As filed with the Securities and Exchange Commission on July 23, 1999
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. 7
and
Registration Statement Under The Investment Company Act of 1940
Amendment No. 10
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.
STRADLEY RONAN STEVENS & YOUNG, LLP
2600 One Commerce Square, Philadelphia, Pennsylvania 19103
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
_____ on March 1, 1999 pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
_____ 75 days after filing pursuant to paragraph (a)(2).
[X] on October 18, 1999 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.
P R O S P E C T U S
Class A, Class B, Class C and Class X Shares
OCTOBER 18, 1999
---------------------------------
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND
ASAF AIM INTERNATIONAL EQUITY FUND
ASAF JANUS OVERSEAS GROWTH FUND
ASAF JANUS SMALL-CAP GROWTH FUND
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND
ASAF NEUBERGER BERMAN MID-CAP GROWTH FUND
ASAF NEUBERGER BERMAN MID-CAP VALUE FUND
ASAF OPPENHEIMER LARGE-CAP GROWTH FUND
ASAF MARSICO CAPITAL GROWTH FUND
ASAF JANUS CAPITAL GROWTH FUND
ASAF BANKERS TRUST MANAGED INDEX 500 FUND
ASAF LORD ABBETT GROWTH AND INCOME FUND
ASAF MFS GROWTH WITH 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
- ------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
T A B L E O F C O N T E N T S
<S> <C> <C>
RISK/RETURN SUMMARY........................................................................................................
PAST PERFORMANCE...........................................................................................................
EXPENSE INFORMATION........................................................................................................
Shareholder Transaction Expenses..................................................................................
Annual Fund Operating Expenses....................................................................................
Expense Examples..................................................................................................
INVESTMENT PROGRAMS OF THE FUNDS...........................................................................................
ASAF Founders International Small Capitalization Fund.............................................................
ASAF T. Rowe Price International Equity Fund......................................................................
ASAF AIM International Equity Fund................................................................................
ASAF Janus Overseas Growth Fund...................................................................................
ASAF Janus Small-Cap Growth Fund..................................................................................
ASAF T. Rowe Price Small Company Value Fund.......................................................................
ASAF Neuberger Berman Mid-Cap Growth Fund.........................................................................
ASAF Neuberger Berman Mid-Cap Value Fund..........................................................................
ASAF Oppenheimer Large-Cap Growth Fund............................................................................
ASAF Marsico Capital Growth Fund..................................................................................
ASAF Janus Capital Growth Fund....................................................................................
ASAF Bankers Trust Managed 500 Index Fund.........................................................................
ASAF Lord Abbett Growth and Income Fund...........................................................................
ASAF MFS Growth with 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........................................................................................
PORTFOLIO TURNOVER.........................................................................................................
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.....................................................................................
SPECIAL INFORMATION ON THE "MASTER/FEEDER" FUND STRUCTURE..................................................................
MANAGEMENT OF THE FUNDS....................................................................................................
The Investment Manager............................................................................................
The Sub-Advisors..................................................................................................
Fees and Expenses.................................................................................................
DIVIDENDS, CAPITAL GAINS AND TAXES.........................................................................................
FINANCIAL HIGHLIGHTS.......................................................................................................
CERTAIN RISK FACTORS AND INVESTMENT METHODS................................................................................
</TABLE>
<PAGE>
RISK/RETURN SUMMARY
American Skandia Advisor Funds, Inc. (the "Company") is comprised of
nineteen diversified investment portfolios (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 (the "Feeder Funds") -- invest all of their investable assets in a
corresponding portfolio (the "Portfolios") of American Skandia Master Trust
("ASMT" or the "Trust"). 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
that directly invest and manage their own portfolio of securities. Those Funds
of the Company that currently are not organized under a "master/feeder" fund
structure retain the right to become part of the master/feeder structure in the
future. For additional information regarding the "master/feeder" fund structure,
see this Prospectus under "Special Information on the 'Master/Feeder' Fund
Structure."
The Company is designed to provide a wide range of investment options. Each
Fund and Portfolio has its own investment goal and style (and, as a result, its
own level of risk). Some of the Funds and Portfolios offer potential for high
returns with correspondingly higher risk, while others offer stable returns with
relatively less risk. It is possible to lose money when investing even in the
most conservative of the Funds or Portfolios. Investments in the Funds and
Portfolios are not bank deposits and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
It is not possible to provide an exact measure of the risk to which
a Fund and Portfolio is subject, and a Fund or Portfolio's risk will vary based
on the securities that it holds at a given time. Nonetheless, based on each Fund
and Portfolio's investment style and the risks typically associated with that
style, it is possible to assess in a general manner the risks to which a fund
will be subject. The following discussion highlights the investment strategies
and risks of the Funds and Portfolios. Additional information about each Fund
and Portfolio's potential investments and its risks is included in this
Prospectus under "Investment Programs of the Funds."
<TABLE>
<CAPTION>
International Funds and Portfolios:
Fund/Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
Int'l Small Capitalization Capital growth The Fund invests primarily in equity
Fund securities of small capitalization foreign companies.
T. Rowe Price Int'l Equity Total return on assets The Portfolio invests primarily in common stocks of
Portfolio from long-term growth of established foreign companies.
capital and income
AIM International Equity Capital growth The Fund invests primarily in equity
Fund securities of foreign companies.
Overseas Growth Fund Capital growth The Fund invests primarily in common stocks of foreign
</TABLE>
companies.
Principal Investment Strategies:
The ASAF Founders International Small Capitalization Fund normally invests
primarily in securities issued by foreign companies that 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 growth.
The Sub-advisor to the Fund looks for companies whose fundamental strengths
indicate potential for growth in earnings per share. The Sub-advisor generally
takes a "bottom up" approach to building the Fund, which means that the
Sub-advisor will search for individual companies that demonstrate the best
potential for significant earnings growth, rather than choose investments based
on broader economic characteristics of countries or industries.
The Sub-advisor to the ASMT T. Rowe Price International Equity Portfolio expects
to invest substantially all of the Portfolio's assets (with a minimum of 65%) in
established foreign companies. Geographic diversification will be wide,
including both developed and developing countries, and there will normally be at
least three different countries represented in the Portfolio. Stocks can be
purchased without regard to a company's market capitalization, but the
Sub-advisor's focus typically will be on large and, to a lesser extent,
medium-sized companies.
The Fund will invest in stocks that have the potential for growth of capital or
income or both. Stocks are selected by blending a "bottom-up" approach (an
approach based on the Sub-advisor's fundamental research on particular
companies), with an awareness of a country's economic status and outlook.
However, selecting particular stocks is the focal point of decision-making. The
Sub-advisor weighs a company's prospects for achieving and sustaining
above-average long-term earnings growth and also looks at valuation factors,
such as price/earnings and price/cash flow ratios. Valuation factors often
influence the Sub-advisor's allocations among large-, mid-, and small-cap
companies.
The ASAF AIM International Equity Fund seeks to meet its investment objective by
investing, normally, at least 70% of its assets in marketable equity securities
of foreign companies that are listed on a recognized foreign securities exchange
or traded in a foreign over-the-counter market. The Fund will normally invest in
a diversified portfolio that includes companies located in at least four
countries outside the United States, emphasizing investment in companies in the
developed countries of Western Europe and the Pacific Basin. The Sub-advisor
does not intend to invest more than 20% of the Fund's total assets in companies
located in developing countries.
The Sub-advisor focuses on companies that have experienced above-average,
long-term growth in earnings and have strong prospects for future growth. In
selecting countries in which the Fund will invest, the Sub-advisor also
considers such factors as the prospect for relative economic growth among
countries or regions, economic or political conditions, currency exchange
fluctuations, tax considerations and the liquidity of a particular security. The
Sub-advisor considers whether to sell a particular security when any of those
factors materially changes.
The ASAF Janus Overseas Growth 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 stocks selected for their growth potential. The
Sub-advisor generally takes a "bottom up" approach to choosing investments for
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 where the companies are organized or where they primarily
conduct business. 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 similar selection procedure.
Principal Risks:
o All four of the international funds and portfolios are equity funds, and
the primary risk of each is that the value of the stocks they hold will
decline. Stocks can decline for many reasons, including reasons related to
the particular company, the industry of which it is a part, or the
securities markets generally.
o The level of risk of the international funds and portfolios will generally
be higher than the level of risk associated with domestic equity funds.
Foreign investments involve risks such as fluctuations in currency exchange
rates, unstable political and economic structures, reduced availability of
information, and lack of uniform financial reporting and regulatory
practices such as those that apply to U.S. issuers. While none of the
international funds invest primarily in companies located in developing
countries, each may invest in those companies to some degree, and
investment in developing countries may accentuate the risks of foreign
investing.
o As a fund that invests primarily in the securities of smaller foreign
issuers, the ASAF Founders International Small Capitalization Fund may be
subject to a greater level of risk than the other international funds.
Securities of smaller companies tend to be subject to more abrupt and
erratic price movements than securities of larger companies, in part
because they may have limited product lines, markets, or financial
resources.
<TABLE>
<CAPTION>
Capital Growth Funds and Portfolios:
Fund/Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
Small-Cap Growth Fund Capital growth The Fund invests primarily in common stocks of small
capitalization U.S. companies.
Small Company Value Fund Long-term capital growth The Fund invests primarily in stocks and equity-related
securities of small capitalization U.S. companies that
appear to be undervalued.
Mid-Cap Growth Fund Capital growth Invests primarily in common stocks of medium capitalization
companies.
Mid-Cap Value Fund Capital growth The Fund invests primarily in common stocks of
medium capitalization companies, using a value-oriented
investment approach.
Large-Cap Growth Fund Capital growth The Fund invests primarily in common stocks of
large capitalization growth companies.
Marsico Capital Growth Fund Capital growth The Fund invests primarily in common stocks, with the
majority of the Fund's assets in large-cap stocks.
Janus Capital Growth Capital growth The Portfolio invests primarily in common stocks.
Portfolio
Managed Index 500 Fund To outperform the S&P 500 The Portfolio invests primarily in common stocks included in
Stock Index the S&P 500.
</TABLE>
Principal Investment Strategies:
The ASAF Janus Small-Cap Growth Fund pursues its objective by normally investing
at least 65% of its total assets in the common stocks of small-sized companies.
For purposes of the Fund, small-sized companies are those that have market
capitalizations of less than $1.5 billion or annual gross revenues of less than
$500 million. To a lesser extent, the Fund may also invest in stocks of larger
companies with potential for capital appreciation.
The Sub-advisor generally takes a "bottom up" approach to building the Fund. In
other words, it seeks to identify individual companies with earnings growth
potential that may not be recognized by the market at large. Although themes may
emerge in the Fund, securities are generally selected without regard to any
defined industry sector or other similar selection procedure.
The ASAF T. Rowe Price Small Company Value Fund will invest at least 65% of its
total assets in stocks and equity-related securities of small companies ($1
billion or less in market capitalization). Stock selection will reflect a value
investment approach. The Sub-advisor's research team seeks to identify companies
that appear to be undervalued by various measures, and may be temporarily out of
favor, but have good prospects for capital appreciation. In selecting
investments, the Sub-advisor generally looks to the following:
(1) The stock price appears undervalued in relation to the company's
earnings, projected cash flow, or asset value per share.
(2) The price/earnings ratio is attractive relative to the underlying
earnings growth rate.
(3) The potential exists for some catalyst (such as increased investor
attention, a restructuring or asset sale, or a change in management) to cause
the stock's price to rise.
(4) The dividend yield (the stock's annual dividend divided by the stock
price) is attractive relative to the stock's historic norm or that of its
industry.
The Fund will not sell a stock just because the company has grown to a market
capitalization of more than $1 billion, and it may on occasion purchase
companies with a market cap above $1 billion.
To pursue its objective, the ASAF Neuberger Berman Mid-Cap Growth Fund primarily
invests in the common stocks of mid-cap companies. Companies with equity market
capitalizations from $300 million to $10 billion at the time of investment are
considered mid-cap companies for purposes of the Fund. Some of the Fund's assets
may be invested in the securities of large-cap companies as well as in small-cap
companies. The Fund seeks to reduce risk by diversifying among many companies
and industries.
The Fund is normally managed using a growth-oriented investment approach. The
Sub-advisor looks for fast-growing companies that are in new or rapidly evolving
industries. Factors in identifying these companies may include above-average
growth of earnings or earnings that exceed analysts' expectations. The
Sub-advisor may also look for other characteristics in a company, such as
financial strength, a strong position relative to competitors and a stock price
that is reasonable in light of its growth rate.
The Sub-advisor follows a disciplined selling strategy, and may sell a stock
when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.
To pursue its objective, the ASAF Neuberger Berman Mid-Cap Value Fund primarily
invests in the common stocks of mid-cap companies. Some of the Fund's assets may
be invested in the securities of large-cap companies as well as in small-cap
companies. The Fund seeks to reduce risk by diversifying among many companies
and industries.
Under the Fund's value-oriented investment approach, the Sub-advisor looks for
well-managed companies whose stock prices are undervalued and that may rise in
price when other investors realize their worth. Factors that the Sub-advisor may
use to identify these companies include strong fundamentals, such as a low
price-to-earnings ratio, consistent cash flow, and a sound track record through
all phases of the market cycle. The Sub-advisor may also look for other
characteristics in a company, such as a strong position relative to competitors,
a high level of stock ownership among management, or a recent sharp decline in
stock price that appears to be the result of a short-term market overreaction to
negative news.
The Sub-advisor generally considers selling a stock when it reaches a target
price, when it fails to perform as expected, or when other opportunities appear
more attractive.
The ASAF Oppenheimer Large-Cap Growth Fund seeks its investment objective by
emphasizing investment in common stocks issued by established
large-capitalization "growth companies" that, in the opinion of the Sub-advisor,
have above average earnings prospects but are selling at below normal prices. At
least 65% of the Fund's assets normally will be invested in companies that have
market capitalizations greater than $3 billion, and the Fund will normally
maintain a median market capitalization greater than $5 billion.
"Growth companies" may be developing new products or services, or expanding into
new markets for their products. While they will have what the Sub-advisor
believes to be favorable long-term prospects, they normally retain a large part
of their earnings for research, development and investment in capital assets.
Therefore, they tend not to emphasize the payment of dividends. Investment
opportunities may be sought among securities of smaller, less well-known
companies, although the Fund's emphasis is on large-cap issuers.
The ASAF Marsico Capital Growth Fund will pursue its objective by investing
primarily in common stocks. The Sub-advisor expects that the majority of the
Fund's assets will be invested in the common stocks of larger, more established
companies.
In selecting investments for the Fund, the Sub-advisor uses an approach that
combines "top down" economic analysis with "bottom up" stock selection. The
"top-down" approach takes into consideration such macro-economic factors as
interest rates, inflation, the regulatory environment, and the global
competitive landscape. In addition, the Sub-advisor examines such factors as the
most attractive global investment opportunities, industry consolidation, and the
sustainability of economic trends. As a result of this "top down" analysis, the
Sub-advisor identifies sectors, industries and companies that should benefit
from the trends the Sub-advisor has observed.
The Sub-advisor then looks for individual companies with earnings growth
potential that may not be recognized by the market at large. In determining
whether a particular company is appropriate for investment by the Fund, the
Sub-advisor focuses on a number of different attributes, including the company's
specific market expertise or dominance, its franchise durability and pricing
power, solid fundamentals (e.g., a strong balance sheet, improving returns on
equity, and the ability to generate free cash flow), strong management, and
reasonable valuations in the context of projected growth rates.
The ASMT Janus Capital Growth Portfolio will pursue its objective by investing
primarily in common stocks. Common stock investments will be in 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 generally takes a "bottom up" approach to choosing
investments for 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.
The ASAF Bankers Trust Managed Index 500 Fund seeks to outperform the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500(R)") through stock
selection resulting in different weightings of common stocks relative to the
index. The S&P 500 is an index of 500 common stocks, most of which trade on the
New York Stock Exchange Inc. (the "NYSE").
In seeking to outperform the S&P 500, the Sub-advisor starts with a portfolio of
stocks representative of the holdings of the index. It then uses a set of
quantitative criteria that are designed to indicate whether a particular stock
will predictably perform better or worse than the S&P 500. Based on these
criteria, the Sub-advisor determines whether the Fund should over-weight,
under-weight or hold a neutral position in the stock relative to the proportion
of the S&P 500 that the stock represents. The majority of the issues held by the
Fund will have neutral weightings, but approximately 100 will be over- or
under-weighted relative to the index. In addition, the Sub-advisor may determine
based on the quantitative criteria that certain S&P 500 stocks should not be
held by the Fund in any amount.
As part of a strategy used to attempt to outperform the S&P 500, the Fund
may also invest up to 15% of its total assets in equity securities of companies
not included in the S&P 500.
Principal Risks:
o All of the capital growth funds and portfolios are equity funds, and the
primary risk of each is that the value of the stocks they hold will
decline. Stocks can decline for many reasons, including reasons related to
the particular company, the industry of which it is a part, or the
securities markets generally. These declines can be substantial.
o The risk to which the capital growth funds and portfolios are subject
depends in part on the size of the companies in which the particular fund
or portfolio invests. Securities of smaller companies tend to be subject to
more abrupt and erratic price movements than securities of larger
companies, in part because they may have limited product lines, markets, or
financial resources. Market capitalization, which is the total market value
of a company's outstanding stock, is often used to classify companies based
on size. Therefore, the ASAF Janus Small-Cap Growth Fund and the ASAF T.
Rowe Price Small Company Value Fund can be expected to be subject to the
highest degree of risk relative to the other capital growth funds. The ASAF
Neuberger Berman Mid-Cap Growth Fund and the ASAF Neuberger Berman Mid-Cap
Value Fund can be expected to be subject to somewhat less risk, and the
ASAF Oppenheimer Large-Cap Growth Fund, the ASAF Marsico Capital Growth
Fund, the ASMT Janus Capital Growth Portfolio and the ASAF Bankers Trust
Managed Index 500 Fund to somewhat less risk than the mid-cap funds.
o The ASAF T. Rowe Price Small Company Value Fund and the ASAF Neuberger
Berman Mid-Cap Value Fund take a value approach to investing, while the
ASAF Janus Small-Cap Growth Fund, the ASAF Neuberger Berman Mid-Cap Growth
Fund, the ASAF Oppenheimer Large-Cap Growth Fund, the ASAF Marsico Capital
Growth Fund and the ASMT Janus Capital Growth Portfolio take a growth
approach. Value stocks are believed to be selling at prices lower than what
they are actually worth, while growth stocks are those of companies that
are expected to grow at above-average rates. A fund or portfolio investing
primarily in growth stocks will tend to be subject to more risk than a
value fund, although this will not always be the case. The ASAF Banker
Trust Managed Index 500 Fund, like the S&P 500, will include both value and
growth stocks.
<TABLE>
<CAPTION>
Growth and Income Funds and Portfolios:
Fund/Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
Growth and Income Fund Long term capital growth The Fund invests primarily in common stocks that are
believed and income to be selling at reasonable
prices in relation to value.
Growth with Income Fund Reasonable current income The Fund invests primarily in common stocks and related
and long-term capital securities.
growth and income
Equity Income Portfolio High current income and, The Portfolio invests primarily in dividend-paying common
secondarily, capital growth stocks that, over a period of years, may also provide capital
appreciation, and to a lesser extent in fixed income securities.
Strategic Balanced Fund Capital growth and current The Fund normally invests approximately 60% of its assets in
income equity securities and the remainder in bonds and other fixed
income securities.
</TABLE>
Principal Investment Strategies:
The ASAF Lord Abbett Growth and Income Fund normally will invest in common
stocks (and securities convertible into common stocks). The Sub-advisor will
take a value-oriented approach, in that it will try to keep the Fund's assets
invested in securities that are selling at reasonable prices in relation to
their 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
that it believes will benefit most from these changes.
The stocks that the Fund will normally invest in are those of seasoned companies
that are expected to show above-average growth and that the Sub-advisor believes
are in sound financial condition. The Sub-advisor will be constantly balancing
the opportunity for profit against the risk of loss for the Fund. 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 that the Sub-advisor
believes offer better values.
The ASAF MFS Growth with Income Fund invests, under normal market conditions, at
least 65% of its total assets in common stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts. The stocks in
which the Fund invests generally will pay dividends. While the Fund may invest
in companies of any size, the Fund generally focuses on companies with larger
market capitalizations that the Sub-advisor believes have sustainable growth
prospects and attractive valuations based on current and expected earnings or
cash flow.
The Sub-advisor uses a "bottom up," as opposed to "top down," investment style
in managing the Fund. This means that securities are selected based upon
fundamental analysis of individual companies by the Sub-advisor.
The ASMT INVESCO Equity Income Portfolio seeks to achieve its objective by
investing in securities that will provide a relatively high yield and stable
return and that, over a period of years, may also provide capital appreciation.
The Portfolio normally will invest at least 65% of its assets in dividend-paying
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. In
addition, the Portfolio normally will have some portion of its assets invested
in debt securities, convertible bonds, or preferred stocks.
The Sub-advisor to the ASAF American Century Strategic Balanced Fund intends to
maintain approximately 60% of the Fund's assets in equity securities and the
remainder in bonds and other fixed income securities. With the equity portion of
the Fund, the Sub-advisor utilizes quantitative management techniques in a
two-step process that draws heavily on computer technology. In the first step,
the Sub-advisor ranks stocks, primarily the 1,500 largest publicly traded U.S.
companies as measured by market capitalization. These rankings are determined by
using a computer model that combines measures of a stock's value and measures of
its growth potential. To measure value, the Sub-advisor uses ratios of stock
price to book value and stock price to cash flow, among others. To measure
growth, the Sub-advisor uses, among others, the rate of growth in a company's
earnings and changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called portfolio
optimization. In portfolio optimization, the Sub-advisor uses a computer to
build a portfolio of stocks from the ranking described earlier that it thinks
will provide the best balance between risk and expected return. The goal is to
create an equity portfolio that provides better returns than the S&P 500 Index
without taking on significant additional risk.
The Sub-advisor intends to maintain approximately 80% of the Fund's fixed income
assets in domestic fixed income securities and approximately 20% in foreign
fixed income securities. This percentage will fluctuate and may be higher or
lower depending on the mix the Sub-advisor believes will be most appropriate for
achieving the Fund's objectives. The fixed income portion of the Fund is
invested in a diversified portfolio of government securities, corporate fixed
income securities, mortgage-backed and asset-backed securities, and similar
securities. The Sub-advisor's strategy is to actively manage the Fund by
investing the Fund's fixed income assets in sectors it believes are undervalued
(relative to the other sectors) and which represent better relative long-term
investment opportunities.
The Sub-advisor will adjust weighted average portfolio maturity in response to
expected changes in interest rates. Under normal market conditions, the weighted
average maturity of the fixed income portion of the Fund will range from 3 to 10
years.
Principal Risks:
o Both equity securities (e.g., stocks) and fixed income securities (e.g.,
bonds) can decline in value, and the primary risk of each of the growth and
income funds and portfolios is that the value of the securities they hold
will decline. The degree of risk to which the growth and income funds are
subject is likely to be somewhat less than a fund investing exclusively for
capital growth.
o The values of equity securities tend to fluctuate more widely than the
values of fixed income securities. Therefore, because of their fixed income
investments, the risk to which the ASMT INVESCO Equity Income Portfolio and
ASAF American Century Strategic Balanced Fund are subject will likely be
somewhat lower than a fund that invests exclusively in equity securities,
although both will generally invest the majority of their assets in equity
securities. Fixed income securities with longer maturities (or durations)
are generally subject to greater risk than fixed income securities with
shorter maturities, in that their values will fluctuate more in response to
changes in market interest rates.
o The ASAF American Century Strategic Balanced Fund generally takes a growth
approach to investing in equity securities, while the other growth and
income funds take a value approach. Growth stocks are those of companies
that are expected to grow at above-average rates, while value stocks are
believed to be selling at prices lower than what they are actually worth. A
fund investing primarily in growth stocks will tend to be subject to more
risk than a value fund, although this will not always be the case.
o Both the ASMT INVESCO Equity Income Portfolio and the ASAF American Century
Strategic Balanced Fund may invest a limited portion of their assets in
lower-quality fixed income securities, which are subject to greater risk
that the issuer may fail to make interest and principal payments on the
securities when due.
<TABLE>
<CAPTION>
Fixed Income Funds and Portfolios:
Fund/Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
High Yield Bond Fund High current income The Fund invests primarily in lower-quality fixed income
securities.
Total Return Bond Portfolio Maximize total return, The Portfolio invests primarily in higher-quality fixed
consistent with income securities of varying maturities, so that the
preservation of capital Portfolio's expected average duration will be from
three to six years.
Money Market Portfolio Maximize current income The Portfolio invests in high-quality, short-term, U.S.
and maintain high levels dollar-denominated instruments.
of liquidity
</TABLE>
Principal Investment Strategies:
The ASAF Federated High Yield Bond Fund will invest at least 65% of its assets
in lower-rated corporate fixed income securities ("junk bonds"). These fixed
income securities may include preferred stocks, convertible securities, bonds,
debentures, notes, equipment lease certificates and equipment trust
certificates. The securities in which the Fund invests usually will be rated
below the three highest rating categories of a nationally recognized rating
organization (AAA, AA, or A for Standard & Poor's Corporation ("Standard &
Poor's") and Aaa, Aa or A for Moody's Investors Service, Inc. ("Moody's")) or,
if unrated, are of comparable quality.
There is no lower limit on the rating of securities in which the Fund may
invest.
Methods by which the Sub-advisor attempts to reduce the risks involved in
lower-rated securities include:
Credit Research. The Sub-advisor will perform its own credit
analysis in addition to using rating organizations and other sources, and may
have discussions with the issuer's management or other investment analysts
regarding issuers. The Sub-advisor's credit analysis will consider the issuer's
financial soundness, its responsiveness to changing business and market
conditions, and its anticipated cash flow and earnings. In evaluating an issuer,
the Sub-advisor places special emphasis on the estimated current value of the
issuer's assets rather than their historical cost.
Diversification. The Sub-advisor invests in securities of many different
issuers, industries, and economic sectors.
Economic Analysis. The Sub-advisor will analyze current developments and
trends in the economy and in the financial markets.
The ASMT PIMCO Total Return Bond Portfolio will invest at least 65% of its
assets in the following types of fixed income securities:
(1) securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
(2) corporate debt securities, including convertible securities and
commercial paper;
(3) mortgage and other asset-backed securities;
(4) structured notes, including hybrid or "indexed" securities, and
loan participations;
(5) delayed funding loans and revolving credit securities;
(6) bank certificates of deposit, fixed time deposits and bankers'
acceptances;
(7) repurchase agreements and reverse repurchase agreements;
(8) obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and
(9) obligations of international agencies or supranational entities.
Portfolio holdings will be concentrated in areas of the bond market that the
Sub-advisor believes to be relatively undervalued. In selecting fixed income
securities, the Sub-advisor uses economic forecasting, interest rate
anticipation, credit and call risk analysis, foreign currency exchange rate
forecasting, and other securities selection techniques. The proportion of the
Portfolio'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 management of duration is one of the fundamental tools
used by the Sub-advisor.
The Portfolio will invest in fixed-income securities of varying maturities. The
average portfolio duration of the Portfolio generally will vary within a three-
to six-year time frame based on the Sub-advisor's forecast for interest rates.
The Portfolio can and routinely does invest in certain complex fixed income
securities (including mortgage-backed and asset-backed securities) and engage in
a number of investment practices (including futures, swaps and dollar rolls)
that many other fixed income funds do not utilize. The Portfolio may invest up
to 10% of its assets in fixed income securities that are rated below investment
grade ("junk bonds") (or, if unrated, determined by the Sub-advisor to be of
comparable quality).
The ASMT JPM Money Market Portfolio will invest in high-quality, short-term,
U.S. dollar denominated corporate, bank and government obligations. Under the
regulatory requirements applicable to money market funds, the Portfolio must
maintain a weighted average portfolio maturity of not more than 90 days and
invest in securities that have effective maturities of not more than 397 days.
In addition, the Portfolio will limit its investments to those securities that,
in accordance with guidelines adopted by the Directors of the Company, present
minimal credit risks. The Portfolio will not purchase any security (other than a
United States Government security) unless:
(1) if rated by only one nationally recognized statistical rating
organization (such as Moody's and Standard & Poor's), such organization has
rated it with the highest rating assigned to short-term debt securities;
(2) if rated by more than one nationally recognized statistical
rating organization, at least two rating organizations have rated it with the
highest rating assigned to short-term debt securities; or
(3) it is not rated, but is determined to be of comparable quality
in accordance with the guidelines noted above.
Principal Risks:
o The risk of a fund or portfolio investing primarily in fixed income
securities is determined largely by the quality and maturity
characteristics of its portfolio securities. Lower-quality fixed income
securities are subject to greater risk that the company may fail to make
interest and principal payments on the securities when due. Fixed income
securities with longer maturities (or durations) are generally subject to
greater risk than securities with shorter maturities, in that their values
will fluctuate more in response to changes in market interest rates.
o As a fund that invests primarily in lower-quality fixed income securities,
the ASAF Federated High Yield Bond Fund will be subject to a level of risk
that is high relative to other fixed income funds, and which may be
comparable to or higher than some equity funds. Like equity securities,
lower-quality fixed income securities tend to reflect short-term market
developments to a greater extent than higher-quality fixed income
securities. An economic downturn may adversely affect the value of
lower-quality securities, and the trading market for such securities is
generally less liquid than the market for higher-quality securities.
o As a portfolio that invests primarily in high-quality fixed income
securities of medium duration, the level of risk to which the ASMT PIMCO
Total Return Bond Portfolio is subject can be expected to be less than most
equity funds. Nonetheless, the fixed income securities held by the
Portfolio can decline in value because of changes in their quality, in
market interest rates, or for other reasons. In addition, while the complex
fixed income securities invested in and investment practices engaged in by
the Portfolio are designed to increase its return or hedge its investment,
these securities and practices may increase the risk to which the Portfolio
is subject.
o The ASMT JPM Money Market Portfolio seeks to preserve the value of your
investment at $1.00 per share, but it is still possible to lose money by
investing in the Portfolio. An investment in the Portfolio is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. In addition, the income earned by the Portfolio will
fluctuate based on market conditions and other factors.
<PAGE>
This page has been intentionally left blank.
<PAGE>
PAST PERFORMANCE
The bar chart shows the 1998 performance of the Class A shares of
each Fund that has been in operation since January 1, 1998. The tables below the
bar chart show each such Fund's best and worst quarters during 1998, as well as
the average annual total return for each Fund for 1998 and since inception, if
longer. This information may help provide an indication of each Fund's risks.
The average annual figures reflect sales charges; the other figures do not, and
would be lower if they did. All figures assume reinvestment of dividends. Past
performance does not necessarily indicate how a Fund will perform in the future.
<TABLE>
<CAPTION>
1998 Class A total returns
_________________________________________________________________________________________________________________________
59.91% 60.00%
24.90%
19.84% 40.00%
16.91% 15.70% 15.98% 20.00%
13.93% 5.49% -11.84% 13.94% 4.90% 7.67% 3.92%
0.00%
________________________________________________________________________________________________________-20.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fndrs TRP Janus Janus TRP Oppen- Janus Lord INVESCO Am Fed Total JPM
Int'l Int'l Overseas Smll Smll heimer Cap Abbett Cent High Return Money
Cap Cap Growth Yield Market
</TABLE>
* Class A Total Returns for first six months of 1999 (unannualized) for
each Fund shown in the bar chart are as follows:
Founders International Small Capitalization [insert]%
T. Rowe Price International Equity [insert]%
Janus Overseas Growth [insert]%
Janus Small-Cap Growth [insert]%
T. Rowe Price Small Company Value [insert]%
Oppenheimer Large-Cap Growth [insert]%
Janus Capital Growth [insert]%
Lord Abbett Growth and Income [insert]%
INVESCO Equity Income [insert]%
American Century Strategic Balanced [insert]%
Federated High Yield Bond [insert]%
Total Return Bond [insert]%
JPM Money Market [insert]%
<PAGE>
<TABLE>
<CAPTION>
Fund Name Best Quarter Worst Quarter
<S> <C> <C> <C>
Founders Int'l Small Capitalization Up 12.6%, 1st quarter 1998 Down 17.4%, 3rd quarter 1998
T. Rowe Price Int'l Equity Up 17.0%, 4th quarter 1998 Down 13.5%, 3rd quarter 1998
Janus Overseas Growth Up 15.5%, 4th quarter 1998 Down 13.2%, 3rd quarter 1998
Janus Small-Cap Growth1 Up 26.6%, 4th quarter 1998 Down 19.0%, 3rd quarter 1998
T. Rowe Price Small Company Value Up 8.3%, 4th quarter 1998 Down 19.6%, 3rd quarter 1998
Oppenheimer Large-Cap Growth2 Up 23.5%, 4th quarter 1998 Down 12.8%, 3rd quarter 1998
Janus Capital Growth Up 30.1%, 4th quarter 1998 Down 7.2%, 3rd quarter 1998
Lord Abbett Growth and Income Up 16.1%, 4th quarter 1998 Down 11.3%, 3rd quarter 1998
INVESCO Equity Income Up 12.9%, 4th quarter 1998 Down 6.2%, 3rd quarter 1998
American Century Strategic Balanced Up 13.6%, 4th quarter 1998 Down 6.7%, 3rd quarter 1998
Federated High Yield Bond Up 4.1%, 1st quarter 1998 Down 3.3%, 3rd quarter 1998
Total Return Bond Up 4.4%, 3rd quarter 1998 Down 0.1%, 4th quarter 1998
JPM Money Market Up 1.0%, 3rd quarter 1998 Up 0.9%, 1st quarter 1998
</TABLE>
<TABLE>
<CAPTION>
Average annual total returns
For periods ending 12/31/1998 Class A Class B Class C Class X Index*
<S> <C> <C> <C> <C> <C> <C> <C>
FOUNDERS INT'L SMALL CAPITALIZATION
One year:
7.01% 6.13% 11.03% 8.96% 20.00%
Since inception (7/28/97): 4.21% 4.13% 7.48% 5.89% 5.59%
T. ROWE PRICE INT'L EQUITY
One year: 8.21% 7.37% 12.26% 10.29% 20.00%
Since inception (7/28/97): -0.91% -1.28% 2.14% 0.74% 5.59%
JANUS OVERSEAS GROWTH
One year (inception date 12/31/97): 9.88% 9.10% 14.20% 11.88% 20.00%
JANUS SMALL-CAP GROWTH1
One year: 0.19% -1.19% 3.90% 1.63% 28.57%
Since inception (7/28/97): 1.53% 1.26% 4.85% 3.25% 21.27%
T. ROWE PRICE SMALL COMPANY VALUE
One year:
-16.23% -17.56% -13.26% -15.46% 28.57%
Since inception (7/28/97): -8.43% -8.94% -5.61% -7.34% 21.27%
OPPENHEIMER LARGE-CAP GROWTH2
One year (inception date 12/31/97): 18.61% 18.70% 23.30% 21.61% 28.57%
JANUS CAPITAL GROWTH
One year: 51.91% 53.16% 58.12% 57.08% 28.57%
Since inception (7/28/97): 34.56% 35.89% 38.83% 38.40% 21.27%
LORD ABBETT GROWTH AND INCOME
One year (inception date 12/31/97): 8.21% 7.68% 12.48% 10.42% 28.57%
INVESCO EQUITY INCOME
One year: 10.22% 9.55% 14.45% 12.46% 28.57%
Since inception (7/28/97): 14.24% 14.68% 17.96% 16.69% 21.27%
AMERICAN CENTURY STRATEGIC BALANCED
One year:
13.90% 13.14% 18.03% 16.14% 21.35%
Since inception (7/28/97): 11.00% 11.12% 14.45% 13.08% 16.92%
FEDERATED HIGH YIELD BOND
One year: 0.42% -1.47% 3.40% 1.15% 3.86%
Since inception (7/28/97): 1.94% 1.18% 4.54% 3.07% 5.62%
TOTAL RETURN BOND
One year: 3.10% 1.17% 6.07% 3.85% 8.69%
Since inception (7/28/97): 4.99% 4.12% 7.49% 6.04% 8.65%
</TABLE>
<TABLE>
<CAPTION>
7-DAY YIELD (AS OF 12/31/98)
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
JPM MONEY MARKET
: 3.48% 2.95% 2.97% 2.97%
</TABLE>
*Each Fund's average annual total return is compared to the
performance of a broad-based securities index that is made up of
the type of securities in which the Fund invests. The ASAF
Founders International Small Capitalization Fund, the ASAF T.
