufficient to meet
FHLMC's minimum sinking fund obligation on the next sinking fund payment date,
FHLMC agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC
CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute
collateral in the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and
certain risks involved therein, see this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related
securities include securities other than those described above that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property, including CMO residuals or stripped
mortgage-backed securities. Other mortgage-related securities may be equity or
debt securities issued by agencies or instrumentalities of the U.S. Government
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, homebuilders, mortgage banks, commercial banks,
investment banks, partnerships, trusts and special purpose entities of the
foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a
series of CMOs is applied first to make required payments of principal and
interest on the CMOs and second to pay the related administrative expenses of
the issuer. The residual in a CMO structure generally represents the interest in
any excess cash flow remaining after making the foregoing payments. Each payment
of such excess cash flow to a holder of the related CMO residual represents
income and/or a return of capital. The amount of residual cash flow resulting
from a CMO will depend on, among other things, the characteristics of the
mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets, in
the same manner as an interest-only ("IO") class of stripped mortgage-backed
securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed
Securities." In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances the Fund may
fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers. The CMO residual market has only very recently developed and
CMO residuals currently may not have the liquidity of other more established
securities trading in other markets. Transactions in CMO residuals are generally
completed only after careful review of the characteristics of the securities in
question. In addition, CMO residuals may or, pursuant to an exemption therefrom,
may not have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, which the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
these securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be deemed
"illiquid" and subject to the Fund's limitations on investment in illiquid
securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor
expects that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future. Several types of asset-backed securities may
be offered to investors, including Certificates for Automobile Receivables. For
a discussion of automobile receivables, see this SAI under "Certain Risk Factors
and Investment Methods." Consistent with the Fund's investment objectives and
policies, the Sub-advisor also may invest in other types of asset-backed
securities.
Foreign Securities. The Fund may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Fund may invest up to 20%
of its assets in securities denominated in foreign currencies, and may invest
beyond this limit in U.S. dollar-denominated securities of foreign issuers. The
Fund may invest up to 10% of its assets in securities of issuers based in
emerging market countries. 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 in general, and the special risks of investing in developing
countries, see this SAI and the Company's Prospectus 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.
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 indices, 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 indices of securities. If
other types of financial instruments, including other types of options, futures
contracts, or futures options are traded in the future, the Fund may also use
those instruments, provided that the Directors of the Company determine that
their use is consistent with the Fund's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indices. The Fund may purchase and sell both
put and call options on debt or other securities or indices 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 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
indices (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
Programs of the Funds." 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 longer 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 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 Funds by the Internal Revenue Code may limit the
Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants." To be eligible,
natural persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets exceeding
$5 million. In addition, an eligible swap transaction must meet three
conditions. First, the swap agreement may not be part of a fungible class of
agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is related to another economic indicator or
financial market index. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by such an unrelated indicator. Indexed securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Sub-advisor analyzes these
securities in its overall assessment of the effective duration of the Fund's
portfolio in an effort to monitor the Fund's interest rate risk.
Foreign Currency Exchange-Related Securities. The Fund may invest in
foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this SAI
under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Fund may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Fund to buy additional bonds at the favorable
rate or to sell the warrants at a profit. If interest rates rise, the warrants
would generally expire with no value.
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.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the assets of the Fund (taken at market
value at the time of the investment) in "illiquid securities;" illiquid
securities being defined to include securities subject to legal or contractual
restrictions on resale (which may include private placements), repurchase
agreements maturing in more than seven days, certain options traded over the
counter that the Fund has purchased, securities being used to cover options the
Fund has written, securities for which market quotations are not readily
available, or other securities which legally or in the Sub-advisor's option may
be deemed illiquid;
2. Purchase securities for the Fund from, or sell portfolio securities
to, any of the officers and directors or trustees of the Company, the Trust, the
Investment Manager or the Sub-advisor;
3. Invest more than 5% of the assets of the Fund (taken at market value
at the time of investment) in any combination of interest only, principal only,
or inverse floating rate securities;
4. Invest in companies for the purpose of exercising management or control;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
6. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Fund may make margin deposits in connection with futures contracts or other
permissible investments;
7. Purchase or sell oil, gas or other mineral programs;
8. Maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except as set forth in the Company's
Prospectus and this SAI for transactions in options, futures, and options on
futures transactions arising under swap agreements or other derivative
instruments; or
9. Pledge, mortgage or hypothecate its assets, except as may be
necessary in connection with permissible borrowings or investments; and then
such pledging, mortgaging or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment. The deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for future
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio's assets.
ASAF JPM MONEY MARKET FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Fund will not invest in bank obligations for which
any affiliate of the Sub-advisor is the ultimate obligor or accepting bank.
Asset-Backed Securities. The asset-backed securities in which the Fund
may invest are subject to the Fund's overall credit requirements. However,
asset-backed securities, in general, are subject to certain risks. Most of these
risks are related to limited interests in applicable collateral. For example,
credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested. For a
discussion of asset-backed securities and the risks involved therein see the
Company's Prospectus and this SAI under "Certain Risk Factors and Investment
Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933 (without registering the certificates under such Act).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements. The
repurchase agreements into which the Fund may enter will usually be short, from
overnight to one week, and at no time will the Fund invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. For a discussion of
repurchase agreements and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Fund invests the proceeds of
borrowings under reverse repurchase agreements. The Fund will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Fund will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Fund may not enter into reverse repurchase agreements exceeding
in the aggregate one-third of the market value of its total assets, less
liabilities other than the obligations created by reverse repurchase agreements.
The Fund will establish and maintain with its custodian a separate account with
a segregated portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements. If interest rates rise
during the term of a reverse repurchase agreement, such reverse repurchase
agreement may have a negative impact on the Fund's ability to maintain a net
asset value of $1.00 per share.
Foreign Securities. The Fund may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Fund's restrictions on
lending, loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. The Fund may pay reasonable finders' and custodial fees in
connection with a loan. In making a loan, the Fund will consider all facts and
circumstances surrounding the making of the loan, including the creditworthiness
of the borrowing financial institution. The Fund will not make any loans in
excess of one year. The Fund will not lend its securities to any officer,
employee, Director or Trustee of the Company, the Trust, the Investment Manager,
any Sub-advisor of the Company or the Trust, or the Administrator unless
otherwise permitted by applicable law.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest in companies for the purpose of exercising management or control;
2. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued securities or of securities
for delivery at a future date;
4. Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 10% of the market value
of the Fund's total assets would be in investments which are illiquid;
5. Mortgage, pledge or hypothecate any assets, except as may be
necessary in connection with permissible borrowings or investments; and then
such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Company's Prospectus and this
SAI; or
7. Purchase or sell interests in oil, gas or other mineral exploration
or development programs.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Investment Restrictions. Each Fund and Portfolio has adopted the following
fundamental investment restrictions which may not be changed without shareholder
approval.
1. Senior Securities. No Fund or Portfolio may issue senior securities,
except as permitted under the Investment Company Act of 1940 (the "1940 Act").
2. Borrowing. No Fund or Portfolio may borrow money, except that a Fund
or Portfolio may (i) borrow money for non-leveraging, temporary or emergency
purposes, and (ii) engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may involve a borrowing, in a
manner consistent with the Fund or Portfolio's investment objective and
policies; provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Fund or Portfolio's assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. Subject to the above limitations, the Funds and
Portfolios may borrow from banks or other persons to the extent permitted by
applicable law.
3. Underwriting. No Fund or Portfolio may underwrite securities issued
by other persons, except to the extent that the Fund or Portfolio may be deemed
to be an underwriter (within the meaning of the Securities Act of 1933) in
connection with the purchase and sale of portfolio securities.
4. Real Estate. No Fund or Portfolio may purchase or sell real estate
unless acquired as a result of the ownership of securities or other instruments;
provided that this restriction shall not prohibit a Fund or Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business.
5. Commodities. No Fund or Portfolio may purchase or sell physical
commodities unless acquired as a result of the ownership of securities or
instruments; provided that this restriction shall not prohibit a Fund or
Portfolio from (i) engaging in permissible options and futures transactions and
forward foreign currency contracts in accordance with the Fund's or Portfolio's
investment policies, or (ii) investing in securities of any kind.
6. Lending. No Fund or Portfolio may make loans, except that a Fund or
Portfolio may (i) lend portfolio securities in accordance with the Fund or
Portfolio's investment policies in amounts up to 33 1/3% of the total assets of
the Fund or Portfolio taken at market value, (ii) purchase money market
securities and enter into repurchase agreements, and (iii) acquire publicly
distributed or privately placed debt securities and purchase debt.
7. Industry Concentration. No Fund or Portfolio may purchase any
security if, as a result, more than 25% of the value of the Fund or Portfolio's
assets would be invested in the securities of issuers having their principal
business activities in the same industry; provided that this restriction does
not apply to investments in obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities (or repurchase agreements
with respect thereto).
8. Diversification. No Fund or Portfolio may, with respect to 75% of
the value of its total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, (i) more than 5% of the value of the Fund's
or Portfolio's total assets would be invested in the securities of such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Fund or Portfolio.
Notes to Investment Restrictions. The following notes should be read in
conjunction with the above fundamental investment restrictions. These notes are
not fundamental policies and may be changed without shareholder approval.
o Applicable to All Funds and Portfolios: If a restriction on a Fund's
or Portfolio's investments is adhered to at the time an investment is made, a
subsequent change in the percentage of Fund or Portfolio assets invested in
certain securities or other instruments, or change in average duration of the
Fund's or Portfolio's investment portfolio, resulting from changes in the value
of the Fund's or Portfolio's total assets, will not be considered a violation of
the restriction; provided, however, that the asset coverage requirement
applicable to borrowings shall be maintained in the manner contemplated by
applicable law.
o Applicable to All Funds and Portfolios: With respect to investment
restrictions (2) and (6), a Fund or Portfolio will not borrow or lend to any
other fund unless it applies for and receives an exemptive order from the
Securities and Exchange Commission (the "Commission"), if so required, or the
Commission issues rules permitting such transactions. There is no assurance the
Commission would grant any order requested by the Fund or Portfolio or
promulgate any rules allowing the transactions.
o Applicable Only to the ASAF Founders International Small
Capitalization Fund and the ASAF Founders Small Capitalization Fund: With
respect to investment restriction (7), the Funds use industry classifications
based, where applicable, on Baseline, Bridge Information Systems, Reuters, the
S&P Stock Guide published by Standard & Poor's, information obtained from
Bloomberg L.P. and Moody's International, and/or the prospectus of the issuing
company. Selection of an appropriate industry classification resource will be
made by the Sub-advisor in the exercise of its reasonable discretion.
o Applicable Only to the ASAF T. Rowe Price International Equity Fund
(and corresponding Portfolio) and the ASAF T. Rowe Price Small Company Value
Fund: With respect to investment restrictions (2) and (6), the Fund and
Portfolio have no current intention of borrowing or lending to any other fund.
For purposes of investment restriction (6), the Fund and Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
CERTAIN RISK FACTORS AND INVESTMENT METHODS
Some of the investment instruments, techniques and methods which may be
used by one or more of the Funds and the risks attendant thereto are described
below. Other risk factors and investment methods may be described in the
Company's Prospectus under "Investment Programs of the Funds" and "Certain Risk
Factors and Investment Methods," and in this SAI under "Investment Programs of
the Funds." The risk factors and investment methods described below only apply
to those Funds or Portfolios that may invest in such securities or use such
investment methods. The below references to the investment methods used by the
Feeder Funds apply equally to the Funds' corresponding Portfolios.
Debt Obligations. Yields on short, intermediate, and long-term
securities are dependent on a variety of factors, including, the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in prevailing
interest rates will generally reduce the value of debt investments, and a
decline in interest rates will generally increase the value of debt investments.
The ability of a Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the debt securities in which a Fund
invests to meet their obligations for the payment of interest and principal when
due.
Special Risks Associated with Low-Rated and Comparable Unrated
Securities. Low-rated and comparable unrated securities, while generally
offering higher yields than investment-grade securities with similar maturities,
involve greater risks, including the possibility of default or bankruptcy. They
are regarded as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal. The special risk considerations in
connection with such investments are discussed below. See the Appendix of this
Statement for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated
and comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience
appreciation when interest rates decline and depreciation when interest rates
rise. The market values of low-rated and comparable unrated securities tend to
reflect individual corporate developments to a greater extent than do
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Low-rated and comparable unrated securities also tend
to be more sensitive to economic conditions than are higher-rated securities.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of low-rated and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Fund might incur
additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased fluctuation in the market
prices of low-rated and comparable unrated securities and thus in a Fund's net
asset value.
As previously stated, the value of such a security will
decrease in a rising interest rate market and accordingly, so will a Fund's net
asset value. If a Fund experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of some
high-yield securities (discussed below), a Fund may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a Fund's
asset base over which expenses could be allocated and could result in a reduced
rate of return for a Fund.
Payment Expectations. Low-rated and comparable unrated
securities typically contain redemption, call, or prepayment provisions which
permit the issuer of securities containing such provisions to, at their
discretion, redeem the securities. During periods of falling interest rates,
issuers of high-yield securities are likely to redeem or prepay the securities
and refinance them with debt securities with a lower interest rate. To the
extent an issuer is able to refinance the securities, or otherwise redeem them,
a Fund may have to replace the securities with a lower-yielding security, which
would result in a lower return for a Fund.
Issuers of lower-rated securities are often highly leveraged,
so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
Such issuers may not have more traditional methods of financing available to
them and may be unable to repay outstanding obligations at maturity by
refinancing. The risk of loss due to default in payment of interest or repayment
of principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
Credit Ratings. Credit ratings issued by credit-rating
agencies attempt to evaluate the safety of principal and interest payments of
rated securities. They do not, however, evaluate the market value risk of
low-rated and comparable unrated securities and, therefore, may not fully
reflect the true risks of an investment. In addition, credit-rating agencies may
or may not make timely changes in a rating to reflect changes in the economy or
in the condition of the issuer that affect the market value of the security.
Consequently, credit ratings may be used only as a preliminary indicator of
investment quality. Investments in low-rated and comparable unrated securities
will be more dependent on the applicable Sub-advisor's credit analysis than
would be the case with investments in investment-grade debt securities. Such
Sub-advisor may employ its own credit research and analysis, which could include
a study of existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history, and the current trend of earnings. The Sub-advisor continually monitors
the investments in a Fund and evaluates whether to dispose of or to retain
low-rated and comparable unrated securities whose credit ratings or credit
quality may have changed.
Liquidity and Valuation. A Fund may have difficulty disposing
of certain low-rated and comparable unrated securities because there may be a
thin trading market for such securities. There is no established retail
secondary market for many of these securities. A Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Fund's asset value and a Fund's ability to dispose of
particular securities, when necessary to meet a Fund's liquidity needs or in
response to a specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a portfolio.
Market quotations are generally available on many low-rated and comparable
unrated issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by purchasing an option identical to that previously sold.
When writing a call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, a Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the expiration
of its obligation as a writer. If a call option which a Fund has written
expires, the Fund will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying security or
currency.
Writing (Selling) Put Options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the exercise price
during the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against delivery of
the underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
Premium Received from Writing Call or Put Options. A Fund will
receive a premium from writing a put or call option, which increases such Fund's
return in the event the option expires unexercised or is closed out at a profit.
The amount of the premium will reflect, among other things, the relationship of
the market price of the underlying security to the exercise price of the option,
the term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss if the
purchase price exceeds the market value plus the amount of the premium received,
unless the security subsequently appreciates in value.
Closing Transactions. A Fund may terminate an option that it
has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written. Closing transactions may be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency. A
Fund will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Fund.
Furthermore, effecting a closing transaction will permit a
Fund to write another call option on the underlying security or currency with
either a different exercise price or expiration date or both. If a Fund desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that a Fund will be able to effect
such closing transactions at a favorable price. If a Fund cannot enter into such
a transaction, it may be required to hold a security or currency that it might
otherwise have sold. When a Fund writes a covered call option, it runs the risk
of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. A Fund will pay transaction costs
in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a
Fund for the purpose of acquiring the underlying securities or currencies for
its portfolio. Utilized in this fashion, the purchase of call options enables a
Fund to acquire the securities or currencies at the exercise price of the call
option plus the premium paid. At times the net cost of acquiring securities or
currencies in this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to a Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, a Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
Purchasing Put Options. A Fund may purchase a put option on an
underlying security or currency owned by the Fund (a "protective put") as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Fund, as the holder of the put option, is
able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Fund purchases put options at a time when the Fund does
not own the underlying security or currency, the Fund seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, a Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be profitable,
the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs.
Dealer Options. Exchange-traded options generally have a
continuous liquid market while dealer options have none. Consequently, a Fund
will generally be able to realize the value of a dealer option it has purchased
only by exercising it or reselling it to the dealer who issued it. Similarly,
when a Fund writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the option. While
a Fund will seek to enter into dealer options only with dealers who will agree
to and which are expected to be capable of entering into closing transactions
with the Fund, there can be no assurance that the Fund will be able to liquidate
a dealer option at a favorable price at any time prior to expiration. Until a
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to a Fund. For example, since
a Fund must maintain a secured position with respect to any call option on a
security it writes, a Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair a Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Commission has taken the position that
purchased dealer options and the assets used to secure the written dealer
options are illiquid securities. A Fund may treat the cover used for written OTC
options as liquid if the dealer agrees that the Fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to the
extent the maximum repurchase price under the formula exceeds the intrinsic
value of the option. To this extent, a Fund will treat dealer options as subject
to a Fund's limitation on unmarketable or illiquid securities. If the Commission
changes its position on the liquidity of dealer options, a Fund will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options. During the option period, a Fund, as writer of a call option has,
in return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that a Fund may lose the premium it paid
plus transaction costs. If a Fund does not exercise the option and is unable to
close out the position prior to expiration of the option, it will lose its
entire investment.