Rowe Price International Equity Fund and the ASAF Janus Overseas
Growth Fund are compared to the Morgan Stanley Capital
International (MSCI) EAFE Index; the ASAF Janus Small-Cap Growth
Fund, the ASAF T. Rowe Price Small Company Value Fund, the ASAF
Neuberger Berman Mid-Cap Growth Fund, the ASAF Neuberger Berman
Mid-Cap Value Fund, the ASAF Oppenheimer Large-Cap Growth Fund,
the ASAF Marsico Capital Growth Fund, the ASAF Janus Capital
Growth Fund, the ASAF Lord Abbett Growth and Income Fund, and
the ASAF INVESCO Equity Income Fund are compared to the Standard
& Poors 500 Index,; the American Century Strategic Balanced Fund
is compared to a blended index (60% Standard & Poors, 40% Lehman
Brothers Government/Corporate Index); the ASAF Federated High
Yield Bond Fund is compared to the ML High Yield Index; and the
ASAF Total Return Bond Fund is compared to the LB Aggregate
Index.
1Prior to January 1, 1999, the ASAF Janus Small-Cap Growth Fund
was known as the ASAF Founders Small Capitalization Fund.
2Prior to December 31, 1998, the ASAF Oppenheimer Large-Cap
Growth Fund was known as the ASAF Robertson Stephens Value +
Growth Fund.
<PAGE>
EXPENSE INFORMATION
The maximum transaction costs and total annual 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 (fees paid directly from your investment):
High Yield Bond & Total Return Bond All Other Funds:
Funds: (other than Class A shares of
Money Market Fund(1))
Class A Class B & X Class C Class A Class B & X Class C
------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) on
Purchases 4.25% None None 5.00% None None
(as % of offering price)
Maximum Contingent Deferred Sales
Charge
(Load) (as % of lower of original None(2) 6.00%(3) 1.00%(3) None(2)
purchase price or redemption proceeds) 6.00%(3) 1.00%(3)
Redemption Fee None(4) None(4) None(4) None(4) None(4) None(4)
Exchange Fee None None None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets, in %):
Management Estimated Other Total Annual Fee Waivers Net Annual
ASAF Fund: Fees Distribution Expenses Fund Operating and Expense Fund Operating
and Expenses Reimbursement(6) Expenses
Service
(12b-1)
Fees(5)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Int'l Small Capitalization
Class A 1.10 0. 7.60 9.20 (7.10) 2.10
Class B 1.10 1. 7.70 9.80 (7.20) 2.60
Class C 1.10 1. 7.62 9.72 (7.12) 2.60
Class X 1.10 1. 7.48 9.58 (6.98) 2.60
International Equity
Class A 1.00 0. 4.56 6.06 (3.96) 2.10
Class B 1.00 1. 4.50 6.50 (3.90) 2.60
Class C 1.00 1. 4.55 6.55 (3.95) 2.60
Class X 1.00 1. 4.54 6.54 (3.94) 2.60
Overseas Growth
Class A 1.10 0. 2.52 4.12 (2.02) 2.10
Class B 1.10 1. 2.48 4.58 (1.98) 2.60
Class C 1.10 1. 2.48 4.58 (1.98) 2.60
Class X 1.10 1. 2.50 4.60 (2.00) 2.60
Small-Cap Growth
Class A 0.90 0. 4.98 6.38 (4.68) 1.70
Class B 0.90 1. 4.96 6.86 (4.66) 2.20
Class C 0.90 1. 4.70 6.60 (4.40) 2.20
Class X 0.90 1. 4.79 6.69 (4.49) 2.20
Small Company Value
Class A 1.00 0. 2.01 3.51 (1.76) 1.75
Class B 1.00 1. 2.03 4.03 (1.78) 2.25
Class C 1.00 1. 1.97 3.97 (1.72) 2.25
Class X 1.00 1. 2.00 4.00 (1.75) 2.25
Mid-Cap Growth(7)
Class A 0.90 0. 1.60 3.00 (1.25) 1.75
Class B 0.90 1. 1.60 3.50 (1.25) 2.25
Class C 0.90 1. 1.60 3.50 (1.25) 2.25
Class X 0.90 1. 1.60 3.50 (1.25) 2.25
Mid-Cap Value(7)
Class A 0.90 0. 1.60 3.00 (1.25) 1.75
Class B 0.90 1. 1.60 3.50 (1.25) 2.25
Class C 0.90 1. 1.60 3.50 (1.25) 2.25
Class X 0.90 1. 1.60 3.50 (1.25) 2.25
Large-Cap Growth(8)
Class A 0.90 0. 2.69 4.09 (2.29) 1.80
Class B 0.90 1. 2.67 4.57 (2.27) 2.30
Class C 0.90 1. 2.57 4.47 (2.17) 2.30
Class X 0.90 1. 2.67 4.57 (2.27) 2.30
Marsico Capital Growth(7)
Class A 1.00 0. 1.34 2.84 (1.09) 1.75
Class B 1.00 1. 1.29 3.29 (1.04) 2.25
Class C 1.00 1. 1.44 3.44 (1.19) 2.25
Class X 1.00 1. 1.22 3.22 (0.97) 2.25
<PAGE>
Janus Capital Growth
Class A 1.00 0. 1.15 2.65 (0.95) 1.70
Class B 1.00 1. 1.14 3.14 (0.94) 2.20
Class C 1.00 1. 1.13 3.13 (0.93) 2.20
Class X 1.00 1. 1.16 3.16 (0.96) 2.20
Growth and Income
Class A 1.00 0. 2.07 3.57 (1.97) 1.60
Class B 1.00 1. 2.06 4.06 (1.96) 2.10
Class C 1.00 1. 2.01 4.01 (1.91) 2.10
Class X 1.00 1. 1.98 3.98 (1.88) 2.10
Equity Income
Class A 0.75 0. 1.61 2.86 (1.31) 1.55
Class B 0.75 1. 1.63 3.38 (1.33) 2.05
Class C 0.75 1. 1.58 3.33 (1.28) 2.05
Class X 0.75 1. 1.60 3.35 (1.30) 2.05
Strategic Balanced
Class A 0.90 0.50 2.92 4.32 (2.72) 1.60
Class B 0.90 1.00 2.75 4.65 (2.55) 2.10
Class C 0.90 1.00 2.87 4.77 (2.67) 2.10
Class X 0.90 1.00 2.76 4.66 (2.56) 2.10
High Yield Bond
Class A 0.70 0.50 1.70 2.90 (1.40) 1.50
Class B 0.70 1.00 1.62 3.32 (1.32) 2.00
Class C 0.70 1.00 1.71 3.41 (1.41) 2.00
Class X 0.70 1.00 1.63 3.33 (1.33) 2.00
Total Return Bond
Class A 0.65 0.50 1.78 2.93 (1.53) 1.40
Class B 0.65 1.00 1.93 3.58 (1.68) 1.90
Class C 0.65 1.00 1.87 3.52 (1.62) 1.90
Class X 0.65 1.00 2.03 3.68 (1.78) 1.90
Money Market
Class A 0.50 0.50 1.42 2.42 (0.92) 1.50
Class B 0.50 1.00 1.39 2.89 (0.89) 2.00
Class C 0.50 1.00 1.57 3.07 (1.07) 2.00
Class X 0.50 1.00 1.68 3.18 (1.18) 2.00
</TABLE>
(1) Class A shares of the ASAF JPM Money Market Fund are sold without an initial
sales charge (load).
(2) Under certain circumstances, purchases of Class A shares not subject to an
initial sales charge (load) will be subject to a contingent deferred sales
charge (load) ("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."
(3) If you purchase Class B or X shares, you do not pay an initial sales charge
but you may pay a CDSC if you redeem some or all of your shares before the end
of the seventh (in the case of Class B shares) or eighth (in the case of Class X
shares) year after which you purchased such shares. The CDSC is 6%, 5%, 4%, 3%,
2%, 2% and 1% for redemptions of Class B shares occurring in years one through
seven, respectively. The CDSC is 6%, 5%, 4%, 4%, 3%, 2%, 2% and 1% for
redemptions of Class X shares occurring in years one through eight,
respectively. No CDSC is charged after these periods. 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."
(4) 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."
(5) As discussed below under "How to Buy Shares - Supplemental Distribution
Plans," the Company and the Trust have adopted Plans under Rule 12b-1 to permit
an affiliate of Company's and Trust's Investment Manager to receive brokerage
commissions in connection with the purchase and sale of securities held by the
Funds and Portfolios, and to use these commissions to promote the sale of shares
of the Funds. The staff of the Securities and Exchange Commission takes the
position that commission amounts received under these Supplemental Distribution
Plans should be reflected in the expenses of the Funds. The estimated
Distribution Fees are derived from data regarding each Fund's and Portfolio's
brokerage transactions, and the proportion of such transactions directed to
certain dealers that sell Fund shares, for the year ended June 30, 1999. Actual
commission amounts received under the Supplemental Distribution Plans will vary.
(6) The Funds' investment manager has agreed to reimburse and/or waive fees for
each Fund until March 1, 2000 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, and extraordinary expenses, do not exceed the percentages
shown in the table under "Net Annual Fund Operating Expenses."
(7) Other expenses shown are based on estimated amounts for the current fiscal
year.
(8) Prior to December 31, 1998, the Investment Manager had engaged Robertson,
Stephens & Company Investment Management, L.P. as Sub-advisor for the Fund, and
the total Investment Management fee was at the annual rate of 1.10% of the
average daily net assets of the Fund. As of December 31, 1998, the Investment
Manager engaged OppenheimerFunds, Inc. as Sub-advisor for the Fund, and, as of
March 1, 1999, the Investment Management fee is payable at the annual rate of
0.90% of the first $1 billion of the average daily net assets of the Fund, plus
0.85% of the Fund's average daily net assets in excess of $1 billion. The
Management Fee in the above chart reflects the revised fee.
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.
<PAGE>
EXPENSE EXAMPLES:
This example is intended to help you compare the cost of investing
in the Funds with the cost of investing in other mutual funds.
Full Redemption. This Example assumes that you invest $10,000 in a
Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year, that the Funds' total operating expenses remain the same, and
that the Funds' expense waivers and reimbursements remain in effect until March
1, 2000. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Small $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert]
Capitalization
T. Rowe Price [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
International Equity
AIM International [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Equity
Overseas Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small Company Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Large-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Marsico Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Janus Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Managed Index 500 [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth and Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth with Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Equity Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Strategic Balanced [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
High Yield Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Total Return Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Money Market [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
</TABLE>
<TABLE>
<CAPTION>
5 Years 10 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>
International Small $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert]
Capitalization
T. Rowe Price [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
International Equity
AIM International n/a n/a n/a n/a n/a n/a n/a n/a
Equity
Overseas Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small Company Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Large-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Marsico Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Janus Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Managed Index 500 n/a n/a n/a n/a n/a n/a n/a n/a
Growth and Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth with Income n/a n/a n/a n/a n/a n/a n/a n/a
Equity Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Strategic Balanced [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
High Yield Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Total Return Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Money Market [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
</TABLE>
No Redemption. You would pay the following expenses based on the above
assumptions except that you do not redeem your shares at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Small $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert]
Capitalization
T. Rowe Price [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
International Equity
AIM International [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Equity
Overseas Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small Company Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Large-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Marsico Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Janus Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Managed Index 500 [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth and Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth with Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Equity Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Strategic Balanced [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
High Yield Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Total Return Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Money Market [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
</TABLE>
<TABLE>
<CAPTION>
5 Years 10 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>
International Small $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert] $[insert]
Capitalization
T. Rowe Price [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
International Equity
AIM International n/a n/a n/a n/a n/a n/a n/a n/a
Equity
Overseas Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Small Company Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Mid-Cap Value [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Large-Cap Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Marsico Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Janus Capital Growth [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Managed Index 500 n/a n/a n/a n/a n/a n/a n/a n/a
Growth and Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Growth with Income n/a n/a n/a n/a n/a n/a n/a n/a
Equity Income [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Strategic Balanced [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
High Yield Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Total Return Bond [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
Money Market [insert] [insert] [insert] [insert] [insert] [insert] [insert] [insert]
</TABLE>
<TABLE>
<CAPTION>
5 Years 10 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>
International Small $4009 $3908 $3884 $3938 $7418 $7487 $7528 $7654
Capitalization
International Equity 3022 2847 2864 2932 5786 5789 5895 6036
Overseas Growth 2342 2155 2155 2216 4474 4471 4565 4694
Small-Cap Growth 3100 2941 2851 2954 5961 5983 5907 6110
Small Company Value 2088 1917 1894 1953 3983 4010 4074 4200
Large-Cap Growth 2380 2202 2164 2257 4582 4592 4614 4805
Janus Capital Growth 1754 1563 1559 1610 3267 3269 3374 3485
Growth and Income 2098 1916 1897 1932 4021 4031 4096 4174
Equity Income 1823 1646 1626 1675 3437 3459 3535 3641
Strategic Balanced 2375 2140 2185 2198 4593 4521 4677 4710
High Yield Bond 1770 1617 1653 1662 3416 3427 3600 3620
Total Return Bond 1773 1712 1688 1795 3434 3589 3685 3913
Money Market 1207 1445 1517 1601 2686 3039 3308 3489
</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."
<PAGE>
INVESTMENT PROGRAMS OF THE FUNDS
The investment objective, policies and limitations for each of the
Funds are described below. 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. The
investment objective, policies and limitations of each Feeder Fund are identical
to those of its corresponding Portfolio.
While certain policies apply to all Funds and Portfolios, generally
each Fund and Portfolio has a different investment objective and investment
focus. As a result, the risks, opportunities and returns of investing in each
Fund or Portfolio will differ. Those investment policies specifically labeled as
"fundamental" may not be changed without shareholder approval. However, the
investment objective of each Fund and Portfolio generally is not a fundamental
policy and may be changed by the Directors of the Company or Trustees of the
Trust without shareholder approval. Similarly, most of the Funds' and
Portfolios' investment policies and limitations are not fundamental policies.
There can be no assurance that the investment objective of any Fund
or Portfolio will be achieved. Risks relating to certain types of securities and
instruments in which the Funds and Portfolios may invest are described in this
Prospectus under "Certain Risk Factors and Investment Methods."
If approved by the Directors of the Company, the Company may add more Funds
and may cease to offer any existing Funds in the future.
<PAGE>
ASAF FOUNDERS International Small Capitalization Fund:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Principal Investment Policies and Risks:
To achieve its objective, the Fund normally invests primarily in
securities issued by foreign companies that 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 growth. The
Sub-advisor looks for companies whose fundamental strengths indicate potential
for growth in earnings per share. The Sub-advisor generally takes a "bottom up"
approach to building the Fund, which means that the Sub-advisor will search for
individual companies that demonstrate the best potential for significant
earnings growth, rather than choose investments based on broader economic
characteristics of countries or industries.
As discussed below, foreign securities are generally considered to
involve more risk than those of U.S. companies, and securities of smaller
companies are generally considered to be riskier than those of larger companies.
Therefore, because the Fund's investment focus is on securities of small and
medium-sized foreign companies, the risk of loss and share price fluctuation of
this Fund likely will be high relative to most of the other Funds of the Company
and popular market averages.
Foreign Securities. For purposes of the Fund, the term "foreign
securities" refers to securities of issuers, that, in the judgment of the
Sub-advisor, have their principal business activities outside of the United
States, and may include American Depositary Receipts. 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
(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. The foreign securities in which the Fund will
invest typically will be traded on the applicable country's principal stock
exchange but may also be traded on regional exchanges or over-the-counter.
Investments in foreign securities involve different risks than U.S.
investments, including fluctuations in currency exchange rates, unstable
political and economic structures, reduced availability of information, and lack
of uniform financial reporting and regulatory practices such as those that apply
to U.S. issuers. Foreign investments of the Fund may include securities issued
by companies located in developing countries. Developing 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 Fund is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security or for hedging purposes.
For an additional discussion of the risks involved in foreign
securities, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Small and Medium-Sized Companies. Investments in small and
medium-sized companies involve greater risk than is customarily associated with
more established companies. Generally, small and medium-sized companies are
still in the developing stages of their life cycles and are attempting to
achieve rapid growth in both sales and earnings. While these companies often
have growth rates that exceed those of large companies, 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 a limited market and may be subject to more abrupt or
erratic movements in price.
Other Investments:
In addition to investing in common stocks, the Fund may invest in
other types of securities and may engage in certain investment practices. 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 at the time of purchase. Convertible securities and preferred
stocks purchased by the Fund may be rated in medium and lower categories by
Moody's or S&P, but will not be rated lower than B. The Fund may also invest in
unrated convertible securities and preferred stocks if the Sub-advisor believes
that the financial condition of the issuer or the terms of the securities limits
risk to a level similar to that of securities rated B or above.
In addition, the Fund may enter into stock index, interest rate and
foreign currency futures contracts (or options thereon) for hedging purposes.
The Fund may write covered call options on any or all of its portfolio
securities as the Sub-advisor considers appropriate. The Fund also may purchase
options on securities and stock indices for hedging purposes. The Fund may buy
and sell options on foreign currencies for hedging purposes.
For more information on these securities and investment practices
and their risks, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. Up to 100% of the assets of the Fund may be
invested temporarily in cash or cash equivalents if the Sub-advisor determines
that it would be appropriate for purposes of increasing liquidity or preserving
capital in light of market or economic conditions. Temporary investments may
include U.S. government obligations, commercial paper, bank obligations, and
repurchase agreements. While the Fund is in a defensive position, the
opportunity to achieve its investment objective of capital growth will be
limited.
<PAGE>
ASAF T. Rowe Price International Equity Fund:
Investment Objective: The investment objective of the Fund is to seek total
return from long-term growth of capital and income by investing in its
corresponding Portfolio, which in turn principally invests 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.
Principal Investment Policies and Risks:
The Sub-advisor expects to invest substantially all of the
Portfolio's assets (with a minimum of 65%) in established foreign companies.
Geographic diversification will be wide, including both developed and developing
countries, and there will normally be at least three different countries
represented in the Portfolio. Stocks can be purchased without regard to a
company's market capitalization, but the Sub-advisor's focus typically will be
on large and, to a lesser extent, medium-sized companies. Investment in foreign
companies may be made through American Depositary Receipts (ADRs) and the
securities of foreign investment funds or trusts (including passive foreign
investment companies).
The Portfolio will invest in stocks that have the potential for
growth of capital or income or both. Stocks are selected by using a "bottom-up"
approach (an approach based on the Sub-advisor's fundamental research on
particular companies) in an effort to identify companies capable of achieving
and sustaining above-average long-term earnings growth. The Sub-advisor seeks to
purchase stocks at reasonable prices in relation to anticipated earnings, cash
flow or book value. Valuation factors often influence the Sub-advisor's
allocations among large-, mid-, and small-cap companies.
While bottom-up stock selection is the focus of its decision
making, the Sub-advisor also invests with an awareness of the global economic
backdrop and its outlook for individual companies. Country allocation is driven
largely by stock selection, though the Sub-advisor may limit investments in
markets that appear to have poor overall prospects.
In selecting stocks, the Sub-advisor generally favors companies
with one or more of the following characteristics:
o leading market position;
o attractive business niche;
o strong franchise or natural monopoly;
o technological leadership or proprietary advantages;
o seasoned management;
o earnings growth and cash flow sufficient to support growing dividends; and
o healthy balance sheet with relatively low debt.
As with all stock funds, the Portfolio's (and Fund's) share price can fall
because of weakness in one or more securities markets, particular industries or
specific holdings. As a stock fund investing primarily in foreign securities,
the Portfolio may be subject to greater risk of loss and price fluctuation than
domestic funds. The risks of foreign investing, which are described in more
detail below under "Certain Risk Factors and Investment Methods," include
varying stages of economic and political development of foreign countries,
differing regulatory and accounting standards in non-U.S. markets, higher
transaction costs, and the risks of currency fluctuations. In addition, the
Portfolio's investments in foreign securities will be subject to the risks of
currency fluctuations, in which a decline in the value of a foreign currency
versus the U.S. dollar can reduce the dollar value of securities denominated in
that currency. While the Portfolio may engage in forward foreign currency
exchange contracts and futures and options on foreign currencies, the Portfolio
does not engage in extensive currency hedging under normal conditions. To the
extent that the Portfolio has investments in developing countries, the risks of
foreign investing will be accentuated.
Other Investments:
In addition to common stocks, the Portfolio may also purchase a variety of
other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as investment grade corporate and governmental
debt securities, when considered consistent with the Portfolio's investment
objectives and program. The Portfolio may enter into stock index or currency
futures contracts (or options thereon) for hedging purposes or to provide an
efficient means of managing the Portfolio's exposure to the foreign equity
markets. The Portfolio may write covered call options and purchase put and call
options on foreign currencies, securities, and stock indices. As part of its
investment program and to maintain greater flexibility, the Portfolio may invest
up to 10% of its total assets in hybrid instruments, which combine the
characteristics of futures, options and securities. For additional information
about these investments and their risks, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Investment Programs
of the Funds."
Temporary Investments. Under exceptional economic or market conditions
abroad, the Portfolio may temporarily invest all or a major portion of its
assets in U.S. government obligations or debt obligations of U.S. companies.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective will be limited. The Portfolio's cash reserves may be
invested in high-quality domestic and foreign money market instruments. In
addition to enabling the Portfolio to take defensive positions, cash reserves
also provide flexibility in meeting redemptions and paying expenses.
<PAGE>
ASAF AIM INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek long-term
capital growth by investing in a diversified portfolio of international equity
securities the issuers of which are considered to have strong earnings momentum.
Principal Investment Objectives and Risks:
The Fund seeks to meet its investment objective by investing,
normally, at least 70% of its total assets in marketable equity securities of
foreign companies that are listed on a recognized foreign securities exchange or
traded in a foreign over-the-counter market. The Fund will normally invest in a
diversified portfolio that includes companies located in at least four countries
outside the United States, emphasizing investment in companies in the developed
countries of Western Europe and the Pacific Basin. The Sub-advisor does not
intend to invest more than 20% of the Fund's total assets in companies located
in developing countries (i.e., those that are in the initial stages of their
industrial cycles).
The Sub-advisor focuses on companies that have experienced
above-average, long-term growth in earnings and have strong prospects for future
growth. In selecting countries in which the Fund will invest, the Sub-advisor
also considers such factors as the prospect for relative economic growth among
countries or regions, economic or political conditions, currency exchange
fluctuations, tax considerations and the liquidity of a particular security. The
Sub-advisor considers whether to sell a particular security when any of those
factors materially changes.
As with any equity fund, the fundamental risk associated with the
Fund is the risk that the value of the securities it holds might decrease. The
prices of equity securities change in response to many factors, including the
historical and prospective earnings of the issuer, the value of its assets,
general economic conditions, interest rates, investor perceptions and market
liquidity.
As a fund that invests primarily in the securities of foreign
issuers, the risk and degree of share price fluctuation of the Fund may be
greater than a fund investing primarily in domestic securities. The risks of
investing in foreign securities, which are described in more detail below under
"Certain Risk Factors and Investment Methods," include political and economic
conditions and instability in foreign countries, less available information
about foreign companies, lack of strict financial and accounting controls and
standards, less liquid and more volatile securities markets, and fluctuations in
currency exchange rates. While the Fund has authority to engage in transactions
intended to hedge its exposure to fluctuations in foreign currencies, it does
not currently intend to do so. To the extent the Fund invests in securities of
issuers in developing countries, the Fund may be subject to even greater levels
of risk and share price fluctuation. Transaction costs are often higher in
developing countries and there may be delays in settlement of transactions.
Other Investments:
The Fund may invest up to 20% of its total assets in debt or
preferred equity securities exchangeable for or convertible into marketable
equity securities of foreign companies. In addition, the Fund may regularly
invest up to 20% of its total assets in high-grade short-term debt securities,
including U.S. Government obligations, investment grade corporate bonds or
taxable municipal securities, whether denominated in U.S. dollars or foreign
currencies.
The Fund may use futures contracts and related options, options on
securities, securities indices and currencies to attempt to hedge against the
overall level of risk normally associated with the Fund's investments. The Fund
also may from time to time make short sales of securities "against the box."
Additional information about convertible securities, options,
futures contracts, short sales and other investments and investment practices of
the Fund is included in this Prospectus under "Certain Risk Factors and
Investment Methods."
Temporary Investments. In addition to regularly investing up to 20%
of its total assets in short-term debt securities as noted above, the Fund may
hold all or a significant portion of its assets in cash, money market
instruments, bonds or other debt securities in anticipation of or in response to
adverse market conditions or for cash management purposes. While the Fund is in
such a defensive position, the opportunity to achieve its investment objective
of capital growth may be limited.
<PAGE>
ASAF JANUS OVERSEAS GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
long-term growth of capital.
Principal Investment Policies and Risks:
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 stocks selected for their growth
potential. The Sub-advisor generally takes a "bottom up" approach to choosing
investments for 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 where the companies are organized or where
they primarily conduct business. 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 similar selection
procedure. Current income is not a significant factor in choosing investments,
and any income realized by the Fund will be incidental to its objective.
As with any common stock fund, the fundamental risk associated with
the 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. As a fund that invests
primarily in the securities of foreign issuers, the risk associated with the
Fund may be greater than a fund investing primarily in domestic securities. For
a further discussion of the risks involved in investing in foreign securities,
see this Prospectus under "Certain Risk Factors and Investment Methods." In
addition, the fund may invest to some degree in smaller or newer issuers, which
are more likely to realize substantial growth as well as suffer significant
losses than larger or more established issuers.
The Fund generally intends to purchase securities for long-term
investment rather than short-term gains. However, short-term transactions may
occur as the result of liquidity needs, securities having reached a desired
price or yield, 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 the investment was made. 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.
Special Situations. 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
increase in value due to a specific development with respect to that issuer.
Developments creating a special situation might include 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.
Other Investments:
The Fund may invest to a lesser degree in types of securities other
than common stocks, including preferred stocks, warrants, convertible securities
and debt securities. The Fund is subject to the following percentage limitations
on investing in certain types of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
In addition, the Fund may invest in the following types of securities and engage
in the following investment techniques:
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 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 income. The
Fund may also use currency hedging techniques, including forward currency
exchange contracts, to manage exchange rate risk with respect to investments
exposed to foreign currency fluctuations.
Index/structured Securities. The Fund may invest in
indexed/structured securities, which typically are short- to intermediate-term
debt securities 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 offer growth potential because
of anticipated changes in interest rates, credit standing, currency
relationships or other factors
For more information on the types of securities and instruments
other than common stocks in which the Portfolio may invest and their risks, see
this Prospectus under "Certain Risk Factors and Investment Methods" and the
Company's SAI under "Investment Programs of the Funds."
Temporary Investments. 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. The Fund's cash and similar investments may
include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the Fund is
in a defensive position, the opportunity to achieve its investment objective of
long-term growth of capital will be limited.
<PAGE>
ASAF JANUS SMALL-CAP GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Principal Investment Policies and Risks:
The Fund pursues its objective by normally investing at least 65%
of its total assets in the common stocks of small-sized companies. For purposes
of the Fund, small-sized companies are those that have market capitalizations of
less than $1.5 billion or annual gross revenues of less than $500 million. To a
lesser extent, the Fund may also invest in stocks of larger companies with
potential for capital appreciation.
The Sub-advisor generally takes a "bottom up" approach to building
the Fund. In other words, it seeks to identify individual companies with
earnings growth potential that may not be recognized by the market at large.
Although themes may emerge in the Fund, securities are generally selected
without regard to any defined industry sector or other similar selection
procedure.
Current income is not a significant factor in choosing investments.
Because the Fund invests primarily in common stocks, the
fundamental risk of investing in the Fund is 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 or economic
conditions. As a Fund that invests primarily in smaller or newer issuers, the
Fund may be subject to greater risk of loss and share price fluctuation than
funds investing primarily in larger or more established issuers. Smaller
companies are more likely to realize substantial growth as well as suffer
significant losses than larger issuers. Smaller companies may lack depth of
management, they may be unable to generate funds necessary for growth or
potential development internally or to generate such funds through external
financing on favorable terms, or they may be developing or marketing products or
services for which there are not yet, and may never be, established markets. In
addition, such companies may be subject to intense competition from larger
competitors, and may have more limited trading markets than the markets for
securities of larger issuers.
While the Sub-advisor tries to reduce the risk of the Fund by
diversifying its assets among issuers (so that the effect of any single holding
is reduced), and by not concentrating its assets in any particular industry,
there is no assurance that these effort will be successful in reducing the risks
to which the Fund is subject.
The Fund generally intends to purchase securities for long-term
investment rather than short-term gains. However, short-term transactions may
occur as the result of liquidity needs, securities having reached a desired
price or yield, 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 the investment was made. 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.
Special Situations. 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
increase in value due to a specific development with respect to that issuer.
Developments creating a special situation might include 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.
Other Investments:
The Fund may invest to a lesser degree in types of securities other
than common stocks, including preferred stocks, warrants, convertible securities
and debt securities. The Fund is subject to the following percentage limitations
on investing in certain types of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
The Fund may make short sales "against the box." In addition, the Fund may
invest in the following types of securities and engage in the following
investment techniques:
Index/structured Securities. The Fund may invest in
indexed/structured securities, which typically are short- to intermediate-term
debt securities 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 offer growth potential because
of anticipated changes in interest rates, credit standing, currency
relationships or other factors.
Foreign Securities. The Fund may invest without limit in foreign
equity and debt securities. The Fund may invest directly in foreign securities
denominated in foreign currencies, or may invest through depositary receipts or
passive foreign investment companies. Generally, the same criteria are used to
select foreign securities as domestic securities. The Sub-advisor seeks
companies that meet these criteria regardless of country of organization or
principal business activity. However, certain factors such as expected inflation
and currency exchange rates, government policies affecting businesses, and a
country's prospects for economic growth may warrant consideration in selecting
foreign securities.
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
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, currency exchange rates or interest rates. To a limited
extent, the Fund may also use derivative instruments for non-hedging purposes
such as seeking to increase income.
For more information on the types of securities other than common
stocks in which the Portfolio may invest, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Company's SAI under "Investment
Programs for the Funds."
Temporary Investments. 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. The Fund's cash and similar investments may
include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the Fund is
in a defensive position, the opportunity to achieve its investment objective of
capital growth will be limited.
<PAGE>
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.
Principal Investment Policies and Risks:
The Fund will invest at least 65% of its total assets in stocks and
equity-related securities of small companies ($1 billion or less in market
capitalization). 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 Sub-advisor's research team seeks to identify companies
that appear to be undervalued by various measures, and may be temporarily out of
favor, but have good prospects for capital appreciation. In selecting
investments, the Sub-advisor generally looks to the following:
(1) Above-average dividend yield (the stock's annual dividend divided by
the stock price) relative to a company's peers or its own historic norm.
(2) Low price/earnings, price/book value or price/cash flow ratios relative
to the S&P 500 Index, the company's peers, or its own historic norm.
(3) Low stock price relative to a company's underlying asset values.
(4) A plan to improve the business through restructuring.