An exchange-traded option position may be closed out only on an
exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at a particular time
and that a Fund can close out its position by effecting a closing transaction.
If a Fund is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, a Fund may not be able to sell the underlying security at a time
when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices. Options on stock indices are similar to
options on specific securities except that, rather than the right to take or
make delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks.
Risk Factors of Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether a Fund will realize a
gain or a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Fund would not be able to close out
options which it had written or purchased and, if restrictions on exercise were
imposed, might be unable to exercise an option it purchased, which would result
in substantial losses.
Price movements in portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Fund bears the risk
that the price of the securities may not increase as much as the level of the
index. In this event, the Fund would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of a Fund's securities does not.
If this occurred, a Fund would experience a loss on the call which would not be
offset by an increase in the value of its securities and might also experience a
loss in the market value of its securities.
Unless a Fund has other liquid assets which are sufficient to satisfy
the exercise of a call on the index, the Fund will be required to liquidate
securities in order to satisfy the exercise. When a Fund has written a call on
an index, there is also the risk that the market may decline between the time
the Fund has the call exercised against it, at a price which is fixed as of the
closing level of the index on the date of exercise, and the time the Fund is
able to sell securities. As with options on securities, the Sub-advisor will not
learn that a call has been exercised until the day following the exercise date,
but, unlike a call on securities where a Fund would be able to deliver the
underlying security in settlement, a Fund may have to sell part of its
securities in order to make settlement in cash, and the price of such securities
might decline before they could be sold.
If a Fund exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money," the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although a Fund may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
Trading in Futures. A futures contract provides for the future sale by
one party and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a stock index) at a specified price, date,
time and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when a Fund purchases or sells a security, no price would be
paid or received by a Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain a Fund's open positions in
futures contracts, a Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments, or other liquid
securities, known as "initial margin." A margin deposit is intended to ensure a
Fund's performance of the futures contract. The initial margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund.
These subsequent payments, called "variation margin," to and from the
futures broker are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." A Fund expects to
earn interest income on its margin deposits. Although certain futures contracts,
by their terms, require actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually closed out before
the delivery date. Closing out an open futures contract purchase or sale is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less than the original
sale price, a Fund realizes a gain; if it is more, a Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, a Fund will
continue to be required to maintain the margin deposits on the futures contract.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made. For example, one
contract in the Financial Times Stock Exchange 100 Index future is a contract to
buy 25 pounds sterling multiplied by the level of the UK Financial Times 100
Share Index on a given future date. Settlement of a stock index futures contract
may or may not be in the underlying security. If not in the underlying security,
then settlement will be made in cash, equivalent over time to the difference
between the contract price and the actual price of the underlying asset at the
time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss. Commissions on financial futures contracts and
related options transactions may be higher than those which would apply to
purchases and sales of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated futures
contracts. A public market exists in futures contracts covering a number of
indices, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Regulatory Matters Relating to Futures Contracts and Related Options.
The Staff of the Commission has taken the position that the purchase and sale of
futures contracts and the writing of related options may give rise to "senior
securities" for the purposes of the restrictions contained in Section 18 of the
1940 Act on investment companies' issuing senior securities. However, the Staff
has taken the position that no senior security will be created if a Fund
maintains in a segregated account an amount of cash or other liquid assets at
least equal to the amount of the Fund's obligation under the futures contract or
option. Each Fund will conduct its purchases and sales of any futures contracts
and writing of related options transactions in accordance with this requirement.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, a Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying instrument and sold it after the decline. Furthermore, in the
case of a futures contract purchase, in order to be certain that a Fund has
sufficient assets to satisfy its obligations under a futures contract, a Fund
earmarks to the futures contract liquid assets equal in value to the current
value of the underlying instrument less the margin deposit.
Liquidity. A Fund may elect to close some or all of its
futures positions at any time prior to their expiration. A Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. A Fund may close its positions by taking
opposite positions which would operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid by or released to a Fund, and such
Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded. Although a Fund may
intend to purchase or sell futures contracts only on exchanges or boards of
trade where there appears to be an active market, there is no assurance that a
liquid market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, a Fund
would continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, a Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by a Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Sub-advisor will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of a Fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by a Fund for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when a Fund has
sold futures to hedge its portfolio against a decline in the market, the index,
indices, or underlying instruments on which the futures are written might
advance and the value of the underlying instruments held in the Fund's portfolio
might decline. If this were to occur, a Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, the Sub-advisor may believe that
over time the value of a Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also possible
that if a Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if a Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). A Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price movements in the
futures contracts and the portion of the portfolio being hedged, the price
movements of futures contracts might not correlate perfectly with price
movements in the underlying instruments due to certain market distortions.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the futures
market are less onerous than margin requirements in the securities markets, and
as a result the futures market might attract more speculators than the
securities markets do. Increased participation by speculators in the futures
market might also cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the imperfect
correlation between price movements in the underlying instruments and movements
in the prices of futures contracts, even a correct forecast of general market
trends by the Sub-advisor might not result in a successful hedging transaction
over a very short time period.
Certain Risks of Options on Futures Contracts. A Fund may seek to close
out an option position by writing or buying an offsetting option covering the
same index, underlying instruments, or contract and having the same exercise
price and expiration date. The ability to establish and close out positions on
such options will be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the Commission and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In particular,
funds received from customers for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the interbank market
conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions
applicable to a Fund, a Fund may generally enter into forward foreign currency
exchange contracts under two circumstances. First, when a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date the security is
purchased or sold and the date on which payment is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of a Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, a Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currencies or currency act as an effective proxy for other
currencies. In such a case, a Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the Fund's
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in a Fund. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency a Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency a Fund is obligated to deliver. However, as noted, in order to
avoid excessive transactions and transaction costs, a Fund may use liquid assets
denominated in any currency to cover the amount by which the value of a forward
contract exceeds the value of the securities to which it relates.
If a Fund retains the portfolio security to which the foreign currency
hedging transaction related and engages in an offsetting forward contract
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, a Fund will suffer a
loss to the extent of the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
As noted above, a currency futures contract sale creates an obligation
by a Fund, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The exchange commitments can involve payments
to be made in the same currency or in different currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from the
party selling the interest rate floor.
Hybrid Instruments. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument. The risks of investing in hybrid instruments reflect a combination
of the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of futures
and forward contracts in this Statement for a discussion of these risks.
Further, the prices of the hybrid instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
hybrid instruments could take place in an over-the-counter market or in a
private transaction between a Fund and the seller of the hybrid instrument, the
creditworthiness of the other party to the transaction would be a risk factor
which a Fund would have to consider. Hybrid instruments also may not be subject
to the regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the Commission, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
Foreign Currency Exchange-Related Securities. Certain Funds may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are
warrants which entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange
rate linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the spot exchange rate two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero-Coupon Securities. Zero-coupon securities pay no cash income and
are sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity.
Zero-coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero-coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero-coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero-coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts ("TIGRSTM") and Certificate of Accrual on Treasuries
("CATSTM"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as a Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Fund will be able to have its beneficial ownership of zero-coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities. The price of when-issued securities, which may
be expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within 90 days of the purchase.
During the period between purchase and settlement, no payment is made by a Fund
to the issuer and no interest accrues to such Fund. Forward commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of a Fund's other assets. While when-issued securities may be sold prior to the
settlement date, a Fund intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
Mortgage-Backed Securities. Principal and interest payments made on the
mortgages in an underlying mortgage pool are passed through to a Fund.
Unscheduled prepayments of principal shorten the securities' weighted average
life and may lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is passed through
to a Fund. This principal is returned to a Fund at par. As a result, if a
mortgage security were trading at a premium, its total return would be lowered
by prepayments, and if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support" below.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many asset-backed
securities are issued in more than one class, each with different payment terms.
Multiple class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support."
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those described above
may be issued in the future. A Fund may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection against ultimate
default ensures ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of such
approaches. Examples of asset-backed securities with credit support arising out
of the structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds" (where
cash or investments, sometimes funded from a portion of the initial payments on
the underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees). The
degree of credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if a letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may
be backed by receivables from motor vehicle installment sales contracts or
installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile Contracts only by
filing a financing statement and by having the servicer of the Automobile
Contracts, which is usually the originator of the Automobile Contracts, take
custody thereof. In such circumstances, if the servicer of the Automobile
Contracts were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that such party could
acquire an interest in the Automobile Contracts superior to that of the holders
of Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable Securities. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition, various state and
federal securities laws give the motor vehicle owner the right to assert against
the holder of the owner's Automobile Contract certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may
be backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and reduce the yield of the Credit Card Receivable
Security.
Credit card holders are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such holder the
right to set off certain amounts against balances owed on the credit card,
thereby reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the cardholder.
Warrants. Warrants basically are options to purchase equity securities
at a specific price valid for a specific period of time. They do not represent
ownership of the securities but only the right to buy them. Investments in
warrants are speculative in that warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in
foreign currencies involves certain risks. A change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of a Fund's assets denominated in that currency. Such changes
will also affect a Fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens), the value of a Fund's securities
denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment
in the securities markets of certain foreign countries is restricted or
controlled in varying degrees. These restrictions may at times limit or preclude
investment in certain of such countries and may increase the cost and expenses
of a Fund. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the form
of prior governmental approval, limits on the amount or type of securities held
by foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by these
or other countries in which a Fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Fund's securities may be less liquid and
more volatile than securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. Commissions on foreign stock exchanges,
which may be fixed, may generally be higher than negotiated commissions on U.S.
exchanges, although a Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies
of certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest or regulation,
in their respective economies. Action by these governments could have a
significant effect on market prices of securities and payment of dividends. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and economic
conditions of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a
Fund's foreign securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
Costs. Investors should understand that the expense ratio of a
Fund investing primarily in foreign securities can be expected to be higher than
investment companies investing in domestic securities since the cost of
maintaining the custody of foreign securities and the rate of advisory fees paid
by a Fund are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of a Fund,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of a Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the 1940 Act and exemptive relief from such
Act may be required. All of these considerations are among the factors which
could cause significant risks and uncertainties to investment in Eastern Europe
and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, of
developing countries, a number of Latin American countries are also among the
largest debtors. There have been moratoria on, and reschedulings of, repayment
with respect to these debts. Such events can restrict the flexibility of these
debtor nations in the international markets and result in the imposition of
onerous conditions on their economies.
Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U.S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. Certain Latin American countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market for
certain currencies and it would, as a result, be difficult for a Fund to engage
in foreign currency transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
ADDITIONAL PERFORMANCE INFORMATION
ASAF JPM MONEY MARKET FUND (the "Money Market Fund"):
In accordance with regulations prescribed by the Commission, the
Company is required to compute the Money Market Fund's current annualized yield
for a seven-day period in accordance with a specified formula, which does not
take into consideration any realized or unrealized gains or losses on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) in the value of a hypothetical
account having a balance of one share of the Money Market Fund at the beginning
of such seven-day period, dividing such net change in account value by the value
of the account at the beginning of the period to determine the base period
return and annualizing this quotient on a 365-day basis.
The Commission also permits the Company to disclose the effective yield
of the Money Market Fund for the same seven-day period, which is the Fund's
yield determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result.
The yield on amounts held in the Money Market Fund normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Fund's actual yield is affected by changes in interest
rates on money market securities, the average portfolio maturity of the
corresponding Portfolio in which the Money Market Fund invests, the types and
quality of portfolio securities held by such Portfolio, and the Fund's and
Portfolio's operating expenses.
The current yield and effective yield calculations for each class of
shares of the ASAF JPM Money Market Fund are shown below for the seven day
period ended April 30, 1998:
Class A Class B Class C Class X
Current Yield 3.72% 3.19% 3.21% 3.21%
Effective Yield 3.79% 3.24% 3.26% 3.27%
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."
The total return of each class of shares of each Fund other than the
JPM Money Market Fund, computed as of April 30, 1998, that had commenced
operations prior to that date is shown below:
<TABLE>
<CAPTION>
Total Return (for the period from commencement of
operations until April 30, 1998, without
annualization)
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
ASAF Founders International Small Capitalization Fund1 9.58% 8.95% 13.95% 11.61%
ASAF T. Rowe Price International Equity Fund1 (1.66%) (2.90%) 1.90% (0.12%)
ASAF Janus Overseas Growth Fund2 4.94% 4.40% 9.40% 6.95%
ASAF Founders Small Capitalization Fund1 5.13% 4.30% 9.40% 7.16%
ASAF T. Rowe Price Small Company Value Fund1 7.74% 6.91% 11.91% 9.63%
ASAF Robertson Stephens Value + Growth Fund2 8.55% 8.30% 13.20% 10.95%
ASAF Janus Capital Growth Fund1 16.99% 16.99% 21.79% 20.17%
ASAF Lord Abbett Growth and Income Fund2 5.70% 5.50% 10.30% 8.08%
ASAF INVESCO Equity Income Fund1 14.02% 13.68% 18.68% 16.67%
ASAF American Century Strategic Balanced Fund1 3.91% 2.98% 7.98% 5.60%
ASAF Federated High Yield Bond Fund1 2.09% 0.34% 5.29% 2.96%
ASAF Total Return Bond Fund1 1.02% (1.21%) 3.82% 1.45%
</TABLE>
1. Commenced operations July 28, 1997.
2. Commenced operations January 2, 1998.
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:
<TABLE>
<CAPTION>
YIELD = 2 [ (a - b + 1)6 - 1 ]
cd
<S> <C> <C> <C>
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
</TABLE>
Net investment income will be determined in accordance with rules
established by the Commission. The price per share of Class A shares, other than
shares of the ASAF JPM Money Market Fund, will include the maximum sales charge
imposed on purchases of Class A shares which decreases with the amount of shares
purchased.
The yield for each class of shares of the ASAF Federated High Yield
Fund and ASAF Total Return Bond Fund for the 30 day period ended April 30, 1998
is shown below:
<TABLE>
<CAPTION>
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
ASAF Federated High Yield Bond Fund
ASAF Total Return Bond Fund
</TABLE>
Non-Standardized Performance. In order to more completely represent a
Fund's performance or more accurately compare such performance to other measures
of investment return, a Fund also may include in advertisements, sales
literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which standardized return is quoted; it may
consist of an aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. Non-Standardized Return may or
may not take sales charges into account; performance data calculated without
taking the effect of sales charges into account will be higher than data
including the effect of such charges. Non-standardized performance will be
advertised only if the standard performance data for the same period, as well as
for the required periods, is also presented.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current NAV per share.
A Fund's effective distribution rate is computed by dividing the distribution
rate by the ratio used to annualize the most recent monthly distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. Unlike a Fund's yield, which
is computed from the yields to maturity of all debt obligations held by the
Fund, the distribution rate is based on a Fund's last monthly distribution. A
Fund's monthly distribution tends to be relatively stable and may be more or
less than the amount of net investment income and short-term capital gain
actually earned by the Fund during the month (see the Company's Prospectus under
"Dividends, Capital Gains and Taxes").
Other data that may be advertised or published about each Fund include
the average portfolio quality, the average portfolio maturity and the average
portfolio duration.
Comparative Information. From time to time, the Funds may advertise
their performance compared to similar funds using certain unmanaged indices,
reporting services and publications. Descriptions of some of the indices which
may be used are listed below:
o The Standard & Poor's 500 Composite Stock Price Index is a
well-diversified list of 500 large capitalization companies representing the
U.S. Stock Market.
o The Standard and Poor's Small Cap 600 index is designed to represent
price movements in the small cap U.S. equity market. It contains companies
chosen by the Standard & Poor's Index Committee for their size, industry
characteristics, and liquidity. None of the companies in the S&P 600 overlap
with the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is weighted by
market capitalization.
o The NASDAQ Composite OTC Price Index is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks.
o The Lehman Government Bond Index is a measure of the market value of
all public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government. Mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government
Index.
o The Lehman Government/Corporate Bond Index is a measure of the market
value of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or its equivalent or higher ("investment grade") by
a nationally recognized rating agency.
o The Russell 2000 Index represents the bottom two thirds of the
largest 3000 publicly traded companies domiciled in the U.S. Russell uses total
market capitalization to determine the companies that are included in the Index.
Only common stocks are included in the Index.
o The Russell 2500 Index is a market value-weighted, unmanaged index
showing total return (i.e., principal changes with income) in the aggregate
market value of 2,500 stocks of publicly traded companies domiciled in the
United States. The Index includes stocks traded on the New York Stock Exchange
and the American Stock Exchange as well as in the over-the-counter market.
o The Morgan Stanley Capital International EAFE Index (the "EAFE
Index") is an unmanaged index, which includes over 1,000 companies representing
the stock markets of Europe, Australia, New Zealand and the Far East. The EAFE
Index is typically shown weighted by the market capitalization. However, EAFE is
also available weighted by Gross Domestic Product ("GDP"). These weights are
modified on July 1st of each year to reflect the prior year's GDP.
o The Lehman Brothers High Yield BB Index is a measure of the market
value of public debt issues with a minimum par value of $100 million and rated
Ba1-Ba3 by Moody's. All bonds within the index are U.S. dollar denominated,
non-convertible and have at least one year remaining to maturity.
Each Fund's investment performance may be advertised in various
financial publications, newspapers, magazines, including: Across the Board,
Advertising Age, Adviser's Magazine, Adweek, Agent, American Banker, American
Agent and Broker, Associated Press, Barron's, Best's Review, Bloomberg, Broker
World, Business Daily, Business Insurance, Business Marketing, Business Month,
Business News Features, Business Week, Business Wire, California Broker,
Changing Times, Consumer Reports, Consumer Digest, Crain's, Dow Jones News
Service, Economist, Entrepreneur, Entrepreneurial Woman, Financial Planning,
Financial Services Week, Financial Times, Financial World, Forbes, Fortune,
Hartford Courant, Inc., Independent Business, Institutional Investor, Insurance
Forum, Insurance Advocate Independent, Insurance Review Investor's, Insurance
Times, Insurance Week, Insurance Product News, Insurance Sales, Investment
Dealers Digest, Investment Advisor, Journal of Commerce, Journal of Accountancy,
Journal of the American Society of CLU & ChFC, Kiplinger's Personal Finance,
Knight-Ridder, Life Association News, Life Insurance Selling, Life Times,
LIMRA's MarketFacts, Lipper Analytical Services, Inc., MarketFacts, Medical
Economics, Money, Morningstar, Inc., Nation's Business, National Underwriter,
New Choices, New England Business, New York Times, Pension World, Pensions &
Investments, Professional Insurance Agents, Professional Agent, Registered
Representative, Reuter's, Rough Notes, Round the Table, Service, Success, The
Standard, The Boston Globe, The Washington Post, Tillinghast, Time, U.S. News &
World Report, U.S. Banker, United Press International, USA Today, Value Line,
The Wall Street Journal, Wiesenberger Investment and Working Woman.