(5) A sound balance sheet and other positive financial characteristics.
The Fund may sell securities for a variety of reasons, such as to
secure gains, limit losses or re-deploy assets into more promising
opportunities. The Fund will not sell a stock just because the company has grown
to a market capitalization of more than $1 billion, and it may on occasion
purchase companies with a market cap above $1 billion.
As with all stock funds, the Fund's share price can fall because of
weakness in the securities market as a whole, in particular industries or in
specific holdings. Investing in small companies involves greater risk of loss
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 stocks. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience. While a
value approach to investing is generally considered to involve less risk than a
growth approach, investing in value stocks carries the risks that the market
will not recognize the stock's intrinsic value for a long time or that a stock
judged to be undervalued may actually be appropriately priced.
Other Investments:
Although the Fund will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, preferred stocks,
convertible securities, warrants and bonds when considered consistent with the
Fund's investment objective and policies. The Fund may purchase preferred stock
for capital appreciation where the issuer has omitted, or is in danger of
omitting, payment of the dividend on the stock. Debt securities would be
purchased in companies that meet the investment criteria for the Fund.
The Fund may invest up to 20% of its total assets in foreign
securities, including American Depositary Receipts and securities of companies
in developing countries, and may enter into forward foreign currency exchange
contracts. (The Fund may invest in foreign cash items as described below in
excess of this 20% limit.) The Fund may enter into stock index or currency
futures contracts (or options thereon) for hedging purposes or to provide an
efficient means of managing the Fund's exposure to the equity markets. The Fund
may also write (sell) call and put options and purchase put and call options on
securities, financial indices, and currencies. The Fund may invest up to 10% of
its total assets in hybrid instruments, which combine the characteristics of
futures, options and securities. For additional information about these
investments and their risks, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Investment Programs of the
Funds."
Temporary Investments. The Fund may establish and maintain cash
reserves without limitation for temporary defensive purposes. The Fund's
reserves may be invested in high-quality domestic and foreign money market
instruments, including repurchase agreements. Cash reserves also provide
flexibility in meeting redemptions and paying expenses. While the Fund is in a
defensive position, the opportunity to achieve its investment objective of
long-term capital growth will be limited.
<PAGE>
ASAF Neuberger Berman Mid-Cap Growth Fund:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Principal Investment Policies and Risks:
To pursue its objective, the Fund primarily invests in the common
stocks of mid-cap companies. Companies with equity market capitalizations from
$300 million to $10 billion at the time of investment are considered mid-cap
companies for purposes of the Fund. The Company may revise this definition based
on market conditions. Some of the Fund's assets may be invested in the
securities of large-cap companies as well as in small-cap companies. The Fund
seeks to reduce risk by diversifying among many companies and industries. The
Fund does not seek to invest in securities that pay dividends or interest, and
any such income is incidental.
The Fund is normally managed using a growth-oriented investment
approach. For growth investors, the aim is to invest in companies that are
already successful but could be even more so. The Sub-advisor looks for
fast-growing companies that are in new or rapidly evolving industries. Factors
in identifying these companies may include above-average growth of earnings or
earnings that exceed analysts' expectations. The Sub-advisor may also look for
other characteristics in a company, such as financial strength, a strong
position relative to competitors and a stock price that is reasonable in light
of its growth rate.
The Sub-advisor follows a disciplined selling strategy, and may sell a
stock when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.
As a Fund that invests primarily in the stocks of mid-cap companies,
the Fund's risk and share price fluctuation can be expected to be more than that
of many funds investing primarily in large-cap companies, but less than that of
many funds investing primarily in small-cap companies. Mid-cap stocks may
fluctuate more widely in price than the market as a whole, may underperform
other types of stocks when the market or the economy is not robust, or fall in
price or be difficult to sell during market downturns. In addition, the Fund's
growth investment program will generally involve greater risk and price
fluctuation than funds that invest in more undervalued securities. Because the
prices of growth stocks tend to be based largely on future expectations, these
stocks tend to be more sensitive than value stocks to bad economic news and
negative earnings surprises.
Other Investments:
Although equity securities are normally the Fund's primary investments,
it may invest in preferred stocks and convertible securities, as well as the
types of securities described below. Additional information about these
investments and the special risk factors that apply to them is included in this
Prospectus under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Fund may invest up to 35% of its total
assets, measured at the time of investment, in investment grade fixed income or
debt securities. If the quality of any fixed income securities held by the Fund
deteriorates so that they are no longer investment grade, the Fund will sell
such securities in an orderly manner so that the Fund's holdings of such
securities do not exceed 5% of its total assets.
Foreign Securities. The Fund may invest up to 10% of the value of its
total assets, measured at the time of investment, in equity and debt securities
that are denominated in foreign currencies. There is no limitation on the
percentage of the Fund's assets that may be invested in securities of foreign
companies that are denominated in U.S. dollars. In addition, the Fund may enter
into foreign currency transactions, including forward foreign currency contracts
and options on foreign currencies, to manage currency risks, to facilitate
transactions in foreign securities, and to repatriate dividend or interest
income received in foreign currencies.
Covered Call Options. 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, and may purchase
call options in related closing transactions.
Temporary Investments. When the Fund anticipates unusual market or
other conditions, it may temporarily depart from its objective of capital growth
and invest substantially in high-quality short-term investments. This could help
the Fund avoid losses but may mean lost opportunities.
<PAGE>
ASAF Neuberger Berman Mid-Cap Value Fund:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Principal Investment Policies and Risks:
To pursue its objective, the Fund primarily invests in the common
stocks of mid-cap companies. Some of the Fund's assets may be invested in the
securities of large-cap companies as well as in small-cap companies. The Fund
seeks to reduce risk by diversifying among many companies and industries.
Under the Fund's value-oriented investment approach, the Sub-advisor
looks for well-managed companies whose stock prices are undervalued and that may
rise in price when other investors realize their worth. Fund managers may
identify value stocks in several ways, including based on earnings, book value
or other financial measures. Factors that the Sub-advisor may use to identify
these companies include strong fundamentals, such as a low price-to-earnings
ratio, consistent cash flow, and a sound track record through all phases of the
market cycle.
The Sub-advisor may also look for other characteristics in a company,
such as a strong position relative to competitors, a high level of stock
ownership among management, or a recent sharp decline in stock price that
appears to be the result of a short-term market overreaction to negative news.
The Sub-advisor generally considers selling a stock when it reaches a
target price, when it fails to perform as expected, or when other opportunities
appear more attractive.
As a Fund that invests primarily in the stocks of mid-cap companies,
the Fund's risk and share price fluctuation can be expected to be more than that
of many funds investing primarily in large-cap companies, but less than that of
many funds investing primarily in small-cap companies. Mid-cap stocks may
fluctuate more widely in price than the market as a whole, may underperform
other types of stocks when the market or the economy is not robust, or fall in
price or be difficult to sell during market downturns. While value investing
historically has involved less risk than investing in growth companies, the
stocks purchased by the Fund may remain undervalued during a short or extended
period of time. This may happen because value stocks as a category lose favor
with investors compared to growth stocks, or because the Sub-advisor failed to
anticipate which stocks or industries would benefit from changing market or
economic conditions.
Other Investments:
Although equity securities are normally the Fund's primary investments,
it may invest in preferred stocks and convertible securities, as well as the
types of securities described below. Additional information about these
investments and the special risk factors that apply to them is included in this
Prospectus under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Fund may invest up to 35% of its total
assets, measured at the time of investment, in fixed income or debt securities.
The Fund may invest up to 15% of its total assets, measured at the time of
investment, in debt securities that are rated below investment grade or
comparable unrated securities. There is no minimum rating on the fixed income
securities in which the Fund may invest.
Foreign Securities. The Fund may invest up to 10% of the value of its
total assets, measured at the time of investment, in equity and debt securities
that are denominated in foreign currencies. There is no limitation on the
percentage of the Fund's assets that may be invested in securities of foreign
companies that are denominated in U.S. dollars. In addition, the Fund may enter
into foreign currency transactions, including forward foreign currency contracts
and options on foreign currencies, to manage currency risks, to facilitate
transactions in foreign securities, and to repatriate dividend or interest
income received in foreign currencies.
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, and may purchase call options
in related closing transactions. The value of securities against which options
will be written will not exceed 10% of the Fund's net assets.
Temporary Investments. When the Fund anticipates unusual market or
other conditions, it may temporarily depart from its objective of capital growth
and invest substantially in high-quality short-term investments. This could help
the Fund avoid losses but may mean lost opportunities.
<PAGE>
ASAF OPPENHEIMER LARGE-CAP GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Principal Investment Policies and Risks:
The Fund seeks its objective by emphasizing investments in equity
securities issued by established large-capitalization "growth companies." At
least 65% of the Fund's assets normally will be invested in companies that have
market capitalizations greater than $3 billion, and the Fund will normally
maintain a median market capitalization greater than $5 billion. For purposes of
the Fund, equity securities include common stocks, preferred stocks and
convertible securities.
In selecting securities for the Fund, the Sub-advisor looks for
high-growth companies that the Sub-advisor believes are able to maintain high
levels of growth. In seeking broad diversification of the Fund's portfolio among
industries and market sectors, the Sub-advisor looks for the characteristics
listed below, although the characteristics used may change over time and may
vary in particular cases. Currently, the Sub-advisor looks for:
o Companies that exhibit above average growth in revenues,
o Companies that exhibit above average growth in earnings, and
o Sustainability of the factors driving revenue and earnings growth.
Because the Fund invests a substantial portion (or all) of its
assets in stocks, the Fund is subject to the risks associated with stock
investments, and the Fund's share price therefore may fluctuate substantially.
The prices of growth company stocks may fluctuate more than other stocks,
although the Fund's focus on large, more-established growth companies may help
reduce some of that risk. The Fund's share price will be affected by changes in
the stock markets generally, and factors specific to a company or an industry
will affect the prices of particular stocks held by the Fund (for example, poor
earnings, loss of major customers, availability of basic resources or supplies,
major litigation against an issuer, or changes in government regulations
affecting an industry). Because of the types of securities it invests in, the
Fund is designed for those who are investing for the long term. While the
Sub-advisor tries to reduce risks by diversifying its investments, by carefully
researching securities before they are purchased, and in some cases by using
hedging techniques such as futures contracts, there is no assurance that these
efforts to reduce risk will be successful.
Other Investments:
While the Sub-advisor will invest the Portfolio's assets
primarily in domestic equity securities, it also may invest in other types of
securities and employ special investment techniques. The Portfolio may purchase
securities of foreign companies or governments, including those in developing
countries. The Portfolio may buy and sell futures contracts, forward foreign
currency contracts and put and call options on securities, currencies, futures
contracts and broadly-based securities indices. The Portfolio may use these
instruments to hedge the Portfolio against price fluctuations or to increase its
exposure to the market, but not for speculative purposes. The Portfolio
currently does not use these instruments extensively. In addition to options,
futures contracts and forward contracts, the Portfolio may invest in specially
designed derivative instruments for hedging purposes or to enhance total return.
For additional information about these investments and their
risks, see this Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may invest a portion of
its assets in cash, cash equivalents and U.S. Government securities for
liquidity purposes, but will not invest a significant portion of its assets in
these instruments for temporary defensive purposes.
<PAGE>
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 is not an
investment objective and any income realized on the Fund's investments,
therefore, will be incidental to the Fund's objective.
Principal Investment Policies and Risks:
The Fund will pursue its objective by investing primarily in common
stocks. The Sub-advisor expects that the majority of the Fund's assets will be
invested in the common stocks of larger, more established companies.
In selecting investments for the Fund, the Sub-advisor uses an
approach that combines "top down" economic analysis with "bottom up" stock
selection. The "top down" approach takes into consideration such macro-economic
factors as interest rates, inflation, the regulatory environment, and the global
competitive landscape. In addition, the Sub-advisor examines such factors as the
most attractive global investment opportunities, industry consolidation, and the
sustainability of economic trends. As a result of this "top down" analysis, the
Sub-advisor identifies sectors, industries and companies that should benefit
from the trends the Sub-advisor has observed.
The Sub-advisor then looks for individual companies with earnings
growth potential that may not be recognized by the market at large. In
determining whether a particular company is appropriate for investment by the
Fund, the Sub-advisor focuses on a number of different attributes, including the
company's specific market expertise or dominance, its franchise durability and
pricing power, solid fundamentals (e.g., a strong balance sheet, improving
returns on equity, and the ability to generate free cash flow), strong
management, and reasonable valuations in the context of projected growth rates.
This is called "bottom up" stock selection.
The primary risk associated with investment in the Fund will be the
risk that the equity securities held by the Fund will decline in value. The risk
of the Fund is expected to be commensurate with that of other funds using a
growth strategy to invest in the stocks of large and medium-sized companies.
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 desired price, or by reason of
developments not foreseen at the time of the investment was made.
Special Situations. 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
increase 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.
Other Investments:
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. The Fund may invest up to
10% of its total assets in debt securities, which may include corporate bonds
and debentures and government securities.
The Fund may also purchase securities of foreign issuers, including
foreign equity and debt securities and depositary receipts. Foreign securities
are selected primarily on a stock-by-stock basis without regard to any defined
allocation among countries or geographic regions. 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.
Index/structured Securities. The Fund may invest without limit in
index/structured securities, which are debt securities 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.
Futures, Options and Other Derivative Instruments. The Fund may
purchase and write (sell) options on securities, financial indices, and foreign
currencies, and may invest in futures contracts on securities, financial
indices, and foreign currencies, 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.
For an additional discussion of many of these types of securities
and their risks, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. 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 believes that appropriate
investment opportunities for capital growth with desirable risk/reward
characteristics are unavailable. Cash and similar investments (whether made for
defensive purposes or to receive a return on idle cash) will include high-grade
commercial paper, certificates of deposit and repurchase agreements. While the
Fund is in a defensive position, the opportunity to achieve its investment
objective of capital growth will be limited.
<PAGE>
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
growth of capital.
Principal Investment Policies and Risks:
The Fund will pursue its objective by investing in its
corresponding Portfolio, which in turn will invest primarily in common stocks.
Common stock investments will be in 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 generally
takes a "bottom up" approach to choosing investments for the Portfolio. 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. Current
income is not a significant factor in choosing investments.
Because the Portfolio invests a substantial portion (or all) of its
assets in stocks, the Portfolio is subject to the risks associated with stock
investments, and the Portfolio's (and Fund's) share price therefore may
fluctuate substantially. This is true despite the Portfolio's focus on the
stocks of larger more-established companies. The Portfolio's share price will be
affected by changes in the stock markets generally, and factors specific to a
company or an industry will affect the prices of particular stocks held by the
Portfolio (for example, poor earnings, loss of major customers, major litigation
against an issuer, or changes in government regulations affecting an industry).
Because of the types of securities in which the Portfolio invests, the Fund is
designed for those who are investing for the long term.
The Portfolio generally intends to purchase securities for
long-term investment rather than short-term gains. However, short-term
transactions may occur as the result of liquidity needs, securities having
reached a desired price or yield, 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 the investment was made.
Special Situations. The Portfolio 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.
Other Investments:
Although the Sub-advisor expects to invest primarily in equity
securities, the Portfolio may also invest to a lesser degree in preferred
stocks, convertible securities, warrants, and debt securities when the Portfolio
perceives an opportunity for capital growth from such securities. The Portfolio
is subject to the following percentage limitations on investing in certain types
of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
In addition, the Portfolio may invest in the following types of securities and
engage in the following investment techniques:
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and depositary
receipts. Foreign securities are selected primarily on a stock-by-stock basis
without regard to any defined allocation among countries or geographic regions.
No more than 25% of the Portfolio's assets may be invested in foreign securities
denominated in foreign currencies and not publicly traded in the United States.
Futures, Options and Other Derivative Instruments. The Portfolio
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
interest rate swaps and swap-related products (collectively "derivative
instruments"). The Portfolio 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 Portfolio may also use derivative instruments for
non-hedging purposes such as seeking to increase income. The Portfolio may also
use a variety of currency hedging techniques, including forward foreign currency
exchange contracts, to manage exchange rate risk with respect to investments
exposed to foreign currency fluctuations.
For more information on the types of securities other than common
stocks in which the Portfolio may invest, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Temporary Investments. The Sub-advisor may increase the Portfolio'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. Cash and similar investments
(whether made for defensive purposes or to receive a return on idle cash) will
include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the
Portfolio is in a defensive position, the opportunity for the Portfolio and the
Fund to achieve their investment objectives of capital growth will be limited.
<PAGE>
ASAF BANKERS TRUST MANAGED INDEX 500 FUND:
Investment Objective: The investment objective of the Fund is to outperform the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500(R)") through
stock selection resulting in different weightings of common stocks relative to
the index.
Principal Investment Policies and Risks:
The Fund will invest in the common stocks of companies included in the
S&P 500. The S&P 500 is an index of 500 common stocks, most of which trade on
the New York Stock Exchange Inc. (the "NYSE"). The Sub-advisor believes that the
S&P 500 is representative of the performance of publicly traded common stocks in
the U.S. in general.
In seeking to outperform the S&P 500, the Sub-advisor starts with a
portfolio of stocks representative of the holdings of the index. It then uses a
set of quantitative criteria that are designed to indicate whether a particular
stock will predictably perform better or worse than the S&P 500. Based on these
criteria, the Sub-advisor determines whether the Fund should over-weight,
under-weight or hold a neutral position in the stock relative to the proportion
of the S&P 500 that the stock represents. The majority of the issues held by the
Fund will have neutral weightings, but approximately 100 will be over- or
under-weighted relative to the index. In addition, the Sub-advisor may determine
based on the quantitative criteria that (1) certain S&P 500 stocks should not be
held by the Fund in any amount, and (2) certain equity securities that are not
included in the S&P 500 should be held by the Fund.
As a mutual fund investing primarily in common stocks, the Fund is
subject to the risk that common stock prices will decline over short or even
extended periods. The U.S. stock market tends to be cyclical, with periods when
stock prices generally rise and periods when prices generally decline. The
Sub-advisor believes that the various quantitative criteria used to determine
which stocks to over- or under-weight will balance each other so that the
overall risk of the Fund is not likely to differ materially from the risk of the
S&P 500 itself. While the Fund attempts to outperform the S&P 500, the Fund may
underperform the index over short or extended periods.
Unlike other stock funds, the Fund is not "actively" managed based on
the Sub-Advisor's economic, financial or market analysis or its investment
judgment. Instead, the Fund primarily utilizes a "quantitative" investment
approach to invest among a limited number of stocks (i.e., those in the S&P
500).
About the S&P 500. The S&P 500 is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all common stocks
publicly traded in the United States. Stocks in the S&P 500 are weighted
according to their market capitalization (the number of shares outstanding
multiplied by the stock's current price). The composition of the S&P 500 is
determined by S&P based on such factors as market capitalization, trading
activity, and whether the stock is representative of stocks in a particular
industry group. The composition of the S&P 500 may be changed from time to time.
"Standard & Poor's(R)", "S&P 500(R)", "Standard & Poor's 500", and "500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
the Investment Manager and Sub-advisor.
The Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the shareholders of the Fund
or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the S&P 500
to track general stock market performance. S&P's only relationship to the
Investment Manager or the Sub-advisor is the licensing of certain trademarks and
trade names of S&P and of the S&P 500. S&P has no obligation to take the needs
of the Investment Manager, Sub-advisor or the shareholders of the Fund into
consideration in determining, composing or calculating the S&P 500. S&P is not
responsible for and has not participated in the issuance or sale of the Fund's
shares, or in the determination or calculation of the Fund's net asset value.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 or any data included therein and shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to the results to be obtained by the Fund, shareholders of the Fund, or any
other person or entity from the use of the S&P 500 or any data included therein.
S&P makes no express or implied warranties and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.
Other Equity Securities. As part of one of the strategies used to
outperform the S&P 500, the Fund may invest in the equity securities of
companies that are not included in the S&P 500. These equity securities may
include securities of companies that are the subject of publicly announced
acquisitions or other major corporate transactions. Securities of some of these
companies may perform much like fixed income investments because the market
anticipates that the transaction will occur and result in a cash payment for the
securities. When investing in these companies, the Fund may enter into
securities index futures contracts and/or related options as described below in
order to maintain its exposure to the equity markets. While this strategy is
intended to generate additional gains without materially increasing risk, there
is no assurance that the strategy will achieve its intended results. The Fund
will not invest more than 15% of its total assets in equity securities of
companies not included in the S&P 500.
Other Investments:
Derivatives. The Fund may invest in various instruments that are or may
be considered derivatives, including securities index futures contracts and
related options, warrants and convertible securities. These instruments may be
used for several reasons: to simulate full investment in the S&P 500 while
retaining cash for fund management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns when the futures
contract, option, warrant or convertible security is priced more attractively
than the underlying equity security or the S&P 500. The Fund will not use
derivatives for speculative purposes or to leverage its assets. The Fund will
limit its use of securities index futures contracts and related options so that,
at all times, margin deposits for futures contracts and premiums on related
options do not exceed 5% of the Fund's assets and the percentage of the Fund's
assets being used to cover its obligations under futures and options does not
exceed 50%.
Additional information about these derivative instruments and their
risks is included in this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. The Fund may maintain up to 25% of its assets in
short-term debt securities and money market instruments to meet redemption
requests or to facilitate investment in the securities of the S&P 500. These
securities include obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities or by any of the states, repurchase
agreements, commercial paper, and certain bank obligations. The Fund will not
invest in these securities as part of a temporary defensive strategy to protect
against potential market declines.
<PAGE>
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.
Principal Investment Policies and Risks:
The Fund normally will invest in common stocks (and securities
convertible into common stocks). Typically, in choosing stocks, the Sub-advisor
looks for companies using a three-step process:
o Quantitative research is performed on a universe of large, seasoned, U.S.
and multinational companies to identify which stocks the Sub-advisor
believes represent the best bargains;
o Fundamental research is conducted to assess a company's operating
environment, resources and strategic plans and to determine its prospects
for exceeding the earnings expectations reflected in its stock price.
o Business cycle analysis is used to assess the economic and interest-rate
sensitivity of the Fund, helping the Sub-advisor to assess how adding or
deleting stocks changes the Fund's overall sensitivity to economic activity
and interest rates.
The Sub-advisor will take a value-oriented approach, in that it
will try to keep the Fund's assets invested in securities that are selling at
reasonable prices in relation to their value. In doing so, the Fund may forgo
some opportunities for gains when, in the judgment of the Sub-advisor, they are
too risky.
The prices of the common stocks that the Fund invests in will
fluctuate. Therefore, the Fund's share price will also fluctuate, and may
decline substantially. While there is the risk that an investment will never
reach what the Sub-advisor believes is its full value, or go down in value, the
Fund's risk and share price fluctuation (and potential for gain) may be less
than many other stock funds because of the Fund's emphasis on large, seasoned
company value stocks.
Other Investments:
Consistent with the Fund's investment objective, the Fund, in
addition to investing in common stocks and convertible securities, may write
covered call options with respect to securities in the Fund. 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 net assets at the time an
option is written. The Fund may also invest up to 10% of the Fund's net assets
(at the time of investment) in foreign securities, and invest in straight bonds
and other debt securities.
Temporary Investments. The Fund may invest in short-term debt and
other high quality fixed-income securities to create reserve purchasing power
and also for temporary defensive purposes. While the Fund is in a defensive
position, the opportunity to achieve its investment objective will be limited.
<PAGE>
ASAF MFS GROWTH WITH INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek to
provide reasonable current income and long-term capital growth and income.
Principal Investment Policies and Risks:
The Fund invests, under normal market conditions, at least 65% of
its total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts. The stocks in which the
Fund invests generally will pay dividends. While the Fund may invest in
companies of any size, the Fund generally focuses on companies with larger
market capitalizations that the Sub-advisor believes have sustainable growth
prospects and attractive valuations based on current and expected earnings or
cash flow.
The Sub-advisor uses a "bottom up," as opposed to "top down,"
investment style in managing the Fund. This means that securities are selected
based upon fundamental analysis of individual companies by the Sub-advisor.
The Fund may invest up to 20% of its total assets in foreign equity
securities.
As with any fund investing primarily in common stocks, the value of
the securities held by the Fund may decline in value, either because of changing
economic, political or market conditions or because of the economic condition of
the company that issued the security. These declines may be substantial. In
light of the Fund's focus on income-producing large-cap stocks, the risk and
share price fluctuations of the Fund (and its potential for gain) may be less
than many other stock funds. The Fund may invest in foreign companies, including
companies located in developing countries, and it therefore will be subject to
risks relating to political, social and economic conditions abroad, risks
resulting from differing regulatory standards in non-U.S. markets, and
fluctuations in currency exchange rates.
Other Investments:
Although the Fund will invest primarily in common stocks and
related securities, the Fund may also invest in debt securities, including
variable and floating rate securities and zero coupon, deferred interest and
pay-in-kind bonds. The Fund may also purchase warrants and make short sales
"against the box."
Futures, Options and Forward Contracts. The Fund may purchase and sell
futures contracts and related options on securities indices, foreign currencies
and interest rates for hedging and non-hedging purposes. The Fund may also enter
into forward contracts for the purchase or sale of foreign currencies for
hedging and non-hedging purposes. The Fund may purchase and write (sell) options
on securities, stock indices and foreign currencies.
For more information on the types of securities other than common
stocks in which the Fund may invest, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Investment Programs
for the Funds."
Temporary Investments. The Fund may depart from its principal
investment strategy by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. When investing for defensive
purposes, the Fund may hold cash or invest in cash equivalents such as
short-term U.S. government securities, commercial paper and bank instruments.
While the Fund is in a defensive position, the opportunity to achieve its
investment objective will be limited.
<PAGE>
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.
Principal Investment Policies and Risks:
The Fund seeks to achieve its objective by investing in its
corresponding Portfolio, which in turn will seek to invest in securities that
will provide a relatively high yield and stable return and that, over a period
of years, may also provide capital appreciation. The Portfolio normally will
invest at least 65% of its assets in dividend-paying common stocks of domestic
and foreign issuers. Up to 10% of the Portfolio's assets may be invested in
equity securities that do not pay regular dividends. In addition, the Portfolio
normally will have some portion of its assets invested in debt securities,
convertible bonds, or preferred stocks. The Portfolio may invest up to 25% of
its total assets in foreign securities, including securities of issuers in
countries considered to be developing. These foreign investments may serve to
increase the overall risks of the Portfolio.
The Portfolio's investments in common stocks may, of course,
decline in value, which will result in declines in the Portfolio's (and Fund's)
share price. Such declines could be substantial. To minimize the risk this
presents, the Sub-advisor only invests the Portfolio's assets in marketable
common stocks and equity securities; and will not invest more than 5% of the
Portfolio's assets in the securities of any one company or more than 25% of the
Portfolio's assets in any one industry. In light of the Portfolio's focus on
income producing stocks, its risk and share price fluctuation (and potential for
gain) may be less than many other stock funds.
Debt Securities. The Portfolio'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 Portfolio 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 Portfolio'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 or
Moody's Investors Services, Inc., or equivalent unrated debt securities ("junk
bonds").
In order to minimize its risk in investing in debt securities, the
Portfolio will invest no more than 15% of its assets in junk bonds, and in no
event will the Portfolio ever invest in a debt security rated below Caa by
Moody's or CCC by Standard & Poor's. While the Sub-advisor will monitor all of
the debt securities in the Portfolio for the issuers' ability to make required
principal and interest payments and other quality factors, the Sub-advisor may
retain in the Portfolio 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 under "Certain
Risk Factors and Investment Methods."
Temporary Investments:
In periods of uncertain market and economic conditions, the
Portfolio may assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes or government
securities, or held in cash. While the Portfolio is in a defensive position, the
opportunity for the Portfolio and Fund to achieve their investment objectives
may be limited.
<PAGE>
ASAF American century Strategic Balanced Fund:
Investment Objective: The investment objective of the Fund is to seek
capital growth and current income.
Principal Investment Policies and Risks:
The Sub-advisor intends to maintain approximately 60% of the Fund's
assets in equity securities and the remainder in bonds and other fixed income
securities. Both the Fund's equity and fixed income investments will fluctuate
in value. The equity securities will fluctuate depending on the performance of
the companies that issued them, general market and economic conditions, and
investor confidence. The fixed income investments will be affected primarily by
rising or falling interest rates and the credit quality of the issuers. As a
Fund that invests both in equity and fixed income securities, the Fund's risk of
loss and share price fluctuation will tend to be less than funds investing
primarily in equity securities and more than funds investing primarily in fixed
income securities.
Equity Investments. With the equity portion of the Fund, the
Sub-advisor utilizes quantitative management techniques in a two-step process
that draws heavily on computer technology. In the first step, the Sub-advisor
ranks stocks, primarily the 1,500 largest publicly traded U.S. companies as
measured by market capitalization. These rankings are determined by using a
computer model that combines measures of a stock's value and measures of its
growth potential. To measure value, the Sub-advisor uses ratios of stock price
to book value and stock price to cash flow, among others. To measure growth, the
Sub-advisor uses, among others, the rate of growth in a company's earnings and
changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called
portfolio optimization. In portfolio optimization, the Sub-advisor uses a
computer to build a portfolio of stocks from the ranking described earlier that
it thinks will provide the best balance between risk and expected return. The
goal is to create an equity portfolio that provides better returns than the S&P
500 Index without taking on significant additional risk.
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 and may be higher or lower depending on the mix
the Sub-advisor believes will be most appropriate 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 is invested in a diversified
portfolio of government securities, corporate fixed income securities,
mortgage-backed and asset-backed securities, and similar securities. The
Sub-advisor's strategy is to actively manage the Fund by investing the Fund's
fixed income assets in sectors it believes are undervalued (relative to the
other sectors) and which represent better relative long-term investment
opportunities.
The Sub-advisor will adjust the weighted average portfolio maturity
in response to expected changes in interest rates. Under normal market
conditions, the weighted average maturity of the fixed income portion of the
Fund will range from 3 to 10 years. During periods of rising interest rates, the
weighted average maturity may be reduced 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 Fund may be moved toward the longer end of its
maturity range.
Debt securities that comprise the Fund's fixed income portfolio
will primarily be investment grade obligations. However, the Fund may invest up
to 10% of its fixed income assets in high-yield securities or "junk bonds."
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 their
risks, see this Prospectus under "Certain Risk Factors and Investment Methods."
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. The Sub-advisor
also considers the impact of foreign exchange rates in selecting securities
denominated in foreign currencies.
Foreign Securities. The Fund may invest up to 25% of its total
assets in equity and debt securities of foreign issuers, including foreign
governments and their agencies, when these securities meet its standards of
selection. (As noted above, approximately 20% of the fixed income portion of the
Fund normally will be invested in foreign securities.) These investments will be
made primarily in issuers in developed markets. The Fund may make such
investments either directly in foreign securities, or by purchasing depositary
receipts for foreign securities. 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.
Other Investments:
The Fund may make short sales "against the box." The Fund may also
invest in derivative securities. Certain of these derivative securities may be
described as "index/structured" securities, which are securities whose value or
performance is linked to other equity securities (as in the case of depositary
receipts), currencies, interest rates, securities indices or other financial
indicators ("reference indices"). 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 because the
Fund may not invest in oil and gas leases or futures.
For further information on these securities and investment
practices, see this Prospectus under "Certain Risk Factors and Investment
Methods."
<PAGE>
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.
Principal Investment Policies and Risks:
The Fund will invest at least 65% of its assets in lower-rated
corporate fixed income securities ("junk bonds"). These fixed income securities
may include preferred stocks, convertible securities, bonds, debentures, notes,
equipment lease certificates and equipment trust certificates. The securities in
which the Fund invests usually will be rated below the three highest rating
categories of a nationally recognized rating organization (AAA, AA, or A for
Standard & Poor's Corporation ("Standard & Poor's") and Aaa, Aa or A for Moody's
Investors Service, Inc. ("Moody's")) or, if unrated, are of comparable quality.
There is no lower limit on the rating of securities in which the Fund may
invest. The Fund may purchase or hold securities rated in the lowest rating
category or securities in default.
A fund that invests primarily in lower-rated fixed income
securities will be subject to greater risk and share price fluctuation than a
typical fixed income fund, and may be subject to an amount of risk that is
comparable to or greater than many equity funds. Lower-rated securities will
usually offer higher yields than higher-rated securities, but with more risk of
loss of principal and interest. This is because of the reduced creditworthiness
of the securities and the increased risk of default. Like equity securities,
lower-rated fixed income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed income
securities, which tend to react primarily to fluctuations in market interest
rates.
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 industries sensitive to market cycles, where
deterioration in a company's cash flow may impair its ability to meet its
obligations under the bonds. From time to time, 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, the value of
the securities may fall, and the Fund may bear 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. Adverse
publicity and the perception of investors relating to these securities and their
issuers, whether or not warranted, may also affect the price or liquidity of
lower-rated bonds. For an additional discussion of the risks involved in
lower-rated securities, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Methods by which the Sub-advisor attempts to reduce the risks
involved in lower-rated securities include:
Credit Research. The Sub-advisor will perform its own credit analysis in
addition to using rating organizations and other sources, and may have
discussions with the issuer's management or other investment analysts regarding
issuers. The Sub-advisor's credit analysis will consider the issuer's financial
soundness, its responsiveness to changing business and market conditions, and
its anticipated cash flow and earnings. In evaluating an issuer, the Sub-advisor
places special emphasis on the estimated current value of the issuer's assets
rather than their 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.
Other Investments:
Under normal circumstances, the Fund will not invest more than 10%
of its total assets in equity securities. The Fund may invest up to 10% of its
total assets in foreign securities that are not publicly traded in the United
States.
The Fund may own zero coupon bonds or pay-in-kind securities, which
are fixed income securities that do not make regular cash interest payments. The
prices of these securities are generally more sensitive to changes in market
interest rates than are conventional bonds. Additionally, interest on zero
coupon bonds and pay-in-kind securities must be reported as taxable income to
the Fund even though it receives no cash interest until the maturity of such
securities.
The Portfolio may invest in securities issued by real estate
investment trusts, which are companies that hold real estate or mortgage
investments. Usually, real estate investment trusts are not diversified, and,
therefore, are subject to the risks of a single project or a small number of
projects. They also may be heavily dependent on cash flows from the property
they own, may bear the risk of defaults on mortgages, and may be affected by
changes in the value of the underlying property.
Temporary Investments. The Fund may also invest all or a part of
its assets temporarily in cash or cash items for defensive purposes during times
of unusual market conditions or to maintain liquidity. Cash items may include
certificates of deposit and other bank obligations; commercial paper (generally
lower-rated); short-term notes; obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities; and repurchase agreements.
While the Fund is in a defensive position, the opportunity to achieve its
investment objective of high current income may be limited.
<PAGE>
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 and prudent
investment management.
Principal Investment Policies and Risks:
The Fund will invest in its corresponding Portfolio, at least 65%
of the assets of which will be invested in the following types of fixed income
securities;
<TABLE>
<CAPTION>
<S> <C>
o securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
o corporate debt securities, including convertible securities and commercial paper;
o mortgage and other asset-backed securities;
o structured notes, including hybrid or "indexed" securities, and loan participations;
o delayed funding loans and revolving credit securities;
o bank certificates of deposit, fixed time deposits and bankers' acceptances;
o repurchase agreements and reverse repurchase agreements;
o obligations of foreign governments or their subdivisions, agencies and instrumentalities; and
o obligations of international agencies or supranational entities.
</TABLE>
Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, interest rate or maturity) that the Sub-advisor
believes to be relatively undervalued. In selecting fixed income securities, the
Sub-advisor uses economic forecasting, interest rate anticipation, credit and
call risk analysis, foreign currency exchange rate forecasting, and other
securities selection techniques. The proportion of the Portfolio'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
management of duration (a measure of a fixed income security's expected life
that incorporates its yield, coupon interest payments, final maturity and call
features into one measure) is one of the fundamental tools used by the
Sub-advisor.
The Portfolio will invest in fixed-income securities of varying
maturities. The average portfolio duration of the Portfolio generally will vary
within a three- to six-year time frame based on the Sub-advisor's forecast for
interest rates. The Portfolio may invest up to 10% of its assets in fixed income
securities that are rated below investment grade ("junk bonds") but are 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).
Generally, over the long term, the return obtained by a portfolio
investing primarily in fixed income securities such as the Portfolio is not
expected to be as great as that obtained by a portfolio investing in equity
securities. At the same time, the risk and price fluctuation 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. However, the Portfolio can and routinely does invest in certain
complex fixed income securities (including various types of mortgage-backed and
asset-backed securities) and engage in a number of investment practices
(including futures, swaps and dollar rolls) as described below, that many other
fixed income funds do not utilize. These investments and practices are designed
to increase the Portfolio's return or hedge its investments, but may increase
the risk to which the Portfolio is subject.
Like other fixed income funds, the Portfolio is subject to market
risk. Bond values fluctuate based on changes in interest rates, market
conditions, investor confidence and announcements of economic, political or
financial information. Generally, the value of fixed income securities will
change inversely with changes in market interest rates. As interest rates rise,
market value tends to decrease. This risk will be greater for long-term
securities than for short-term securities. Certain mortgage-backed and
asset-backed securities and derivative instruments in which the Portfolio may
invest may be particularly sensitive to changes in interest rates. The Portfolio
is also subject to credit risk, which is the possibility that an issuer of a
security (or a counterparty to a derivative contract) will default or become
unable to meet its obligation. Generally, the lower the rating of a security,
the higher its degree of credit risk.
The following paragraphs describe some specific types of
fixed-income investments that the Portfolio may invest in, and some of the
investment practices that the Portfolio will engage in. More information about
some of these investments, including futures, options and mortgage-backed and
asset-backed securities, and discussed in more detail below under "Certain Risk
Factors and Investment Methods."
U.S. Government Securities. The Portfolio may invest in various
types of U.S. Government securities, including those that are supported by the
full faith and credit of the United States; those that are supported by the
right of the issuing agency to borrow from the U.S. Treasury; those that are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others that are supported only by the credit of
the instrumentality.
Corporate Debt Securities. Corporate debt securities include
corporate bonds, debentures, notes and other similar instruments, including
convertible securities and preferred stock. Debt securities may be acquired with
warrants attached. The rate of return or return of principal on some debt
obligations may be linked or indexed to exchange rates between the U.S. dollar
and a foreign currency or currencies.
While the Sub-advisor may regard some countries or companies as
favorable investments, pure fixed income opportunities may be unattractive or
limited due to insufficient supply or legal or technical restrictions. In such
cases, the Portfolio may consider equity securities or convertible bonds to gain
exposure to such investments.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The interest rates on these securities are tied to other interest
rates, such as money-market indices or Treasury bill rates, and reset
periodically. While these securities provide the Portfolio with a certain degree
of protection against losses caused by rising interest rates, they will cause
the Portfolio's interest income to decline if market interest rates decline.
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 fixed at issuance, and is
generally lower than the interest rate on typical bonds. Over the life of the
bond, however, this interest will be paid based on a principal value that has
been adjusted for inflation. Repayment of the adjusted principal upon maturity
may be guaranteed, but the market value of the bonds is not guaranteed, and will
fluctuate. The Portfolio may invest in inflation-indexed bonds that do not
provide a repayment guarantee. While these securities are expected to be
protected from long-term inflationary trends, short-term increases in inflation
may lead to losses.
Catastrophe Bonds. Catastrophe bonds are fixed income securities
for which the return of principal and payment of interest is contingent upon the
non-occurrence of a specific "trigger" event. The trigger event may be, for
example, a hurricane or an earthquake in a specific geographic region that
causes losses exceeding a specific amount. If the trigger event occurs, the
Portfolio may lose all or a portion of the amount it invested in the bond.
Catastrophe bonds may also expose the Portfolio to certain other risks,
including default, adverse regulatory interpretation, and adverse tax
consequences.
Mortgage-Backed and Other Asset-Backed Securities. The Portfolio
may invest all of its assets in mortgage-backed and other asset-backed
securities, including collateralized mortgage obligations. The value of some
mortgage-backed and asset-backed securities in which the Portfolio invests may
be particularly sensitive to changes in market interest rates.
Reverse Repurchase Agreements and Dollar Rolls. In addition to
entering into reverse repurchase agreements (as described below under "Certain
Risk Factors and Investment Methods"), the Portfolio may also enter into dollar
rolls. In a dollar roll, the Portfolio 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. The Portfolio
forgoes principal and interest paid on the securities sold in a dollar roll, but
the Portfolio is compensated by the difference between the 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 Portfolio also could be compensated through
the receipt of fee income. Reverse repurchase agreements and dollar rolls can be
viewed as collateralized borrowings and, like any borrowings, will tend to
exaggerate fluctuations in Portfolio's (and Fund's) share price and may cause
the Portfolio to need to sell portfolio securities at times when it would
otherwise not wish to do so.
Foreign Securities. 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 (as determined by the Sub-advisor). The Portfolio may buy
and sell foreign currency futures contracts and options on foreign currencies
and foreign currency futures contracts, and enter into forward foreign currency
exchange contracts for the purpose of hedging currency exchange risks arising
from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies.
Derivative Instruments. The Portfolio may purchase and write call
and put options on securities, securities indices and on foreign currencies. The
Portfolio may invest in interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts and options thereon that are
traded on U.S. or foreign exchanges or boards of trade. The Portfolio may also
enter into swap agreements with respect to foreign currencies, interest rates
and securities indices. The Portfolio may use these techniques to hedge against
changes in interest rates, currency exchange rates or securities prices or as
part of its overall investment strategy.
For a discussion of futures and options and their risks, see this
Prospectus under "Certain Risk Factors and Investment Methods." The Portfolio's
investments in swap agreements are described directly below.
Swap Agreements. The Portfolio may enter into interest rate, index
and currency exchange rate swap agreements for the purposes of attempting to
obtain a desired return at a lower cost than if the Portfolio 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, the two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular investments or instruments.
The returns to be exchanged between the parties are calculated with respect to a
"notional amount," i.e., a specified dollar amount that is hypothetically
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.
Under most swap agreements entered into by the Portfolio, the
parties' obligations are determined on a "net basis." Consequently, the
Portfolio's obligations (or rights) under a swap agreement will generally be
equal only to a net amount based on the relative values of the positions held by
each party.
Whether the Portfolio's use of swap agreements will be successful
will depend on the sub-advisor's ability to predict that certain types of
investments are likely to produce greater returns than other investments.
Moreover, the Portfolio may not receive the expected amount under a swap
agreement if the other party to the agreement defaults or becomes bankrupt. The
swaps market is relatively new and is largely unregulated.
<PAGE>
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.
Principal Investment Policies and Risks:
As a money market fund, the Fund seeks to maintain a stable net
asset value of $1.00 per share. In other words, the Fund attempts to operate so
that shareholders do not lose any of the principal amount they invest in the
Fund. Of course, there can be no assurance that the Fund will achieve its goal
of a stable net asset value, and shares of the Fund are neither insured nor
guaranteed by the U.S. government or any other entity. For instance, the issuer
or guarantor of a portfolio security or the other party to a contract could
default on its obligation, and this could cause the Fund's net asset value to
fall below $1. In addition, the income earned by the Fund will fluctuate based
on market conditions and other factors.
The Fund invests in its corresponding Portfolio. Under the
regulatory requirements applicable to money market funds, the Portfolio must
maintain a weighted average portfolio maturity of not more than 90 days and
invest in high quality U.S. dollar-denominated securities that have effective
maturities of not more than 397 days. In addition, the Portfolio will limit its
investments to those securities that, in accordance with guidelines adopted by
the Directors of the Company, present minimal credit risks. The Portfolio will
not purchase any security (other than a United States Government security)
unless:
o if rated by only one nationally recognized statistical rating organization
(such as Moody's and Standard & Poor's), such organization has rated it
with the highest rating assigned to short-term debt securities;
o if rated by more than one nationally recognized statistical rating
organization, at least two rating organizations have rated it with the
highest rating assigned to short-term debt securities; or
o it is not rated, but is determined to be of comparable quality in
accordance with procedures noted above.
These standards must be satisfied at the time an investment is made. If the
quality of the investment later declines, the Portfolio may continue to hold the
investment, subject in certain circumstances to a finding by the Trustees that
disposing of the investment would not be in the Portfolio's best interest.
Subject to the above requirements, the Portfolio will invest in one
or more of the types of investments described below.
United States Government Obligations. The Portfolio may invest in
obligations of the U.S. Government and its agencies and instrumentalities either
directly or through repurchase agreements. U.S. Government obligations 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. Some 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 are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others are supported only
by the credit of the agency. There is no assurance that the U.S. Government will
provide financial support to one of its agencies if it is not obligated to do so
by law.
Bank Obligations. The Portfolio may invest in high quality United
States dollar-denominated negotiable certificates of deposit, time deposits and
bankers' acceptances of U.S. and foreign banks, savings and loan associations
and savings banks meeting certain total asset minimums. The Portfolio 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 commitments of their member countries, and there is no assurance
these commitments will be undertaken or met.
Commercial Paper; Bonds. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by United States corporations. The
Portfolio 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.
Asset-Backed Securities. As may be permitted by current laws and
regulations, the Portfolio may invest in asset-backed securities up to 10% of
its net assets.
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Trustees of the Trust, the
Portfolio 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
Sub-advisor will review the structure of synthetic instruments to identify
credit and liquidity risks and will monitor such risks.
Foreign Securities. Foreign investments must be denominated in U.S. dollars
and may be made directly in securities of foreign issuers or in the form of
American Depositary Receipts and European Depositary Receipts.
For more information on certain of these investments, see this Prospectus
under "Certain Risk Factors and Investment Methods."
<PAGE>
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 it would be in the
Fund's or Portfolio's best interest to do so. It may be appropriate to buy or
sell portfolio securities due to economic, market, or other factors that are not
within the Sub-advisor's or Investment Manager's control. Such transactions will
increase a Fund's "portfolio turnover." A 100% portfolio turnover rate would
occur if all of the securities in a portfolio of investments were replaced
during a given period.
Although turnover rates may vary substantially from year to year,
it is anticipated that the following Portfolios and Non-Feeder Funds may
regularly have annual rates of turnover exceeding 100%.
ASAF Founders International Small Capitalization Fund
ASAF Janus Overseas Growth Fund
ASAF Janus Small-Cap Growth Fund
ASAF Neuberger Berman Mid-Cap Growth Fund
ASAF Neuberger Berman Mid-Cap Value Fund
ASAF Marsico Capital Growth Fund
ASMT Janus Capital Growth Portfolio
ASMT PIMCO Total Return Bond Portfolio
A high rate of portfolio turnover (100% or more) involves correspondingly
higher brokerage commission expenses and other transaction costs, which are
borne by a Fund and will reduce its performance. High portfolio turnover rates
may also generate larger taxable income and taxable capital gains, which may
increase your tax liability.
<PAGE>
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 the account at
any time with as little as $50. The initial investment minimum is reduced to $50
per Fund through "Automatic Investment Plans," which are discussed in this
Prospectus under "Special Investment Programs and Privileges." Lower minimum
initial and additional investments may also be applicable in certain other
circumstances, including purchases by certain tax deferred retirement programs.
There is no minimum investment requirement when you are buying shares by
reinvesting dividends and distributions from a Fund.
METHODS OF BUYING SHARES:
Each Fund offers 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 each class.
You can purchase shares of the Funds through any selling dealer,
broker, bank or other financial institution ("dealers"), 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 an application is
submitted without a dealer listed, American Skandia Marketing, Incorporated (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 the Funds are accepted only on days on which
the New York Stock Exchange ("NYSE") is open for business (a "business day").
Orders 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. The offering price is the net asset value ("NAV") plus any
initial sales charge that applies. Orders received by the Transfer Agent after
the close of trading on a business day, 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. 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.
The Company, the Distributor or the Transfer Agent reserves the
right to reject any order for the purchase of a Fund's shares. The Company may
cancel any purchase order for which payment has not been received by the fifth
business day after 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 has incurred. If the Transfer
Agent deems it appropriate, additional documentation for any order may be
required, and the order will not be considered to be received until such
additional documentation is received.
PURCHASE OF CLASS A SHARES:
Class A shares (other than Class A shares of the ASAF JPM Money
Market Fund) are sold at an offering price that normally equals 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 sales charges. The Fund receives an amount equal to the NAV
to invest for your account. A portion of the sales charge is retained by the
Distributor and a portion is allocated to your dealer. The Distributor may
allocate the entire amount of the initial sales charge to dealers for all sales
occurring during a particular period. The current sales charge rates are as
follows:
<TABLE>
<CAPTION>
High Yield Bond & Total Return Bond Funds: All Other Funds (other than Money Market
Fund):
<S> <C> <C> <C> <C>
Front-end Sales Front-end Sales Front-end Sales Front-end Sales
Charge (as % of Charge (as % of amt. Charge (as % of Charge (as % of amt.
offering price) invested) offering price) invested)
Amount of Purchase:
Less than $50,000 4.25% 4.44% 5.00% 5.26%
$50,000 up to $100,000 3.75% 3.90% 4.25% 4.44%
$100,000 up to $250,000 3.25% 3.36% 3.25% 3.36%
$250,000 up to $500,000 2.25% 2.30% 2.25% 2.30%
$500,000 up to $1 million 1.50% 1.52% 1.50% 1.52%
</TABLE>
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 of Class A shares of any one or
more of the Funds in the following cases:
o Purchases aggregating $1 million or more;
o Purchases by an employer-sponsored retirement plan under section
403(b) of the Code that features an employer
contribution or "match"; or
o Purchases by an employer-sponsored retirement plan under
section 401(a) of the Code (including a 401(k) plan) with at
least 25 eligible employees or that uses the services of a
third party administer that has established an electronic link
with the Company.
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 acquired by the reinvestment of dividends or
capital gains distributions or redemptions for the purpose of making
distributions or loans to section 401(a) or 403(b)(7) plan participants, and
will be waived under certain circumstances described in the Company's SAI. The
Class A CDSC will be equal to 1.0% of the lesser of the shares' NAV at the time
of redemption or the time of purchase. Therefore, any increase in the share
price is not subject to the CDSC. The Class A CDSC is paid to the Distributor to
reimburse expenses incurred in providing distribution-related services to the
Fund. 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).
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 those by
you, your spouse and your children under the age of 21 (if all parties are
purchasing shares for their own account), those by certain tax qualified plans
such as IRAs, SIMPLE IRAs, individual type 403(b)(7) plans, and single
participant Keogh type plans for the benefit of such individuals, and those by a
company controlled by such individuals
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 all
Classes of shares will determine the 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. Part of the LOI amount will be held in escrow to
cover additional sales charges that may be due if your total investments over
the LOI period are not sufficient to qualify for the intended sales charge
reduction. The rules described above under "Combined Purchases" may apply.
Waiver of All Class A Sales Charges. No sales charge is imposed on
purchases of Class A shares in connection with various types of transactions and
for various types of investors. These sales charge waivers include: (1) shares
purchased by the reinvestment of loan repayments by a participant in a
retirement plan; (2) shares purchased by the reinvestment of distributions
received from a Fund; (3) 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); (4) purchases by former
participants in a qualified retirement plan, where a portion of the plan was
invested in the Company; (5) purchases by non-qualified deferred compensation
plans; (6) purchases under arrangements between the Company and organizations
which make recommendations to or permit group solicitations of its employees,
members or participants; (7) purchases by employees and registered
representatives (and their parents, spouses and dependent children) of dealers
if the purchase is for the purchaser's own account (or for the benefit of an
employee's parents, spouse, parents of spouse, or minor children); and (8)
purchases by clients of a dealer or other investment professional that has
entered into an agreement with the Distributor providing for the use of Fund
shares in investment products or services made available to its clients (those
clients may be charged separate fees by their dealer for the products or
services).
In order to receive the above sales charge reductions or waivers,
you must notify the Transfer Agent of the reduction or waiver request when you
place your purchase order. 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.
PURCHASE OF CLASS B SHARES:
Because in most cases it is more advantageous for an investor to
purchase Class A shares for amounts in excess of $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.
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 time of purchase. Therefore,
any increase in the share price is not subject to the CDSC. 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. The Distributor has assigned its right to receive any Class B CDSC, as
well as any distribution and service fees discussed below under "Distribution
Plans," to a third party that provides funding for the up-front sales concession
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 your investment and
the amount being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
Redemption During: Class B CDSC (as % of amount subject to charge):
<S> <C> <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>
For purposes of determining the CDSC, all purchases are considered
to have been made on the first business day of the month in which the purchase
was actually made.
Waiver of Class B CDSC. The Class B CDSC will be waived in the
following cases if shares are redeemed and the Transfer Agent is notified: (1)
redemptions under a Systematic Withdrawal Plan as described in this Prospectus
under "Special Investment Programs and Privileges"; (2) redemptions to pay
premiums for optional insurance coverage described in this Prospectus under
"Special Investment Programs and Privileges"; (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 under
"Distribution Plans." The conversion is based on the relative NAV of the two
classes, and no sales 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.
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 pays for the Bonus Shares as part of its
services to the Funds. The Distributor expects to recover the costs of
purchasing 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 19, 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 time of purchase.
Therefore, any increase in the share price is not subject to the CDSC. 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. The Distributor has assigned its right to receive any Class X CDSC, as
well as any distribution and service fees discussed below under "Distribution
Plans," to a third party that provides funding for the up-front sales concession
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) all 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
held for less than 8 years. The amount of the Class X CDSC will depend on the
number of years since your investment and the amount being redeemed, according
to the following schedule:
<TABLE>
<CAPTION>
Redemption During: Class X CDSC (as % of amount subject to charge):
<S> <C> <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>
For purposes of determining the CDSC, all purchases are considered
to have been made on the first business day of the month in which the purchase
was actually made. In the case of Class X shares purchased prior to August 19,
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 19, 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 under
"Distribution Plans." The conversion is based on the relative NAV of the two
classes, and no sales 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.
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 will 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 time of purchase. Therefore, any
increase in the share price is not subject to the CDSC. 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
DISTRIBUTION PLANS:
The Company has adopted a Distribution and Service Plan (commonly
known as a "12b-1 Plan") for each Class of shares to compensate the Distributor
for its services and costs in distributing shares and servicing shareholder
accounts. Under the Distribution and Service Plan for Class A shares, the Fund
pays the Distributor 0.50% of the Fund's average daily net assets attributable
to Class A shares. Under the Plans for Class B, X and C shares, the Fund pays
the Distributor 1.00% of the Fund's average daily net assets attributable to the
relevant Class of shares. Because these fees are paid out of a Fund's assets on
an ongoing basis, these fees may, over time, increase the cost of an investment
in the Fund and may be more costly than other types of sales charges.
The Distributor uses distribution and service fees received under
each Plan to compensate qualified dealers for services provided in connection
with the sale of shares and the maintenance of shareholder accounts. In
addition, the Distributor uses distribution and service fees received under the
Class X Plans as reimbursement for its purchases of Bonus Shares.
In addition, the Company has adopted a Supplemental Distribution
Plan under Rule 12b-1 and the Trust has adopted a Distribution Plan under Rule
12b-1 (together, the "Supplemental Plans"). The Supplemental Plans permit the
Distributor to receive brokerage commissions in connection with purchases and
sales of securities held by the Funds and Portfolios, and to use these
commissions to promote the sale of shares of the Company. Under the Supplemental
Plans, transactions for the purchase and sale of securities for a Fund or
Portfolio may be directed to certain brokers for execution ("clearing brokers")
who have agreed to pay part of the brokerage commissions received on these
transactions to the Distributor for "introducing" transactions to the clearing
broker. In turn, the Distributor will use the brokerage commissions received as
an introducing broker to pay various distribution-related expenses, such as
advertising, printing of sales materials, and payments to dealers. No Fund or
Portfolio will pay any new fees or charges resulting from the Supplemental
Plans, nor is it expected that the brokerage commissions paid by a Fund or
Portfolio will increase as the result of implementation of the Supplemental
Plans.
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. Dividend and capital gains distributions
can 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.
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. You may set up more than one of these programs simultaneously.
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 (other than Class X shares
held by shareholders who first purchased Class X shares after August 18, 1998)
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, as of the date the Transfer Agent
receives your SWP request; or (ii) in the case of SWPs based on a fixed
percentage, each SWP redemption is limited to an amount that would not exceed
10% on an annualized basis of your account value at the time of withdrawal.
Exchange Privilege. You may exchange your shares of a Fund for shares of
the same class of any other Fund. For complete policies governing exchanges, see
this Prospectus under "How to Exchange Shares."
Reinvestment Privilege. If you redeem Class A, B or X shares on
which you paid an initial sales charge or a CDSC, you have up to 180 days to
reinvest all or part of the redemption proceeds in Class A shares of the Fund
without paying another sales charge. 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. 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 under the 1940 Act -- intends
to make certain life insurance coverage available to certain persons on whose
behalf shares are purchased. The benefits of this coverage, which are payable at
death, will be related to the amounts paid to purchase shares and to the value
of the shares held. 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. These
redemptions will not be subject to contingent deferred sales charges, but will
have the same tax consequences as any other Fund redemptions.
The life insurance coverage will be available to eligible persons
who enroll for the coverage within a limited time period after shares of the
Company are first held for the person's benefit. 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. The Company
offers you a number of ways to sell your shares, including in writing, by
telephone, by Automated Clearing House ("ACH") bank transfer or by wire
transfer. 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. 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 redeem Fund shares in
amounts 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 upon
orders from brokers on behalf of their customers at the offering price next
determined after receipt of the order. Brokers may charge for this service.
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 person to whom a
check is made payable 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. To avoid dishonor
of checks due to fluctuations in account value, shareholders are advised against
redeeming all or most of their account by check. You may not write a check that
would require the Fund to redeem shares that were purchased by check within the
prior 15 days. There is presently no charge for checkwriting privileges, but the
Fund or the Transfer Agent may impose such charges in the future or may modify
or terminate the privilege. Any applicable CDSC will be deducted when a check is
paid.
ADDITIONAL INFORMATION:
To protect you and the Funds from fraud, redemption requests must
be in writing and must include a signature guarantee in the following situations
(the Company or the Transfer Agent may require a signature guarantee in other
situations at their discretion):
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
Except as described below, 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 and
purchased in the exchange transaction on the business day on which the Transfer
Agent receives an exchange request that is in proper form, if the request is
received by the close of the NYSE that day. You should consider the differences
in investment objectives and expenses between the Funds before making an
exchange. Exchanges may be taxable transactions and may be subject to special
tax rules about which you should consult your tax adviser.
You may exchange your Fund shares (other than Class A shares of the
ASAF JPM Money Market Fund) for shares of any other Fund without 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 on Class X shares 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 NAV.
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 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.
The Company may 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 a
Fund 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 the Company will attempt to give you prior notice whenever it
is reasonably able to do so, it may impose these restrictions at any time.
Each Fund reserves the right to terminate or modify the exchange
privilege in the future.
<PAGE>
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's total assets attributable
to a class, less any liabilities, by the number of total shares of that class
outstanding. In general, the assets of each Non-Feeder Fund and Portfolio
(except the ASMT JPM Money Market Portfolio) are valued on the basis of market
quotations. However, in certain circumstances where market quotations are not
readily available or where market quotations for a particular security or asset
are believed to be incorrect, securities and other assets are valued by methods
that are believed to accurately reflect their fair value. The assets of the ASMT
JPM Money Market Portfolio are valued by the amortized cost method, which is
intended to approximate market value. Because NAV is calculated and purchases
may be made only on business days, and because securities traded on foreign
exchanges may trade on other days, the value of a Fund or Portfolio's
investments may change on days when you will not be able to purchase or redeem
shares.
SHAREHOLDER ACCOUNT RULES AND POLICIES
o The offering of any class of Fund shares may be suspended when 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 a 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 of the owners or the
dealer representative of record for the account unless an owner instructs the
Transfer Agent otherwise. The Transfer Agent will record any telephone calls to
verify data concerning transactions and has adopted other procedures to confirm
that telephone or electronic instructions 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
instructions received by electronic means that they reasonably believe 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 There are no share certificates for the Company's shares.
o Dealers that can perform account transactions for their clients
through the National Securities Clearing Corporation are responsible for
obtaining their clients' permission to do so and are responsible to their
clients if they perform 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 ordinarily forwarded within 7 calendar
days after the business day on which the Transfer Agent receives the redemption
request 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 A Fund may redeem small accounts without a shareholder request 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.
No CDSC will be charged on 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.
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 Social Security or Employer
Identification Number when you sign your application, or if you violate Internal
Revenue Service regulations on the reporting of income.
SPECIAL INFORMATION ON THE
"MASTER/FEEDER" FUND STRUCTURE
An investor in the Feeder Funds should be aware that these Funds,
unlike mutual funds that 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 small amounts of cash). The Portfolios of the
Trust, which have the same investment objective, policies and limitations as
their corresponding Feeder Funds, in turn invest their assets directly in a
portfolio of securities. Therefore, each of the Feeder Funds acquires an
indirect interest in the securities owned by its corresponding Portfolio.
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 the
corresponding Feeder Fund and will pay a proportionate share of the Portfolio's
expenses. Other investors in a Portfolio, however, are not required to sell
their shares to the public at the same price as the corresponding Feeder Fund,
and may have different sales commissions and operating expenses. These
differences may result in differences in returns among the investment companies
that invest exclusively in the Portfolios. Currently, of the investment
companies that invest in the Portfolios, only shares of the Feeder Funds may be
purchased by the general public in the United States.
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 reduce their 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. For
example, if a large investor withdraws from a Portfolio, the remaining investors
may bear higher pro rata operating expenses. However, this possibility also
exists for traditionally structured funds with large investors.
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 withdrawal of
all a Feeder Fund's assets from a corresponding Portfolio may affect the
investment performance of the Feeder Fund. If the Directors of the Company
determine that a Feeder Fund should withdraw all of its assets from its
corresponding Portfolio, the Directors would consider what action should be
taken, including investing all of the Fund's assets in another pooled investment
entity or retaining an investment adviser to manage the Fund's assets directly.
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 interest in the Portfolio. When a Feeder Fund is requested to vote on
matters pertaining to a Portfolio, the Fund will hold a meeting of its
shareholders and will vote its interest in the Portfolio for or against such
matters proportionately to the instructions to vote for or against such matters
received from Fund shareholders.
MANAGEMENT OF THE FUNDS
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"). Because each of the Feeder Funds
invests all of its investable assets in a corresponding Portfolio of the Trust,
the Feeder Funds do not require an investment manager. In addition to serving as
investment manager to the Company and the Trust, ASISI has served since 1992 as
the investment manager to American Skandia Trust, an investment company whose
shares are made available to life insurance companies writing variable annuity
contracts and variable life insurance policies.
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 Trust, 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. The Investment Manager must also provide, or obtain and supervise,
the executive, administrative, accounting, custody, transfer agent and
shareholder servicing services that are deemed advisable by the Directors or the
Trustees.
The Company, the Trust, and American Skandia Investment Services,
Incorporated ("ASISI") have filed an application with the Securities and
Exchange Commission for an order to permit ASISI to change sub-advisors for a
Fund or Portfolio in the future, and to permit ASISI to enter into new
sub-advisory agreements, without obtaining shareholder approval of the changes.
Any such Sub-advisor change would continue to be subject to approval by the
Board of Directors of the Company or the Board of Trustees of the Trust, as
appropriate. This order (which likely will be similar in its conditions to
orders previously granted to other investment companies that are operated in a
similar manner as the Company and the Trust) is intended to facilitate the
efficient supervision and management of the Sub-advisors by ASISI and the
Directors of the Company and the Trustees of the Trust.
THE SUB-ADVISORS:
ASISI currently engages the following Sub-advisors to manage the
investments 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, subject to the supervision and control of the Investment Manager,
for the purchase, retention and sale of securities 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. 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 a number of other investment companies and
private accounts. Founders managed assets aggregating approximately $[insert]
billion as of June 30, 1999.
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.
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 over $[insert] billion under
management as of June 30, 1999 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, Mark C.J.
Bickford-Smith, Robert W. Smith, 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. Mark C.J. Bickford-Smith joined Price-Fleming in 1995 and
has 14 years experience with the Fleming Group in research and financial
analysis. Robert W. Smith joined Price-Fleming in 1996, and has been with T.
Rowe Price since 1992. He has 12 years experience in financial analysis. John R.
Ford joined Price-Fleming in 1982 and has 17 years of experience with Fleming
Group in research and portfolio management. James B.M. Seddon joined
Price-Fleming in 1987 and has 12 years of experience in investment management.
David J.L. Warren joined Price-Fleming in 1984 and has 17 years experience in
equity research, fixed income research and portfolio management.
A I M Capital Management, Inc. ("AIM"), 11 Greenway Plaza, Suite
100, Houston, Texas 77046-1173, serves as Sub-advisor for the ASAF AIM
International Equity Fund. AIM has acted as an investment advisor since 1986
and, together with its parent, A I M Advisors, Inc., advises or manages over ___
investment portfolios encompassing a broad range of investment objectives. As of
June 20, 1999, AIM managed approximately $___ billion in assets.
AIM uses a team approach to investment management. The members of the team
responsible for the management of the ASAF AIM International Equity Fund are A.
Dale Griffin, III, Clas G. Olsson and Barrett K. Sides. The members of the team
are all officers of AIM. Mr. Griffin, Senior Portfolio Manager, has been
associated with AIM and/or its affiliates since 1989. Mr. Olsson, Portfolio
Manager, has been associated with AIM and/or its affiliates since 1994. Mr.
Sides, Portfolio Manager, has been associated with AIM and/or its affiliates
since 1990.
Janus Capital Corporation ("Janus") serves as Sub-advisor for the
ASAF Janus Overseas Growth Fund, the ASAF Janus Small-Cap 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 June 30, 1999,
Janus managed assets worth approximately $[insert] billion.
The portfolio manager responsible for management of the ASAF Janus Overseas
Growth Fund is Helen Young Hayes, Vice President of Janus. Ms. Hayes joined
Janus in 1987.
The ASAF Janus Small-Cap Growth Fund is managed by a management
team consisting of James P. Craig, III, William Bales and Jonathan Coleman. The
management team has managed the Fund since Janus became the Fund's Sub-advisor
in January, 1999. James P. Craig, III is Chief Investment Officer of Janus. He
joined Janus in May 1983. William H. Bales has been a research analyst with
Janus since 1993, focusing primarily on the transportation, consumer products
and restaurant industries. He joined Janus in September 1991. Jonathan D.
Coleman has been a research analyst with Janus since July 1994, focusing
primarily on the railroad, computer, healthcare and financial services
industries. Prior to joining Janus, Mr. Coleman was a Fulbright Fellow from
August 1993 until June 1994.
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.
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 June 30, 1999, T. Rowe Price and its affiliates
managed approximately $[insert] billion for approximately six 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 Inc. ("NB Management") serves as
sub-advisor for the ASAF Neuberger Berman Mid-Cap Growth Fund and the ASAF
Neuberger Berman Mid-Cap Value Fund. NB Management and its predecessor firms
have specialized in the management of mutual funds since 1950. Neuberger Berman,
LLC ("Neuberger Berman"), an affiliate of NB Management, acts as a principal
broker in the purchase and sale of portfolio securities for the Funds for which
it serves as Sub-advisor, and provides NB Management with certain assistance in
the management of the Funds without added cost to the Funds or ASISI. Neuberger
Berman and its affiliates manage securities accounts, including mutual funds,
that had approximately $[insert] billion of assets as of June 30, 1999.