From time to time the Company may publish the sales of shares of one or
more of the Funds on a gross or net basis and for various periods of time, and
compare such sales with sales similarly reported by other investment companies.
MANAGEMENT OF THE COMPANY
The following table sets forth information concerning the officers and
Directors of the Company, including their addresses and principal business
occupations for the last five years:
<TABLE>
<CAPTION>
Name, Age and Address:(1) Position Held with the Company:(2) Principal Occupation:(3)
<S> <C> <C> <C>
John Birch (47)* Vice President Senior Vice President and Chief
Operating Officer:
American Skandia Investment Services,
Incorporated
December 1997 to present
Executive Vice President and
Chief Operating Officer:
International Fund Administration
Bermuda
August 1996 to October 1997
Senior Vice President and
Chief Administrative Officer:
Gabelli Funds, Inc.
Rye, New York
March 1995 to August 1996
Executive Vice President:
Kansallis Osake Pankki
New York, New York
May 1985 to March 1995
Gordon C. Boronow (45)* Vice President & Director President & Chief Operating Officer:
American Skandia Life Assurance
Corporation
Jan R. Carendi (53)* President, Principal Executive Officer Senior Executive Vice President &
and Director Member of Corporate Management Group:
Skandia Insurance Company Ltd.
David E. A. Carson (64) Director Chairman & Chief Executive Officer:
People's Bank People's Bank (January 1998 to present)
850 Main Street
Bridgeport, CT 06604 President, Chairman & Chief Executive
Officer:
People's Bank (1983 to January 1998)
Richard G. Davy, Jr. (50) Treasurer and Chief Financial and Vice President, Operations:
Accounting Officer 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 (35) Secretary Senior Counsel, Securities and
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 (73) 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 (45)* Director Executive Vice President & Chief
Financial Officer:
American Skandia Life Assurance
Corporation
Thomas M. O'Brien (47) Director Vice Chairman:
North Fork Bank North Fork Bank (January 1997 to
275 Broad Hollow Road present)
Melville, NY 11747
President & Chief Executive Officer:
North Side Savings Bank (December 1984
to December 1996)
F. Don Schwartz (63) Director Management Consultant
1101 Penn Grant Road (April 1985 to present)
Lancaster, PA 17602
</TABLE>
* Indicates a Director of the Company who is an "interested person" within
the meaning set forth in the 1940 Act.
(1) Unless otherwise indicated, the address of each officer and director listed
above is One Corporate Drive, Shelton, Connecticut 06484.
(2) All of the officers and Directors of the Company listed above serve in
similar capacities for the Trust and/or American Skandia Trust, both of which
are also investment companies managed by the Investment Manager.
(3) Unless otherwise indicated, each officer and director listed above has held
his principal occupation for at least the last five years. In addition to the
principal occupations noted above, the following officers and Directors of the
Company hold the following positions with American Skandia Life Assurance
Corporation ("ASLAC"), American Skandia Investment Services, Incorporated
("ASISI"), American Skandia Marketing, Incorporated ("ASM"), American Skandia
Information Services and Technology Corporation ("ASIST") or American Skandia
Investment Holding Corporation ("ASIHC"): Mr. Boronow also serves as Executive
Vice President, Chief Operating Officer and a Director of ASIHC, and a Director
of ASLAC, ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President,
Chief Executive Officer and a Director of ASIHC, and Chief Executive Officer and
a Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director of
ASISI; Mr. Mazzaferro also serves as Executive Vice President, Chief Financial
Officer and a Director of ASIHC, a Director of ASLAC, President, Chief Financial
Officer and a Director of ASISI, and Executive Vice President and Chief
Financial Officer of ASM and ASIST.
The Company's Articles of Incorporation provides that the Directors,
officers and employees of the Company may be indemnified by the Company to the
fullest extent permitted by federal and state law, including Maryland law.
Neither the Articles of Incorporation nor the By-laws of the Company authorize
the Company to indemnify any director or officer against any liability to which
he or she would otherwise be subject by reason of or for willful misfeasance,
bad faith, gross negligence or reckless disregard of such person's duties.
The officers and Directors of the Company who are "interested persons"
within the meaning of the 1940 Act do not receive compensation directly from the
Company for serving in the capacities described above. Those officers and
Directors of the Company, however, who are affiliated with the Investment
Manager may receive remuneration indirectly from the Company for services
provided in their respective capacities with the Investment Manager. Each of the
non-interested Directors is expected to receive for his service on the Board of
Directors an annual and "per-meeting" fee, plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with attendance at Board meetings.
The following table sets forth information concerning the compensation
anticipated to be paid by the Company to the Directors in the current fiscal
year. Neither the Company nor any investment company in the Fund Complex offers
any pension or retirement benefits to its directors or trustees.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the
Name of Director: from the Company:(1) Company and Fund Complex:(2)
<S> <C> <C>
Gordon C. Boronow $ 0 $ 0
Jan R. Carendi $ 0 $ 0
David E.A. Carson $20,000 $72,000
Julian A. Lerner $20,000 $72,000
Thomas M. Mazzaferro $ 0 $ 0
Thomas M. O'Brien $20,000 $72,000
F. Don Schwartz $20,000 $72,000
</TABLE>
(1) The amount indicated estimates the compensation anticipated to be paid to
the Directors of the Company for the Company's fiscal year ending October 31,
1998.
(2) As of the date of this SAI, the "Fund Complex" consisted of the Company, the
Trust and American Skandia Trust. The amount indicated estimates the
compensation anticipated to be paid to the Directors by the Fund Complex for the
twelve month period ending October 31, 1998.
The Directors and officers of the Company own, in the aggregate, 1.5% of the
Class A shares of the ASAF Founders International Small Capitalization Fund as
of June 2, 1998. The Directors and officers of the Company own, in the
aggregate, less than 1% of the shares of each class of the Company not listed
above.
INVESTMENT ADVISORY & ADMINISTRATION SERVICES
THE INVESTMENT MANAGER:
American Skandia Investment Services, Incorporated ("ASISI," as
previously defined) acts as investment manager to each Non-Feeder Fund and
Portfolio pursuant to separate investment management agreements with the Company
and the Trust, respectively (the "Management Agreements"). Unlike the Non-Feeder
Funds, each of the Feeder Funds invests all of its respective investable assets
in a corresponding Portfolio of the Trust and thus does not require an
investment manager.
ASISI, a Connecticut corporation organized in 1991, is registered as an
investment adviser with the Commission and is a wholly-owned subsidiary of
American Skandia Investment Holding Corporation, whose indirect parent is
Skandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish company that
owns, directly or indirectly, a number of insurance companies in many countries.
The predecessor to Skandia commenced operations in 1855. In addition to serving
as investment manager to the Company and the Trust, ASISI currently serves as
the investment manager to American Skandia Trust, an open-end management
investment company whose shares are made available to life insurance companies
writing variable annuity contracts and variable life insurance policies. Shares
of American Skandia Trust also may be offered directly to qualified pension and
retirement plans. For a list of those officers and Directors of the Company who
also serve in similar capacities for the Investment Manager, see this SAI under
"Management of the Company."
The Management Agreements provide, in substance, that the Investment
Manager will furnish each Non-Feeder Fund and Portfolio with investment advice
and investment management and administrative services subject to the supervision
of the Directors of the Company or the Trustees of the Trust, where applicable,
and in conformity with the stated investment objective, policies and limitations
of the applicable Fund or Portfolio. The Investment Manager is responsible for
providing, at its expense, such personnel as is required by each Non-Feeder Fund
or Portfolio for the proper conduct of its affairs and may engage a sub-advisor
to conduct the investment program of the Fund or Portfolio pursuant to the
Investment Manager's obligations under the Management Agreements. The Investment
Manager, not the Funds or Portfolios, is responsible for the expenses of
conducting the investment programs of the Funds and Portfolios.
The Management Agreements provide further that neither the Investment
Manager nor its personnel shall be liable for any act or omission in the course
of, or connected with, rendering services under the agreements, or for any
losses that may be sustained in the purchase, holding or sale of any security on
behalf of the Funds or Portfolios, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the agreements.
The Management Agreements also permit the Investment Manager to render services
to others.
Under the terms of the Management Agreements, each Non-Feeder Fund and
Portfolio has agreed to pay ASISI an investment management fee, which is accrued
daily and paid monthly, equal on an annual basis to a stated percentage of the
respective Fund or Portfolio's average daily NAV. The Investment Manager, not
any Fund or Portfolio, is responsible for the payment of the sub-advisory fees
to the Sub-advisors. 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."
The investment management fee paid for each Fund and Portfolio for the
fiscal period from commencement of operations until October 31, 1997 was as
follows:
<TABLE>
<CAPTION>
Investment
Name of Fund Management Fee
<S> <C>
ASAF Founders International Small Capitalization Fund $520
ASMT T. Rowe Price International Equity Portfolio $4,658
ASAF Janus Overseas Growth Fund $0
ASAF Founders Small Capitalization Fund $577
ASAF T. Rowe Price Small Company Value Fund $1,530
ASAF Neuberger&Berman Mid-Cap Growth Fund $0
ASAF Neuberger&Berman Mid-Cap Value Fund $0
ASAF Robertson Stephens Value + Growth Fund $0
ASAF Marsico Capital Growth Fund $0
ASMT Janus Capital Growth Portfolio $10,500
ASAF Lord Abbett Growth and Income Fund $0
ASMT INVESCO Equity Income Portfolio $4,791
ASAF American Century Strategic Balanced Fund $1,513
ASAF Federated High Yield Bond Fund $1,022
ASMT PIMCO Total Return Bond Portfolio $4,456
ASMT JPM Money Market Portfolio $1,134
</TABLE>
Fees for the Portfolios are based upon the total assets of each
Portfolio, which include assets other than those of the Feeder Funds. The
Portfolios commenced operations in June 1997, while the ASAF Founders
International Small Capitalization Fund, ASAF Founders Small Capitalization
Fund, ASAF T. Rowe Price Small Company Value Fund, ASAF American Century
Strategic Balanced Fund, and ASAF Federated High Yield Bond Fund commenced
operations on July 28, 1997. The ASAF Janus Overseas Growth Fund, ASAF Robertson
Stephens Value + Growth Fund, and ASAF Lord Abbett Growth and Income Fund
commenced operations on January 2, 1998. The ASAF Neuberger&Berman Mid-Cap
Growth Fund, ASAF Neuberger&Berman Mid-Cap Value Fund, and ASAF Marsico Capital
Growth Fund commenced operations on August [insert], 1998. As discussed in this
SAI under "Fund Expenses" and in the Company's Prospectus under "Expense
Information," the Investment Manager has voluntarily agreed to reimburse the
other expenses of each Fund so that each Fund's total expenses do not exceed
specified levels. During the fiscal period, the amounts of these reimbursements
exceeded the investment management fees included in the above table.
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 LLC for the ASAF Founders
International Small Capitalization Fund and the ASAF Founders Small
Capitalization Fund; (b) Rowe Price-Fleming International, Inc. for the ASMT T.
Rowe Price International Equity Portfolio; (c) Janus Capital Corporation for the
ASAF Janus Overseas Growth Fund and the ASMT Janus Capital Growth Portfolio; (d)
T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small Company Value
Fund; (e) Neuberger&Berman Management Incorporated for the ASAF Neuberger&Berman
Mid-Cap Growth Fund and the ASAF Neuberger&Berman Mid-Cap Value Fund; (f)
Robertson, Stephens & Company Investment Management, L.P. for the ASAF Robertson
Stephens Value + Growth Fund; (g) Marsico Capital Management, LLC for the ASAF
Marsico Capital Growth Fund; (h) Lord, Abbett & Co. for the ASAF Lord Abbett
Growth and Income Fund; (i) INVESCO Funds Group, Inc. for the ASMT INVESCO
Equity Income Portfolio; (j) American Century Investment Management, Inc.
(formerly known as, "Investors Research Corporation") for the ASAF American
Century Strategic Balanced Fund; (k) Federated Investment Counseling for the
ASAF Federated High Yield Bond Fund; (l) Pacific Investment Management Company
for the ASMT PIMCO Total Return Bond Portfolio; (m) J.P. Morgan Investment
Management Inc.
for the ASMT JPM Money Market Portfolio.
The Sub-Advisory Agreements provide that the Sub-advisors will
formulate and implement a continuous investment program for each Non-Feeder Fund
or Portfolio in accordance with the Fund or Portfolio's investment objective,
policies and limitations and any investment guidelines established by the
Investment Manager. Each Sub-advisor will, subject to the supervision and
control of the Investment Manager, determine in its discretion which issuers and
securities will be purchased, held, sold or exchanged by the Fund or Portfolio,
and will place orders with and give instructions to brokers and dealers to cause
the execution of such transactions. The Sub-advisors are required to furnish the
Investment Manager with periodic reports concerning the transactions and
performance of the Fund or Portfolio. Each Sub-advisor is required to furnish at
its own expense all investment facilities necessary to perform its obligations
under the Sub-Advisory Agreement. Nothing in the Sub-advisory Agreements
prevents the Investment Manager from engaging other sub-advisors to provide
investment advice and other services to a Fund or Portfolio, or from providing
such services itself.
The sub-advisory fee paid by the Investment Manager for each Fund and
Portfolio for the fiscal period from commencement of operations until October
31, 1997 was as follows:
<TABLE>
<CAPTION>
Name of Fund Sub-advisory Fee
<S> <C>
ASAF Founders International Small Capitalization Fund $284
ASMT T. Rowe Price International Equity Portfolio $2,329
ASAF Janus Overseas Growth Fund $0
ASAF Founders Small Capitalization Fund $320
ASAF T. Rowe Price Small Company Value Fund $917
ASAF Neuberger&Berman Mid-Cap Growth Fund $0
ASAF Neuberger&Berman Mid-Cap Value Fund $0
ASAF Robertson Stephens Value + Growth Fund $0
ASAF Marsico Capital Growth Fund $0
ASMT Janus Capital Growth Portfolio $4,725
ASAF Lord Abbett Growth and Income Fund $0
ASMT INVESCO Equity Income Portfolio $2,235
ASAF American Century Strategic Balanced Fund $839
ASAF Federated High Yield Bond Fund $365
ASMT PIMCO Total Return Bond Portfolio $1,714
ASMT JPM Money Market Portfolio $204
</TABLE>
Fees for the Portfolios are based upon the total assets of each
Portfolio, which include assets other than those of the Feeder Funds. The
Portfolios commenced operations in June 1997, while the ASAF Founders
International Small Capitalization Fund, ASAF Founders Small Capitalization
Fund, ASAF T. Rowe Price Small Company Value Fund, ASAF American Century
Strategic Balanced Fund, and ASAF Federated High Yield Bond Fund commenced
operations on July 28, 1997. The ASAF Janus Overseas Growth Fund, ASAF Robertson
Stephens Value + Growth Fund, and ASAF Lord Abbett Growth and Income Fund
commenced operations on January 2, 1998. The ASAF Neuberger&Berman Mid-Cap
Growth Fund, ASAF Neuberger&Berman Mid-Cap Value Fund, and ASAF Marsico Capital
Growth Fund commenced operations on August [insert], 1998.
Each Sub-Advisory Agreement will continue in effect from year to year,
provided it is approved at least annually by a vote of the majority of the
Directors or Trustees, where applicable, who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting specifically
called for the purpose of voting on such approval. Each Sub-Advisory Agreement
may be terminated without penalty at any time by the Investment Manager or the
Sub-advisor upon 60 days' written notice, and will automatically terminate in
the event of its "assignment" (as that term is defined in the 1940 Act) or upon
termination of the Management Agreement with respect to that particular Fund or
Portfolio (provided that the Sub-advisor has received notice of such
termination).
THE ADMINISTRATOR:
PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,
Delaware 19809, a Delaware corporation which is an indirect wholly-owned
subsidiary of PNC Financial Corp., serves as the administrator for both the
Company and the Trust. Pursuant to administration agreements between the
Administrator and the Company and the Trust, respectively (the "Administration
Agreements"), the Administrator has agreed to provide certain fund accounting
and administrative services to the Company and the Trust, including, among other
services, accounting relating to the Company and the Trust and the investment
transactions of the foregoing; computing daily NAVs; monitoring the investments
and income of the Company and the Trust for compliance with applicable tax laws;
preparing for execution and filing federal and state tax returns, and annual and
semi-annual shareholder reports; preparing monthly financial statements
including a schedule of investments; assisting in the preparation of
registration statements and other filings related to the registration of shares;
coordinating contractual relationships and communications between the Investment
Manager and the Company's and the Trust's custodians; preparing and maintaining
the Company's and the Trust's books of account, records of securities
transactions, and all other books and records in accordance with applicable
laws, rules and regulations (including, but not limited to, those records
required to be kept pursuant to the 1940 Act); and performing such other duties
related to the administration of the Company and the Trust as may be agreed upon
in writing by the parties to the respective Administration Agreements.
Under the terms of the Administration Agreements, the Administrator
shall be obligated to exercise care and diligence in the performance of its
duties, to act in good faith and to use its best efforts, within reasonable
limits, in performing services to be provided for under the agreements. The
Administrator shall be liable for any damages arising out of its failure to
perform its duties under the Administration Agreements to the extent such
damages arise out of its willful misfeasance, bad faith, gross negligence or
reckless disregard of such duties. Any person, even though also an officer,
director, partner, employee or agent of the Administrator, who may be or become
an officer, director, trustee, employee or agent of the Company or the Trust,
shall be deemed when rendering services to the Company or the Trust or acting on
any business of the Company or the Trust (other than services or business in
connection with the Administrator's duties under the Administration Agreements)
to be rendering such services to or acting solely for the Company or the Trust
and not as an officer, director, partner, employee or agent or one under the
control or direction of the Administrator even though paid by them. The
Administration Agreements shall continue until terminated by either party on 60
days' prior written notice to the other party.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreements includes payment of the
Administrator's "out-of-pocket" expenses. Such reimbursable "out-of-pocket"
expenses include, but are not limited to, postage and mailing, telephone, telex,
Federal Express, outside independent pricing service charges and record
retention/storage. For the period from commencement of operations until October
31, 1997, the Company paid the Administrator $16,898, and the Trust paid the
Administrator $25,353.
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 March 1, 1999 to
reimburse each Fund for its respective operating expenses (and, in the case of
the Feeder Funds, the Feeder Fund's pro rata share of operating expenses of the
Fund's corresponding Portfolio), exclusive of taxes, interest, brokerage
commissions, distribution fees and extraordinary expenses, but inclusive of the
management fee, which in the aggregate exceed specified percentages of the
Fund's average net assets as follows:
ASAF Founders International Small Capitalization Fund: 1.60%
ASAF T. Rowe Price International Equity Fund: 1.60%
ASAF Janus Overseas Growth Fund: 1.60%
ASAF Founders Small Capitalization Fund: 1.20%
ASAF T. Rowe Price Small Company Value Fund: 1.25%
ASAF Neuberger&Berman Mid-Cap Growth Fund: 1.25%
ASAF Neuberger&Berman Mid-Cap Value Fund: 1.25%
ASAF Robertson Stephens Value + Growth Fund: 1.30%
ASAF Marsico Capital Growth Fund: 1.25%
ASAF Janus Capital Growth Fund: 1.20%
ASAF Lord Abbett Growth & Income Fund: 1.10%
ASAF INVESCO Equity Income Fund: 1.05%
ASAF American Century Strategic Balanced Fund: 1.10%
ASAF Federated High Yield Bond Fund: 1.00%
ASAF Total Return Bond Fund: 0.90%
ASAF JPM Money Market Fund: 1.00%
The Investment Manager may terminate the above voluntary agreements at
any time after March 1, 1999. Voluntary payments of Fund expenses by the
Investment Manager may be made subject to reimbursement by the Fund, at the
Investment Manager's discretion, within the two year period following such
payment to the extent permissible under applicable law and provided that the
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations.
DISTRIBUTION ARRANGEMENTS
THE DISTRIBUTOR:
American Skandia Marketing, Incorporated ("ASM" or the "Distributor"),
located at One Corporate Drive, Shelton, Connecticut 06484, serves as the
principal underwriter and distributor for each Fund pursuant to an underwriting
agreement initially approved by the Directors of the Company (the "Underwriting
Agreement"). The Distributor is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc. ("NASD"). The Distributor is an
"affiliated person" (within the meaning of the 1940 Act) of the Company, the
Trust and the Investment Manager, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation.
Shares of each Fund will be continuously offered and will be sold by
selected broker-dealers who have executed selling agreements with the
Distributor. The Distributor bears all the expenses of providing services
pursuant to the Underwriting Agreement. Each Fund bears the expenses of
registering its shares with the Commission and with applicable state regulatory
authorities. The Underwriting Agreement continues in effect for two years from
initial approval and for successive one-year periods thereafter, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Directors of the Company, including a majority of the Directors who are not
parties to the Underwriting Agreement or "interested persons" of any such party
(as defined in the 1940 Act); or (ii) by the vote of a "majority of the
outstanding voting securities" of a Fund (as defined in the 1940 Act). In the
event that the Underwriting Agreement terminates, all obligations of the
Distributor thereunder shall cease, including the Distributor's undertaking to
purchase Class X Bonus Shares. For information regarding Class X Bonus Shares
and the Distributor's undertaking, see the Company's Prospectus under "How to
Buy Shares: Purchase of Class X Shares." The Distributor is not obligated to
sell any specific amount of shares of any Fund.
THE DISTRIBUTION PLANS:
The Company has adopted separate Distribution and Service plans
(commonly referred to as "12b-1 Plans") for Class A, B, C and X shares of each
Fund (the "Class A Plan," "Class B Plan," "Class C Plan" and "Class X Plan,"
individually, and collectively, the "Plans") pursuant to appropriate resolutions
of the Directors of the Company and in accordance with the requirements of Rule
12b-1 under the 1940 Act and the requirements of the applicable rules of the
NASD regarding asset based sales charges. The Plans permit the payment of
certain fees to the Distributor for its services and costs in distributing Fund
shares and providing for services to shareholder accounts. The Distributor has
assigned its right to receive any distribution and service fees under the Class
B Plan and the Class X Plan, as well as any contingent deferred sales charge for
Class B and Class X shares, to an unaffiliated third party that finances the
sale of Class B and Class X shares. Under the terms of the Plans, the
Distributor provides to each Fund, for review by the Directors of the Company, a
quarterly written report of the amounts expended under the respective Plans and
the purpose for which such expenditures were made. The Directors of the Company
will review such levels of compensation the Plans provide in considering the
continued appropriateness of the Plans.
The Plans were adopted by a majority vote of the Directors of the
Company, including at least a majority of Directors who are not "interested
persons" of the Funds (as defined in the 1940 Act) and who do not have any
direct or indirect financial interest in the operation of the Plans, cast in
person at a meeting called for the purpose of voting on the Plans. In approving
the Plans, the Directors of the Company identified and considered a number of
potential benefits which the Plans may provide, including, but not limited to,
the adequate provision for the costs of implementing effective distribution
activities in the competitive environment and the availability to shareholders
of services provided by representatives who have knowledge of the shareholders'
particular circumstances and goals. With respect to the Class X Plan, the
Directors considered the possible increase in investor interest and consequent
increase in portfolio assets resulting from the use of the fees payable under
such plan, in part, to facilitate the Distributor's purchase of additional
shares for Class X investors as a bonus. The Directors of the Company believe
that there is a reasonable likelihood that the Plans will benefit each Fund and
its current and future shareholders in the manner contemplated.
The Plans, pursuant to their terms, remain in effect from year to year
provided such continuance is approved annually by vote of the Directors in the
manner described above. The Plans may not be amended to increase materially the
amount to be spent for distribution without approval of the shareholders of each
class of a Fund affected thereby entitled to vote thereon under the 1940 Act,
and material amendments to the Plans must also be approved by the Directors of
the Company in the manner described above. A Plan may be terminated at any time,
without payment of a penalty, by vote of the majority of the Directors of the
Company who are not interested persons of the Fund and have no direct or
indirect financial interest in the operations of the Plan, or by a vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
each class of a Fund affected thereby entitled to vote thereon under the 1940
Act. A Plan will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act).
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 quotations.
However, in certain circumstances where market quotations are not readily
available, assets are valued by methods specified in the procedures that are
believed to accurately reflect the assets' fair value.
Securities held by each Non-Feeder Fund and Portfolio, other than the
ASMT JPM Money Market Portfolio (the "Money Market Portfolio"), that are valued
based on market quotations will be valued as follows: portfolio securities,
including open short positions and options written, are valued at the last sale
price on the securities exchange or securities market (including the NASDAQ
National Market System) on which such securities primarily are traded.
Securities not listed on an exchange or securities market, or securities in
which there were not transactions on that day, are valued at the average of the
most recent bid and asked price, except in the case of open short positions
where the asked price is available. Portfolio securities which are traded both
"over-the-counter" and on an exchange are valued according to their primary
market, and it is expected that for debt securities this ordinarily will be the
over-the-counter market.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the net asset value of the shares of a Fund
or Portfolio generally are determined as of such earlier times. Foreign currency
exchange rates are also generally determined prior to the close of the NYSE.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which such values usually are determined
and the close of the NYSE. If such extraordinary events occur, their effects may
not be reflected in the net asset value of a Fund or Portfolio calculated as of
the close of the NYSE on that day.
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 value, 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, other than for the
ASAF JPM Money Market Fund, is determined by adding the maximum sales charge to
the NAV per share. Class A shares of the ASAF JPM Money Market fund, Class B, C
and X shares are offered at NAV without the imposition of an initial sales
charge.
ADDITIONAL INFORMATION ON THE
PURCHASE AND REDEMPTION OF SHARES
RIGHTS OF ACCUMULATION:
Each Fund offers to all qualifying investors certain "rights of
accumulation" under which investors are permitted to purchase Class A shares of
any Fund at the price applicable to the total of (a) the then current purchase
amount plus (b) an amount equal to the then current NAV of the purchaser's
holdings of all shares of any Fund of the Company. Acceptance of the purchase
order is subject to confirmation of qualification. A qualifying investor's
rights of accumulation may be amended or terminated at any time as to subsequent
purchases.
LETTER OF INTENT:
Any person may qualify for a reduced sales charge on purchases of Class
A shares made within a thirteen-month period pursuant to a Letter of Intent
("LOI"). In computing the total amount purchased for purposes of determining the
applicable sales commission, the offering price of shares currently held in the
Funds which were purchased within 90 days from the date of acceptance of the LOI
may be used as a credit toward Fund shares to be purchased under the LOI. Class
A, B, C and X shares acquired through the reinvestment of distributions do not
constitute purchases for purposes of the LOI. During the term of an LOI, Boston
Financial Data Services, Inc., the Company's transfer agent (the "Transfer
Agent"), will hold shares in escrow to secure payment of the higher sales charge
applicable for shares actually purchased if the amount indicated on the LOI is
not purchased. Dividends and capital gains will be paid on all escrowed shares
and these shares will be released when the amount indicated on the LOI has been
purchased. An LOI does not obligate the investor to buy or the Fund to sell the
indicated amount of the LOI. If the specified amount of the LOI is not
purchased, the shareholder shall remit to the Transfer Agent an amount equal to
the difference between the sales charge paid and the sales charge that would
have been paid had the aggregate purchases been made at a single time. If the
Class A shareholder does not (within twenty days after a written request by the
Transfer Agent) pay such difference in sales charge, the Transfer Agent will
redeem an appropriate number of escrowed shares in order to realize such
difference. Additional information about the terms of the LOI are available from
your registered representative.
SPECIAL REDEMPTIONS:
Although it would not normally do so, each Fund has the right to pay
the redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Directors of the Company. When the shareholder
sells portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining NAV. The Funds have elected to
be governed by Rule 18f-1 under the 1940 Act, pursuant to which each Fund is
obligated to redeem shares solely in cash from any one account during any 90-day
period up to the lesser of $250,000 or 1% of the NAV of the applicable Fund or
Portfolio at the beginning of such period.
SUSPENSION OF REDEMPTIONS:
A Fund may not suspend a shareholder's right of redemption or postpone
payment for a redemption for more than seven days, unless the New York Stock
Exchange ("NYSE") is closed for other than customary weekends or holidays, or
trading on the NYSE is restricted, or for any period during which an emergency
exists as a result of which (1) disposal by a Fund or Portfolio of securities
owned by it is not reasonably practicable, or (2) it is not reasonably
practicable for a Fund to fairly determine the value of its assets, or for such
other periods as the Commission may permit for the protection of investors.
For further information regarding the purchase and redemption of Fund
shares, see "How to Buy Shares" and "How to Redeem Shares," respectively, in the
Company's Prospectus.
PORTFOLIO TRANSACTIONS
BROKERAGE ALLOCATION:
Subject to the supervision of the Directors of the Company and the
Trustees of the Trust, where applicable, decisions to buy and sell securities
for the Company and the Trust are made for each Non-Feeder Fund and Portfolio by
its respective Sub-advisor. Each Sub-advisor is authorized to allocate the
orders placed by it on behalf of the applicable Fund or Portfolio to brokers who
also provide research or statistical material or other services to the
Sub-advisor or the Fund or Portfolio for the use of the applicable Fund or
Portfolio and other accounts as to which the Sub-advisor exercises investment
discretion. Such allocation shall be in such amounts and proportions as the
Sub-advisor shall determine. The Sub-advisor will report on allocations of
brokerage either to the Investment Manager, which will report on such
allocations to the Directors of the Company or the Trustees of the Trust, where
applicable, or, if requested, directly to the Directors or Trustees. These
reports will indicate the brokers to whom such allocations have been made and
the basis therefor. The Sub-advisor may consider sale of shares of the Funds, or
may consider or follow recommendations of the Investment Manager that take such
sales into account, as factors in the selection of brokers to effect portfolio
transactions for a Fund or Portfolio, subject to the requirements of best net
price available and most favorable execution. In this regard, the Investment
Manager may direct certain of the Sub-advisors to try to effect a portion of
their Fund or Portfolio's investment transactions through broker-dealers that
sell shares of the Fund (or corresponding Fund, in the case of the Portfolios),
to the extent consistent with best net price available and most favorable
execution.
Subject to the rules promulgated by the Commission, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in amounts and proportions as the Sub-advisor shall
determine. The Sub-advisor will report on these allocations of brokerage either
to the Investment Manager, which will report on such allocations to the
Directors of the Company or the Trustees of the Trust, where applicable, or, if
requested, directly to the Directors or Trustees.
In selecting a broker to effect each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Subject to such policies and procedures as the Directors of
the Company and the Trustees of the Trust may determine, a Sub-advisor shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason
of its having caused a Fund or Portfolio to pay a broker that provides research
services to the Sub-advisor an amount of commission for effecting an investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction, if the Sub-advisor determines in good
faith that such amount of commission was reasonable in relation to the value of
the research service provided by such broker viewed in terms of either that
particular transaction or the Sub-advisor's ongoing responsibilities with
respect to the Fund or Portfolio and other accounts as to which the Sub-advisor
exercises investment discretion. Accordingly, the amount of the brokerage
commission in any transaction may be greater than that available from other
brokers if the difference is reasonably justified by other aspects of the
services offered. For the period from commencement of operations until October
31, 1997, aggregate brokerage commissions of $3,500 and $17,817 were paid in
relation to brokerage transactions of the Company and the Trust, respectively.
During the period ending October 31, 1997, brokerage commissions were
paid to certain affiliates of Rowe Price-Fleming International, Inc. by the ASMT
T. Rowe Price International Equity Portfolio in the amount of $54. For that
period, 0.8% of the total brokerage commissions paid by this Portfolio were paid
to the affiliated brokers, with respect to transactions representing 1.1% of the
Portfolio's total dollar amount of transactions involving the payment of
commissions.
ALLOCATION OF INVESTMENTS:
The Sub-advisors of the Non-Feeder Funds and Portfolios have other
advisory clients, some of which have similar investment objectives to one or
more of the Funds or Portfolios for which advisory services are being provided.
In addition, a Sub-advisor may be engaged to provide advisory services for more
than one Fund or Portfolio. There will be times when a Sub-advisor may recommend
purchases and/or sales of the same securities for a Fund or Portfolio and the
Sub-advisor's other clients. In such circumstances, it will be the policy of
each Sub-advisor to allocate purchases and sales among a Fund or Portfolio and
its other clients, including other Funds or Portfolios for which the Sub-advisor
provides advisory services, in a manner which the Sub-advisor deems equitable,
taking into consideration such factors as size of account, concentration of
holdings, investment objectives, tax status, cash availability, purchase costs,
holding period and other pertinent factors relative to each account.
PORTFOLIO TURNOVER:
Each Non-Feeder Fund and Portfolio may sell its portfolio securities,
regardless of the length of time that they have been held, if the Sub-advisor
and/or the Investment Manager determines that such a disposition is in the
Fund's or Portfolio's best interest. Portfolio turnover rates may increase as a
result of the need for a Fund or Portfolio to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's or Investment Manager's
control. A high rate of portfolio turnover (generally in excess of 100%)
involves correspondingly higher brokerage commission expenses and other
transaction costs, which must be ultimately borne by a Fund's shareholders.
Trading in fixed income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. High
portfolio turnover rates may also generate larger taxable income and taxable
capital gains than would result from lower portfolio turnover rates and may
create higher tax liability for a Fund's shareholders.
A 100% portfolio turnover rate would occur if all of the securities in
a portfolio of investments were replaced during a given period. For additional
information regarding portfolio turnover, see the Company's Prospectus under
"Portfolio Transactions."
ADDITIONAL TAX CONSIDERATIONS
Federal Income Tax Consequences. Each Fund is treated as a separate
entity for federal income tax purposes. Each Fund has qualified and elected or
intends to qualify and elect to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to continue to so qualify in the future. As a regulated
investment company, a Fund must, among other things, (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
stock and securities, gains from the sale or other disposition of stock,
securities or foreign currency and other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or foreign currency; and (b)
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the value of the Fund's total assets is represented by cash,
cash items, U.S. Government securities, securities of other regulated investment
companies, and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets, and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or securities of other regulated investment
companies). As a regulated investment company, a Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements (the "Distribution
Requirement"). For additional information regarding the Funds' treatment as
regulated investment companies under the Code, and certain consequences if such
treatment is not accorded any Fund, see the Company's Prospectus under
"Dividends, Capital Gains and Taxes."
Each Fund will be subject to a 4% non-deductible federal excise tax on
a portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. Each
Fund intends to avoid liability for such tax by satisfying such distribution
requirements.
Each of the Feeder Funds will invest all of its investable assets in a
corresponding Portfolio of the Trust. Each such Fund will be deemed to own a
proportionate share of its corresponding Portfolio's assets and income for the
purpose of determining whether the Fund qualifies as a regulated investment
company. Accordingly, each Portfolio intends to conduct its operations so that
its corresponding Fund will be able to satisfy applicable tax requirements.