Michael M. Kassen and Robert I. Gendelman and S. Basu Mullick are primarily
responsible for the day-to-day management of the ASAF Neuberger Berman Mid-Cap
Value Fund. Mr. Kassen and Mr. Gendelman have been managing the Fund since its
inception, while Mr. Mullick has been managing the Fund since October 1998. Mr.
Kassen has been a Vice President of NB Management and a principal of Neuberger
Berman since December 1992, and was an employee of NB Management from 1990 to
December 1992. Mr. Gendelman is a principal of Neuberger Berman and has been
with NB Management since 1994, where he is currently a Vice President. Mr.
Mullick has been a Vice President of NB Management since October 1998. From 1993
to 1998, Mr. Mullick was a portfolio manager for a prominent investment adviser.
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 NB 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.
OppenheimerFunds, Inc. ("OppenheimerFunds"), Two World Trade
Center, New York, New York 10048-0203 serves as Sub-advisor for the ASAF
Oppenheimer Large-Cap Growth Fund. OppenheimerFunds has operated as an
investment advisor since 1959. OppenheimerFunds (including subsidiaries) manages
investment companies with assets of more than $[insert] billion as of June 30,
1999, and with more than four million shareholder accounts.
Bruce L. Bartlett, CFA has been the portfolio manager responsible for
management of the Portfolio since July 1999. Mr. Bartlett is a Senior Vice
President and Portfolio Manager for OppenheimerFunds who joined OppenheimerFunds
in June 1995. Previously, Mr. Bartlett was a Vice President and Senior Portfolio
Manager at First of America Investment Corporation.
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 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. As
of June 30, 1999, Marsico Capital managed approximately $[insert] billion in
assets.
Bankers Trust Company ("Bankers Trust") is the Sub-advisor to the ASAF
Bankers Trust Managed Index 500 Fund. Bankers Trust conducts a variety of
general banking and trust activities and is a major supplier of financial
services to the international and domestic institutional markets. Bankers Trust
is one of the nation's largest and most experienced investment managers with
approximately $[insert] billion in assets under management globally as of June
30, 1999.
On March 11, 1999, Bankers Trust announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. Pursuant to its agreement with the U.S. Attorney's Office,
Bankers Trust agreed to pay a $60 million fine to federal authorities.
Separately, Bankers Trust agreed to pay a $3.5 million fine to the State of New
York. The events leading up to the guilty pleas did not arise out of the
investment advisory or mutual fund management activities of Bankers Trust or its
affiliates.
As a result of the plea, Bankers Trust would not be able to continue to
provide sub-advisory services to the Portfolio absent an order from the
Securities and Exchange Commission that permits it to do so. The Commission has
granted such an order.
_______________ is responsible for the day-to-day management of the ASAF
Bankers Trust Managed Index 500 Fund. ______________ He has been employed by
Bankers Trust since 19__.
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 June 30, 1999, 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 positions in the equity research department of Lord Abbett since
1982.
Massachusetts Financial Services Company ("MFS") serves as
Sub-advisor for the ASAF MFS Growth with Income Fund. MFS, which is located at
500 Boylston Street, Boston, Massachusetts 02116, and its predecessor
organizations have a history of money management dating from 1924. As of June
30, 1999, the net assets under the management of the MFS organization were
approximately $[insert] billion.
The ASAF MFS Growth with Income Fund is managed by John D. Laupheimer and
Mitchell D. Dynan. Mr. Laupheimer is a Senior Vice President of MFS, and has
been employed by MFS as a portfolio manager since 1981. Mr. Dynan is also a
Senior Vice President of MFS, and has been employed by MFS as a portfolio
manager since 1986.
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, the parent of INVESCO, is one of the largest independent
investment management businesses in the world and managed over $[insert] billion
of assets as of June 30, 1999.
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 director and a senior vice president of
INVESCO. From 1993 to 1994, he was vice president of INVESCO. 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")
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. As of June 30, 1999,
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 John Schniedwind, Kurt Borgwardt, Jeffrey R. Tyler and William
Martin. Mr. Schniedwind is Senior Vice President and Group Leader --
Quantitative Equity for American Century, and has been with American Century
since 1982. Mr. Borgwardt is Vice President, Portfolio Manager and Director of
Quantitative Equity Research for American Century, and has been with American
Century since 1990. Mr. Tyler, Senior Vice President and Portfolio Manager,
joined American Century in 1988. William Martin, Vice President and Senior
Portfolio Manager, joined American Century in 1989. The fixed income portion of
the Fund is managed by a team of portfolio managers with expertise in different
areas of fixed income investing. The portfolio manager leader of the team
responsible for the day-to-day management of the fixed income portion of the
Fund is Brian Howell. Mr. Howell joined American Century in 1987 as a research
analyst and was promoted to his current position as portfolio manager in January
1994.
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. Federated Investment and its
affiliates serve as investment advisors to a number of investment companies and
private accounts. As of June 30, 1999, total assets under management or
administration by Federated and its affiliates 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 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. Mr. Kartsonas, who has
co-managed the Portfolio since August 1998, joined Federated Investors in 1994
as an Investment Analyst and has been an Assistant Vice President of Federated
Investments since March 1997.
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 300, Newport Beach, California 92660, is an
investment counseling firm founded in 1971. As of June 30, 1999, 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 has principal
offices at 522 Fifth Avenue, New York, New York 10036. J.P. Morgan and its
affiliates offer a wide range of services to governmental, institutional,
corporate and individual customers, and act as investment advisor to individual
and institutional clients with combined assets under management of over
$[insert] billion as of June 30, 1999. J.P. Morgan has managed investments for
clients since 1913, and has managed short-term fixed income assets for clients
since 1969.
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 for each Non-Feeder Fund and Portfolio will differ, reflecting,
among other things, the investment objective, policies and limitations of each
Fund and Portfolio. Each investment management fee is accrued daily for the
purposes of determining the sale and redemption price of the Fund's shares. The
fees paid to ASISI for the fiscal year ended October 31, 1998 (or, for those
Funds that have not been in operation for a full fiscal year, the fee rates
payable to ASISI), stated as a percentage of the Non-Feeder Fund or Portfolio's
average daily net assets, are as follows:
<TABLE>
<CAPTION>
Fund/Portfolio: Annual Rate:
<S> <C>
ASAF Founders International Small Capitalization Fund: 1.10%
ASMT T. Rowe Price International Equity Portfolio: 1.00%
ASAF AIM International Equity Fund: 1.10%
ASAF Janus Overseas Growth Fund: 1.00%
ASAF Janus Small-Cap Growth 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 Oppenheimer Large-Cap Growth Fund(1) 1.00%
ASAF Marsico Capital Growth Fund: 1.00%
ASMT Janus Capital Growth Portfolio: 1.00%
ASAF Bankers Trust Managed Index 500 Fund: 0.60%
ASAF Lord Abbett Growth and Income Fund: 0.80%
ASAF MFS Growth with 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>
(1) Prior to December 31, 1998, Robertson, Stephens & Company
Investment Management, L.P. served as Sub-advisor for the Fund (formerly the
ASAF Robertson Stephens Value + Growth Fund). Under the new Investment
Management Agreement for the Fund, fees are payable at an annual rate of 0.90%
of the portion of the average daily net assets of the Fund not in excess of $1
billion; plus 0.85% of the portion of the net assets over $1 billion.
For more information about investment management fees, including
voluntary fee waivers and the fee rates applicable at various asset levels, and
the fees payable by ASISI to each of the Sub-advisors, please see the Company's
SAI under "Investment Advisory & Administration Services."
Other Expenses. In addition to Investment Management fees, each
Fund and Portfolio pays other expenses, including costs incurred in connection
with the maintenance of its securities law registration, printing and mailing
prospectuses and SAIs to shareholders, certain financial accounting services,
taxes or governmental fees, brokerage commissions, custodial, transfer and
shareholder servicing agent costs, expenses of outside counsel and independent
accountants, preparation of shareholder reports and expenses of director and
shareholder meetings. Expenses not directly attributable to any specific Fund(s)
or Portfolio(s) are allocated on the basis of the relative net assets of the
Funds or Portfolios. For additional information regarding Fund and Portfolio
expenses, as well as voluntary agreements by the Investment Manager to limit
such expenses, see this Prospectus under "Expense Information" and the Company's
SAI under "Fund Expenses."
DIVIDENDS, CAPITAL GAINS AND TAXES
DIVIDENDS:
Each Fund intends to distribute substantially all of its net income
and capital gains to shareholders at least once a year. Normally, dividends from
net investment income of each Fund will be declared and paid on the following
basis:
<TABLE>
<CAPTION>
Fund Declared Paid
<S> <C> <C>
ASAF Founders International Small Capitalization annually annually
ASAF T. Rowe Price International Equity annually annually
ASAF AIM International Equity annually annually
ASAF Janus Overseas Growth annually annually
ASAF Janus Small-Cap Growth annually annually
ASAF T. Rowe Price Small Company Value annually annually
ASAF Neuberger Berman Mid-Cap Growth annually annually
ASAF Neuberger Berman Mid-Cap Value annually annually
ASAF Oppenheimer Large-Cap Growth annually annually
ASAF Marsico Capital Growth annually annually
ASAF Janus Capital Growth annually annually
ASAF Bankers Trust Managed Index 500 annually annually
ASAF Lord Abbett Growth and Income semi-annually semi-annually
ASAF MFS Growth with Income semi-annually semi-annually
ASAF INVESCO Equity Income semi-annually semi-annually
ASAF American Century Strategic Balanced semi-annually semi-annually
ASAF Federated High Yield Bond daily monthly
ASAF Total Return Bond daily quarterly
ASAF JPM Money Market daily monthly
</TABLE>
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, see
this Prospectus under "Special Investment Programs and Privileges."
TAXES:
Each of the Funds intends to make distributions that may be taxed
as ordinary income and capital gains. The tax consequences of distributions from
a Fund will vary depending upon the type of account that you maintain.
If you establish an IRA or other tax-deferred retirement account,
dividends and capital gains distributions from the Funds generally will not be
subject to current taxation. If you establish an account outside a tax-deferred
retirement account, the following tax consequences generally will apply. For
regular investment accounts established by individuals, dividends paid by a Fund
from net investment income and net short-term capital gains, whether you choose
to receive them in cash or reinvest them in additional shares, will be taxable
as ordinary income. If you receive your distributions in cash, the value of your
Fund account effectively will be reduced by the amount of the distribution.
Capital gains distributions are made by a Fund when it realizes net
gains on sales of portfolio securities. A Fund's capital gains may vary
substantially from year to year and, therefore, its capital gains distributions
also may vary substantially. A Fund will not make capital gains distributions in
years in which the Fund has a net capital loss. Distributions paid by a Fund
from net long term capital gains will be taxable as long-term capital gains,
regardless of how long you have owned the Fund's shares.
Because of their varying investment strategies, distributions from
some of the Funds are likely to consist primarily of capital gains
distributions, while distributions from others are likely to consist primarily
of ordinary income. Distributions from the ASAF Federated High Yield Bond Fund,
the ASAF Total Return Bond Fund, and the ASAF JPM Money Market Fund are likely
to consist primarily of ordinary income. Because the Funds are new, as of the
date of this Prospectus no Fund has yet distributed any long-term capital gains.
Over time, however, it is expected that distributions from a number of the
Funds, particularly those with capital growth as their investment objective,
will consist primarily of capital gains.
Certain distributions by a Fund may be classified under federal tax
laws as constituting returns of your capital. These are not taxable to you when
received. Federal income tax laws provide, however, that a distribution of this
type will reduce the acquisition price of your shares in the Fund used to
determine your tax liability when you redeem or exchange the shares. Therefore,
the return of capital may result in a larger gain or smaller loss upon
redemption or exchange.
If you purchase shares of a Fund shortly before the date used to
determine eligibility for a dividend or capital gains distribution, you will
receive a portion of your investment back as a taxable distribution. This is
sometimes referred to as "buying a dividend."
In order to satisfy distribution requirements of the Code, the
Funds may declare year-end dividend and capital gains distributions. If received
by shareholders by January 31, these special distributions are treated as having
been paid by the Funds and received by shareholders on December 31 of the prior
year.
The investment income of certain Funds may be subject to foreign
income taxes. The Company may elect to pass these taxes through to the
shareholders of the Funds. If you are a shareholder, you will be required to
report a share of these taxes as income in determining your federal income tax
liability. You will be able to deduct these taxes or, under certain
circumstances, you may be able to claim them as a credit against your federal
income tax.
The Company will provide you with an annual statement as to the
federal income tax status of all distributions for the preceding year, including
any amount of foreign taxes passed through to you.
Taxes on Redemptions and Exchanges. A redemption of shares in a
Fund or an exchange of a Fund's shares for shares in another Fund will be
treated as a sale under the Code, which may result in a capital gain or loss and
current tax liability. However, you will not have a federal tax gain or loss
when Class B or Class X shares of a Fund automatically convert to Class A
shares. The Class A shares you receive after conversion will be considered to
have the same acquisition price as the converted Class B or X shares for
purposes of determining your gain or loss upon subsequent redemptions or
exchanges.
Dividends, capital gains distributions and capital gains or losses
from redemptions and exchanges may be subject to state and local taxes in
addition to Federal income taxes.
The above tax discussion is for general information only. A more
detailed discussion of federal income tax considerations for the Funds is
included in the Company's SAI under "Additional Tax Considerations." You should
consult with your own tax adviser concerning possible tax consequences of
investing in a Fund. If you are considering an IRA or other tax deferred
account, you should consult with your tax adviser regarding the requirements
under Federal tax law governing your specific type of account.
Regulated Investment Company Status. As each Fund intends to
qualify as a "regulated investment company" under the Code, each Fund generally
is entitled to deduct all dividends paid to shareholders from its net income.
However, the deductibility of dividends paid by regulated investment companies
that issue more than one class of shares, such as the Company, is subject to
certain requirements under the Code. In this regard, the Company may deduct
dividends only when shares in each class receive proportionate distributions and
where no class is preferred over any other class in a manner not permitted by
the formal dividend rights of the preferred class.
The Company has received separate opinions of counsel from the law
firms of Caplin & Drysdale and Rogers & Wells which, when taken together,
conclude that the Funds' particular multiple class structure will not prevent
the deductibility of dividends paid by the Funds. However, the Company has not
obtained a ruling on the matter from the IRS. The Company does not believe that
the IRS has considered a multiple class structure with all of the features of
the Funds' structure, including the Bonus Share feature applicable to Class X
shares, and the IRS could disagree with the conclusions expressed in the
opinions. Changes in federal income tax law also could affect the continued
validity of the conclusions stated in the opinions.
If dividends on any class of a Fund's shares are treated as
preferential to another class, dividends in that year on all classes of that
Fund's shares would become non-deductible by the Fund. The effect of such a
development is that income and gains realized by a Fund could be subject to
double taxation -- that is, both the Fund and shareholders could be subject to
taxation. In addition to the tax liability, the Fund could be liable for
interest and penalties. All these liabilities could substantially reduce the
value of your investment in the Fund. There could also be personal income tax
consequences to shareholders of the Fund, such as reclassification of capital
gains distributions as ordinary income, which may be taxable at higher rates.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Funds' financial performance since their inception. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by PricewaterhouseCoopers LLP, the Company's
independent accountants. The report of the independent accountants, along with
the Funds' financial statements, are included in the Company's annual report,
which is available upon request. No financial information is included for the
ASAF AIM International Equity Fund, the ASAF Bankers Trust Managed Index 500
Fund, or the ASAF MFS Growth with Income Fund, which had not commenced
operations prior to the date of this Prospectus.
<PAGE>
To be filed by future amendment.
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. The primary
investment focus of each Fund and Portfolio is described above under "Investment
Programs of the Funds," and an investor should refer to that section to obtain
information about each Fund and Portfolio. In general, whether a particular Fund
or Portfolio may invest in a specific type of security or use an investment
method is described above or in the Company's SAI under "Investment Programs of
the Funds." As noted below, however, certain risk factors and investment methods
apply to all or most of the Funds or Portfolios. Any reference to the "Funds" in
the discussion below generally includes the Non-Feeder Funds and Portfolios.
DERIVATIVE INSTRUMENTS:
To the extent permitted by the investment objectives and policies
of a Fund, a Fund may invest in securities and other instruments that are
commonly referred to as "derivatives." For instance, a Fund may purchase and
write (sell) 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. In general, derivative instruments are securities
or other instruments whose value is derived from or related to the value of some
other instrument or asset.
There are many types of derivatives and many different ways to use
them. Some derivatives and derivative strategies involve very little risk, while
others can be extremely risky and can lead to losses in excess of the amount
invested in the derivative. A Fund may use derivatives to hedge against changes
in interest rates, foreign currency exchange rates or securities prices, to
generate income, as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities, or for other
reasons.
The use of these strategies involves certain special risks,
including the risk that the price movements of derivative instruments will not
correspond exactly with those of the investments from which they are derived.
Strategies involving derivative instruments that are intended to reduce the risk
of loss can also reduce the opportunity for gain. Furthermore, regulatory
requirements for a Fund to set aside assets to meet its obligations with respect
to derivatives may result in a Fund being unable to purchase or sell securities
when it would otherwise be favorable to do so, or in a Fund needing to sell
securities at a disadvantageous time. A Fund may also be unable to close out its
derivatives positions when desired. There is no assurance that a Fund will
engage in derivative transactions. Certain derivative instruments and some of
their risks are described in more detail below.
Options. Most of the Funds (except for the ASMT INVESCO Equity
Income Portfolio, the ASAF Federated High Yield Bond Fund, and the ASMT JPM
Money Market Portfolio) may engage in at least some types of options
transactions. The purchaser of an option on a security or currency obtains the
right to purchase (in the case of a call option) or sell (in the case of a put
option) the security or currency at a specified price within a limited period of
time. Upon exercise by the purchaser, the writer (seller) of the option has the
obligation to buy or sell the underlying security at the exercise price. An
option on a securities index is similar to an option on an individual security,
except that the value of the option depends on the value of the securities
comprising the index, and all settlements are made in cash.
A Fund will pay a premium to the party writing the option when it
purchases an option. In order for a call option purchased by a Fund to be
profitable, the market price of the underlying security must rise sufficiently
above the exercise price to cover the premium and other transaction costs.
Similarly, 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 other transaction costs.
Generally, the Funds will write call options only if they are
covered (i.e., the Fund owns the security subject to the option or has the right
to acquire it without additional cost). By writing a call option, a Fund assumes
the risk that it may be required to deliver a security for a price lower than
its market value at the time the option is exercised. Effectively, a Fund that
writes a covered call option gives up the opportunity for gain above the
exercise price should the market price of the underlying security increase, but
retains the risk of loss should the price of the underlying security decline. A
Fund will write call options in order to obtain a return from the premiums
received and will retain the premiums whether or not the options are exercised,
which will help offset a decline in the market value of the underlying
securities. A Fund that writes a put option likewise receives a premium, but
assumes the risk that it may be required to purchase the underlying security at
a price in excess of its current market value.
A Fund may sell an option that it has previously purchased prior to
the purchase or sale of the underlying security. Any such sale would result in a
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 option. A Fund may
terminate an option it has written by entering into a closing purchase
transaction in which it purchases an option of the same series as the option
written.
Futures Contracts and Related Options. Each Fund (except the ASAF
Neuberger Berman Mid-Cap Growth Fund, the ASAF Neuberger Berman Mid-Cap Value
Fund, the ASAF Lord Abbett Growth and Income Fund, the ASMT INVESCO Equity
Income Portfolio, the ASAF Federated High Yield Bond Fund, and the ASMT JPM
Money Market Portfolio) may enter into financial futures contracts and related
options. The seller of a futures contract agrees to sell the securities or
currency called for in the contract and the buyer agrees to buy the securities
or currency at a specified price at a specified future time. Financial futures
contracts may relate to securities indices, interest rates or foreign
currencies. Futures contracts are usually settled through net cash payments
rather than through actual delivery of the securities underlying the contract.
For instance, in a stock index futures contract, the 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 when the contract expires and the
price specified in the contract. A Fund may use futures contracts to hedge
against movements in securities prices, interest rates or currency exchange
rates, or as an efficient way to gain exposure to these markets.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in the contract at the
exercise price at any time during the life of the option. The writer of the
option is required upon exercise to assume the opposite position.
Pursuant to regulations of the Commodity Futures Trading Commission
("CFTC"), no Fund will:
(i) 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) 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.
Risks of Options and Futures Contracts. Options and futures
contracts can be highly volatile and their use can reduce a Fund's performance.
Successful use of these strategies requires the ability to predict future
movements in securities prices, interest rates, currency exchange rates, and
other economic factors. If a Sub-advisor seeks to protect a Fund against
potential adverse movements in the relevant financial markets using these
instruments, and such markets do not move in the predicted direction, the Fund
could be left in a less favorable position than if such strategies had not been
used. A Fund's potential losses from the use of futures extends beyond its
initial investment in such contracts.
Among the other risks inherent in the use of options and futures
are (a) the risk of imperfect correlation between the price of options and
futures and the prices of the securities or currencies to which they relate, (b)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities and (c) the possible need to defer closing
out certain positions to avoid adverse tax consequences. With respect to options
on stock indices and stock index futures, the risk of imperfect correlation
increases the more the holdings of the Fund differ from the composition of the
relevant index. These instruments may not have a liquid secondary market. Option
positions established in the over-the-counter market may be particularly
illiquid and may also involve the risk that the other party to the transaction
fails to meet its obligations.
FOREIGN SECURITIES:
Investments in securities of foreign issuers may involve risks that
are not present with domestic investments. While investments in foreign
securities can reduce risk by providing further diversification, such
investments involve "sovereign risks" in addition to the credit and market risks
to which securities generally are subject. Sovereign risks 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. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to domestic issuers.
In some countries, there may also be the possibility of expropriation or
confiscatory taxation, difficulty in enforcing contractual and other
obligations, political or social instability or revolution, or diplomatic
developments that could affect investments in those countries.
Securities of some foreign issuers are less liquid and their prices
are more volatile than securities of comparable domestic issuers. Further, it
may be more difficult for the Company's agents to keep currently informed about
corporate actions and decisions that may affect the price of portfolio
securities. Brokerage commissions on foreign securities exchanges, which may be
fixed, may be higher than in the United States. Settlement of transactions in
some foreign markets may be less frequent or less reliable than in the United
States, which could affect the liquidity of investments.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), and International Depositary
Receipts ("IDRs"). ADRs are U.S. dollar-denominated receipts generally issued by
a domestic bank evidencing its ownership of a security of a foreign issuer. ADRs
generally are publicly traded in the United States. ADRs are subject to many of
the same risks as direct investments in foreign securities, although ownership
of ADRs may reduce or eliminate certain risks associated with holding assets in
foreign countries, such as the risk of expropriation. EDRs, GDRs and IDRs are
receipts similar to ADRs that typically trade in countries other than the United
States.
Depositary receipts may be issued as sponsored or unsponsored
programs. In sponsored programs, the issuer makes arrangements to have its
securities traded as depositary receipts. In unsponsored programs, the issuer
may not be directly involved in 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.
Developing Countries. Although none of the Funds invest primarily
in securities of issuers in developing countries, many of the Funds may invest
in these securities to some degree. Many of the risks described above with
respect to investing in foreign issuers are accentuated when the issuers are
located in developing countries. Developing countries may be politically and/or
economically unstable, and the securities markets in those countries may be less
liquid or subject to inadequate government regulation and supervision.
Securities of issuers in developing countries may be more volatile and, in the
case of debt securities, more uncertain as to payment of interest and principal.
Investments in developing countries may include securities created through the
Brady Plan, under which certain heavily-indebted countries have restructured
their bank debt into bonds.
Currency Fluctuations. Investments in foreign securities may be
denominated in foreign currencies. The value of a Fund's investments denominated
in foreign currencies may be affected, favorably or unfavorably, by exchange
rates and exchange control regulations. A Fund's share price and the amounts it
distributes to shareholders in dividends may, therefore, also be affected by
changes in currency exchange rates. Foreign currency exchange rates generally
are determined by the forces of supply and demand in foreign exchange markets,
including perceptions of the relative merits of investment in different
countries, actual or perceived changes in interest rates or other complex
factors. Currency exchange rates also can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, 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.
While the introduction of a single currency, the euro, on January
1, 1999 for participating nations in the European Economic and Monetary Union
generally occurred without significant market or operational disruption, the
euro still presents certain political and economic uncertainties. These
uncertainties may include political reaction against the euro in participating
nations and operational difficulties as the result of the fact that some
securities still pay dividends and interest in the old currencies. These
uncertainties could cause market disruptions, and could adversely affect the
value of securities held by the Funds.
Foreign Currency Transactions. A Fund that invests in securities
denominated in foreign currencies will need to engage in foreign currency
exchange transactions. Such transactions may occur on a "spot" basis at the
exchange rate prevailing at the time of the transaction. Alternatively, a fund
may enter into forward foreign currency exchange contracts. A forward contract
involves an obligation to purchase or sell a specified currency at a specified
future date at a price set at the time of the contract. A Fund may enter into a
forward contract when it wishes to "lock in" the U.S. dollar price of a security
it expects to or is obligated to purchase or sell in the future. This practice
may be referred to as "transaction hedging." In addition, when a Fund's
Sub-advisor believes that the currency of a particular country may suffer or
enjoy a significant movement compared to another currency, the Fund may enter
into a forward contract to sell or buy the first foreign currency (or a currency
that acts as a proxy for such currency). This practice may be referred to as
"portfolio hedging." In any event, the precise matching of the forward contract
amounts and the value of the securities involved generally will not be possible.
No Fund will enter into a forward contract if it would be obligated to sell an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency, or will sell an amount of proxy
currency in excess of the value of securities denominated in the related
currency. The effect of entering into a forward contract on a Fund share price
will be similar to selling securities denominated in one currency and purchasing
securities denominated in another. Although a forward contract may reduce a
Fund's losses on securities denominated in foreign currency, it may also reduce
the potential for gain on the securities if the currency's value moves in a
direction not anticipated by the Sub-advisor.
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 the company's income for purposes of receiving dividend
payments and on the company's assets in the event of liquidation. (Some of the
Sub-advisors consider preferred stocks to be equity securities for purposes of
the various Funds' investment policies and restrictions, while others consider
them fixed income securities.) 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.
FIXED INCOME SECURITIES:
Most of the Funds, including the Funds that invest primarily in equity
securities, may invest to some degree in bonds, notes, debentures and other
obligations of corporations and governments. Fixed-income securities are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest and principal payments as
they come due. The ratings given a security by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P"), which are described in
detail in the Appendix to the Company's SAI, provide a generally useful guide as
to such credit risk. The lower the rating, the greater the credit risk the
rating service perceives to exist with respect to the security. Increasing the
amount of Fund assets invested in lower-rated securities generally will increase
the Fund's income, but also will increase the credit risk to which the Fund is
subject. Market risk relates to the fact that the prices of fixed income
securities generally will be affected by changes in the level of interest rates
in the markets generally. An increase in interest rates will tend to reduce the
prices of such securities, while a decline in interest rates will tend to
increase their prices. In general, the longer the maturity or duration of a
fixed income security, the more its value will fluctuate with changes in
interest rates.
Lower-Rated Fixed Income Securities. Lower-rated high-yield bonds
(commonly known as "junk bonds") are those that are rated lower than the four
highest categories by a nationally recognized statistical rating organization
(for example, lower than Baa by Moody's or BBB by S&P), or, if not rated, are of
equivalent investment quality as determined by the Sub-advisor. Lower-rated
bonds are generally considered to be high risk investments as they are subject
to greater credit risk than higher-rated bonds. In addition, the market for
lower-rated bonds may be thinner and less active than the market for
higher-rated bonds, and the prices of lower-rated high-yield bonds may fluctuate
more than the prices of higher-rated bonds, particularly in times of market
stress. Because the risk of default is higher in lower-rated bonds, a
Sub-advisor's research and analysis tend to be very important ingredients in the
selection of these bonds. In addition, the exercise by an issuer of redemption
or call provisions that are common in lower-rated bonds may result in their
replacement by lower yielding bonds.
Bonds rated in the four highest ratings categories are frequently
referred to as "investment grade." However, bonds rated in the fourth category
(Baa or BBB) are considered medium grade and may have speculative
characteristics.
MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are securities representing interests in
"pools" of mortgage loans on residential or commercial real property and that
generally provide for monthly payments of both interest and principal, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans (net of fees paid to the issuer or guarantor of the securities).
Mortgage-backed securities are frequently issued by U.S. Government agencies or
Government-sponsored enterprises, and payments of interest and principal on
these securities (but not their market prices) may be guaranteed by the full
faith and credit of the U.S. Government or by the agency only, or may be
supported by the issuer's ability to borrow from the U.S. Treasury.
Mortgage-backed securities created by non-governmental issuers may be supported
by various forms of insurance or guarantees.
Like other fixed-income securities, the value of a mortgage-backed
security will generally decline when interest rates rise. However, when interest
rates are declining, their value may not increase as much as other fixed-income
securities, because early repayments of principal on the underlying mortgages
(arising, for example, from sale of the underlying property, refinancing, or
foreclosure) may serve to reduce the remaining life of the security. If a
security has been purchased at a premium, the value of the premium would be lost
in the event of prepayment. Prepayments on some mortgage-backed securities may
necessitate that a Fund find other investments, which, because of intervening
market changes, will often offer a lower rate of return. In addition, the
mortgage securities market may be particularly affected by changes in
governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs). CMOs are a type of
mortgage-backed security that are typically issued in multiple series with each
series having a different maturity. Principal and interest payments from the
underlying collateral are first used to pay the principal on the series with the
shortest maturity; in turn, the remaining series are paid in order of their
maturities. Therefore, depending on the type of CMOs in which a Fund invests,
the investment may be subject to greater or lesser risk than other types of
mortgage-backed securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are mortgage-backed securities that have been divided into interest
and principal components. "IOs" (interest only securities) receive the interest
payments on the underlying mortgages while "POs" (principal only securities)
receive the principal payments. The cash flows and yields on IO and PO classes
are extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage loans. If the underlying mortgages
experience higher than anticipated prepayments, an investor in an IO class of a
stripped mortgage-backed security may fail to recoup fully its initial
investment, even if the IO class is highly rated or is derived from a security
guaranteed by the U.S. Government. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments, the price on a PO class will be
affected more severely than would be the case with a traditional mortgage-backed
security. Unlike other fixed-income and other mortgage-backed securities, the
value of IOs tends to move in the same direction as interest rates.
ASSET-BACKED SECURITIES:
Asset-backed securities conceptually are similar to mortgage-backed
securities, but they are secured by and payable from payments on assets such as
credit card, automobile or trade loans, rather than mortgages. The credit
quality of these securities depends primarily upon the quality of the underlying
assets and the level of credit support or enhancement provided. In addition,
asset-backed securities involve prepayment risks that are similar in nature to
those of mortgage-backed securities.
CONVERTIBLE SECURITIES AND WARRANTS:
Certain of the Funds may invest in convertible securities.
Convertible securities are bonds, notes, debentures and preferred stocks that
may be converted into or exchanged for shares of common stock. Many convertible
securities are rated below investment grade because they fall below ordinary
debt securities in order of preference or priority on the issuer's balance
sheet. Convertible securities generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. Frequently, convertible securities are callable by the issuer,
meaning that the issuer may force conversion before the holder would otherwise
choose.
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 the
warrants. A warrant will expire without value if the rights under such warrant
are not exercised prior to its expiration date.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD COMMITMENT TRANSACTIONS:
The Funds (other than the ASAF Founders International Small
Capitalization Fund, ASAF T. Rowe Price Small Company Value Fund, ASAF Neuberger
Berman Mid-Cap Growth Fund, Neuberger Berman Mid-Cap Value Fund, ASAF
Oppenheimer Large-Cap Growth Fund, ASAF Lord Abbett Growth and Income Fund, and
ASAF INVESCO Equity Income Fund) may purchase securities on a when-issued,
delayed-delivery or forward commitment basis. These transactions generally
involve the purchase of a security with payment and delivery due at some time in
the future. A 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. If the seller fails to complete the sale, the Fund may lose
the opportunity to obtain a favorable price and yield. While the Funds will
generally engage in such when-issued, delayed-delivery or forward commitment
transactions with the intent of actually acquiring the securities, a Fund may
sometimes sell such a security prior to the settlement date. The ASMT JPM Money
Market Portfolio will not enter into these commitments if they would exceed 15%
of the value of the Fund's total assets less its liabilities other than
liabilities created by these commitments.
Certain Funds may also sell securities on a delayed-delivery or
forward commitment basis. If the Fund does so, it will not participate in future
gains or losses on the security. If the other party to such a transaction fails
to pay for the securities, the Fund could suffer a loss.
ILLIQUID AND RESTRICTED SECURITIES:
Subject to guidelines adopted by the Directors of the Company or
Trustees of the Trust, each Fund may invest up to 15% of its net assets in
illiquid securities (except for the ASMT JPM Money Market Portfolio, which is
limited to 10% of its net assets, and the ASAF Oppenheimer Large-Cap Growth
Fund, which is limited to 5% of its net assets). Illiquid securities are those
that, because of the absence of a readily available market or due to legal or
contractual restrictions on resale, cannot be sold within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the investment. Therefore, a Fund may find it difficult to sell illiquid
securities at the time considered most advantageous by its Sub-advisor and may
incur expenses that would not be incurred in the sale of securities that were
freely marketable.
Certain securities that would otherwise be considered illiquid
because of legal restrictions on resale to the general public may be traded
among qualified institutional buyers under Rule 144A of the Securities Act of
1933. These Rule 144A securities, and well as commercial paper that is sold in
private placements under Section 4(2) of the Securities Act, may be deemed
liquid by the Fund's Sub-advisor under the guidelines adopted by the Directors
of the Company. However, the liquidity of a Fund's investments in Rule 144A
securities could be impaired if trading does not develop or declines.