If a Fund or Portfolio acquires stock in certain non-U.S. corporations
("passive foreign investment companies" or "PFICs") that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gains) or at least 50% of whose average assets
produce or are held for the production of such passive income, that Fund (or, in
the case of a Portfolio, its corresponding Fund indirectly through its interest
in the Portfolio) could be subject to federal income tax and additional interest
charges on "excess distributions" received from such companies or gain from the
sale of stock in such companies, even if the Fund distributes its share of the
PFIC income as a taxable dividend to its shareholders. A certain election
(treating the PFIC as a "qualified electing fund") filed with the Fund's federal
income tax return may, if available, ameliorate these adverse tax consequences,
but any such election would require the applicable Fund to recognize ordinary
taxable income and net capital gain of the PFIC without the corresponding
receipt of cash which may need to be distributed by the Fund to satisfy the
Distribution Requirement.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Funds would be entitled to avoid the tax consequences
described in the previous paragraph by electing to mark-to-market their stock in
certain PFICs. Marking to market in this context means recognizing as gain for
each taxable year the excess, as of the end of that year, of the fair market
value of each PFIC's stock over the owner's adjusted basis in that stock
(including mark to market gains of a prior year for which an election was in
effect).
Gains and losses realized by a Fund (directly, or through its interest
in a Portfolio) in connection with certain transactions involving foreign
currency-denominated debt securities, certain foreign currency futures and
options, foreign currency forward contracts, foreign currencies themselves, or
payables or receivables denominated in a foreign currency are generally treated
as ordinary income and loss.
Some Funds, or, in certain cases, the Portfolio in which a Fund may
invest its assets, may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. A Fund, more than 50% of the value of whose total assets at the close of
a taxable year (held directly or indirectly through a corresponding Portfolio)
consists of stock or securities in foreign corporations, may elect to
"pass-through" these foreign taxes to its shareholders, in which case each
shareholder will be required to include its pro rata portion thereof in its
gross income but, if it itemizes deductions, will be able to deduct or (subject
to various limitations) will be able to claim a credit for its portion of such
taxes, in computing its federal income tax liability.
Each Fund or Portfolio that invests in zero coupon securities or in
other securities with original issue discount (or securities with market
discount, if the Fund or Portfolio elects to include market discount in income
currently) must accrue such discount income currently even if no corresponding
payment is received. However, because income subject to a Fund's Distribution
Requirement includes such accrued discount, to satisfy that requirement, a Fund
may have to dispose of its (or, as the case may be, its corresponding
Portfolio's) securities under disadvantageous circumstances, or borrow, to
generate the needed cash.
Forward currency contracts, options and futures contracts entered into
by a Fund or Portfolio may create "straddles" for federal income tax purposes
with other such contracts or with securities positions, and this may affect the
character and timing of gains or losses realized by the Fund (or, in the case of
a Portfolio, by its corresponding Fund) on such contracts, options or
securities. Certain straddles treated as short sales for tax purposes may also
result in the loss of the holding period of securities included in the straddles
for purposes of the 30% of gross income test described above, and therefore, a
Fund's or Portfolio's ability to enter into forward currency contracts, options
and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a Fund
or Portfolio at the end of each taxable year will be required to be
"marked-to-market" for federal income tax purposes -- i.e., treated as having
been sold at market value. For options and futures contracts, 60% of any gain or
loss recognized on these deemed sales and on actual dispositions will be treated
as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss regardless of how long the Fund or Portfolio has
held such options or futures. However, gain or loss recognized on certain
foreign currency contracts will be treated as ordinary income or loss.
If a Fund or Portfolio satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging position
during the period of the hedge for purposes of determining whether the Fund (or,
in the case of a Portfolio, its corresponding Fund) satisfies the 30% gross
income test above. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. Each Fund or
Portfolio will consider whether it should seek to satisfy those requirements to
enable the Fund (or, in the case of a Portfolio, its corresponding Fund) to
qualify for this treatment for hedging transactions.
To maintain a constant $1.00 per share NAV, the Directors of the ASAF
JPM Money Market Fund (the "Money Market Fund") may direct that the number of
outstanding shares be reduced pro rata. If this adjustment is made, it will
reflect the lower market value of portfolio securities and not realized losses.
The adjustment may result in a shareholder having more dividend income than net
income in his account for a period. When the number of outstanding shares of the
Money Market Fund is reduced, the shareholder's basis in the shares of the Fund
may be adjusted to reflect the difference between taxable income and net
dividends actually distributed. This difference may be realized as a capital
loss when the shares are liquidated.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Company's Prospectus whether taken in shares or in cash. These
distributions will be treated as dividends, but will qualify for the 70%
dividends-received deduction for the Fund's corporate shareholders only to the
extent designated in a notice to the Fund's shareholders as being attributable
to dividends received by the Fund. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in a Fund's shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
At the time of an investor's purchase of shares of a Fund (other than
the Money Market Fund), a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions from such
appreciation or income may be taxable to such investor even if the NAV of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption of shares of a Fund, other than the Money Market Fund
(including an exchange for other Fund shares), a shareholder may realize a
taxable gain or loss. Such gain or loss will be capital if the shares are
capital assets in the shareholder's hands and will be long-term, mid-term or
short-term capital gain or loss, depending upon the shareholder's holding period
for the shares. A sales charge paid in purchasing shares of a Fund ("load
charge") cannot be taken into account for purposes of determining gain or loss
on the redemption or exchange of such shares within 90 days after their purchase
to the extent shares of the same or another Fund are subsequently acquired
without payment of a load charge pursuant to a reinvestment or exchange
privilege. Such disregarded load charge will result in an increase in the
shareholder's tax basis in the Fund shares subsequently acquired. Also, any loss
realized on a redemption or exchange of shares of a Fund will be disallowed to
the extent the shares disposed of are replaced with shares of the same Fund
within a period of 61 days beginning 30 days before and ending 30 days after
such disposition. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If Fund shares are redeemed or
exchanged at a loss after being held for six months or less, the loss will be
treated as long-term, instead of short-term, capital loss to the extent of any
capital gains distributions received on those shares; administrative actions
contemplated by the Internal Revenue Service ("IRS") may affect this result in a
manner not yet determinable.
Each shareholder will be required to furnish its social security or
taxpayer identification number and certify that such number is correct and that
the shareholder is not subject to back-up withholding for failure to report
income to the IRS. Failure to comply with applicable IRS regulations, including
the certification procedures described above, may result in the Fund being
required to collect back-up withholding at a 31% rate on taxable distributions
and redemptions to the shareholder.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to shareholder
accounts maintained as qualified retirement plans. Shareholders should consult
their tax advisers for more information.
The foregoing discussion relates solely to federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) generally. The discussion does
not address special tax rules applicable to certain classes of investors, such
as tax-exempt entities, insurance companies, and financial institutions.
A foreign shareholder (i.e., a nonresident alien individual, foreign
trust or estate, foreign corporation or foreign partnership) not engaged in a
U.S. trade or business with which its investment in a Fund is effectively
connected will be subject to federal income tax treatment that is different from
that described above. These investors may be subject to U.S. withholding tax at
the rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from a Fund and, unless an effective IRS Form W-8
or authorized substitute is on file, to backup withholding at the rate of 31% on
certain other payments from the Fund. Distributions treated as long term capital
gains to foreign shareholders will not be subject to federal income tax unless
the distributions are effectively connected with the shareholder's U.S. trade or
business or, in the case of a non-resident alien individual, the shareholder is
present in the U.S. for more than 182 days during the taxable year and certain
other conditions are met. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund.
State and Local Tax Consequences. Each Fund may be subject to state or
local taxes in jurisdictions in which such Fund may be deemed to be doing
business. In addition, in those states or localities which have income tax laws,
the treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
have different tax consequences for shareholders than would direct investment in
such Fund's (or, in the case of a Feeder Fund, its corresponding Portfolio's)
portfolio securities. Shareholders should consult their own tax advisers with
respect to any state or local taxes.
CAPITAL STOCK OF THE COMPANY &
PRINCIPAL HOLDERS OF SECURITIES
The Company is an open-end management investment company organized
under the laws of Maryland on March 5, 1997. The Company currently has sixteen
separate series of shares of beneficial interest, each of which is divided into
Class A, B, C and X shares. The Directors of the Company are authorized to
establish, from time to time and without shareholder approval, additional series
or classes of shares.
The shares of the Funds are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series vote together in the election and selection of
directors. Shares of a Fund vote together as a class on matters that affect the
Fund in substantially the same manner. Matters pertaining only to one or more
Funds will be voted upon only by those Funds. As to matters affecting a single
class, shares of such class will vote separately. Shares of the Funds do not
have cumulative voting rights. The Company and the Funds do not intend to hold
annual meetings of shareholders unless required to do so by the 1940 Act or the
Maryland statutes under which the Company is organized. Although Directors are
not elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Directors. If required by
applicable law, a meeting will be held to vote on the removal of a Director or
Directors of the Company if requested in writing by the holders of not less than
10% of the Company's outstanding shares. Each Fund's shares when issued are
fully paid, non-assessable and freely transferable, and have no preference,
preemptive or similar rights.
The following table lists persons owning more than 5% of any class of the
Fund's outstanding shares as June 2, 1998.
<TABLE>
<CAPTION>
American Skandia Advisor Funds, Inc., - Report of 5% or Greater Owners
As of June 2, 1998
Fund and Share Class Owner Name Address Percent
Ownership
<S> <C> <C> <C>
ASAF Founders International Small Cap N/A N/A N/A
Fund Class A, C & X
ASAF Founders International Small Cap Donaldson Lufkin Jenrette P.O. Box 2052 8.82%
Fund Class B Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF T. Rowe Price International Equity Jeanne L. Odell TTEE 2249 Country Club Loop 7.43%
Fund Class A Country Hills Investments Westminster, CO 80234-2637
ASAF T. Rowe Price International Equity N/A N/A N/A
Fund Class B
ASAF T. Rowe Price International Equity State Street Bank & Trust Co. 224 4th Avenue S 5.13%
Fund Class C Cust. For the IRA of Omar Bacon Franklin, TN 37064
Omar Bacon 224 4th Avenue S 5.14%
Franklin, TN 37064
ASAF T. Rowe Price International Equity Dain Rauscher Custodian 6624 S Prescott Way 5.21%
Fund Class X Fred G. Knight Rollover IRA Littleton, CO 80120
ASAF Janus Overseas Growth Fund Jeffrey Guylas 6380 Indian Point Road 5.37%
Class A Joan D. Guylas POA Montague, MI 49437
Joan D. Guylas, TTEE 6380 Indian Point Road 5.37%
Joan D. Guylas TRUST Montague, MI 49437
State Street Bank & Trust Co. 30 Logan Avenue 7.80%
Cust. For the IRA Rollover of Jersey City, NJ 07306
Sebastian Noto
ASAF Janus Overseas Growth Fund N/A N/A N/A
Class B
ASAF Janus Overseas Growth Fund Donaldson Lufkin Jenrette P.O. Box 2052 13.63%
Class C Securities Corporation Jersey City, NJ 07303
ASAF Janus Overseas Growth Fund N/A N/A N/A
Class X
ASAF Founders Small Capitalization Fund Jeanne L. Odell TTEE 2249 Country Club Loop 8.79%
Class A Country Hills Investments Westminster, CO 80234-2637
State Street Bank & Trust Co. 30 Logan Avenue 12.35%
Cust. For the IRA Rollover of Jersey City, NJ 07306
Sebastian Noto
Southwest Securities Inc FBO P.O. Box 509002 5.45%
Elizabeth Calabrese Dallas, TX 75350
ASAF Founders Small Cap Fund N/A N/A N/A
Class B, C & X
ASAF T. Rowe Price Small Co. Value Fund N/A N/A N/A
Class A & B
ASAF T. Rowe Price Small Co. Value Fund Ronald Sowers Prestwick Country Club 5.17%
Class C Judith Sowers 1223 Links Road
Myrtle Beach, SC 29575
Curtis B. Bruce 11276 Meadow Glen Way E 6.00%
Catherine Bruce JT WROS Escondido, CA 92026-7009
ASAF T. Rowe Price Small Co. Value Fund N/A N/A N/A
Class X
ASAF Robertson Stephens Value + Growth Donaldson Lufkin Jenrette P.O. Box 2052 8.82%
Fund Class A Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF Robertson Stephens Value + Growth N/A N/A N/A
Fund Class B, C & X
ASAF Janus Capital Growth Fund N/A N/A N/A
Class A, B, C & X
ASAF Lord Abbett Growth and Income Fund Jeffrey Guylas 6380 Indian Point Road 7.15%
Class A Joan D. Guylas POA Montague, MI 49437
Joan D. Guylas, TTEE 6380 Indian Point Road 7.15%
Joan D. Guylas TRUST Montague, MI 49437
ASAF Lord Abbett Growth and Income Fund Donaldson Lufkin Jenrette P.O. Box 2052 9.79%
Class B Securities Corporation Jersey City, NJ 07303
ASAF Lord Abbett Growth and Income Fund Ronald Whiting 7606 4th Avenue 7.19%
Class C Bradenton, FL 34209-3248
David Nicely 5501 High Drive 6.65%
Barbara A Nicely JT WROS Shawnee Mission, KS 66208
ASAF Lord Abbett Growth and Income Fund David Nicely 5501 High Drive 5.79%
Class X Barbara A Nicely JT WROS Shawnee Mission, KS 66208
ASAF INVESCO Equity Income Fund N/A N/A N/A
Class A, B, C & X
ASAF American Century Strategic State Street Bank & Trust Co 1552 N. Windsor Drive 6.18%
Balanced Fund Class A Cust for the IRA of Arlington Heights, IL 60004
Jack Friedman
Raymond James & Assoc Inc CSDN 85682 Hampstead 5.21%
Betty Jane Morrissey Eugene, OR 97405
Minnesota Knights Foundation 3700 W 200th St 55352
FBO Donald Schwalm Jordan, MN
ASAF American Century Strategic Donaldson Lufkin Jenrette P.O. Box 2052 6.69%
Balanced Fund Class B Securities Corporation Jersey City, NJ 07303
Phyllis Muente W143N5489 Van Buren Drive 6.76%
Menomonee Fls, WI 53051
ASAF American Century Strategic State Street Bank & Trust Co. 4174 Bristolwood Drive 5.72%
Balanced Fund Class C Cust. For the IRA Rollover of Flint, MI 48507
James Gosnell
Ronald Whiting 7606 4th Avenue 8.21%
Bradenton, FL 34209-3248
NFSC/FMTC IRA Rollover FBO 4901 Ridgewood Lane 11.46%
John Wilhite Jr Alton, IL 62002
NFSC/FMTC IRA Rollover FBO 1410 Shady Creek Lane, Apt A 6.30%
Franklin J. Wagner St. Louis, MO 63146
5.06%
ASAF American Century Strategic N/A N/A N/A
Balanced Fund Class X
ASAF Federated High Yield Bond Fund Joan Guylas Ttee 6380 Indian Point Road 6.52%
Class A Joseph S & Joan D Guylas Trust Montague, MI 49437
Jeffrey Guylas 6380 Indian Point Road 6.52%
Joan D. Guylas POA Montague, MI 49437
ASAF Federated High Yield Bond Fund N/A N/A N/A
Class B, C
ASAF Federated High Yield Bond Fund State Street Bank & Trust Co. 737 Blue Creek Drive 6.25%
Class X Cust for the IRA Rollover of Webster, NY 14580
Joseph Fantuzzo
ASAF Total Return Bond Fund State Street Bank & Trust Co. 1400 Carpenter Street, Apt 241 5.13%
Class A Cust for the IRA of San Leandro, CA 94577
Paul Dianda
Donaldson Lufkin Jenrette P.O. Box 2052 5.56%
Securities Corporation Jersey City, NJ 07303
ASAF Total Return Bond Fund N/A N/A N/A
Class B
ASAF Total Return Bond Fund NFSC/FMTC IRA Rollover FBO 1410 Shady Creek Lane, Apt A 5.08%
Class C Franklin J. Wagner St. Louis, MO 63146-4469
Inde & Co Cust FBO BNRIRA 4401 Rockside Road 6.44%
#17-083-1 Independence, OH 44131
c/o Independence Bank
Ronald Whiting 7606 4th Avenue 5.86%
Bradenton, FL 34209
ASAF Total Return Bond Fund N/A N/A N/A
Class X
ASAF JPM Money Market Fund State Street Bank & Trust Co 22 Valleybrook Court 5.37%
Class A Cust for the IRA Rollover of Blackwood, NJ 08012
Anthony Trotter
State Street Bank & Trust Co 1160 River Run 13.13%
Cust for the SEP IRA of Bishop, GA 30621
Rick Brewer
State Street Bank & Trust Co 4663 S 25 West 6.49%
Cust for the IRA of Trafalgar, IN 46181
Bill Stevens
ASAF JPM Money Market Fund Joy Johnson 440 Columbine Street 17.46%
Class B Denver, CO
ASAF JPM Money Market Fund Jon P Rohr 3069 Todd Ln 6.65%
Class C Shelia S Rohr JT WROS Lancaster, PA 17601-1352
Helen Rizzotto & Barbara 318 N Jerome St 7.16%
A Bowersox TTES Allentown, PA 18103-2222
ASAF JPM Money Market Fund State Street Bank & Trust Co. 1620 Ridgeview Circle 5.04%
Class X Cust for the IRA of Monument, CO 80132
Bonnie C. Wendelburg
State Street Bank & Trust Co. 2311 N Drury Lane 6.15%
Cust for the IRA of Arlington Heights, IL 60004
Joseph Cannistra
</TABLE>
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, serves as custodian for all
domestic cash and securities holdings of the Funds and Portfolios investing
primarily in domestic securities. Morgan Stanley Trust Company, located at One
Pierrepont Plaza, Brooklyn, New York 11201, serves as custodian for all cash and
securities holdings of the ASAF Founders International Small Capitalization
Fund, the ASAF T. Rowe Price International Equity Fund (and corresponding
Portfolio) and the ASAF Janus Overseas Growth Fund, and co-custodian for all
foreign securities holdings of the Funds and Portfolios which invest primarily
in domestic securities.