REPURCHASE AGREEMENTS:
Each Fund (other than the ASAF Lord Abbett Growth and Income Fund)
may enter into 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. Repurchase agreements
must be fully collateralized and can be entered into only with well-established
banks and broker-dealers that have been deemed creditworthy by the Sub-advisor.
Repurchase transactions are intended to be short-term transactions, usually with
the seller repurchasing the securities within seven days. Repurchase agreements
that mature in more than seven days are subject to a Fund's limit on illiquid
securities.
A Fund that enters into a repurchase agreement may lose money in
the event that the other party defaults on its obligation and the Fund is
delayed or prevented from disposing of the collateral. A Fund also might incur a
loss if the value of the collateral declines, and it might incur costs in
selling the collateral or asserting its legal rights under the agreement. If a
defaulting seller filed for bankruptcy or became insolvent, disposition of
collateral might be delayed pending court action.
The ASAF Neuberger Berman Mid-Cap Growth Fund will not invest more
than 25% of its net assets in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS:
Certain Funds (specifically, the ASAF AIM International Equity
Fund, ASAF Janus Overseas Growth Fund, the ASAF Neuberger Berman Mid-Cap Growth
Fund, the ASAF Neuberger Berman Mid-Cap Value Fund, the ASAF Marsico Capital
Growth Fund, the ASMT Janus Capital Growth Portfolio, the ASMT PIMCO Total
Return Bond Portfolio, and the ASMT JPM Money Market Portfolio) may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument and agrees to repurchase it at an agreed upon date and
price, which reflects an effective interest rate. It may also be viewed as a
borrowing of money by the Fund and, like borrowing money, may increase
fluctuations in a Fund's share price. When entering into a reverse repurchase
agreement, a Fund must set aside on its books cash or other liquid assets in an
amount sufficient to meet its repurchase obligation.
BORROWING:
Each Fund may borrow money from banks. 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, such Fund must reduce such
borrowings so as to meet the necessary test within three business days. Certain
Funds (the ASAF Founders International Small Capitalization Fund, the ASAF AIM
International Equity Fund, the ASAF Neuberger Berman Mid-Cap Growth Fund, the
ASAF Neuberger Berman Mid-Cap Value Fund and the ASMT JPM Money Market
Portfolio) will not purchase securities when outstanding borrowings are greater
than 5% of the Fund's total assets. If a Fund borrows money, its share price may
fluctuate more widely until the borrowing is repaid.
LENDING PORTFOLIO SECURITIES:
Each Fund may lend securities with a value of up to 33 1/3% of its
total assets to broker-dealers, institutional investors, or others for the
purpose of realizing additional income. Voting rights on loaned securities
typically pass to the borrower, although a Fund has the right to terminate a
securities loan, usually within three business days, in order to vote on
significant matters or for other reasons. All securities loans will be
collateralized by cash or securities issued or guaranteed by the U.S. Government
or its agencies at least equal in value to the market value of the loaned
securities. Nonetheless, lending securities involves certain risks, including
the risk that the Fund will be delayed or prevented from recovering the
collateral if the borrower fails to return a loaned security.
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. In
addition, certain Sub-advisors may invest Fund assets in money market funds that
they advise or in other investment companies. Mutual funds pay their own
operating expenses, and the Funds, as shareholders in the funds, will indirectly
pay their proportionate share of such funds' expenses.
SHORT SALES "AGAINST THE BOX":
While none of the Funds will make short sales generally, the ASAF
AIM International Equity Fund, the ASAF Janus Small-Cap Growth Fund, the ASAF
MFS Growth with Income Fund and the ASAF American Century Strategic Balanced
Fund may make short sales "against the box." A short sale against the box
involves selling a security that the Fund owns, or has the right to obtain
without additional cost, for delivery at a specified date in the future. A Fund
may make a short sale against the box to hedge against anticipated declines in
the market price of a portfolio security. If the value of the security sold
short increases instead, the Fund loses the opportunity to participate in the
gain.
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 in
preparation for the year 2000. At this time, there can be no assurance that the
actions taken by the Service Providers, who are generally not affiliated with
the Investment Manager, 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 are seeking further
assurances from the Service Providers that all of the systems they use in
connection with the Funds 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, and is attempting to
develop contingency plans in the event that the Service Providers' systems are
not adapted in time.
<PAGE>
Mailing Address
P.O. Box 8012
Boston, MA 02266-8012
Investment Manager
American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, CT 06484
Sub-Advisors
A I M Capital Management, Inc.
American Century Investment Management, Inc.
Bankers Trust Company
Federated Investment Counseling
Founders Asset Management LLC
INVESCO Funds Group, Inc.
Janus Capital Corporation
J.P. Morgan Investment Management Inc.
Lord, Abbett & Co.
Massachusetts Financial Services Company
Marsico Capital Management, LLC
Neuberger Berman Management Inc.
OppenheimerFunds, Inc.
Pacific Investment Management Company
Rowe Price-Fleming International, Inc.
T. Rowe Price Associates, Inc.
Distributor
American Skandia Marketing, Incorporated
One Corporate Drive
Shelton, CT 06484
Transfer and Dividend Paying Agent
Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Custodians
PFPC Trust Company The Chase Manhattan Bank
Airport Business Center, International Court 2 One Pierrepont Plaza
200 Stevens Drive Brooklyn, NY 11201
Philadelphia, PA 19113
Administrator
PFPC Inc.
103 Bellevue Parkway
Wilmington, DE 19809
Independent Accountants
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA 19103
Legal Counsel
Stradley Ronon Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
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 by
writing to "American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston,
Massachusetts 02266-8012. There may be a small charge for historical account
information for prior years.
Additional information about the Funds is included in a Statement
of Additional Information, which is incorporated by reference into this
Prospectus. Additional information about the Funds' investments is available in
the Funds' annual and semi-annual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected each Fund's performance during its last
fiscal year. The Statement of Additional Information and additional copies of
annual and semi-annual reports are available without charge by calling the above
number.
The information in Company filings with the Securities and Exchange
Commission (including the Statement of Additional Information) is available from
the Commission. Copies of this information may be obtained, upon payment of
duplicating fees, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. The information can also be reviewed and copied at
the Commission's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. Finally, information about the Company is available on the
Commission's Internet site at http://www.sec.gov.
Investment Company Act File No. 811-08085
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STATEMENT OF ADDITIONAL INFORMATION
October 18, 1999
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AMERICAN SKANDIA ADVISOR FUNDS, INC.
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Table of Contents Page
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General Information........................................................................................................
Investment Programs of the Funds...........................................................................................
ASAF Founders International Small Capitalization Fund.............................................................
ASAF T. Rowe Price International Equity Fund......................................................................
ASAF AIM International Equity Fund................................................................................
ASAF Janus Overseas Growth Fund...................................................................................
ASAF Janus Small-Cap Growth Fund..................................................................................
ASAF T. Rowe Price Small Company Value Fund.......................................................................
ASAF Neuberger Berman Mid-Cap Growth Fund.........................................................................
ASAF Neuberger Berman Mid-Cap Value Fund..........................................................................
ASAF Oppenheimer Large-Cap Growth Fund............................................................................
ASAF Marsico Capital Growth Fund..................................................................................
ASAF Janus Capital Growth Fund....................................................................................
ASAF Bankers Trust Managed Index 500 Fund.........................................................................
ASAF Lord Abbett Growth and Income Fund...........................................................................
ASAF MFS Growth with 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..................................................................................................
Additional Information on the "Master Feeder" Fund Structure...............................................................
Investment Advisory & Administration Services..............................................................................
Fund Expenses..............................................................................................................
Distribution Arrangements..................................................................................................
Determination of Net Asset Value...........................................................................................
Additional Information on the Purchase and Redemption of Shares............................................................
Portfolio Transactions.....................................................................................................
Additional Tax Considerations..............................................................................................
Capital Stock of the Company & Principal Holders of Securities.............................................................
Other Information..........................................................................................................
Financial Statements.......................................................................................................
Appendix...................................................................................................................
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This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Company's current Prospectus, dated March 1,
1999. 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 nineteen 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" and this SAI under
"Additional 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 AIM International Equity Fund:
A I M Capital Management, Inc.; (d) ASAF Janus Overseas Growth Fund: Janus
Capital Corporation; (e) ASAF Janus Small-Cap Growth Fund: Janus Capital
Corporation; (f) ASAF T. Rowe Price Small Company Value Fund: T. Rowe Price
Associates, Inc.; (g) ASAF Neuberger Berman Mid-Cap Growth Fund: Neuberger
Berman Management Inc.; (h) ASAF Neuberger Berman Mid-Cap Value Fund: Neuberger
Berman Management Inc.; (i) ASAF Oppenheimer Large-Cap Growth Fund:
OppenheimerFunds, Inc.; (j) ASAF Marsico Capital Growth Fund: Marsico Capital
Management, LLC.; (k) ASMT Janus Capital Growth Portfolio: Janus Capital
Corporation; (l) ASAF Bankers Trust Managed Index 500 Fund: Bankers Trust
Company; (m) ASAF Lord Abbett Growth & Income Fund: Lord, Abbett & Co.; (n) ASAF
MFS Growth with Income Fund: Massachusetts Financial Services Company; (o) ASMT
INVESCO Equity Income Portfolio: INVESCO Funds Group, Inc.; (p) ASAF American
Century Strategic Balanced Fund: American Century Investment Management, Inc.;
(q) ASAF Federated High Yield Bond Fund: Federated Investment Counseling; (r)
ASMT PIMCO Total Return Bond Portfolio: Pacific Investment Management Company;
and (s) 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. The Fund generally
will not enter into forward contracts with a term greater than one year. 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.
Temporary Defensive 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. 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"). For more information on mortgage-related securities, 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" 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.
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."
The Fund may also 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. The Fund will not commit more than 5% of its total assets to
premiums when purchasing 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. The Fund will not commit more than 5% of its total assets to
premiums when purchasing 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. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). 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.
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 by the
Fund to cover the position, or alternative cover (such as owning an offsetting
position) will be employed.
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 financial 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 futures or options 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.
The Fund will generally not enter into a forward contract with a term of greater
than one year.
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 (taxable at a maximum rate of 20%) or loss and 40%
short-term capital gain or loss regardless of the holding period of the
instrument (or, in the case of foreign exchange contracts, entirely as ordinary
income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Fund would be required to distribute
any such gain even though it would not receive proceeds from the sale at the
time the option, futures or forward position is entered into.
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 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, (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 net 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."
Cash Reserves. The Fund's cash 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.
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 AIM INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek long-term
capital growth by investing in a diversified portfolio of international equity
securities the issuers of which are considered by the Sub-advisor to have strong
earnings momentum.
Investment Policies:
In managing the Fund, the Sub-advisor seeks to apply to the Fund the
same investment strategy that it applies to several of its other managed
portfolios that have similar investment objectives but that invest primarily in
United States equities markets. The Fund will utilize to the extent practicable
a fully managed investment policy providing for the selection of securities
which meet certain quantitative standards determined by the Sub-advisor. The
Sub-advisor reviews carefully the earnings history and prospects for growth of
each company considered for investment by the Fund. It is anticipated that
common stocks will be the principal form of investment of the Fund. The Fund is
primarily comprised of securities of two basic categories of companies: (a)
"core" companies, which the Sub-advisor considers to have experienced
above-average and consistent long-term growth in earnings and to have excellent
prospects for outstanding future growth, and (b) "earnings acceleration"
companies, which the Sub-advisor believes are currently enjoying a dramatic
increase in earnings.
If a particular foreign company meets the quantitative standards
determined by the Sub-advisor, its securities may be acquired by the Fund
regardless of the location of the company or the percentage of the Fund's
investments in the company's country or region. However, the Sub-advisor will
also consider other factors in making investment decisions for the Fund,
including such factors as the prospects for relative economic growth among
countries or regions, economic and political conditions, currency exchange
fluctuations, tax considerations and the liquidity of a particular security.
The Sub-advisor recognizes that often there is less public information
about foreign companies than is available in reports supplied by domestic
companies, that foreign companies are not subject to uniform accounting and
financial reporting standards, and that there may be greater delays experienced
by the Fund in receiving financial information supplied by foreign companies
than comparable information supplied by domestic companies. In addition, the
value of the Fund's investments that are denominated in a foreign currency may
be affected by changes in currency exchange rates. For these and other reasons,
the Sub-advisor from time to time may encounter greater difficulty applying its
disciplined stock selection strategy to an international equity investment
portfolio than to a portfolio of domestic equity securities.
Any income realized by the Fund will be incidental and will not be an
important criterion in the selection of portfolio securities.
Under normal market conditions the Fund will invest at least 70% of its
total assets in marketable equity securities, including common stock, preferred
stock, and other securities having the characteristics of stock (such as an
equity or ownership interest in a company) of foreign companies that are listed
on a recognized foreign securities exchange or traded on a foreign
over-the-counter market. The Fund may also satisfy the foregoing requirement in
part by investing in the securities of foreign issuers in the form of ADRs,
EDRs, or other securities representing underlying securities of foreign issuers.
The Fund may also invest up to 20% of its total assets in securities
exchangeable for or convertible into equity securities of foreign companies that
are listed on a recognized foreign securities exchange or traded in a foreign
over-the-counter market.
Under normal market conditions, the Fund intends to invest in a
diversified portfolio that includes companies located in at least four countries
outside of the United States. The Fund will emphasize investment in foreign
companies in the developed countries of Western Europe (such as Germany, France,
Switzerland, the Netherlands and the United Kingdom) and the Pacific Basin (such
as Japan, Hong Kong and Australia), but the Portfolio may also invest in the
securities of companies located in developing countries (such as Turkey,
Malaysia and Mexico) in various regions of the world. The risks of investment in
the equity markets of developing countries are described in more detail
immediately below and in this Statement under "Certain Risk Factors and
Investment Methods."
Real Estate Investment Trusts ("REITs"). The Fund may invest in equity
and/or debt securities issued by REITs. Such investments will not exceed 5% of
the total assets of the Fund.
REITs are trusts that sell equity or debt securities to investors and
use the proceeds to invest in real estate or interests therein. A REIT may focus
on particular types of projects, such as apartment complexes, or geographic
regions, such as the Southeastern United States, or both.
To the extent that the Fund invests in REITs, it could conceivably own
real estate directly as a result of a default on the securities it owns. The
Fund, therefore, may be subject to certain risks associated with the direct
ownership of real estate, including difficulties in valuing and trading real
estate, declines in the value of real estate, environmental liability risks,
risks related to general and local economic conditions, adverse change in the
climate for real estate, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates.
In addition to the risks described above, equity REITs may be affected
by any changes in the value of the underlying property owned by the trusts,
while mortgage REITs may be affected by the quality of any credit extended.
Equity and mortgage REITs are dependent upon management skill, and are generally
not diversified and therefore are subject to the risk of financing single or a
limited number of projects. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation, and the possibility that
the REIT will fail to maintain its exemption from the 1940 Act. Changes in
interest rates may also affect the value of debt securities of REITs held by the
Fund. By investing in REITs indirectly through the Fund, a shareholder will bear
not only his/her proportionate share of the expenses of the Fund, but also,
indirectly, similar expenses of the REITs.
Repurchase Agreements and Reverse Repurchase Agreements. The Fund may
enter into repurchase agreements and reverse repurchase agreements. A repurchase
agreement is collateralized by the security acquired by the Fund and the value
of the acquired security is marked to market daily in order to minimize the
Fund's risk. Repurchase agreements usually are for short periods, such as one or
two days, but may be entered into for longer periods of time. Repurchase
agreements will be secured by U.S. Treasury securities, U.S. Government agency
securities (including, but not limited to those which have been stripped of
their interest payments and mortgage-backed securities) and commercial paper. In
the event of bankruptcy or other default of a seller of a repurchase agreement,
the Fund may experience losses, including possible reduced levels of income and
lack of access to income during this period.
The Fund may employ reverse repurchase agreements (i) for temporary
emergency purposes, such as to meet unanticipated net redemptions so as to avoid
liquidating other portfolio securities during unfavorable market conditions;
(ii) to cover short-term cash requirements resulting from the timing of trade
settlements; or (iii) to take advantage of market situations where the interest
income to be earned from the from the investment of the proceeds of the
transaction is greater than the interest expense of the transaction. The Fund
may enter into reverse repurchase agreements in amounts not exceeding 10% of the
value of its total assets. Reverse repurchase agreements involve the risk that
the market value of securities retained by the Fund in lieu of liquidation may
decline below the repurchase price of the securities sold by the Fund that it is
obligated to repurchase. This risk could cause a reduction in the net asset
value of the Fund's shares.
Additional information about repurchase and reverse repurchase
agreements and their risks are included in the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Lending of Portfolio Securities. While 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 the right to call its loans
and obtain the securities on three business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time that
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. 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.
Additional information about the lending of portfolio securities is included in
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowings. The Fund may borrow money to a limited extent from banks
for temporary or emergency purposes subject to the limitations under the 1940
Act. In addition, the Fund does not intend to engage in leverage; therefore,
consistent with current interpretations of the SEC, the Fund will not purchase
additional securities while borrowings from banks exceed 5% of the Fund's total
assets. Additional information about borrowing is included in the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Securities Issued on a When-Issued or Delayed-Delivery Basis. The Fund
may purchase securities on a "when-issued" basis, that is, delivery of and
payment for the securities is not fixed at the date of purchase, but is set
after the securities are issued (normally within forty-five days after the date
of the transaction). The Fund also may purchase or sell securities on a
delayed-delivery basis. The payment obligation and the interest rate that will
be received on the delayed delivery-securities are fixed at the time the buyer
enters into the commitment. If the Fund purchases a when-issued security or
enters into a delayed-delivery agreement, the Fund's custodian bank will
segregate cash or other liquid assets in an amount at least equal to the
when-issued commitment or delayed-delivery agreement commitment. Additional
information about when-issued and delayed-delivery transactions and their risks
is included in this Statement and in the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Short Sales "Against the Box." As described in the Trust's Prospectus,
the Fund may from time to time make short sales against the box. To secure its
obligation to deliver the securities sold short, the Fund will deposit in escrow
in a separate account with its custodian an equal amount of the securities sold
short or securities convertible into or exchangeable for such securities.
Because the Fund ordinarily will want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the
securities sold short, the Fund will normally close out a short position covered
by convertible securities by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering the convertible securities that
it already holds.
The Fund will make a short sale, as a hedge, when it believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund or a security convertible into or exchangeable for such
security. In such case, any future losses in the Fund's long position should be
reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount the Fund owns, either directly or indirectly,
and, in the case where the Fund owns convertible securities, changes in the
conversion premium. In determining the number of shares to be sold short against
the Fund's position in a convertible security, the anticipated fluctuation in
the conversion premium is considered. The Fund may also make short sales to
generate additional income from the investment of the cash proceeds of short
sales. In no event may more than 10% of the value of the Fund's total assets be
deposited or pledged as collateral for short sales at any time.
Rule 144A Securities. The Fund may purchase privately placed securities
that are eligible for resale pursuant to 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 securities that have not been registered under the
1933 Act. The Sub-advisor, under guidelines adopted by the Trust's Board of
Trustees, 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. The determination of whether a
Rule 144A security is liquid 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 will consider, as it deems appropriate
under the circumstances, the (i) frequency of trades and quotes, (ii) number of
dealers and potential purchasers, (iii) dealer undertakings to make a market,
and (iv) nature of the security and of marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). The liquidity of Rule 144A securities will also be
monitored by the Sub-advisor 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 will be reviewed to determine what, if any, action is
required to assure that the Fund does not invest more than 15% of its net assets
in illiquid securities. Additional information about illiquid and Rule 144A
securities is included in the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Securities. The Fund normally invests primarily in foreign
securities, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). Generally, ADRs, in registered form, are designed
for use in the United States securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. ADRs and EDRs may be listed on
stock exchanges, or traded in OTC markets in the United States or Europe, as the
case may be. ADRs, like other securities traded in the United States, will be
subject to negotiated commission rates.
To the extent the Fund invests in securities denominated in foreign
currencies, the Fund bears the risk of changes in the exchange rates between
U.S. currency and the foreign currency, as well as the availability and status
of foreign securities markets. The Fund's investments in securities denominated
in foreign currencies generally will be marketable equity securities (including
common and preferred stock, depositary receipts for stock and fixed income or
equity securities exchangeable for or convertible into stock) of foreign
companies that generally are listed on a recognized foreign securities exchange
or traded in a foreign over-the-counter market. The Fund may also invest in
foreign securities listed on recognized U.S. securities exchanges or traded in
the U.S. over-the-counter market.
Investments by the Fund in foreign securities, whether denominated in
U.S. currencies or foreign currencies, may entail risks that are greater than
those associated with domestic investments. The risks of investing in foreign
securities are discussed in detail in this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods." Investment by the Fund in
ADRs, EDRs and similar securities also may entail some or all or these risks.
The Sub-advisor seeks to mitigate the risks associated with foreign investment
through diversification and active professional management.
Developing Countries. A developing country or emerging market country can
be considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the developed European countries (primarily in
Western Europe), the United States, Canada, Japan, Australia, New Zealand, Hong
Kong and Singapore. The characteristics of markets can change over time.
Currently, the Sub-advisor believes that investing in many emerging markets is
not desirable or feasible because of the lack of adequate custody arrangements
for the Fund's assets, overly burdensome repatriation and similar restrictions,
the lack of organized and liquid securities markets, unacceptable political
risks or other reasons. As desirable opportunities to invest in securities in
emerging markets develop, the Fund may expand and further broaden the group of
emerging markets in which it invests.
Many of the risks relating to foreign securities generally will be
greater for emerging markets than for developed countries. Many emerging markets
have experienced substantial rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets for certain developing
markets. Economies in emerging markets generally are heavily dependent upon
international trade and accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries with which they
trade. There also may be a lower level of securities market monitoring and
regulation of developing markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely limited. The
possibility of revolution and the dependence on foreign economic assistance may
be greater in these countries than in developed countries.
In addition, brokerage commissions, custodial services and other costs
relating to investment in foreign markets are often higher than the costs of
investing in the United States; this is particularly true with respect to
emerging markets. Such markets have different settlement and clearance
procedures. 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 settlement problems may cause
emerging market securities to be illiquid. The inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security caused by settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in liability to the
purchaser. Certain emerging markets may lack clearing facilities equivalent to
those in developed countries. Accordingly, settlements can pose additional risks
in such markets and ultimately can expose the Fund to the risk of losses
resulting from its inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's portfolio securities in
such markets may not be readily available. The Fund's portfolio securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Trust's Board of Trustees.
Portfolio Turnover. Any particular security will be sold, and the
proceeds reinvested, whenever such action is deemed prudent from the viewpoint
of the Fund's investment objective, regardless of the holding period of that
security. Additional information about portfolio turnover is included in this
Statement under "Portfolio Transactions" and the Trust's Prospectus under
"Portfolio Turnover."
Options, Futures and Currency Strategies. The Fund may use forward
contracts, futures contracts, options on securities, options on indices, options
on currencies, and options on futures contracts to attempt to hedge against the
overall level of investment and currency risk normally associated with the
Fund's investments. These instruments are often referred to as "derivatives,"
which may be defined as financial instruments whose performance is derived, at
least in part, from the performance of another asset (such as a security,
currency or an index of securities).
General Risks of Options, Futures and Currency Strategies. The use by
the Fund of options, futures contracts and forward currency contracts involves
special considerations and risks. For example, there might be imperfect
correlation, or even no correlation, between the price movements or an
instrument (such as an option contract) and the price movements of the
investments being hedged. In these circumstances, if a "protective put" is used
to hedge a potential decline in a security and the security does decline in
price, the put option's increased value may not completely offset the loss in
the underlying security. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as changing
interest rates, market liquidity, and speculative or other pressures on the
markets in which the hedging instrument is traded.
The Fund will not enter into a hedging transaction if the Sub-advisor
determines that the cost of hedging will exceed the potential benefit to the
Fund.
Additional information on these instruments is included in this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Certain risks pertaining to particular strategies are described in the sections
that follow.
Cover. Transactions using forward contracts, futures contracts
and options (other than options purchased by a Fund) expose the Fund to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other options, forward contracts or futures contracts or (2) cash
or liquid assets with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash or liquid securities.
Assets used as cover cannot be sold while the position in the
corresponding forward contract, futures contract or option is open, unless they
are replaced with other appropriate assets. If a large portion of a Fund's
assets is used for cover or otherwise set aside, it could affect portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Writing Call Options. The Fund may write (sell) covered call
options on securities, futures contracts, forward contracts, indices and
currencies. Writing call options can serve as a limited hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option.
Writing Put Options. The Fund may write (sell) put options on
securities, futures contracts, forward contracts, indices and currencies. The
Fund would write a put option at an exercise price that, reduced by the premium
received on the option, reflects the lower price it is willing to pay for the
underlying security, contract or currency. The risk in such a transaction would
be that the market price of the underlying security, contract or currency would
decline below the exercise price less the premium received.
Purchasing Put Options. The Fund may purchase put options on
securities, futures contracts, forward contracts, indices and currencies. The
Fund may enter into closing sale transactions with respect to such options,
exercise such option or permit such option to expire.
The Fund may also purchase put options on underlying securities,
contracts or currencies against which it has written other put options. For
example, where the Fund has written a put option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a put option with a different strike price and/or expiration date that
would eliminate some or all of the risk associated with the written put. Used in
combinations, these strategies are commonly referred to as "put spreads."
Likewise, the Fund may write call options on underlying securities, contracts or
currencies against which it has purchased protective put options. This strategy
is commonly referred to as a "collar."
Purchasing Call Options. The Fund may purchase covered call
options on securities, futures contracts, forward contracts, indices and
currencies. The Fund may enter into closing sale transactions with respect to
such options, exercise such options or permit such options to expire.
The Fund may also purchase call options on underlying securities,
contracts or currencies against which it has written other call options. For
example, where the Fund has written a call option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a call option with a different strike price and/or expiration date that
would eliminate some or all of the risk associated with the written call. Used
in combinations, these strategies are commonly referred to as "call spreads."
Options may be either listed on an exchange or traded in
over-the-counter ("OTC") markets. Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation) and have standardized strike prices and
expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. The Fund will not purchase an OTC option unless it
believes that daily valuations for such options are readily obtainable. OTC
options differ from exchange-traded options in that OTC options are transacted
with dealers directly and not through a clearing corporation (which would
guarantee performance). Consequently, there is a risk of non-performance by the
dealer. Since no exchange is involved, OTC options are valued on the basis of an
average of the last bid prices obtained from dealers, unless a quotation from
only one dealer is available, in which case only that dealer's price will be
used.
Index Options. The risks of investment in index options may be
greater than options on securities. Because index options are settled in cash,
when the Fund writes a call on an 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 writing a call index option
position by holding a diversified portfolio of securities 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
underlie the index and, as a result, bears a risk that the value of the
securities held will not be perfectly correlated with the value of the index.
Limitations on Options. The Fund will not write options it,
immediately after such sale, the aggregate value of securities or obligations
underlying the outstanding options exceeds 20% of the Fund's total assets. The
Fund will not purchase options if, at the time of the investment, the aggregate
premiums paid for the options will exceed 5% of the Fund's total assets.
Interest Rate, Currency and Stock Index Futures Contracts. The
Fund may enter into interest rate, currency or stock index futures contracts
(collectively, "Futures" or "Futures Contracts") and options on Futures as a
hedge against changes in prevailing levels of interest rates, currency exchange
rates or stock price levels, respectively, in order to establish more definitely
the effective return on securities or currencies held or intended to be acquired
by it. The Fund's hedging may include sales of Futures as an offset against the
effect of expected increases in interest rates, and decreases in currency
exchange rates and stock prices, and purchase of Futures as an offset against
the effect of expected declines in interest rates, and increases in currency
exchange rates or stock prices.
A Futures Contract is a two party agreement to buy or sell a specified
amount of a specified security or currency (or deliver a cash settlement price,
in the case of an index future) for a specified price at a designated date, time
and place. A stock index future provides for the delivery, at a designated date,
time and place, of an amount of cash equal to a specified dollar amount times
the difference between the stock index value at the close of trading on the
contract and the price agreed upon in the Futures Contract; no physical delivery
of stocks comprising the index is made.
The Fund will only enter into Futures Contracts that are traded on
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading thereon in the United States
are regulated under the Commodity Exchange Act and by the Commodity Futures
Trading Commission ("CFTC").
The Fund's Futures transactions will be entered into for hedging
purposes only; that is, Futures will be sold to protect against a decline in the
price of securities or currencies that the Fund owns, or Futures will be
purchased to protect the Fund against an increase in the price of securities or
currencies it has committed to purchase or expects to purchase.
If the Fund were unable to liquidate a Future or an option on Futures
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund might be required to maintain the position
being hedged by the Future or option or to maintain cash or securities in a
segregated account.
Additional information on Futures, options on Futures, and their risks
is included in this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Forward Contracts. A forward contract is an obligation,
usually arranged with a commercial bank or other currency dealer, to purchase or
sell a currency against another currency at a future date and price as agreed
upon by the parties. The Fund either may accept or make delivery of the currency
at the maturity of the forward contract. The Fund may also, if its contra party
agrees prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Forward contracts are traded
over-the-counter, and not on organized commodities or securities exchanges. As a
result, it may be more difficult to value such contracts, and it may be
difficult to enter into closing transactions.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does establish
a rate of exchange in advance.
Additional information on forward contracts and their risks is included
in this SAI and the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Other Investment Companies. The Fund may invest in other investment
companies to the extent permitted by the 1940 Act and rules and regulations
thereunder, and, if applicable, exemptive orders granted by the SEC.
Investment Policy Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the ASAF AIM International Equity
Fund. This limitation is not a "fundamental" restriction, and may be changed by
the Trustees without shareholder approval. The Fund will not:
1. Make investments for the purpose of gaining control of a company's
management.
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.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. The Fund will enter into such agreements only to provide
cash to satisfy unusually heavy redemption requests and for other temporary or
emergency purposes, rather than to obtain cash to make additional investments.
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 reverse repurchase agreements and the
risks involved therein, see the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Other Income-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 JANUS SMALL-CAP GROWTH FUND:
Investment Objective: As stated in the Prospectus, the Fund's investment
objective is capital appreciation. 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:
Illiquid Investments. The Fund may invest up to 15% of its net assets
in illiquid investments (i.e., securities that are not readily marketable). The
Directors have authorized the Sub-advisor to make liquidity determinations with
respect to certain securities, including Rule 144A Securities and commercial
paper purchased by the Fund. Under the guidelines established by the Directors,
the Sub-advisor will consider, among other factors: 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; 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; and 5) any rating of the security by a Nationally
Recognized Statistical Rating Organization ("NRSRO"). In the case of commercial
paper, the Sub-advisor will also determine that the paper is not traded flat or
in default as to principal and interest. A foreign security that may be freely
traded on or through the facilities of an offshore exchange or other established
offshore securities market is not considered an illiquid security.
Investment Company Securities. From time to time, the Fund may invest
in securities of other investment companies, subject to the provisions of
Section 12(d)(1) of the 1940 Act. The Fund may invest in securities of money
market funds managed by the Sub-advisor subject to the terms of an exemptive
order obtained by the Sub-advisor and the funds that are advised or sub-advised
by the Sub-advisor. Under such order, the Fund will limit its aggregate
investment in a money market fund managed by the Sub-adviser to the greater of
(i) 5% of its total assets or (ii) $2.5 million, although the Company's Board of
Directors may increase this limit up to 25% of the Company's total assets.
Depositary Receipts. The Fund may invest in sponsored and unsponsored
American Depositary Receipts ("ADRs"), which are described in the Company's
Prospectus under "Certain Risk Factors and Investment Methods." Holders of
unsponsored 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"), Global Depositary Receipts ("GDRs") and in other similar
instruments representing securities of foreign companies.
Income-Producing Securities. Types of income producing securities that
the Fund may purchase include, but are not limited to, (i) variable and floating
rate obligations, which are securities having interest rates that are adjusted
periodically according to a specified formula, usually with reference to some
interest rate index or market interest rate, (ii) standby commitments, which are
instruments similar to puts that give the holder the option to obligate a
broker, dealer or bank to repurchase a security at a specified price, and (iii)
tender option bonds, which are securities that are coupled with the option to
tender the securities to a bank, broker-dealer or other financial institution at
periodic intervals and receive the face value of the bond. The Fund will
purchase standby commitments, tender option bonds and instruments with demand
features primarily for the purpose of increasing the liquidity of its portfolio.
The Fund may also invest in inverse floaters, which are debt instruments the
interest on which varies in an inverse relationship to the interest rate on
another security. For example, certain inverse floaters pay interest at a rate
that varies inversely to prevailing short-term interest rates. Some inverse
floaters have an interest rate reset mechanism that multiplies the effects of
changes in an underlying index. Such a mechanism may increase fluctuations in
the security's market value. The Fund will not invest more than 5% of its assets
in inverse floaters.
High-Yield/High-Risk Securities. The Fund intends to invest less than
35% of its net assets in debt securities that are rated below investment grade
(e.g., securities rated BB or lower by Standard & Poor's Ratings Services
("Standard & Poor's") or Ba or lower by Moody's Investors Service, Inc.
("Moody's")). Lower rated securities involve a higher degree of credit risk,
which is the risk that the issuer will not make interest or principal payments
when due. In the event of an unanticipated default, the Fund would experience a
reduction in its income, and could expect a decline in the market value of the
securities so affected.
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. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the Sub-advisor may treat such securities as unrated debt. Because of
the size and perceived demand of the issue, among other factors, certain
municipalities may not incur the costs of obtaining a rating. The Sub-advisor
will analyze the creditworthiness of the issuer, as well as any financial
institution or other party responsible for payments on the security, in
determining whether to purchase unrated municipal bonds. Unrated debt securities
will be included in the 35% limit unless the portfolio managers deem such
securities to be the equivalent of investment grade securities.
The Fund may purchase defaulted securities subject to the above limits,
but only when the Sub-advisor believes, based upon its analysis of the financial
condition, results of operations and economic outlook of an issuer, that there
is potential for resumption of income payments and that the securities offer an
unusual opportunity for capital appreciation. Notwithstanding the Sub-advisor's
belief as to the resumption of income, however, the purchase of any security on
which payment of interest or dividends is suspended involves a high degree of
risk. Such risk includes, among other things, the following:
Financial and Market Risks. Investments in securities that are
in default involve a high degree of financial and market risks that can result
in substantial or, at times, even total losses. Issuers of defaulted securities
may have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about their
condition. The market prices of securities of such issuers also are subject to
abrupt and erratic movements and above average price volatility, and the spread
between the bid and asked prices of such securities may be greater than normally
expected.
Disposition of Portfolio Securities. Although the Fund
generally will purchase securities for which the Sub-advisor expects an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices. The Fund will limit holdings of any
such securities to amounts that the Sub-advisor believes could be readily sold,
and holdings of such securities would, in any event, be limited so as not to
limit the Fund's ability to readily dispose of securities to meet redemptions.
Other. Defaulted securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Fund.
Repurchase and Reverse Repurchase Agreements. The Fund may enter into
repurchase agreements. While it is not possible to eliminate all risks from
repurchase agreement transactions, the Fund will limit repurchase agreements to
those parties whose creditworthiness has been reviewed and found satisfactory by
the Sub-advisor under guidelines established by the Board of Directors of the
Company.
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. The
Fund will enter into reverse repurchase agreements only with parties that the
Sub-advisor deems creditworthy. Using reverse repurchase agreements to earn
additional income involves the risk that the interest earned on the invested
proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Fund,
although the requirement for the Fund to segregate assets in the amount of the
reverse repurchase agreement minimizes this effect. 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 an additional discussion of repurchase agreements and reverse
repurchase agreements and their risks, see the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Futures, Options and Forward Contracts. 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
Fund's total assets. 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 pursuant to procedures adopted by the Sub-advisor for monitoring the
creditworthiness of those entities. To the extent that an option purchased or
written by the Fund in a negotiated transaction is illiquid, the value of the
option purchased or the amount of the Fund's obligations under an option it has
written, 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 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 of their risks, 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 that 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 Fund's custodian. 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 NRSRO 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, 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. The Fund bears the
risk of loss of any payments it is contractually obligated to make in connection
with interest rate swaps. In addition, if the other party to an interest rate
swap that is not collateralized defaults, the Fund would risk the loss 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.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the ASAF Janus Small-Cap 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 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, or the Fund's 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 ("Rule 144A Securities"), or any successor to
such rule, Section 4(2) commercial paper and municipal lease obligations.
Accordingly, such securities may not be subject to the foregoing limitation.
4. The Fund may not invest in companies for the purpose of exercising
control of management.
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." The Fund will not purchase a junk bond if immediately after such
purchase the Fund would have more than 5% of its total assets invested in such
securities. 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."
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. 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%.
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 by the
Fund to cover the position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover 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 as cover could impede portfolio management or the Fund's ability
to meet redemption requests or other current obligations.
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 financial 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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
entirely as ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Fund would be required to distribute
any such gain even though it would not receive proceeds from the sale at the
time the option, futures or forward position is entered into.
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."
Money Market Securities. The Fund will hold a certain portion of its assets
in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, rated in the two highest rating categories, maturing in
one year or less.
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. The Fund may write covered call options on
securities it owns. Generally, the purpose of writing those 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 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 SAI 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 SAI
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 SAI 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. 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 SAI 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. 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 SAI 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. Options
on foreign currencies may be traded on U.S. or foreign exchanges, or
over-the-counter. Options on foreign currencies that are traded on the OTC
market 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 SAI 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.
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"). 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 SAI.
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 no longer would be eligible for purchase by the Fund,
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.
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 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 SAI 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.
For an additional discussion of options and their risks, 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
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
SAI 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 SAI 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 SAI 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 SAI 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.
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 SAI.
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 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 OPPENHEIMER LARGE-CAP GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital appreciation. The Fund does not invest to seek current income.
Investment Policies:
In selecting securities for the Fund, the Sub-advisor evaluates the
merits of securities primarily through the exercise of its own investment
analysis. This may include, among other things, evaluation of the history of the
issuer's operations, prospects for the industry of which the issuer is part, the
issuer's financial condition, the issuer's pending product developments and
developments by competitors, the effect of general market and economic
conditions on the issuer's business, and legislative proposals or new laws that
might affect the issuer. Current income is not a consideration in the selection
of securities for the Fund, whether for appreciation, defensive or liquidity
purposes. The fact that a security has a low yield or does not pay current
income will not be an adverse factor in selecting securities to try to achieve
the Fund's investment objective of capital appreciation unless the Sub-advisor
believes that the lack of yield might adversely affect appreciation
possibilities.
The portion of the Fund's assets allocated to securities and methods
selected for capital appreciation will depend upon the judgment of the
Sub-advisor as to the future movement of the equity securities markets. If the
Sub-advisor believes that economic conditions favor a rising market, the Fund
will emphasize securities and investment methods selected for high capital
growth.
Foreign Securities. The Fund may invest in securities (which may be
denominated in U.S. dollars or non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (described below) and
foreign governments or their agencies or instrumentalities and in securities
issued by U.S. corporations denominated in non-U.S. currencies. The types of
foreign debt obligations and other securities in which the Fund may invest are
the same types of debt and equity securities identified in the Prospectus.
Foreign securities include equity and debt securities of companies
organized under the laws of countries other than the United States and debt
securities of foreign governments that are traded on foreign securities
exchanges or in the foreign over-the-counter markets, as well as American
Depository Receipts that are listed on a U.S. securities exchange or traded in
the U.S. over-the-counter markets. However, American Depository Receipts are not
subject to some of the special considerations and risks that apply to foreign
securities traded and held abroad.
Investing in foreign securities offers potential benefits not available
from investing solely in securities of domestic issuers, including the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets.
Investing in foreign securities involves special additional risks and
considerations not typically associated with investing in securities of issuers
traded in the U.S. From time to time, U.S. Government policies have discouraged
certain investments abroad by U.S. investors, through taxation or other
restrictions, and it is possible that such restrictions could be re-imposed. For
an additional discussion of foreign investing and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Illiquid and Restricted Securities. The Fund may invest in illiquid and
restricted securities. Illiquid securities include repurchase agreements
maturing in more than seven days, or certain participation interests other than
those puts exercisable within seven days. Under the guidelines established by
the Company's Board of Directors, the Sub-advisor determines the liquidity of
certain of the Fund's investments. The Sub-advisor monitors holdings of illiquid
securities on an ongoing basis and at times the Fund may be required to sell
some holdings to maintain adequate liquidity.
The Fund has percentage limitations that apply to purchases of illiquid
securities, as stated in the Prospectus. Those percentage restrictions do not
limit purchases of restricted securities that are eligible for sale to qualified
institutional purchasers pursuant to Rule 144A under the Securities Act of 1933,
provided that those securities have been determined to be liquid by the Board of
Directors of the Company or by the Sub-advisor under Board-approved guidelines.
Those guidelines take into account the trading activity for such securities and
the availability of reliable pricing information, among other factors. If there
is a lack of trading interest in a particular Rule 144A security, the Fund's
holding of that security may be considered illiquid. For an additional
discussion of illiquid and restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Loans of Portfolio Securities. The Fund may lend its portfolio
securities subject to the restrictions stated in the Prospectus under "Certain
Risk Factors and Investment Methods." Repurchase transactions are not considered
"loans" for the purpose of the Fund's limit on the percentage of its assets that
can be loaned. In a portfolio securities lending transaction, the Fund receives
from the borrower an amount equal to the interest paid or the dividends declared
on the loaned securities during the term of the loan as well as the interest on
the collateral securities, less any finders', administrative or other fees the
Fund pays in connection with the loan. The terms of the Fund's loans must meet
applicable tests under the Internal Revenue Code and must permit the Fund to
reacquire loaned securities, generally within the customary settlement period,
in time to vote on any important matter. For an additional discussion of
securities lending and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Fund may acquire securities subject to
repurchase agreements for liquidity purposes to meet anticipated redemptions, or
pending the investment of the proceeds from sales of Fund shares, or pending the
settlement of purchases of Fund securities. In a repurchase transaction, the
Fund acquires a security from, and simultaneously agrees to resell it to, an
approved vendor. An "approved vendor" is a U.S. commercial bank or the U.S.
branch of a foreign bank or a broker-dealer that has been designated a primary
dealer in government securities, which must meet credit requirements set forth
in guidelines established by the Company's Board of Directors. Repurchase
agreements are similar to loans collateralized by the underlying security. The
Fund's repurchase agreements require that at all times while the repurchase
agreement is in effect, the value of the collateral must equal or exceed the
repurchase price to fully collateralize the repayment obligation. Additionally,
the Sub-advisor will continuously monitor the collateral's value. For an
additional discussion of repurchase agreements and certain risks and regulatory
limits involved therein, see the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Hedging with Futures Contracts. The Fund may use hedging instruments
for the purposes described in the Prospectus. When hedging to attempt to protect
against declines in the market value of the Fund's portfolio, or to permit the
Fund to protect unrealized gains on portfolio securities that have appreciated,
or to facilitate selling securities for investment reasons, the Fund may sell
financial futures. When hedging to establish a position in the equities market
as a temporary substitute for the purchase of individual equity securities, the
Fund may buy futures. Normally, the Fund may thereafter purchase the equity
securities and terminate the hedging position.
The Fund's strategy of hedging with futures will be incidental to the
Fund's investment activities in the underlying cash market. In the future, the
Fund may employ hedging instruments and strategies that are not presently
contemplated but which may be developed, to the extent such investment methods
are consistent with the Fund's investment objective, and are legally permissible
and disclosed in the Prospectus. Additional information about the hedging
instruments the Fund may use is provided below.
The Fund may buy and sell futures contracts related to financial
indices, including stock indices. Financial indices cannot be purchased or sold
directly. All futures transactions are effected through a clearinghouse
associated with the exchange on which the contracts are traded. For an
additional discussion on futures, including certain risks involved therein, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Regulatory Aspects of Futures. The Fund is required to operate
within certain guidelines and restrictions with respect to its use of futures
and options on futures established by the Commodity Futures Trading Commission
("CFTC"). In addition, due to requirements under the Investment Company Act of
1940 (the "Investment Company Act"), when the Fund purchases a stock index
future, the Fund will identify on the Company's records, liquid assets in an
amount equal to the market value of the securities underlying such future, less
the margin deposit applicable to it. For an additional discussion on the
regulatory aspects of hedging instruments, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Hedging with Futures. Selling futures to attempt to
protect against declines in the values of the portfolio's securities involves
the risk that the prices of the futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of the Fund's securities. To
compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of the hedging instruments,
the Fund may use hedging instruments 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 more than the historical volatility of the
applicable index.
If the Fund uses hedging instruments to establish a position in the
equities markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying futures, it is possible that the market may
decline. If the Fund then concludes not to invest in equity securities at that
time because of concerns as to a possible further market decline or for other
reasons, the Fund will realize a loss on the hedging instruments that is not
offset by a reduction in the price of the equity securities purchased. For an
additional discussion of hedging instruments, including certain risks involved
therein, see this SAI under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the ASAF Oppenheimer Large-Cap Growth
Fund. This limitation is not a "fundamental" restriction and may be changed by
the Directors without shareholder approval.
The Fund will not invest in interests in oil, gas, or other mineral
exploration or development programs.
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 use futures contracts and options for leveraging purposes. 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 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 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 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 high-yield/high risk and mortgage- and
asset-backed 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 and mortgage- and asset-backed securities, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Zero Coupon, Pay-in-Kind, and Step Coupon Bonds. The Fund may purchase
zero coupon, pay-in-kind, and step coupon bonds. 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.
For an additional discussion of zero coupon securities, see this SAI 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:
Corporate Bonds and Debentures. The Fund may purchase corporate bonds
and debentures, including bonds rated below investment grade. The Fund will not
invest more than 5% of its net assets in bonds rated below investment grade. For
a discussion of lower rated securities, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
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. 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 description of these
investment techniques, see the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Other Income-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" 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 BANKERS TRUST MANAGED INDEX 500 FUND:
Investment Objective: The investment objective of the AST Bankers Trust Managed
Index 500 Fund is to outperform the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500(R) Index") through stock selection resulting in different
weightings of common stocks relative to the index.
Investment Policies:
As a diversified fund, no more than 5% of the assets of the Fund may be
invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Fund's assets may be invested without
regard to this limitation. The Fund will not invest more than 25% of its assets
in the securities of issuers in any one industry. In the unlikely event that the
S&P 500 should concentrate to an extent greater than that amount, the Fund's
ability to achieve its objective may be impaired.
The Sub-advisor will not purchase the stock of its parent company,
Bankers Trust New York Corporation, which is included in the S&P 500.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities that are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities that have not
been registered under the 1933 Act are referred to as private placements or
restricted securities. Restricted or other illiquid securities may be subject to
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
commercial paper, foreign securities, municipal securities and corporate bonds
and notes. Institutional investors depend on an efficient institutional market
in which the unregistered security can be readily resold or on an issuer's
ability to honor a demand for repayment. The fact that there are contractual or
legal restrictions on resale of such investments to the general public or to
certain institutions may not be indicative of their liquidity.
Specifically, the Securities and Exchange Commission (the "SEC") has
adopted Rule 144A, which allows a broader institutional trading market for
securities otherwise subject to restrictions on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act of resales of certain securities to qualified institutional
buyers. The Sub-advisor anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Subject to guidelines promulgated by the Board of Directors of the
Company, the Sub-advisor will monitor the liquidity of Rule 144A securities in
the Fund's portfolio. In reaching liquidity decisions, the Sub-advisor will
consider, among other things, the following factors: (i) the frequency of trades
and quotes for the security; (ii) the number of dealers and other potential
purchasers wishing to purchase or sell the security; (iii) dealer undertakings
to make a market in the security and (iv) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Short-Term Instruments. When the Fund experiences large cash inflows or
anticipates substantial redemption requests, the Fund may hold short-term
investments for a limited time pending the purchase of equity securities. The
Fund's short-term instruments may consist of: (i) short-term obligations issued
or guaranteed by the U.S. government or any of its agencies or instrumentalities
or by any of the states; (ii) other short-term debt securities rated AA or
higher by S&P or Aa or higher by Moody's or, if unrated, of comparable quality
in the opinion of the Sub-advisor; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits and
bankers' acceptances; and (v) repurchase agreements. At the time the Fund
invests in commercial paper, bank obligations or repurchase agreements, the
issuer or the issuer's parent must have outstanding debt rated AA or higher by
S&P or Aa or higher by Moody's or outstanding commercial paper or bank
obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of the
Sub-advisor.
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of discount for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
U.S. Government Obligations. The Fund may invest in obligations issued
or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Fund must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Government securities in which
the Fund may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credit of the issuing agency. Securities that are backed by the full
faith and credit of the United States include obligations of the Government
National Mortgage Association, the Farmers Home Administration, and the
Export-Import Bank.
When-Issued and Delayed-Delivery Securities. The Fund may purchase
securities on a when-issued or delayed-delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Fund until settlement takes place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction, reflect the value of
such securities in determining its net asset value each day thereafter and, if
applicable, calculate the maturity for the purposes of average maturity from the
commitment date. At the time of settlement a when-issued security may be valued
at less than the purchase price. To facilitate such acquisitions, the Fund will
maintain with its custodian a segregated account consisting of cash or other
liquid assets in an amount at least equal to such commitments. On delivery dates
for such transactions, the Fund will meet its obligations from maturities or
sales of the securities held in the segregated account and/or from cash flow. If
the Fund chooses to dispose of the right to acquire a when-issued security prior
to its acquisition, it could, as with the disposition of any other obligation,
incur a gain or loss due to market fluctuation. 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 when-issued commitments.
Equity Investments. The Fund may invest in equity securities listed on
any domestic securities exchange or traded in the over-the-counter market as
well as certain restricted or unlisted securities. They may or may not pay
dividends or carry voting rights. Common stock occupies the most junior position
in a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
or emergency purposes (such as meeting larger than anticipated redemption
requests) and not for leverage, by among other things, agreeing to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of time. The
strike price of warrants sometimes is much lower than the current market price
of the underlying securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities.
Convertible Securities. Convertible securities may be debt securities
or preferred stocks that may be converted into common stock or that carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts.
Futures Contracts. The Fund may enter into securities index futures
contracts. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
These investments will be made by the Fund solely for hedging purposes. Such
investments will be made only if they are economically appropriate to the
reduction of risks involved in the management of the Fund. In this regard, the
Fund may enter into futures contracts or options on futures related to the S&P
500.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial margin"). It is
expected that the initial margin would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, because each day the Fund will
provide or receive cash that reflects any decline or increase in the contract's
value.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Because transactions
in the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Fund will
incur brokerage fees when it purchases or sells futures contracts. The liquidity
of the futures market depends on participants entering into offsetting
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.
In addition, futures contracts entail other risks. Nonetheless, the
Sub-advisor believes that use of such contracts in certain circumstances will
benefit the Fund. For an additional discussion of futures contracts and the
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 use stock index futures on a
continual basis to "equitize" cash so that the Fund may maintain 100% equity
exposure. The Fund will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits on all
the futures contracts of the Portfolio and premiums paid on outstanding options
on futures contracts owned by the Portfolio (other than those entered into for
bona fide hedging purposes) would exceed 5% of the market value of the total
assets of the Portfolio.
A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. The Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received will
be included as initial margin deposits. In anticipation of a decline in interest
rates, the Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities that the Fund intends to purchase. Similarly, if the
value of the securities held by the Portfolio is expected to decline as a result
of an increase in interest rates, the Fund might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve 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 an
option on a futures contact involves risks similar to those risks relating to
the sale of futures contracts.
Options on Securities Indices. The Fund may purchase and write (sell)
call and put options on securities indices. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index.
Options on securities indices entail certain risks. The absence of a
liquid secondary market to close out options positions on securities indices may
occur, although the Portfolio generally will only purchase or write such an
option if the Sub-adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Sub-adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
For an additional discussion of options and the risks involved therein,
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" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
2. Invest for the purpose of exercising control or management;
3. Purchase securities of other investment companies except in
compliance with the 1940 Act; or
4. Invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable, not including Rule 144A securities and commercial paper that is sold
under section 4(2) of the 1933 Act that have been determined to be liquid under
procedures established by the Board of Directors.
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 MFS GROWTH WITH INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek to
provide reasonable current income and long-term capital growth and income.
Investment Policies:
Corporate Debt Securities. The Fund may invest in debt securities, such
as convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and similar entities.
Variable and Floating Rate Obligations. The Fund may invest in floating
or variable rate securities. Investments in variable or floating rate securities
normally will involve industrial development or revenue bonds which provide that
the rate of interest is set as a specific percentage of a designated base rate,
such as rates on Treasury Bonds or Bills or the prime rate at a major commercial
bank, and that a bondholder can demand payment of the obligations on behalf of
the Fund on short notice at par plus accrued interest, which amount may be more
or less than the amount of the bondholder paid for them. The maturity of
floating or variable rate obligations (including participation interests
therein) is deemed to be the longer of (i) the notice period required before the
Fund is entitled to receive payment of the obligation upon demand or (ii) the
period remaining until the obligation's next interest rate adjustment. If not
redeemed by the Fund through the demand feature, the obligations mature on a
specified date, which may range up to thirty years from the date of issuance.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds. The Fund may
invest in zero coupon bonds, deferred bonds and bonds on which the interest is
payable in kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt
obligations, which are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds do provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations, which
provide that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of
such cash. Such investments may experience greater volatility in market value
than debt obligations, which make regular payments of interest. The Fund will
accrue income on such investments for tax and accounting purposes, which are
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations.
Equity Securities. The Fund may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
Foreign Securities. The Fund may invest in dollar-denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. For a discussion of the risks involved in
foreign securities, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Depository Receipts. The Fund may invest in American Depository
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other types of
depository receipts. ADRs are certificates by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depository
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of the
Fund in ADRs, GDRs and other types of depository receipts are deemed to be
investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depository which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S. depositories.
Under the terms of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depository of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. The Fund may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United Sates can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
shares to the local depositary of an ADR agent bank in the foreign country.
Simultaneously, the ADR agents create a certificate which settles at the Fund's
custodian in five days. The Fund may also execute trades on the U.S. markets
using existing ADRs. A foreign issuer of the security underlying an ADR is
generally not subject to the same reporting requirements in the United States as
a domestic issuer. Accordingly, information available to a U.S. investor will be
limited to the information the foreign issuer is required to disclose in its
country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may also be
subject to exchange rate risks if the underlying foreign securities are
denominated in a foreign currency.
Emerging Markets. The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
Company Debt. Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
Foreign currencies. Some emerging market countries may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's et asset value.
Inflation. Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Liquidity; Trading Volume; Regulatory Oversight. The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore , there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
markets may not be readily available. The Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
SEC. If market prices are not readily available, the Fund's securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Directors.
Withholding. Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Sub-adviser will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.
Forward Contracts. The Fund may enter into contracts for the purchase
or sale of a specific currency at a future date at a price at the time the
contract is entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes).
The Fund does not presently intend to hold Forward Contracts entered
into until maturity, at which time it would be required to deliver or accept
delivery of the underlying currency, but will seek in most instances to close
out positions in such Contracts by entering into offsetting transactions, which
will serve to fix the Fund's profit or loss based upon the value of the
Contracts at the time the offsetting transactions is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgement of the Sub-adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Sub-adviser believes that its value will decline relative to the dollar.
For an additional discussion of Forward Contracts see this SAI and the
Company Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may purchase and sell futures contracts
("Future Contracts") on stock indices, foreign currencies, interest rates or
interest-rate related instruments, indices of foreign currencies or commodities.
The Fund also may purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including municipal bond
indices and any other indices of foreign or domestic fixed income securities
that may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures Contracts call for settlement only on the expiration
date and cannot be exercised at any other time during their term.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index futures
contracts in anticipations of or during market decline to attempt to offset the
decrease in market value of the Fund's securities portfolio that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may be
offset, in whole or in part, by gains on the futures position. When the Fund is
not fully invested in the securities market and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the dollar cost of foreign-denominated securities, or increase the
dollar cost of foreign-denominated securities to be acquired, even if the value
of such securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant security, which could offset, in whole or in part, the increased
cost of such securities resulting from the rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
For further information on Futures Contracts, see this SAI under
"Certain Risk Factors and Investment Methods."
Investment in Other Investment Companies. The Fund may invest other
investment companies, including both open-end and closed-end companies.
Investments in closed-end investment companies may involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities.
Options. The Fund may invest in the following types of options, which
involves the risks described below under the caption "Special Risk Factors."
Options on Foreign Currencies. The Fund may purchase and write options
on foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward Contracts,
will be utilized. For example, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effect of the
adverse movements in exchange rates.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. Foreign currency options written
by the Fund will generally be covered in a manner similar to the covering of
other types of options.
Options on Futures Contracts. The Fund may also purchase and write
options to buy or sell those Futures Contracts in which it may invest as
described above under "Futures Contracts." Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. Exchanges are traded on the same contract market as the underlying
Futures Contract, an, like Futures Contracts, are subject to the regulation by
the CFTC and the performance guarantee of the exchange clearinghouse. In
addition, Options on Futures Contracts may be traded on foreign exchanges. The
Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (I) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the Fund owns
liquid and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the underlying
Futures Contract, (b) through the ownership of liquid and unencumbered assets
equal to the value of the security or index underlying the Futures Contract, or
(c) through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held (i)
is equal to or greater than the exercise price of the put written if where the
exercise price of the put held (ii) is less than the exercise price of the put
written of the Fund owns liquid and unencumbered assets equal to the difference.
Put and call Options on Futures Contracts may also be covered in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Upon the exercise of a
call Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate its
futures position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the underlying
Futures Contract which, if the Fund has covered its obligation through the sale
of such Contract, will close out its futures position.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures positions,
the Fund's losses from existing Options on Futures Contracts may to some extent
be reduced or increased by changes in the value of portfolio securities.
Options on Securities. The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities.
A call option written by the Fund 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 for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call on
the same security and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the difference.
If the portfolio writes a put option it must segregate liquid and unencumbered
assets with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written or where the exercise price of the put held is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets equal
to the difference. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the Fund owns liquid and unencumbered assets. Such transactions
permit the Fund to generate additional premium income, which will partially
offset declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that another
option on such security is not written. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction in connection with the option prior to or
concurrent with the sale of the security.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a call
option against that security. The exercise price of the call option the Fund
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will decline moderately
during the option period. Buy-and-write transactions using out-of-the-money call
options may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, the Fund's' maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference between
the Fund's' purchase price of the security and the exercise price, less related
transaction costs. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset in part,
or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price or the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's' gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or retain the option until it is exercised, at which time
the Fund will be required to take delivery of the security at the exercise
price; the Fund' return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market environments
that call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or in part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
The writing of options on securities will not be undertaken by the Fund
solely for hedging purposes, and could involve certain risks which are not
present in the case of hedging transactions. Moreover, even where options are
written for hedging purposes, such transactions constitute only a partial hedge
against declines in the value of portfolio securities or against increases in
the value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future. If
such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit.
Options on Stock Indices. The Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. The Fund may
cover written call options on stock indices by owning securities whose price
changes, in the opinion of the Adviser, are expected to be similar to those of
the underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other securities in
its portfolio. The Fund may also cover call options on stock indices by holding
a call on the same index and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the Fund own liquid and unencumbered assets equal to the
difference. If the Portfolio writes put options on stock indices, it must
segregate liquid and unencumbered assets with a value equal to the exercise
price, or hold a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices may also
be covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options
for this purpose, the Fund will also bear the risk of losing all or a portion of
the premium paid it the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included. The composition of the index is changed periodically.
For an additional discussion of options, see this SAI under "Certain
Risk Factors and Investment Methods."
Special Risk Factors.
Risk of Imperfect Correlation of Hedging Instruments with the Fund's Portfolio.
The use of derivatives for "cross hedging" purposes (such as a transaction in a
Forward Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk that
the price of the portfolio securities being hedged will not move in the same
amount or direction as the underlying index or obligation.
It should be noted that stock index futures contracts or options based
upon a narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrowly-based indices for hedging purposes, movements in
the value of the index should, if the hedge is successful, correlate closely
with the portion of the Fund' portfolio or the intended acquisitions being
hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the derivative
and the price of the underlying index or obligation. The anticipated spread
between the prices may be distorted due to the difference in the nature of the
markets such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the derivatives markets. In this
regard, trading by speculators in derivatives has in the past occasionally
resulted in market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Fund is
subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the extent
of any loss suffered by the Fund in connection with such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. For example, where
the Fund covers a call option written on a stock index through segregation of
securities, such securities may not match the composition of the index, and the
Fund may not be fully covered. As a result, the Fund could be subject to risk of
loss in the event of adverse market movements.
Risks of Non-Hedging Transactions. The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. Nevertheless, the method of
covering an option employed by the Fund may not fully protect it against risk of
loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains. The Fund may also
enter into futures, Forward Contracts for non-hedging purposes. For example, the
Fund may enter into such a transaction as an alternative to purchasing or
selling the underlying instrument or to obtain desired exposure to an index or
market. In such instances, the Fund will be exposed to the same economic risks
incurred in purchasing or selling the underlying instrument or instruments.
However, transactions in futures, Forward Contracts may be leveraged, which
could expose the Fund to greater risk of loss than such purchases or sales.
Entering into transactions in derivatives for other than hedging purposes,
therefore, could expose the Fund to significant risk of loss if the prices,
rates or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received. Such transactions,
therefore, create an opportunity for increased return by providing the Fund with
two simultaneous premiums on the same security, but involve additional risk,
since the Fund may have an option exercised against it regardless of whether the
price of the security increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market. Prior to
exercise or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. In that event, it may not
be possible to close out a position held by the Fund, and the Fund could be
required to purchase or sell the instrument underlying an option, make or
receive a cash settlement or meet ongoing variation margin requirements. Under
such circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or other
assets at a time when it is disadvantageous to do so. The inability to close out
options and futures positions, therefore, could have an adverse impact on the
Fund' ability effectively to hedge its portfolio, and could result in trading
losses.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions or to
recover excess variation margin payments.
Potential Bankruptcy of a Clearinghouse or Broker. When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or the
broker through which the Fund has effected the transaction. In that event, the
Fund might not be able to recover amounts deposited as margin, or amounts owed
to the Fund in connection with its transactions, for an indefinite period of
time, and could sustain losses of a portion or all of such amounts. Moreover,
the performance guarantee of an exchange clearinghouse generally extends only to
its members and the Fund could sustain losses, notwithstanding such guarantee,
in the event of the bankruptcy of its broker.
Trading and Position Limits. The exchanges on which futures and options
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers.) Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Fund.
Risks of Options on Futures Contracts. The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium paid
for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an Option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the price of the option may not correlate
with movements in the price of the underlying security, index, currency or
Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S. Exchanges. Transactions
in Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are subject
to all of the correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by the Fund. Further,
the value of such positions could be adversely affected by a number of other
complex political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected in
the forward, futures or options market until the following day, thereby making
it more difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) the SEC. To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and the Fund will therefore be subject to the risk
of default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded on
exchanges located in foreign countries. Such transactions may not be conducted
in the same manner as those entered into on U.S. exchanges, and may be subject
to different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, 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 (the
"OCC"), thereby reducing the risk of counterparty default.
The purchase and sale of exchange-traded foreign currency options, is
subject to 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.
Repurchase Agreements. The Fund may enter into repurchase agreements
with sellers who are member firms (or a subsidiary thereof) of the New York
Stock Exchange or members of the Federal Reserve System or recognized primary
U.S. Government securities dealers which the Sub-adviser has determined to be
creditworthy. The securities that the Fund purchases and holds through its agent
are U.S. Government securities. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase price
may be the same, with interest at a standard rate due to the Fund together with
the repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Government securities.
The Fund only enters into repurchase agreements after the Sub-adviser
has determined that the seller is creditworthy, and the Sub-adviser monitors
that seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon amount of collateral.
For an additional discussion of repurchase agreements, see the Company
Prospectus under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Fund may purchase securities that are not
registered under the Securities Act of 1933 ("restricted securities"), including
those that can be offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act ("Rule 144A securities") and commercial paper
issued under Section 4(2) of the 1933 Act ("4(2) paper"). The Board of Directors
has delegated to the Sub-adviser the daily function of determining and
monitoring the liquidity of Rule 144A securities and Section 4(2) paper. The
Board, however, retains oversight of the liquidity and availability of
information. Subject the Fund's limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. In addition, the Fund might
have to sell these securities at less than fair value. Market quotations for
these securities will be less readily available. Therefore, judgment may at
times play a greater role in valuing these securities than in the case of
unrestricted securities. Additional information about restricted securities and
their risks is included in the Company's prospectus under "Certain Risk factors
and Investment Methods."
Short Sales Against The Box. The Fund may make short sales "against the
box." If the Fund enters into a short sales against the box, it is required to
segregate securities equivalent in kind and amount to the securities sold short
(or securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will incur
transaction costs, including interest, in connection with opening, maintaining,
and closing short sales against the box. For further information about this
practice, please refer to the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Short Term Instruments. The Fund may hold cash and invest in cash
equivalents, such as short-term U.S. Government Securities, commercial paper and
bank instruments.
Temporary Defensive Positions. During periods of unusual market
conditions when the Sub-adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash
(including foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government securities and related repurchase agreements.
Warrants. The Fund may invest in warrants. The strike price of warrants
typically is much lower than the current market price of the underlying
securities, yet they are subject to similar price fluctuations, in absolute
terms. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss. Additional information regarding warrants is included
in this SAI and the Company's Prospectus under "Certain Risk factors and
Investment Methods."
"When-Issued" Securities. The Fund may purchase securities on a
"when-issued," "forward commitment," or "delayed delivery" basis. The commitment
to purchase a security for which payment will be made on a future date may be
deemed a separate security. While awaiting delivery of securities purchased on
such basis, the Fund will identify liquid and unencumbered assets equal to its
forward delivery commitment. For more information about when-issued securities,
please see this SAI 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 up to 10% of its fixed income
assets in high yield securities. There are no credit or maturity restrictions on
the fixed income securities in which the high yield portion of the Fund may be
invested. 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. For purposes of determining
the weighted average maturity of the fixed income portion of the Fund, the
Sub-advisor will use weighted average life as the measure of maturity for all
mortgage-backed and 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
("transaction hedging"); (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 ("portfolio hedging"). It is anticipated that the Fund will
enter into portfolio hedges much less frequently than transaction hedges.
As to transactional hedging, 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 portfolio hedging, 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. 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.
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).
Investments in Companies with Limited Operating History. The Fund may
invest in the securities of issuers with limiting operating history. The
Sub-advisor considers an issuer to have a limited operating history if that
issuer has a record of less than three years of continuous operation.
Investments in securities of issuers with limited operating history may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating history and financial
information upon which the manager may base its investment decision on behalf of
the Fund. In addition, financial and other information regarding such issuers,
when available, may be incomplete or inaccurate.
The Fund will not invest more than 5% of its total assets in the
securities of issuers with less than a three-year operating history. The
Sub-advisor will consider periods of capital formation, incubation,
consolidation, and research and development in determining whether a particular
issuer has a record of three years of continuous operation.