TRANSFER AGENT:
Boston Financial Data Services, Inc. (the "Transfer Agent," as previously
defined), located at Two Heritage Drive, Quincy, Massachusetts 02171, serves as
the transfer agent for the Company.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P., located at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, has been selected as the independent certified
public accountants of the Company, providing audit services and assistance and
consultation with respect to the preparation of filings with the Commission.
REGISTRATION STATEMENT:
This SAI and the Company's Prospectus do not contain all the
information included in the Company's Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. The Registration Statement, including the exhibits
filed therewith, may be examined at the Commission's offices in Washington, D.C.
The Commission maintains a Website (http: / / www.sec.gov) that contains this
SAI, material incorporated by reference, and other information regarding the
Funds and Portfolios.
FINANCIAL STATEMENTS
Audited financial statements of each Fund for the period ended October
31, 1997, together with the notes thereto and the report of Coopers & Lybrand
L.L.P., are attached to this SAI. Unaudited financial statements for the period
between November 1, 1997 and April 30, 1998 are also attached.
<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
<TABLE>
<CAPTION>
ITEM 24. Financial Statements and Exhibits
<S> <C> <C> <C>
(a) Financial statements contained in Part A:
* (1) Financial Highlights for the period July 28, 1997 (commencement of operations) to April 30,
1998.
Financial Statements contained in Part B:
* (1) Audited Financial Statements for the Registrant for the period ended October 31, 1997.
(a) Independent Auditors' Report;
(b) Schedules of Investments as of October 31, 1997;
(c) Statements of Assets and Liabilities as of October 31, 1997;
(d) Statements of Operations for the period ended October 31, 1997;
(e) Statements of Changes in Net Assets for the
period ended October 31, 1997; (f) Financial
Highlights for the period from July 28, 1997
(commencement of operations) to October 31, 1997; and
(g) Notes to Financial Statements.
* (2) Audited Financial Statements for American Skandia Master Trust for the period ended October 31,
1997.
(a) Independent Auditors' Report;
(b) Schedules of Investments as of October 31, 1997;
(c) Statements of Assets and Liabilities as of October 31, 1997;
(d) Statements of Operations for the period ended October 31, 1997;
(e) Statements of Changes in Net Assets for the
period ended October 31, 1997; (f) Supplementary Data
for the period ended October 31, 1997; and (g) Notes
to Financial Statements.
* (3) Unaudited Financial Statements for the Registrant for the period ended April 30, 1998.
* (4) Unaudited Financial Statements for American Skandia Master Trust for the period ended April 30,
1998.
(b) Exhibits:
(i) 1. (a) Articles of Incorporation of Registrant.
(iii) (b) Amendment to Articles of Incorporation of Registrant dated July 3, 1997.
(iv) (c) Amendment to Articles of Incorporation of Registrant dated July 17, 1997.
(d) Articles Supplementary of Registrant dated December 29, 1997.
(i) 2. By-laws of Registrant.
3. None.
4. None.
(ii) 5. (a) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Founders International Small
Capitalization Fund.
(v) (b) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Janus Overseas Growth Fund.
(ii) (c) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Founders Small Capitalization Fund.
(ii) (d) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF T. Rowe Price Small Company Value Fund.
* (e) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Neuberger&Berman Mid-Cap Growth Fund.
* (f) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Neuberger&Berman Mid-Cap Value Fund.
(v) (g) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Robertson Stephens Value + Growth Fund.
* (h) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Marsico Capital Growth Fund.
(v) (i) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Lord Abbett Growth and Income Fund.
(ii) (j) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF American Century Strategic Balanced
Fund.
(ii) (k) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Federated High Yield Bond Fund.
(ii) (l) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the ASAF Founders International
Small Capitalization Fund.
(v) (m) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Janus Capital Corporation for the ASAF Janus Overseas Growth Fund.
(ii) (n) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the ASAF Founders Small
Capitalization Fund.
(ii) (o) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small
Company Value Fund.
* (p) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Neuberger&Berman Management Inc. for the ASAF Neuberger&Berman
Mid-Cap Growth Fund.
* (q) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Neuberger&Berman Management Inc. for the ASAF Neuberger&Berman
Mid-Cap Value Fund.
(v) (r) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Robertson Stephens & Company Investment Management, LP for the ASAF
Robertson Stephens Value + Growth Fund.
* (s) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Marsico Capital Management, LLC for the ASAF Marsico Capital Growth
Fund.
(v) (t) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Lord, Abbett & Co. for the ASAF Lord Abbett Growth and Income Fund.
(iii) (u) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and American Century Investment Management, Inc. for the ASAF American
Century Strategic Balanced Fund.
(iii) (v) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Federated Investment Counseling for the ASAF Federated High Yield
Bond Fund.
(ii) 6. (a) Form of Underwriting and Distribution Agreement between Registrant and American
Skandia Marketing, Incorporated.
(iii) (b) Form of Sales Agreement with American Skandia Marketing, Incorporated.
7. None.
(ii) 8. (a) Form of Custody Agreement between Registrant and PNC Bank.
(ii) (b) Form of Custody Agreement between Registrant and Morgan Stanley Trust Company.
(c) Form of Amendment to Custody Agreement between Registrant and PNC Bank.
(ii) 9. (a) Form of Administration Agreement between Registrant and PFPC Inc.
(ii) (b) Form of Transfer Agency and Service Agreement between Registrant and State Street Bank
and Trust Company.
* (c) Form of Administration Agreement between Registrant and American Skandia Investment
Services, Incorporated.
* (d) Form of Amendment to Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company.
10. Opinion and Consent of Counsel to Registrant.
* 11. (a) Consent of Independent Public Accountants of Registrant
* (b) Consent of Independent Public Accountants of American Skandia Master Trust
(iii) (c) Consent of Caplin & Drysdale.
(v) (d) Opinion of Caplin & Drysdale
(iii) (e) Consent of Rogers & Wells.
(v) (f) Opinion of Rogers & Wells.
12. None.
(ii) 13. Form of Share Purchase Agreement.
14. None.
(ii) 15. (a) Form of Distribution and Service Plan for Class A Shares.
(ii) (b) Form of Distribution and Service Plan for Class B Shares.
(ii) (c) Form of Distribution and Service Plan for Class C Shares.
(ii) (d) Form of Distribution and Service Plan for Class X Shares.
(e) Form of Distribution and Service Plan for New Class X Shares.
16. Calculation of Performance Information.
* 17. Financial Data Schedules.
18. Form of Rule 18f-3 Plan.
</TABLE>
- --------------------------------------
* To be filed by future amendment.
(i) Incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A as filed with the Securities and Exchange
Commission (the "Commission") on March 10, 1997.
(ii) Incorporated by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on June 4, 1997.
(iii) Incorporated by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on July 9, 1997.
(iv) Incorporated by reference to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on October 17, 1997.
(v) Incorporated by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on December 31, 1997.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
Five series of the Registrant currently are organized under a
"master/feeder" fund structure and may be considered to control the
corresponding master portfolios of American Skandia Master Trust in which they
invest. Registrant is not under common control with any person except to the
extent Registrant is deemed to be under the control of its Investment Manager.
<TABLE>
<CAPTION>
ITEM 26. Number of Holders of Securities
Number of Record Holders
Fund Name (All Four Classes) as of May 29, 1998
---------------------------- ------------------
<S> <C> <C>
ASAF Founders International Small Capitalization Fund
Class A 277
Class B 170
Class C 175
Class X 373
ASAF T. Rowe Price International Equity Fund
Class A 399
Class B 313
Class C 273
Class X 755
ASAF Janus Overseas Growth Fund
Class A 508
Class B 415
Class C 536
Class X 1048
ASAF Founders Small Capitalization Fund
Class A 323
Class B 251
Class C 263
Class X 546
ASAF T. Rowe Price Small Company Value Fund
Class A 1077
Class B 918
Class C 838
Class X 1872
ASAF Neuberger&Berman Mid-Cap Growth Fund
Class A 0
Class B 0
Class C 0
Class X 0
ASAF Neuberger&Berman Mid-Cap Value Fund
Class A 0
Class B 0
Class C 0
Class X 0
ASAF Robertson Stephens Value + Growth Fund
Class A 371
Class B 330
Class C 345
Class X 779
ASAF Marsico Capital Growth Fund
Class A 0
Class B 0
Class C 0
Class X 0
ASAF Janus Capital Growth Fund
Class A 1628
Class B 1383
Class C 1052
Class X 2561
ASAF Lord Abbett Growth and Income Fund
Class A 436
Class B 320
Class C 402
Class X 896
ASAF INVESCO Equity Income Fund
Class A 716
Class B 686
Class C 558
Class X 1433
ASAF American Century Strategic Balanced Fund
Class A 237
Class B 274
Class C 173
Class X 566
ASAF Federated High Yield Bond Fund
Class A 324
Class B 475
Class C 352
Class X 750
ASAF Total Return Bond Fund
Class A 169
Class B 239
Class C 230
Class X 461
ASAF JPM Money Market Fund
Class A 129
Class B 126
Class C 182
Class X 338
</TABLE>
<PAGE>
ITEM 27. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland
provides for indemnification of officers, directors, employees and agents of a
Maryland corporation. With respect to indemnification of the officers and
directors of the Registrant, and of other employees and agents to such extent as
shall be authorized by the Board of Directors or the By-laws of the Registrant
and be permitted by law, reference is made to Article VIII, Paragraph (a)(5) of
the Registrant's Articles of Incorporation and Article V of the Registrant's
By-laws, both filed herewith.
With respect to liability of the Investment Manager to Registrant or to
shareholders of Registrant's Funds under the Investment Management Agreements,
reference is made to Section 13 of each form of Investment Management Agreement
filed herewith.
With respect to the Sub-Advisors' indemnification under the
Sub-Advisory Agreements of the Investment Manager, any affiliated person within
the meaning of Section 2(a)(3) of the Investment Company Act of 1940, as amended
(the "ICA"), of the Investment Manager and each person, if any, who controls the
Investment Manager within the meaning of Section 15 of the 1933 Act, as amended
(the "1933 Act"), reference is made to Section 14 of each form of Sub-Advisory
Agreement filed herewith.
With respect to Registrant's indemnification of American Skandia
Marketing, Incorporated (the "Distributor"), its officers and directors and any
person who controls the Distributor within the meaning of Section 15 of the 1933
Act, and the Distributor's indemnification of Registrant, its officers and
directors and any person who controls Registrant, if any, within the meaning of
the 1933 Act, reference is made to Section 10 of the form of Underwriting and
Distribution Agreement filed herewith.
Insofar as indemnification for liability arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant or expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
American Skandia Investment Services, Incorporated ("ASISI"), One
Corporate Drive, Shelton, Connecticut 06484, serves as the investment manager to
the Registrant. Information as to the officers and directors of ASISI is
included in ASISI's Form ADV (File No. 801-40532), including the amendments to
such Form ADV filed with the Commission on April 7, 1998, August 13, 1997, April
11, 1997, October 22, 1996, March 22, 1996 and April 11, 1995, and is
incorporated herein by reference.
ASISI currently engages the following sub-advisors (the "Sub-advisors")
to conduct the investment programs of the funds of the Registrant or the master
portfolios in which certain of Registrant's funds invest: (a) Founders Asset
Management LLC, Founders Financial Center, 2930 East Third Avenue, Denver,
Colorado 80206; (b) Rowe Price-Fleming International, Inc., 100 East Pratt
Street, Baltimore, Maryland 21209; (c) Janus Capital Corporation, 100 Fillmore
Street, Denver, Colorado 80206-4923; (d) T. Rowe Price Associates, Inc., 100
East Pratt Street, Baltimore, Maryland 21209; (e) Neuberger&Berman Management
Inc. 605 Third Avenue, New York, NY 10158; (f) Robertson, Stephens & Company
Investment Management, L.P., 555 California Street, San Francisco, CA 94014; (g)
Marsico Capital Management, LLC, 1200 17th Street, Denver, CO 80202; (h) Lord,
Abbett & Co., The General Motors Building, 767 Fifth Avenue, New York, NY 10153;
(i) INVESCO Funds Group, Inc., 7800 East Union Avenue, Denver, Colorado
80217-3706; (j) American Century Investment Management, Inc. (formally named,
"Investors Research Corporation"), Twentieth Century Tower, 4500 Main Street,
Kansas City, Missouri 64111; (k) Federated Investment Counseling, Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779; (l) Pacific Investment
Management Company, 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660; and (m) J.P. Morgan Investment Management, Inc., 522 Fifth
Avenue, New York, New York, 10036. Information as to the officers and directors
of each of the Sub-advisors is included in each Sub-advisor's current Form ADV,
as amended and filed with the Commission, and is incorporated herein by
reference.
ITEM 29. Principal Underwriter
American Skandia Marketing, Incorporated (the "Distributor," as
previously defined), One Corporate Drive, Shelton, Connecticut 06484, serves as
the principal underwriter and distributor for the Registrant. The Distributor is
a registered broker-dealer and member of the National Association of Securities
Dealers, Inc. The Distributor is an "affiliated person" (as defined under the
ICA) of the Registrant and ASISI, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation.
The following table sets forth information on the current officers and
directors of the Distributor, all of whom have as their principal business
address, One Corporate Drive, Shelton, Connecticut 06484:
<TABLE>
<CAPTION>
Name: Position Held with the Distributor: Position Held with the Registrant:
<S> <C> <C>
Gordon C. Boronow Deputy Chief Executive Officer & Vice President & Director
Director
Kimberly A. Bradshaw Vice President & National None
Accounts Manager
Jan R. Carendi Chairman, Chief Executive Officer & President, Principal Executive Officer
Director & Director
Robert Brinkman Senior Vice President, National None
Sales Manager
Kathleen Chapman Assistant Corporate Secretary None
Daniel R. Darst Senior Vice President & None
National Marketing Director
Paul DeSimone Vice President, Corporate None
Controller & Director
Wade A. Dokken President, Deputy Chief Executive None
Officer & Director
Walter G. Kenyon Vice President & None
National Accounts Manager
Lawrence Kudlow Senior Vice President & None
Chief Economist
N. David Kuperstock Vice President, Product Development None
& Director
Thomas M. Mazzaferro Executive Vice President & Director
Chief Financial Officer
Brian O'Connor Vice President & National Sales None
Manager, Internal Wholesaling
M. Patricia Paez Director None
M. Priscilla Pannell Corporate Secretary None
Hayward Sawyer Senior Vice President, National None
Sales Manager & Director
Leslie S. Sutherland Vice President & National Accounts None
Manager
C. Ake Svensson Treasurer None
Amanda C. Sutyak Vice President None
Christian Thwaites Vice President, Qualified Plans None
Bayard F. Tracy Senior Vice President, National None
Sales Manager & Director
Mary Toumpas Vice President & Compliance Director None
</TABLE>
ITEM 30. Location of Accounts and Records
Records regarding the Registrant's securities holdings are maintained
at Registrant's Custodians, PNC Bank, Airport Business Center, International
Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201. Certain records
with respect to the Registrant's securities transactions are maintained at the
offices of the various sub-advisors to the Registrant. The Registrant's
corporate records are maintained at its offices at One Corporate Drive, Shelton,
Connecticut 06484. The Registrant's financial ledgers and similar financial
records are maintained at the offices of its Administrator, PFPC Inc., 103
Bellevue Parkway, Wilmington, DE 19809. Certain records regarding the
shareholders of the Registrant are maintained at the offices of the Registrant's
transfer agent, Boston Financial Data Services, Inc., Two Heritage Drive,
Quincy, Massachusetts 02171.
All accounts, books and other documents required to be maintained by
Section 31(a) of the ICA, and the Rules promulgated thereunder with respect to
American Skandia Master Trust (the "Master Trust") are maintained at the Master
Trust's offices at One Corporate Drive, Shelton, Connecticut 06484, at the
offices of the various sub-advisors, and at the offices of the above-mentioned
Custodians and Administrator.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
(a) None.
(b) Registrant filed Post-Effective Amendment No. 2 to its Registration
Statement, using audited financial statements, within four to six months from
the effective date of the 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 5th day of June, 1998.
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>
Signature Title Date
<S> <C>
/s/ Gordon C. Boronow* Vice President & Director 6/5/98
Gordon C. Boronow
/s/ Jan R. Carendi President, Principal Executive 6/5/98
Jan R. Carendi Officer & Director
/s/ David E.A. Carson* Director 6/5/98
David E.A. Carson
/s/ Richard G. Davy, Jr. Treasurer (Chief Financial and 6/5/98
Richard G. Davy, Jr. Accounting Officer)
/s/ Julian A. Lerner* Director 6/5/98
Julian A. Lerner
/s/ Thomas M. Mazzaferro* Director 6/5/98
Thomas M. Mazzaferro
/s/ Thomas M. O'Brien* Director 6/5/98
Thomas M. O'Brien
/s/ F. Don Schwartz* Director 6/5/98
F. Don Schwartz
</TABLE>
*By: /s/ Eric C. Freed
Eric C. Freed
*Pursuant to Powers of Attorney previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, American Skandia Master Trust has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Dublin, Country of Ireland, on the
4th day of June, 1998.
AMERICAN SKANDIA MASTER TRUST
By: /s/ J. Fergus McKeon
J. Fergus McKeon
Assistant 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>
Signature Title Date
<S> <C> <C>
/s/ Gordon C. Boronow* Vice President & Trustee 6/4/98
Gordon C. Boronow
/s/ Jan R. Carendi* President (Chief Executive Officer) & 6/4/98
Jan R. Carendi Trustee
/s/ David E.A. Carson* Trustee 6/4/98
David E.A. Carson
/s/ Richard G. Davy, Jr.* Vice President (Controller) 6/4/98
Richard G. Davy, Jr.
/s/ Julian A. Lerner* Trustee 6/4/98
Julian A. Lerner
/s/ Thomas M. Mazzaferro* Trustee 6/4/98
Thomas M. Mazzaferro
/s/Thomas M. O'Brien* Trustee 6/4/98
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 6/4/98
F. Don Schwartz
/s/ C. Ake Svensson* Treasurer 6/4/98
C. Ake Svensson
</TABLE>
*By: /s/ J. Fergus McKeon
J. Fergus McKeon
*Pursuant to Powers of Attorney previously filed.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Registration Statement Under
The Securities Act of 1933 and
The Investment Company Act of 1940
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Number Description
<S> <C>
1(d) Articles Supplementary of Registrant dated December 29, 1997.
5(e) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF
Neuberger&Berman Mid-Cap Growth Fund.
5(f) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF
Neuberger&Berman Mid-Cap Value Fund.
5(h) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF
Marsico Capital Growth Fund.
5(p) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Neuberger&Berman Management Inc. for the
ASAF Neuberger&Berman Mid-Cap Growth Fund.
5(q) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Neuberger&Berman Management Inc. for the
ASAF Neuberger&Berman Mid-Cap Value Fund.
5(s) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Marsico Capital Management, LLC for the
ASAF Marsico Capital Growth Fund.
8(c) Form of Amendment to Custody Agreement between Registrant and PNC Bank.
9(c) Form of Administration Agreement between Registrant and American
Skandia Investment Services, Incorporated.
9(d) Form of Amendment to Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company.
10 Opinion and Consent of Counsel to Registrant.
11(a) Consent of Independent Public Accountants of Registrant
11(b) Consent of Independent Public Accountants of American
Skandia Master Trust
15(e) Form of Distribution and Service Plan for New Class X Shares.
16 Calculation of Performance Information
18 Form of Rule 18f-3 Plan.
</TABLE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
ARTICLES SUPPLEMENTARY
AMERICAN SKANDIA ADVISOR FUNDS, INC., a Maryland corporation,
having its principal office in Baltimore City, Maryland (which is hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended as follows:
(1) Article SIXTH subsection (a) of the Charter is amended
in its entirety to read as follows:
(a) The total number of shares of stock of all classes and
series which the Corporation has authority to issue is five
billion, five hundred million (5,500,000,000) shares of capital
stock (par value $.001 per share), amounting in aggregate par
value to five million, five hundred thousand ($5,500,000). All of
the authorized shares of capital stock of the Corporation are
initially classified as "Common Stock" of which two hundred and
fifty million (250,000,000) shares are further initially
classified as a series of Common Stock designated the "ASAF
Founders International Small Capitalization Fund," two hundred
fifty million (250,000,000) shares are further initially
classified as a series of Common Stock designated the "ASAF T.
Rowe Price International Equity Fund," two million two hundred
fifty million (250,000,000) shares are further initially
classified as a series of Common Stock designated the "ASAF
Founders Small Capitalization Fund," two hundred fifty million
(250,000,000) shares are further initially classified as a series
of Common Stock designated the "ASAF T. Rowe Price Small Company
Value Fund," two hundred fifty million (250,000,000) shares are
further initially classified as a series of Common Stock
designated the "ASAF Janus Capital Growth Fund," two hundred fifty
million (250,000,000) shares are further initially classified as a
series of Common Stock designated the "ASAF INVESCO Equity Income
Fund," two hundred fifty million (250,000,000) shares are further
initially classified as a series of Common Stock designated the
"ASAF American Century Strategic Balanced Fund," two hundred fifty
million (250,000,000) shares are further initially classified as a
series of Common Stock designated the "ASAF Federated High Yield
Bond Fund," two hundred fifty million (250,000,000) shares are
further initially classified as a series of Common Stock
designated the "ASAF Total Return Bond Fund," and two billion,
five hundred million (2,500,000,000) shares are further initially
classified as a series of Common Stock designated the "ASAF JPM
Money Market Fund," two hundred fifty million (250,000,000) shares
are further initially classified as a series of Common Stock
designated the "ASAF Janus Overseas Growth Fund," two hundred
fifty million (250,000,000) shares are further initially
classified as a series of Common Stock designated the "ASAF
Robertson Stephens Value + Growth Fund," two hundred fifty million
(250,000,000) shares are further initially classified as a series
of Common Stock designated the "ASAF Lord Abbett Growth and Income
Fund." The ASAF Founders International Small Capitalization Fund,
ASAF T. Rowe Price International Equity Fund, ASAF Founders Small
Capitalization Fund, ASAF T. Rowe Price Small Company Value Fund,
ASAF Janus Capital Growth Fund, ASAF INVESCO Equity Income Fund,
ASAF American Century Strategic Balanced Fund, ASAF Federated High
Yield Bond Fund, ASAF Total Return Bond Fund, ASAF JPM Money
Market Fund, ASAF Janus Overseas Growth Fund, ASAF Robertson
Stephens Value + Growth Fund and ASAF Lord Abbett Growth and
Income Fund and any other series of Common Stock which is
preferred over all other series in respect of the assets belonging
to that series as hereinafter provided are referred to
individually as a "Fund" and collectively as the "Funds." Each
Fund shall initially have four classes of shares, designated Class
A, Class B, Class C and Class X Shares. The number of authorized
shares of each such class of a particular Fund shall consist at
any time of the sum of (x) the outstanding shares of that class of
that fund and (y) one fourth of the authorized but unissued shares
of all classes of that Fund; provided, however, that in the event
application of the above formula would result, at the time, in
fractional shares of one or more classes, the number of authorized
shares of each such class shall be rounded down to the nearest
whole number of shares; and provided, further, that at all times
the aggregate number of authorized Class A, Class B, Class C and
Class X shares of any Fund shall not exceed the authorized number
of shares of the Fund. The Board of Directors may classify and
reclassify any unissued shares of capital stock by setting or
changing in any one or more respect the preferences, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of
such shares of stock.
SECOND: (a) As of immediately before the amendment the total number
of shares of stock of all classes which the Corporation has authority to issue
is forty million (40,000,000) shares, all of which are Common Stock (par value
$.001 per share).
(b) As amended the total number of shares of stock of all
classes which the Corporation has authority to issue is five billion, five
hundred million (5,500,000) shares, all of which are Common Stock (par value
$.001 per share).
(c) The aggregate par value of all shares having a par value is $40,000
before the amendment and $5,500,000 as amended.
(d) The shares of stock of the Corporation are divided into
classes, and the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption are not changed by this amendment.
THIRD: The Corporation is a registered open-end company under the
Investment Company Act of 1940, as amended. Pursuant to Article 2-208.1 of the
Corporation and Associations Article Title of the Annotated Code of Maryland,
the foregoing amendment to the Charter of the Corporation has been approved by
the Board of Directors of the Corporation.
IN WITNESS WHEREOF, AMERICAN SKANDIA ADVISOR FUNDS, INC. has caused these
presents to be signed in its name and on its behalf by its Vice President and
witnessed by its Secretary on December 29, 1997.
<PAGE>
WITNESS: AMERICAN SKANDIA ADVISOR FUNDS, INC.
/s/Eric C. Freed By: /s/Gordon C. Boronow
Secretary Vice President
<PAGE>
THE UNDERSIGNED, Vice President of American Skandia Advisor Funds,
Inc., who executed on behalf of the Corporation the foregoing Articles of
Amendment of which this certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing Articles of Amendment to be
the corporate act of said Corporation and hereby certifies that to the best of
his knowledge, information, and belief the matters and facts set forth therein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/Gordon C. Boronow
Vice President
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
AMENDMENT TO CUSTODIAN SERVICES AGREEMENT
This Amendment, dated the __ day of ______, 1998, is entered into
between AMERICAN SKANDIA ADVISER FUNDS, INC., a Maryland corporation (the
"Fund") and PNC BANK, N.A., a national banking association ("PNC Bank").
WHEREAS, the Fund and PNC Bank have entered into a Custodian Services
Agreement dated as of June 1, 1997 (the "Agreement"), pursuant to which the Fund
appointed PNC Bank to act as custodian for its investment portfolios; and
WHEREAS, the Fund and PNC Bank now wish to amend the Agreement as it
relates to Authorized Persons; and
WHEREAS, the Fund's Board of Directors has approved this Amendment;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Defined Terms. From and after the date hereof, the following term as
used in the Agreement shall be amended and restated in its entirety as follows:
"Authorized Person" means any officer of the Fund and any
other person authorized by an officer of the Fund to give Oral
Instructions and Written Instructions on behalf of the Fund
and listed on the Authorized Persons Appendix attached hereto
and made a part hereof or any amendment thereto as may be
received by PNC Bank. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such
limitation in the Authorized Persons Appendix.
2. Miscellaneous. Except to the extent amended and supplemented hereby,
the Agreement shall remain unchanged and in full force and effect and is hereby
ratified, confirmed and approved in all respects as amended and supplemented
hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
AMERICAN SKANDIA ADVISOR FUNDS, INC.
By:
Title:
PNC BANK, N.A.
By:
Title:
To be filed by future amendment
To be filed by future amendment
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
June 4, 1998
American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Re: Post-Effective Amendment No. 3 to the Registration Statement
of American Skandia Advisor Funds, Inc. filed on Form N-1A under the
Securities Act of 1933 and Amendment No. 6 to the Registration Statement
under the Investment Company Act of 1940
Securities Act Registration No.: 333-23017
Investment Company Act No.: 811-08085
Our File No. 74876-00-114
Dear Mesdames and Messrs.:
You have requested us, as counsel to American Skandia Advisor Funds,
Inc. (the "Company"), to furnish you with this opinion and consent in connection
with the above-referenced registration statement (the "Registration Statement")
filed by the Company under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act").
We have made such examination of the statutes, authorities, and records
of the Company and other documents as in our judgment are necessary to form a
basis for opinions hereinafter expressed. In our examination, we have assumed
the genuineness of all signatures on, and authenticity of, and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to our opinion, we have relied upon statements and certificates of
officers and representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the Company is a
Maryland corporation organized with one or more series of shares and is
registered as an open-end management investment company under the 1940 Act, and
that the shares, when issued and sold in accordance with the laws of applicable
jurisdictions, and with the terms of the Prospectus and Statement of Additional
Information included as part of the Registration Statement, will be valid,
legally issued, fully paid, and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement 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,
Werner & Kennedy
By: /s/Robert K. Fulton
Robert K. Fulton
To be filed by future amendment
To be filed by future amendment
AMERICAN SKANDIA ADVISOR FUNDS, INC.
MASTER NEW CLASS X
DISTRIBUTION PLAN
This Distribution Plan (the "Plan") constitutes the written
Distribution Plan for the New Class X shares issued by American Skandia Advisor
Funds, Inc., a Maryland corporation (the "Company"), adopted pursuant to the
provisions of Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). During the effective term of this Plan, the
Company may incur expenses primarily intended to result in the sale of its New
Class X shares or to maintain or improve account services provided to holders of
its New Class X shares upon the terms and conditions hereinafter set forth:
Section 1. The Company is an open-end management investment company formed under
the laws of the State of Maryland. The shares in the Company may be issued in
one or more series (each, a "Fund") and the shares of each Fund may be issued in
multiple classes.
Section 2. This Plan initially will pertain to New Class X Shares of each of the
Funds named in Exhibit A attached hereto and made a part hereof (each, a
"Participating Fund"). This Plan shall also apply to the New Class X Shares of
any other series of the Company designated from time to time by the Board of
Directors of the Company and added to the list of Participating Funds attached
hereto as Exhibit A. Where used in this Plan, the term "Shares" or "New Class X
Shares" shall pertain only to New Class X Shares of a Participating Fund.
Section 3. In order to provide for the implementation of the payments provided
for pursuant to this Plan, the Company has entered into an Underwriting and
Distribution Agreement (the "Agreement") with American Skandia Marketing,
Incorporated ("ASMI"), pursuant to which ASMI serves as the principal
underwriter and general distributor of the Company's shares and pursuant to
which each Participating Fund may pay compensation to ASMI for its services and
to defray various costs incurred or paid by ASMI in connection with the
distribution of New Class X Shares. Such Agreement, or any modification thereof,
shall become effective with respect to New Class X Shares of any Participating
Fund only upon compliance with Section 12(b) of the Investment Company Act, and
Rule 12b-1 thereunder as the same may be amended from time to time.
Section 4. The Company shall pay to ASMI a distribution and service fee at the
annual rate of 1.0% of the average net asset value of the New Class X Shares of
the Participating Funds which have been outstanding for ten years or less, as
determined at the close of each business day, a quarter of which is intended as
a fee for services provided to existing holders of New Class X Shares. The fee
payable to ASMI hereunder is intended to compensate ASMI for services provided
and expenses incurred by it relating to the offering of the New Class X Shares.
Such services and expenses may include, without limitation, purchases by ASMI of
additional New Class X shares as a bonus for investors in the Participating
Funds; payments by ASMI to dealers, brokers, banks and other financial
institutions ("Dealers") with respect to services in connection with sales of
New Class X Shares; and the payment to Dealers of a service fee of up to 0.50%
on an annual basis of average daily net asset value for Class B Shares that have
been outstanding for at least seven years (and any Class B Shares purchased
through the reinvestment of dividends or capital gains on such shares),
determined at the close of each business day, as compensation for maintaining or
improving services provided to holders of New Class X shares, all as set forth
in the Company's registration statement as in effect from time to time. ASMI's
fee hereunder shall be payable in arrears for each calendar month within 5 days
after the close of such calendar month or at such other intervals as the Board
of Directors of the Company ("Board of Directors") may determine. A majority of
the Qualified Directors, as defined below, may, from time to time, reduce the
amount of such payments or may suspend the operation of the Plan for such period
or periods of time as they may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. Amounts paid to
ASMI hereunder shall not be used to pay distribution expenses or service fees
incurred with respect to any other class of shares of the Company.
Section 5. This Plan shall become effective only upon compliance with Section
12(b) of the Investment Company Act and Rule 12b-1 thereunder and shall continue
in effect for a period of more than one year after it takes effect only so long
as such continuance is specifically approved at least annually by a majority of
the Board of Directors and a majority of the Qualified Directors by votes cast
in person at a meeting called for the purpose of voting on continuation of the
Plan.
Section 6. ASMI and any other person authorized to direct the disposition of
monies paid or payable by the Company pursuant to this Plan or any related
Agreement shall provide to the Board of Directors, and the Board of Directors
shall review, at least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made.
Section 7. This Plan may be terminated as to New Class X Shares of a
Participating Fund at any time by vote of the Board of Directors, including a
majority of the Qualified Directors, or by shareholder vote in accordance with
the Investment Company Act. In the event of such termination, the subject Fund
shall cease to be a Participating Fund upon satisfaction of its outstanding
obligations hereunder.
Section 8. All agreements with any person relating to implementation of
this Plan shall be in writing, and any agreement related to this Plan shall
provide:
a) that such agreement may be terminated with respect to New Class X Shares
of a Participating Fund at any time, without payment of any penalty, by vote of
a majority of the Qualified Directors or by shareholder vote in accordance with
the Investment Company Act on not more than 60 days' written notice to any other
party to the agreement; and
b) that such agreement shall terminate automatically in the event of its
assignment.
Section 9. This Plan may not be amended to increase materially the amounts
payable by a Participating Fund pursuant to Section 4 hereof without shareholder
approval in accordance with the Investment Company Act and any material
amendment to this Plan shall be approved by a majority of the Board of Directors
and a majority of the Qualified Directors by votes cast in person at a meeting
called for the purpose of voting on the amendment.
Amendments to this Plan other than material amendments of the
kind referred to above may be adopted by a vote of the Board of Directors,
including a majority of Qualified Directors. The Board of Directors, by such
vote, also may interpret this Plan and make all determinations necessary or
advisable for its administration.
Section 10. As used in this Plan, (a) the term "Qualified Directors" shall mean
those Directors of the Company who are not interested persons of the Company,
and have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it, and (b) the terms "assignment" and "interested
person" shall have the respective meanings specified in the Investment Company
Act and the rules and regulations thereunder, subject to such exemptions as may
be granted by the Securities and Exchange Commission.
Section 11. While this Plan is in effect, the selection and nomination of the
Qualified Directors shall be committed to the discretion of the Qualified
Directors then in office.
Executed as of ___________________, 1998.
AMERICAN SKANDIA ADVISOR FUNDS, INC.