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 under "Portfolio Transactions" and the Company's Prospectus under
"Portfolio Turnover."
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.
Collateralized Mortgage Obligations. The Fund may buy collateralized
mortgage obligations ("CMOs"). 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 CMOs and the risks
involved therein, see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. The Fund may enter into repurchase agreements. The
Fund will limit repurchase agreement transactions to securities issued by the
U.S. government, its agencies and instrumentalities. For a further discussion of
repurchase agreements and the risks involved therein, 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" 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 (such as the 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). 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."
Time and Savings Deposits and Bankers' Acceptances. The Fund may enter
into time and savings deposits (including certificates of deposit) and may
purchase bankers' acceptances. The Fund may enter into 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. The Fund may
also purchase 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.
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 under "Portfolio
Transactions" and the Company's Prospectus under "Portfolio Turnover."
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 segregating cash or other liquid assets
equal in value to the securities subject to repurchase by the Fund.
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. 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. 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 segregated by the Fund) 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 that cash
or cash equivalents in the amount of the difference are segregated by the Fund.
A put option on a security or an index is "covered" if the Fund segregates cash
or cash equivalents equal to the exercise price. 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 that cash or cash equivalents in the amount of the difference
are segregated by the Fund.
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 segregating
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.
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 Company's SAI under
"Certain Risk Factors and Investment Methods."
Inverse Floaters. 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.
Loan Participations. The Fund may purchase participations in commercial
loans. Such indebtedness may be secured or unsecured. Loan participations
typically represent direct participation in a loan to a corporate borrower, and
generally are offered by banks or other financial institutions or lending
syndicates. When purchasing loan participations, the Fund assumes the credit
risk associated with the corporate borrower and may assume the credit risk
associated with an interposed bank or other financial intermediary. The
participation interests in which the Fund intends to invest may not be rated by
any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the corporate borrower for payment of
principal and interest. If the Fund does not receive scheduled interest or
principal payments on such indebtedness, the Fund's share price and yield could
be adversely affected. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
The Fund may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, the Fund bears a
substantial risk of losing the entire amount invested.
The Fund limits the amount of its total assets that it will invest in
any one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, the Fund generally will treat the
corporate borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as a
financial intermediary between the Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, Securities and Exchange Commission ("SEC")
interpretations require the Fund to treat both the lending bank or other lending
institution and the corporate borrower as "issuers" for the purposes of
determining whether the Fund has invested more than 5% of its total assets in a
single issuer. Treating a financial intermediary as an issuer of indebtedness
may restrict the Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
Loan and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what the Sub-advisor believes to be a fair price. In
addition, valuation of illiquid indebtedness involves a greater degree of
judgment in determining the Fund's net asset value than if that value were based
on available market quotations, and could result in significant variations in
the Fund's daily share price. At the same time, some loan interests are traded
among certain financial institutions and accordingly may be deemed liquid. As
the market for different types of indebtedness develops, the liquidity of these
instruments is expected to improve. In addition, the Fund currently intends to
treat indebtedness for which there is no readily available market as illiquid
for purposes of the Fund's limitation on illiquid investments. Investments in
loan participations are considered to be debt obligations for purposes of the
Company's investment restriction relating to the lending of funds or assets by
the Fund.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Sub-advisor's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund.
Delayed Funding Loans and Revolving Credit Facilities. The Fund may
enter into, or acquire participations in, delayed funding loans and revolving
credit facilities. Delayed funding loans and revolving credit facilities are
borrowing arrangements in which the lender agrees to make loans up to a maximum
amount upon demand by the borrower during a specified term. These commitments
may have the effect of requiring the Fund to increase its investment in a
company at a time when it might not otherwise decide to do so (including at a
time when the company's financial condition makes it unlikely that such amounts
will be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times segregate liquid assets, determined to be liquid by
the Sub-advisor in accordance with procedures established by the Board of
Directors, in an amount sufficient to meet such commitments. The Fund may invest
in delayed funding loans and revolving credit facilities with credit quality
comparable to that of issuers of its securities investments. Delayed funding
loans and revolving credit facilities may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, the Fund may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. The Fund
currently intend to treat delayed funding loans and revolving credit facilities
for which there is no readily available market as illiquid for purposes of the
Fund's limitation on illiquid investments. Participation interests in revolving
credit facilities will be subject to the limitations discussed above under "Loan
Participations." Delayed funding loans and revolving credit facilities are
considered to be debt obligations for purposes of the Company's investment
restriction relating to the lending of funds or assets by the Fund.
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: 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
SAI 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-advisors continually monitor
the investments in a Fund and evaluate 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 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 may or may not
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
segregates 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 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 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 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.
Currency Futures Contracts and Related Options. 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. Unlike forward foreign currency exchange contracts,
currency futures contracts are standardized as to amount and delivery period and
are traded on boards of trade and commodities exchanges. 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 SAI 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. 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 generally will purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons.
Mortgage-Backed Securities. When a Fund owns a mortgage-backed
security, 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. Moreover, as the result of the prevailing political
climate, the Fund may not be able to obtain legal remedies or enforce judgements
in foreign countries.
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
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.
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 effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
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 October 31, 1998:
<TABLE>
<CAPTION>
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
Current Yield 3.65% 3.15% 3.15% 3.15%
Effective Yield 3.72% 3.20% 3.20% 3.20%
</TABLE>
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 that had
commenced operations prior to October 31, 1998, other than the JPM Money Market
Fund, computed as of October 31, 1998, is shown below:
<TABLE>
<CAPTION>
Total Return
Class A Class B Class C Class X
<S> <C> <C> <C> <C> <C>
ASAF Founders International Small Capitalization Fund1
One Year -0.90% -2.10% 2.69% 0.40%
Since Inception -1.77% -2.12% 1.77% -0.24%
ASAF T. Rowe Price International Equity Fund1
One Year -0.11% -1.31% 3.48% 1.30%
Since Inception -6.72% -7.13% -3.43% -5.03%
ASAF Janus Overseas Growth Fund2
One Year n/a n/a n/a n/a
Since Inception 0.19% -0.90% 4.20% 1.62%
ASAF Janus Small-Cap Growth Fund1
One Year -13.00% -14.12% -9.40% -11.67%
Since Inception -10.94% -11.38% -7.53% -9.37%
ASAF T. Rowe Price Small Company Value Fund1
One Year -15.69% -16.31% -11.91 -14.11%
Since Inception -12.67% -13.18% -9.58% -11.37%
ASAF Neuberger Berman Mid-Cap Growth Fund3
One Year n/a n/a n/a n/a
Since Inception 12.06% 11.80% 16.90% 14.85%
ASAF Neuberger Berman Mid-Cap Value Fund3
One Year n/a n/a n/a n/a
Since Inception -2.85% -3.80% 1.20% -1.25%
ASAF Oppenheimer Large-Cap Growth Fund2
One Year n/a n/a n/a n/a
Since Inception -0.85% -1.70% 3.00% 0.70%
ASAF Marsico Growth Fund3
One Year n/a n/a n/a n/a
Since Inception -3.89% -4.90% 0.10% -2.48%
ASAF Janus Capital Growth Fund1
One Year 20.43% 20.40% 25.20% 23.53%
Since Inception 17.69% 18.46% 22.09% 20.97%
ASAF Lord Abbett Growth and Income Fund2
One Year n/a n/a n/a n/a
Since Inception 0.17% -0.68% 4.12% 1.85%
ASAF INVESCO Equity Income Fund1
One Year 7.95% 7.30% 12.19% 10.04%
Since Inception 10.17% 10.49% 14.34% 12.70%
ASAF American Century Strategic Balanced Fund1
One Year 4.39% 3.45% 8.33% 6.08%
Since Inception 3.39% 3.17% 7.16% 5.23%
ASAF Federated High Yield Bond Fund1
One Year -2.65% -4.42% 0.31% -1.88%
Since Inception -2.25% -2.97% 0.72% -0.93%
ASAF Total Return Bond Fund1
One Year 4.13% 2.36% 7.26% 5.07%
Since Inception 5.22% 4.28% 8.13% 6.47%
</TABLE>
1. Commenced operations July 28, 1997.
2. Commenced operations January 2, 1998.
3. Commenced operations August 19, 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:
YIELD = 2 [ (a - b + 1)6 - 1 ]
cd
Where: a = net investment income earned during the period attributable to
the subject class
b = net expenses accrued for the period attributable to the subject
class
c = the average daily number of shares of the subject class
outstanding during the period that were entitled to receive
dividends
d = the maximum offering price per share of the subject class
Net investment income will be determined in accordance with rules
established by the Commission. The price per share of Class A shares, 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 October 31,
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 8.17% 8.01% 7.77% 8.02%
ASAF Total Return Bond Fund 4.27% 3.98% 3.93% 3.94%
</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 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. 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. 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.
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.
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 (49)* 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 (46) Vice President President & Chief Operating Officer:
American Skandia Life Assurance
Corporation
Jan R. Carendi (54)* President, Principal Executive Officer Senior Executive Vice President &
and Director Member of Corporate Management Group:
Skandia Insurance Company Ltd.
David E. A. Carson (65)* Director Chairman
People's Bank People's Bank (January 1999-present)
850 Main Street Bridgeport,
CT 06604 Chairman & Chief Executive Officer:
People's Bank (January 1998 to December
1998)
President, Chairman & Chief Executive
Officer:
People's Bank (1983 to January 1998)
Richard G. Davy, Jr. (51) 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 (36) 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 (74) 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. O'Brien (48) 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 (64) 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.
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.
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.
The officers and Directors of the Company who are affiliates with the
Investment Manager 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 unaffiliated
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 paid by the Company to
the Directors in the fiscal year ended October 31, 1998. 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: Company and Fund Complex:(1)
<S> <C> <C>
Gordon C. Boronow $ 0 $ 0
Jan R. Carendi $ 0 $ 0
David E.A. Carson $21,275 $75,625
Julian A. Lerner $21,275 $74,125
Thomas M. Mazzaferro $ 0 $ 0
Thomas M. O'Brien $21,275 $75,625
F. Don Schwartz $21,275 $75,625
</TABLE>
(1) As of the date of this SAI, the "Fund Complex" consisted of the Company, the
Trust and American Skandia Trust. The amount indicated is the compensation paid
to the Directors by the Fund Complex for the twelve month period ending October
31, 1998.
As of July 13, 1999, the Directors and officers of the Company own, in
the aggregate, less than 1% of the shares of each class of the Company.
ADDITIONAL INFORMATION ON THE "MASTER FEEDER" FUND STRUCTURE
As previously discussed, certain Funds of the Company are organized
under a "master feeder" structure. 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.
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.
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."
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. 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 AIM International Equity Fund: 1.10%
ASAF Janus Overseas Growth Fund: 1.10%
ASAF Janus Small-Cap Growth 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 Oppenheimer Large-Cap Growth Fund: .90% of the first $1 billion;
plus .85% of the amount over $1 billion
ASAF Marsico Capital Growth Fund: 1.00%
ASMT Janus Capital Growth Portfolio: 1.00%
ASAF Bankers Trust Managed Index 500 Fund: 0.60%
ASAF Lord Abbett Growth and Income Fund: 1.00%
ASAF MFS Growth with 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>
Investment Management Fee Waivers. The Investment Manager 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 portions of its
investment management fees equal to .10% of the average daily net assets of the
ASAF Janus Overseas Growth Fund and .20% of the average daily net assets of the
ASAF Lord Abbett Growth and Income Fund.
The investment management fees paid for each Fund and Portfolio that
had commenced operations prior to October 31, 1998, for the fiscal period from
commencement of operations until October 31, 1997 and for the fiscal year ended
October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Period ended Year ended
Name of Fund October 31, 1997 October 31, 1998
------------ ---------------- ----------------
<S> <C> <C>
ASAF Founders International Small Capitalization Fund $520 $34,725
ASMT T. Rowe Price International Equity Portfolio $4,658 $94,058
ASAF Janus Overseas Growth Fund $0 $146,239
ASAF Janus Small-Cap Growth Fund $577 $46,399
ASAF T. Rowe Price Small Company Value Fund $1,530 $210,032
ASAF Neuberger Berman Mid-Cap Growth Fund $0 $1,920
ASAF Neuberger Berman Mid-Cap Value Fund $0 $2,770
ASAF Oppenheimer Large-Cap Growth Fund $0 $89,166
ASAF Marsico Capital Growth Fund $0 $43,773
ASMT Janus Capital Growth Portfolio $10,500 $578,304
ASAF Lord Abbett Growth and Income Fund $0 $114,324
ASMT INVESCO Equity Income Portfolio $4,791 $244,316
ASAF American Century Strategic Balanced Fund $1,513 $81,420
ASAF Federated High Yield Bond Fund $1,022 $148,821
ASMT PIMCO Total Return Bond Portfolio $4,456 $151,673
ASMT JPM Money Market Portfolio $1,134 $83,674
</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 Janus Small-Cap Growth 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 Oppenheimer Large-Cap 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 19, 1998. The ASAF AIM International Equity Fund, ASAF
Bankers Trust Managed Index 500 Fund, and ASAF MFS Growth with Income Fund
commenced operations on _______, 1999; therefore, no fees were paid in 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; (b) Rowe Price-Fleming International,
Inc. for the ASMT T. Rowe Price International Equity Portfolio; (c) A I M
Capital Management, Inc. for the ASAF AIM International Equity Fund; (d) Janus
Capital Corporation for the ASAF Janus Overseas Growth Fund, the ASMT Janus
Capital Growth Portfolio, and the ASAF Janus Small-Cap Growth Fund; (e) T. Rowe
Price Associates, Inc. for the ASAF T. Rowe Price Small Company Value Fund; (f)
Neuberger Berman Management Inc. for the ASAF Neuberger Berman Mid-Cap Growth
Fund and the ASAF Neuberger Berman Mid-Cap Value Fund; (g) OppenheimerFunds,
Inc. for the ASAF Oppenheimer Large-Cap Growth Fund; (h) Marsico Capital
Management, LLC for the ASAF Marsico Capital Growth Fund; (i) Bankers Trust
Company for the ASAF Bankers Trust Managed Index 500 Fund; (j) Lord, Abbett &
Co. for the ASAF Lord Abbett Growth and Income Fund; (k) Massachusetts Financial
Services Company for the ASAF MFS Growth with Income Fund; (l) INVESCO Funds
Group, Inc. for the ASMT INVESCO Equity Income Portfolio; (m) American Century
Investment Management, Inc. (formerly known as, "Investors Research
Corporation") for the ASAF American Century Strategic Balanced Fund; (n)
Federated Investment Counseling for the ASAF Federated High Yield Bond Fund; (o)
Pacific Investment Management Company for the ASMT PIMCO Total Return Bond
Portfolio; (p) 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.
Corporate Structure. Several of the Sub-advisors are controlled by other
parties as noted below:
Founders Asset Management LLC ("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, N.A. 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.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83%
of the outstanding voting stock of Janus Capital Corporation, most of which it
acquired in 1984. KCSI is a publicly-traded holding company whose primary
subsidiaries are engaged in transportation and financial services.
All of the voting stock of Neuberger Berman Management Inc. is owned by
individuals who are principals of Neuberger Berman, LLC.
NationsBank N.A., a national bank subsidiary of BankAmerica
Corporation, indirectly owns 50% of the voting control of Marsico Capital
Management, LLC ("Marsico Capital"). Thomas F. Marsico and a company controlled
by Mr.
Marsico own the remainder of Marsico Capital's voting interests.
American Century Companies, Inc. is the parent of American Century
Investment Management, Inc.
Federated Investment Counseling is a wholly owned subsidiary of
Federated Investors.
Pacific Investment Management Company ("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.
J.P. Morgan Investment Management Inc. is a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated, a bank holding company organized under the laws of
Delaware.
A I M Capital Management, Inc. is a wholly-owned subsidiary of A I M
Advisors, Inc. also a registered investment adviser. A I M Advisors, Inc. is
wholly-owned by A I M Management Group Inc., a holding company engaged in the
financial services business and an indirect wholly-owned subsidiary of AMVESCAP
PLC. AMVESCAP PLC and its subsidiaries are an independent investment management
group engaged in institutional investment management and retail mutual fund
businesses in the United States, Europe and the Pacific Region.
Bankers Trust Company is a wholly-owned subsidiary of Bankers Trust New
York Corporation, a wholly-owned subsidiary of Deutschebank.
Massachusetts Financial Services Company is a subsidiary of Sun Life of
Canada (US) Financial Services Holdings, Inc. whole ultimate parent is Sun Life
Assurance Co. of Canada.
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.
A I M Capital Management, Inc. for the ASAF AIM International Equity
Fund: An annual rate equal to the following percentages of the combined average
daily net assets of the Fund and the series of American Skandia Trust that is
managed by A I M Capital Management Inc. and identified by the Sub-advisor and
ASISI as being similar to the Fund of .55% of the portion of the combined
average daily net assets not in excess of $75 million; plus .45% of the portion
in excess of $75 million.
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.
Janus Capital Corporation for the ASAF Janus Small-Cap Growth Fund: An
annual rate of .50% of the portion of the average daily net assets of the Fund
not in excess of $100 million; plus .45% of the portion over $100 million but
not in excess of $500 million; plus .40% of the portion over $500 million but
not in excess of $1 billion; plus .35% of the portion in excess of $1 billion.
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 Inc. 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 Inc. for the ASAF Neuberger Berman Mid-Cap
Value Fund: An annual rate of .40% of the average daily net assets of the Fund.
OppenheimerFunds, Inc. for the ASAF Oppenheimer Large-Cap Growth
Portfolio: An annual rate of .35% of the portion of the average daily net assets
of the Fund not in excess of $500 million; plus .30% of the portion over $500
million but not in excess of $1 billion; plus .25% of the portion in excess of
$1 billion.
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.
Bankers Trust Company for the ASAF Bankers Trust Managed Index 500
Fund: An annual rate equal to the following percentages of the combined series
of American Skandia Trust that is managed by Bankers Trust Company and
identified by the Sub-Advisor and ASISI as being similar to the Fund of .17% of
the portion of the combined average daily net assets not in excess of $300
million; plus .13% of the portion over $300 million but not in excess of $1
billion; plus .08% of the portion in excess of $1 billion.
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.
Massachusetts Financial Services Company for the ASAF MFS Growth with
Income Fund: An annual rate equal to the following percentages of the combined
average daily net assets of the Fund and the domestic equity series of American
Skandia Trust that is managed by Massachusetts Financial Services Company of
.40% of the portion of the combined average daily net assets not in excess of
$300 million; plus .375% of the portion over $300 million but not in excess of
$600 million; plus .35% of the portion over $600 million but not in excess of
$900 million; plus .325% of the portion over $900 million, but not over $1.5
billion; plus .25% of the portion in excess of $1.5 billion.
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.
Sub-Advisory Fee Waivers. Certain Sub-advisors have voluntarily agreed to
waive a portion of their sub-advisory fees set forth above, as follows:
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. Furthermore, the Sub-advisor has voluntarily agreed to waive an
additional portion of its fee equal to .05% of the Portfolio's average daily net
assets so long as the combined average daily net assets of the Portfolio and the
AST T. Rowe Price International Equity Portfolio of American Skandia Trust equal
or exceed $500 million.
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 March 1, 1999, Janus Capital Corporation, the Sub-advisor
for the ASAF Janus Small-Cap Growth Fund, has voluntarily agreed to waive a
portion of its sub-advisory fee equal to .05% of the portion of the average
daily net assets over $400 million but not in excess of $500 million and .05% on
assets over $900 million but not in excess of $1 billion.
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.
The sub-advisory fees paid by the Investment Manager for each Fund and
Portfolio that had commenced operations prior to October 31, 1998, for the
fiscal period from commencement of operations until October 31, 1997 and for the
fiscal year ended October 31, 1998, were as follows:
<TABLE>
<CAPTION>
Name of Fund Period Ended Year Ended
October 31, 1997 October 31, 1998
<S> <C> <C>
ASAF Founders International Small Capitalization Fund $284 $18,941
ASMT T. Rowe Price International Equity Portfolio $2,329 $47,029
ASAF Janus Overseas Growth Fund $0 $66,472
ASAF Janus Small-Cap Growth Fund $320 $25,777
ASAF T. Rowe Price Small Company Value Fund $917 $126,019
ASAF Neuberger Berman Mid-Cap Growth Fund $0 $853
ASAF Neuberger Berman Mid-Cap Value Fund $0 $1,231
ASAF Oppenheimer Large-Cap Growth Fund $0 $40,530
ASAF Marsico Capital Growth Fund $0 $19,698
ASMT Janus Capital Growth Portfolio $4,725 $260,237
ASAF Lord Abbett Growth and Income Fund $0 $34,297
ASMT INVESCO Equity Income Portfolio $2,235 $114,014
ASAF American Century Strategic Balanced Fund $839 $45,233
ASAF Federated High Yield Bond Fund $365 $53,150
ASMT PIMCO Total Return Bond Portfolio $1,714 $58,336
ASMT JPM Money Market Portfolio $204 $15,061
</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 Janus Small-Cap Growth 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, Oppenheimer Large-Cap 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 19, 1998. The ASAF AIM International Equity Fund, ASAF Bankers Trust
Managed Index 500 Fund, and ASAF MFS Growth with Income Fund commenced
operations on _____________, 1999.
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. 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.
Under the terms of the Administration Agreements, the Administrator
shall be obligated to exercise care and diligence in the performance of its
duties, to act in good faith and to use its best efforts, within reasonable
limits, in performing services to be provided for under the agreements. The
Administrator shall be liable for any damages arising out of its failure to
perform its duties under the Administration Agreements to the extent such
damages arise out of its willful misfeasance, bad faith, gross negligence or
reckless disregard of such duties. Any person, even though also an officer,
director, partner, employee or agent of the Administrator, who may be or become
an officer, director, trustee, employee or agent of the Company or the Trust,
shall be deemed when rendering services to the Company or the Trust or acting on
any business of the Company or the Trust (other than services or business in
connection with the Administrator's duties under the Administration Agreements)
to be rendering such services to or acting solely for the Company or the Trust
and not as an officer, director, partner, employee or agent or one under the
control or direction of the Administrator even though paid by them. The
Administration Agreements shall continue until terminated by either party on 60
days' prior written notice to the other party.
As compensation for the services and facilities provided by the
Administrator 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.
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. For the
fiscal year ended October 31, 1998, the Company paid the Administrator $507,368
and the Trust paid the Administrator $291,316.
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.
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, 2000 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 AIM International Equity Fund: _____%
ASAF Janus Overseas Growth Fund: 1.60%
ASAF Janus Small-Cap Growth 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 Oppenheimer Large-Cap Growth Fund: 1.30%
ASAF Marsico Capital Growth Fund: 1.25%
ASAF Janus Capital Growth Fund: 1.20%
ASAF Bankers Trust Managed Index 500 Fund: _____%
ASAF Lord Abbett Growth & Income Fund: 1.10%
ASAF MFS Growth with Income Fund: _____%
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, 2000. 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 following table shows, for the fiscal year ended October 31, 1998,
information about the compensation received by the Distributor:
<TABLE>
<CAPTION>
<S> <C> <C>
Net Underwriting Commissions
(portion of initial sales charge retained by Distributor): $0
Compensation on Redemptions: $164,020
Brokerage Commissions: $0
Other Compensation (compensation from Distribution Plans): $1,931,094
</TABLE>
For the fiscal year ended October 31, 1998, aggregate underwriting
commissions were $2,691,543, of which, as noted above, $0 was retained by the
Distributor. For the fiscal period ended October 31, 1997, aggregate
underwriting commissions were $90,116, of which $0 was retained by the
Distributor.
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 following table shows, for the year ended December 31, 1998, the
amounts paid by the Funds under each Plan, as well as the nature and amount of
the expenditures made under the Plans:
Class A Plan
Amount Paid by Funds: $265,127
Expenditures:
Trail commissions $268,931
Sales literature $45,294
Prospectus & report printing $23,322
Salaries & direct expenses $153,458
Wholesaler compensation $116,581
Class B Plan
Amount Paid by Funds: $1,171,019
Expenditures:
Up-front commissions $18,832,217
Sales literature $101,357
Prospectus & report printing $52,807
Salaries & direct expenses $347,053
Wholesaler compensation $319,433
Class C Plan
Amount Paid by Funds: $540,302
Expenditures:
Up-front commissions $1,368,349
Trail commissions $10,529
Sales literature $46,130
Prospectus & report printing $24,441
Salaries & direct expenses $162,176
Wholesaler compensation $139,784
Class X and New Class X Plan
Amount Paid by Funds: $973,392
Expenditures:
Up-front commissions $5,941,301
Bonus Share purchases $4,233,768
Sales literature $85,851
Prospectus & report printing $46,872
Salaries & direct expenses $300,299
Wholesaler compensation $171,099
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).
DEALER COMPENSATION INFORMATION
In addition to the dealer compensation information described in the
Company's Prospectus, the following may be applicable to the purchase of Fund
shares.
Class A Dealer Compensation. The concessions paid to dealers and
brokers from the initial sales charge on the sale of Class A shares are as
follows:
<TABLE>
<CAPTION>
High Yield Bond & Total Return Bond Funds: All Other Funds (other than Money Market
Fund):
Concession Concession
(as % of (as % of
Amount of Purchase: offering offering
price) price)
<S> <C> <C> <C>
Less than $50,000 3.50% 4.25%
$50,000 up to $100,000 3.00% 3.50%
$100,000 up to $250,000 2.50% 2.50%
$250,000 up to $500,000 1.75% 1.75%
$500,000 up to $1 million 1.25% 1.25%
</TABLE>
In addition, the Distributor may allocate the entire amount of the
initial sales charge for the sale of Class A shares to dealers for all sales
occurring during a particular period.
The Distributor uses distribution and service fees received under the
Class A Plan to compensate qualified dealers for services provided in connection
with the sale of shares and the maintenance of shareholder accounts. Such
compensation generally 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. However, in the case
of shares purchased at NAV with a CDSC, the Distributor will pay the dealer of
record a sales commission in an amount equal to 0.50% of the amount invested,
and the ongoing compensation will not begin until one year after purchase. NAV
shares are not subject to the one-year exclusion in cases where the shareholder
has made arrangements with the Company and the dealer of record waives the sales
commission.
Class B Dealer Compensation. The Distributor uses distribution and
service fees received under the Class B Plan to compensate qualified dealers for
services provided in connection with the sale of 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.
The Distributor normally pays a sales concession 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 concession
to the dealer.
Class X Dealer Compensation. The Distributor uses distribution and
service fees received under the Class X Plan as reimbursement for its purchases
of Bonus Shares, as well as to compensate qualified dealers, brokers, banks and
other financial institutions for services provided in connection with the sale
of Class X shares and the maintenance of shareholder accounts. Such latter
compensation is paid by the Distributor quarterly at an annual rate not to
exceed 0.50% of the Fund's average daily net assets attributable to Class X
shares (and any shares purchased by the reinvestment of dividends or capital
gains as such shares) held for over seven years.
The Distributor normally pays a sales concession 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 concession
to the dealer.
Class C Dealer Compensation. The Distributor uses distribution and
service fees received under the Class C Plan to compensate qualified dealers for
services provided in connection with the sale of 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.
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
REDUCTION OR WAIVER OF SALES CHARGES AND CDSC ON CLASS A SHARES:
The Company's Prospectus under "How to Buy Shares" describes certain
reductions and/or waivers of sales charges and CDSC that apply to the purchase
of Class A Shares. The following provides more specific information on such
reductions or waivers as well as certain additional waivers.
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) 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; (8) any
Sub-advisor of the Company or the Trust; and (9) shares issued in plans of
reorganization, such as mergers, asset acquisitions and exchange offers, to
which a Fund is a party.
Waiver of Class A CDSC. The Class A CDSC is waived in the following
cases if shares are redeemed and the Transfer Agent is notified: (1) redemptions
under a Systematic Withdrawal Plan as described in this Prospectus under
"Special Investment Programs and Privileges"; (2) redemptions to pay premiums
for optional insurance coverage described in this Prospectus under "Special
Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4)
distributions or loans to participants of qualified retirement plans and other
employee benefit plans; (5) 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; (7) the
return of excess contributions made to your IRA, SIMPLE IRA, 403(b)(7) plan or
401(k) plan; and (8) where the shareholder has made arrangements with the
Company and the dealer of record waives its initial sales commission.
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)
individual purchases by a trustee (or other fiduciary) if the investment is for
a single trust estate or single fiduciary account, including an employee benefit
plan other than those described above; and (2) 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: 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.
For the fiscal year ended October 31, 1998, aggregate brokerage commissions of
$320,297 and $177,016 were paid in relation to brokerage transactions of the
Company and the Trust, respectively. The increase in commissions paid is
primarily the result of the increase in the Company's and Trust's net assets and
the fact that the figures for the year ended October 31, 1998 reflect a full
year of operation.
During the period ended 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. During the
fiscal year ended October 31, 1998, 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 $821. For that period, 2.5% of
the total brokerage commissions paid by this Portfolio were paid to the
affiliated brokers, with respect to transactions representing 2.8% of the
Portfolio's total dollar amount of transactions involving the payment of
commissions. During the fiscal year ended October 31, 1998, brokerage
commissions were paid to NationsBanc Montgomery Securities LLC, an affiliate of
the former Sub-advisor to the ASAF Oppenheimer Small-Cap Growth Fund, by this
Fund in the amount of $3,542. For that period, 7.2% of the total brokerage
commissions paid by this Fund were paid to the affiliated broker, with respect
to transactions representing 8.8% of the Fund's total dollar amount of
transactions involving the payment of commissions. During the fiscal year ended
October 31, 1998, brokerage commissions were paid to J.P. Morgan Securities,
Inc., an affiliate of American Century Investment Management, Inc., by the ASAF
American Century Strategic Balanced Fund in the amount of $735. For that period,
5.4% of the total brokerage commissions paid by this Fund were paid to the
affiliated broker, with respect to transactions representing 2.9% of the Fund's
total dollar amount of transactions involving the payment of commissions. During
the fiscal year ended October 31, 1998, brokerage commissions were paid to
Neuberger Berman, LLC, an affiliate of Neuberger Berman Management Inc., by the
ASAF Neuberger Berman Mid-Cap Growth Fund in the amount of $1812. For that
period, 51.8% of the total brokerage commissions paid by this Fund were paid to
the affiliated broker, with respect to transactions representing 58.3% of the
Fund's total dollar amount of transactions involving the payment of commissions.
During the fiscal year ended October 31, 1998, brokerage commissions were paid
to Neuberger Berman, LLC by the ASAF Neuberger Berman Mid-Cap Value Fund in the
amount of $688. For that period, 16.4% of the total brokerage commissions paid
by this Fund were paid to the affiliated broker, with respect to transactions
representing 18.1% of the Fund'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 Turnover."
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 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.
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
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 (220 million); ASAF T. Rowe Price International Equity
Fund (220 million); ASAF AIM International Equity Fund (220 million); ASAF Janus
Overseas Growth Fund (220 million); ASAF Janus Small-Cap Growth Fund (260
million); ASAF T. Rowe Price Small Company Value Fund (220 million); ASAF
Neuberger Berman Mid-Cap Growth Fund (220 million); ASAF Neuberger Berman
Mid-Cap Value Fund (220 million); ASAF Oppenheimer Large-Cap Growth Fund (220
million); ASAF Marsico Capital Growth Fund (220 million); ASAF Janus Capital
Growth Fund (220 million); ASAF Bankers Trust Managed Index 500 Fund (220
million); ASAF Lord Abbett Growth and Income Fund (220 million); ASAF MFS Growth
with Income Fund (220 million); ASAF INVESCO Equity Income Fund (220 million);
ASAF American Century Strategic Balanced Fund (220 million); ASAF Federated High
Yield Bond Fund (220 million); ASAF Total Return Bond Fund (220 million); and
ASAF JPM Money Market Fund (1.5 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. 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. 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. 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.
The following table lists persons owning more than 5% of any class of the
Fund's outstanding shares as of July 12, 1999.
<TABLE>
<CAPTION>
American Skandia Advisor Funds, Inc., - Report of 5% or Greater Owners
As of July 12, 1999
- ------------------------------------------ ------------------------------------ -------------------------------------- ------------
Fund and Share Class Owner Name Address Percent
Ownership
- ------------------------------------------ ------------------------------------ -------------------------------------- -----------
<S> <C> <C>
ASAF Founders International Small N/A N/A N/A
Capitalization Fund Class A, B, C and X
ASAF T. Rowe Price International Equity Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 15.39%
Fund Class A American Skandia #5000149000 Calabasas, CA 91372
ASAF T. Rowe Price International Equity N/A N/A N/A
Fund Class B, C and X
ASAF Janus Overseas Growth Fund N/A N/A N/A
Class A, B, C and X
ASAF Janus Small-Cap Growth Fund Class A Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 6.10%
American Skandia #5000149000 Calabasas, CA 91372
ASAF Janus Small-Cap Growth Fund N/A N/A N/A
Class B, C and X
ASAF T. Rowe Price Small Co. Value Fund
Class A, B, C and X N/A N/A N/A
ASAF Neuberger Berman Mid-Cap Growth Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 10.66%
Fund Class A American Skandia #5000149000 Calabasas, CA 91372
Trustar Trustee 150 N. Broad Street 5.28%
FBO Parkway Corporation Philadelphia, PA 19102-1499
Retirement Plan
ASAF Neuberger Berman Mid-Cap Growth N/A N/A N/A
Fund Class B and C
ASAF Neuberger Berman Mid-Cap Growth Robert R. Brink & Diana M. Ganster RR Brink Locking Systems Inc PSP 6.11%
Fund Class X & Charles R. Brink TTEES 500 Earl Road
Shorewood, IL 60431
ASAF Neuberger Berman Mid-