By: _________________________________
17139-1
<TABLE>
<CAPTION>
ASAF Average Annualized Total Return Inception
- -----------------------------------------------------------------------------------------------------------
Lord Abbett Growth & Income Janus Capital Growth
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 1,057 1,055 1,103 1,081 1,170 1,170 1,218 1,202
T= 5.70% 5.50% 10.30% 8.08% 16.99% 16.99% 21.79% 20.17%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 1,057 1,055 1,103 1,081 1,170 1,170 1,218 1,202
ATR= 5.70% 5.50% 10.30% 8.08% 16.99% 16.99% 21.79% 20.17%
ASAF Average Annualized Total Return Inception
- ------------------------------------------------------------------------------------------------------------
Federated High Yield Bond Total Return Bond
- ------------------------------------------------------------------------------------------------------------
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 1,021 1,003 1,053 1,030 1,010 988 1,038 1,015
T= 2.09% 0.34% 5.29% 2.96% 1.02% -1.21% 3.82% 1.45%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 1,021 1,003 1,053 1,030 1,010 988 1,038 1,015
ATR= 2.09% 0.34% 5.29% 2.96% 1.02% -1.21% 3.82% 1.45%
ASAF Average Annualized Total Return Inception
- -----------------------------------------------------------------------------------------------------------
INVESCO Equity Income Founders Small Capitalization
- -----------------------------------------------------------------------------------------------------------
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 1,140 1,137 1,187 1,167 1,051 1,043 1,094 1,072
T= 14.02% 13.68% 18.68% 16.67% 5.13% 4.30% 9.40% 7.16%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 1,140 1,137 1,187 1,167 1,051 1,043 1,094 1,072
ATR= 14.02% 13.68% 18.68% 16.67% 5.13% 4.30% 9.40% 7.16%
ASAF Average Annualized Total Return Inception
- -----------------------------------------------------------------------------------------------------------
T. Rowe Price International Equity Founders International Small Cap
- -----------------------------------------------------------------------------------------------------------
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 983 971 1,019 999 1,096 1,090 1,140 1,116
T= -1.66% -2.90% 1.90% -0.12% 9.58% 8.95% 13.95% 11.61%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 983 971 1,019 999 1,096 1,090 1,140 1,116
ATR= -1.66% -2.90% 1.90% -0.12% 9.58% 8.95% 13.95% 11.61%
ASAF Average Annualized Total Return Inception
- -----------------------------------------------------------------------------------------------------------
Robertson Stephens Value + Growth Janus Overseas Growth
- -----------------------------------------------------------------------------------------------------------
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 1,086 1,083 1,132 1,110 1,049 1,044 1,094 1,070
T= 8.55% 8.30% 13.20% 10.95% 4.94% 4.40% 9.40% 6.95%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 1,086 1,083 1,132 1,110 1,049 1,044 1,094 1,070
ATR= 8.55% 8.30% 13.20% 10.95% 4.94% 4.40% 9.40% 6.95%
ASAF Average Annualized Total Return Inception
- -----------------------------------------------------------------------------------------------------------
T. Rowe Price Small Company Value American Century
- -----------------------------------------------------------------------------------------------------------
A B C X A B C X
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
n= 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
ERV= 1,077 1,069 1,119 1,096 1,039 1,030 1,080 1,056
T= 7.74% 6.91% 11.91% 9.63% 3.91% 2.98% 7.98% 5.60%
Aggregate Total Return Inception
P= 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
ERV= 1,077 1,069 1,119 1,096 1,039 1,030 1,080 1,056
ATR= 7.74% 6.91% 11.91% 9.63% 3.91% 2.98% 7.98% 5.60%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Money Market 7-Day Yield JPM Money Market
A B C X
<S> <C> <C> <C> <C>
n=sum of seven daily distribution rates 0.000713 0.000611 0.000616 0.000616
n x 365 / 7 = 7 Day Current Yield
Current Yield = 3.72% 3.19% 3.21% 3.21%
(1 + n) ^ (365 / 7) - 1 = 7 Day Effective Yield
Effective Yield = 3.79% 3.24% 3.26% 3.27%
</TABLE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Plan Pursuant to Rule 18f-3(d) Under the
Investment Company Act of 1940
Effective July 21, 1997
Revised August ___, 1998
Each of the series (each a "Fund" and, together, the "Funds")
of American Skandia Advisor Funds, Inc. (the "Company"), an open-end investment
company, may from time to time issue one or more of the following classes of
shares: Class A shares, Class B shares, Class C shares, Class X shares and New
Class X shares. Each class is subject to such investment minimums and other
conditions of eligibility as are set forth in the Company's registration
statement as in effect from time to time (the "Registration Statement"). The
differences in expenses among these classes of shares, and the conversion and
exchange features of each class of shares, are set forth below in this plan
(this "Plan"). Except as noted below, expenses are allocated among the classes
of shares of each Fund based upon the net assets of each Fund attributable to
shares of each class. This Plan is subject to change by action of the Board of
Directors of the Company (the "Board of Directors"), to the extent permitted by
law and by the Articles of Incorporation and By-laws of the Company.
CLASS A SHARES
DISTRIBUTION AND SERVICE FEES
The Class A shares of each Fund pay distribution and service
fees pursuant to a distribution plan (the "Class A Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Investment Company
Act"). Class A shares also bear any costs associated with obtaining shareholder
approval of the Class A Plan (or an amendment to the Class A Plan). Pursuant to
the Class A Plan, Class A shares may pay distribution and service fees at an
annual rate of up to 0.5% of the applicable Fund's average net assets
attributable to the Class A shares. Amounts payable under the Class A Plan are
subject to such further limitations as the Board of Directors may from time to
time in effect and as are set forth in the Registration Statement.
CONVERSION FEATURES
Class A shares of any Fund do not convert to any other class
of shares.
EXCHANGE FEATURES
Class A shares of any Fund (except the ASAF JPM Money Market
Fund (the "Money Market Fund")) may be exchanged, at the holder's option
beginning seven days after the purchase, for Class A shares of any other Fund
that offers Class A shares without the payment of a sales charge, and Class A
shares of the Money Market Fund may be exchanged, at the holder's option
beginning seven days after the purchase, for Class A shares of any other Fund
that offers Class A shares subject to the initial sales charge applicable to
such other Fund, provided that Class A shares of such other Fund are available
to residents of the relevant state and that such requirements as may be
applicable to exchanges, including investment minimums for such other Fund, and
are set forth in the Registration Statement are met or waived. The holding
period for determining any applicable contingent deferred sales charge (a
"CDSC") will include the holding period of the shares exchanged, and will be
calculated using the schedule of any Fund into or from which shares have been
exchanged that would result in the highest CDSC applicable to such Class A
shares.
INITIAL SALES CHARGE
Class A shares of the Funds are offered at a public offering
price that is equal to their net asset value ("NAV") plus the applicable initial
sales charge. Class A shares of the Funds designated as the High Yield Bond Fund
and the Total Return Bond Fund (the "Bond Funds") are offered at a public
offering price that is equal to their NAV plus a sales charge of up to 4.25% for
purchases aggregating less than $50,000; 3.75% for purchases aggregating at
least $50,000 but less than $100,000; 3.25% for purchases aggregating at least
$100,000 but less than $250,000; 2.25% for purchases aggregating at least
$250,000 but less than $500,000; and 1.50% for purchases aggregating at least
$500,000 but less than $1,000,000. Class A shares of the Money Market Fund are
offered at their NAV with no initial sales charge. Class A shares of all Funds
other than the Bond Funds and the Money Market Fund are offered to such
investors at a public offering price that is equal to their NAV plus an initial
sales charge of up to 5.00% for purchases aggregating less than $50,000; 4.25%
for purchases aggregating at least $50,000 but less than $100,000; 3.25% for
purchases aggregating at least $100,000 but less than $250,000; 2.25% for
purchases aggregating at least $250,000 but less than $500,000; and 1.50% for
purchases aggregating at least $500,000 but less than $1 million.
The sales charges on Class A shares in all Funds are subject
to reduction or waiver as permitted by Rule 22d-1 under the Investment Company
Act and as described in the Registration Statement.
CONTINGENT DEFERRED SALES CHARGE
There is no initial sales charge on purchases of Class A
shares aggregating $1 million or more of any one or more of the Funds, but such
shares are subject to a CDSC (the "Class A CDSC") of 1.0% if redeemed within
twelve months of the first business day of the calendar month of their purchase.
The Class A CDSC will be assessed on the lesser of (1) the NAV of the Class A
shares at the time of redemption (not including Class A shares purchased by
reinvestment of dividends or capital gains distributions); or (2) the amount
originally invested in the Class A shares redeemed by the holder thereof.
The Class A CDSC is subject to reduction or waiver in certain
circumstances as permitted by Rule 6c-10 under the Investment Company Act and as
described in the Registration Statement.
CLASS B SHARES
DISTRIBUTION AND SERVICE FEES
The Class B shares of each Fund pay distribution and service
fees pursuant to a distribution plan (the "Class B Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act. Class B shares also bear any costs
associated with obtaining shareholder approval of the Class B Plan (or an
amendment to the Class B Plan). Pursuant to the Class B Plan, Class B shares may
pay distribution and service fees at an annual rate of up to 1.0% of the
applicable Fund's average net assets attributable to Class B shares that have
been outstanding for eight years or less. Amounts payable under the Class B Plan
are subject to such further limitations as the Board of Directors may from time
to time determine and as are set forth in the Registration Statement.
CONVERSION FEATURES
Class B shares of any Fund automatically convert to Class A
shares of the same Fund eight years after the first business day of the calendar
month of their purchase. Such conversion will be effected on the basis of the
relative net asset values of the Class A and Class B shares on the conversion
date without imposition of any sales load, fee or other charge. When Class B
shares of any Fund convert to Class A shares, a portion of any other Class B
shares that have been acquired by each holder through the reinvestment of
dividends or capital gains ("Class B Dividend Shares") on the converted Class B
shares will also convert to Class A shares of the same Fund. The portion of
Class B Dividend Shares to be converted will be based upon the ratio of the
Class B shares automatically converting to Class A shares to the total number of
Class B shares then held by such holder.
EXCHANGE FEATURES
Class B shares of any Fund may be exchanged, at the holder's
option beginning seven days after purchase, for Class B shares of any other Fund
that offers Class B shares without the payment of a sales charge, provided that
Class B shares of such other Fund are available to residents of the relevant
state and that such requirements as may be applicable to exchanges, including
investment minimums for such other Fund, and are set forth in the Registration
Statement are met or waived. The holding period for determining any applicable
CDSC will include the holding period of the shares exchanged and will be
calculated using the schedule of any Fund into or from which shares have been
exchanged that would result in the highest CDSC applicable to such Class B
shares.
INITIAL SALES CHARGE
The Class B shares of each Fund are offered at a public
offering price that is equal to their NAV, with no initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
Class B shares of any Fund that are redeemed within seven
years of the first business day of the calendar month of their purchase are
subject to a CDSC (the "Class B CDSC") in accordance with the following
schedule: Redemption During: Class B CDSC (as % of amount subject to charge):
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
The Class B CDSC will be assessed on the lesser of (i) the NAV
of the Class B shares at the time of redemption (not including Class B shares
purchased by reinvestment of dividends of capital gains distributions), or (ii)
the amount originally invested in the Class B shares redeemed by the holder
thereof.
The Class B CDSC is subject to reduction or waiver in certain
circumstances as permitted by Rule 6c-10 under the Investment Company Act and as
described in the Registration Statement.
CLASS C SHARES
DISTRIBUTION AND SERVICE FEES
The Class C shares of each Fund pay distribution and service
fees pursuant to a distribution plan (the "Class C Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act. Class C shares also bear any costs
associated with obtaining shareholder approval of the Class C Plan (or an
amendment to the Class C Plan). Pursuant to the Class C Plan, Class C may pay
distribution and service fees at an annual rate of up to 1.00% of the applicable
Fund's average net assets attributable to the Class C shares. Amounts payable
under the Class C Plan are subject to such further limitations as the Board of
Directors may from time to time determine and are set forth in the Registration
Statement.
CONVERSION FEATURES
Class C shares of any Fund do not convert to any other class
of shares.
EXCHANGE FEATURES
Class C shares of any Fund may be exchanged, at the holder's
option beginning seven days after purchase, for Class C shares of any other Fund
that offers Class C shares without the payment of a sales charge, provided that
Class C shares of such other Fund are available to residents of the relevant
state and that such requirements as may be applicable to exchanges, including
investment minimums for such other Fund, and are set forth in the Registration
Statement are met or waived. The holding period for determining any applicable
CDSC will include the holding period of the shares exchanged, and will be
calculated using the schedule of any Fund into or from which shares have been
exchanged that would result in the highest CDSC applicable to such Class C
shares.
INITIAL SALES CHARGE
The Class C shares of each fund are offered at a public
offering price that is equal to their NAV, without an initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
Class C shares of any Fund that are subject to a CDSC (the
"Class C CDSC") of 1.00% if redeemed within twelve months of the first business
day of the calendar month of their purchase. The Class C CDSC will be assessed
on the lesser of (i) the NAV of the Class C shares at the time of redemption
(not including Class C shares purchased by reinvestment of dividends or capital
gains distributions) or (ii) the amount originally invested in the Class C
shares redeemed by the holder thereof.
The Class C CDSC is subject to reduction or waiver in certain
circumstances as permitted by Rule 6c-10 under the Investment Company Act and as
described in the Registration Statement.
CLASS X SHARES
DISTRIBUTION AND SERVICE FEES
The Class X shares of each Fund pay distribution and service
fees pursuant to a distribution plan (the "Class X Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act. Class X shares will also bear any
costs associated with obtaining approval of the Class X Plan (or an amendment to
the Class X Plan). Pursuant to the Class X Plan, Class X shares may pay
distribution and service fees at an annual rate of up to 1.0% of the relevant
Fund's average net assets attributable to Class X shares. Amounts payable under
the Class X Plan are subject to such further limitations as the Board of
Directors may from time to time determine and as are set forth in the
Registration Statement.
CONVERSION FEATURES
Class X shares of any Fund automatically convert to Class A
shares of the same Fund eight years after the first business day of the calendar
month of their purchase. Such conversion will be effected on the basis of the
relative net asset values of the Class A and Class X shares on the conversion
date without imposition of any sales load, fee or other charge. When Class X
shares of any Fund convert to Class A shares, a portion of any other Class X
shares that have been acquired by each holder through the reinvestment of
dividends or capital gains distributions ("Class X Dividend Shares") on the
converted Class X shares will also convert to Class A shares of the same Fund.
The portion of Class X Dividend Shares to be converted will be based upon the
ratio of the Class X shares automatically converting to Class A shares to the
total number of Class X shares then held by such holder.
EXCHANGE FEATURES
Class X shares of any Fund may be exchanged, at the holder's
option beginning seven days after purchase, for Class X shares of any other Fund
that offers Class X shares without the payment of a sales charge, provided that
Class X shares of such other Fund are available to residents of the relevant
state and that such requirements as may be applicable to exchanges, including
investment minimums for such other Fund, and are set forth in the Registration
Statement are met or waived.
The holding period for determining any applicable CDSC will
include the holding period of the shares exchanged and will be calculated using
the schedule of any Fund into a form which shares have been exchanged that would
result in the highest CDSC applicable to such Class X shares.
INITIAL SALES CHARGE
The Class X shares of each Fund are offered at a public
offering price that is equal to their NAV, with no initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
Class X shares of any Fund that are redeemed within seven
years of the first business day of the calendar month of their purchase are
subject to a CDSC (the "Class X CDSC") in accordance with the following
schedule: Redemption During: Class X CDSC (as % of amount subject to charge):
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
The Class X CDSC will be assessed on the lesser of (i) the NAV
of the Class X shares at the time of redemption (not including any Class X
shares received by the holder of the Class X shares redeemed as part of a bonus
share program described in the Registration Statement or any Class X shares
purchased by reinvestment of dividends or capital gains distributions), or (ii)
the amount originally invested in the Class X shares redeemed by the holder
thereof.
The Class X CDSC is subject to reduction or waiver in certain
circumstances as permitted by Rule 6c-10 under the Investment Company Act and as
described in the Registration Statement.
NEW CLASS X SHARES
DISTRIBUTION AND SERVICE FEES
The New Class X shares of each Fund pay distribution and
service fees pursuant to a distribution plan (the "Class X Plan") adopted
pursuant to Rule 12b-1 under the Investment Company Act. New Class X shares will
also bear any costs associated with obtaining approval of the New Class X Plan
(or an amendment to the New Class X Plan). Pursuant to the New Class X Plan, New
Class X shares may pay distribution and service fees at an annual rate of up to
1.0% of the relevant Fund's average net assets attributable to Class X shares.
Amounts payable under the New Class X Plan are subject to such further
limitations as the Board of Directors may from time to time determine and as are
set forth in the Registration Statement.
CONVERSION FEATURES
New Class X shares of any Fund automatically convert to Class
A shares of the same Fund ten years after the first business day of the calendar
month of their purchase. Such conversion will be effected on the basis of the
relative net asset values of the Class A and New Class X shares on the
conversion date without imposition of any sales load, fee or other charge. When
New Class X shares of any Fund convert to Class A shares, a portion of any other
New Class X shares that have been acquired by each holder through the
reinvestment of dividends or capital gains distributions ("New Class X Dividend
Shares") on the converted New Class X shares will also convert to Class A shares
of the same Fund. The portion of New Class X Dividend Shares to be converted
will be based upon the ratio of the New Class X shares automatically converting
to Class A shares to the total number of New Class X shares then held by such
holder.
EXCHANGE FEATURES
New Class X shares of any Fund may be exchanged, at the
holder's option beginning seven days after purchase, for New Class X shares of
any other Fund that offers New Class X shares without the payment of a sales
charge, provided that New Class X shares of such other Fund are available to
residents of the relevant state and that such requirements as may be applicable
to exchanges, including investment minimums for such other Fund, and are set
forth in the Registration Statement are met or waived.
The holding period for determining any applicable CDSC will
include the holding period of the shares exchanged and will be calculated using
the schedule of any Fund into a form which shares have been exchanged that would
result in the highest CDSC applicable to such New Class X shares.
INITIAL SALES CHARGE
The New Class X shares of each Fund are offered at a public
offering price that is equal to their NAV, with no initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
New Class X shares of any Fund that are redeemed within eight
years of the first business day of the calendar month of their purchase are
subject to a CDSC (the "New Class X CDSC") in accordance with the following
schedule: Redemption During: New Class X CDSC (as % of amount subject to
charge):
1st year after purchase 6.0%
2nd year after purchase 5.0%
3rd year after purchase 4.0%
4th year after purchase 4.0%
5th year after purchase 3.0%
6th year after purchase 2.0%
7th year after purchase 2.0%
8th year after purchase 1.0%
9th year after purchase None
The New Class X CDSC will be assessed on the lesser of (i) the
NAV of the New Class X shares at the time of redemption (not including any New
Class X shares received by the holder of the New Class X shares redeemed as part
of a bonus share program described in the Registration Statement or any New
Class X shares purchased by reinvestment of dividends or capital gains
distributions), or (ii) the amount originally invested in the New Class X shares
redeemed by the holder thereof.
The New Class X CDSC is subject to reduction or waiver in
certain circumstances as permitted by Rule 6c-10 under the Investment Company
Act and as described in the Registration Statement.
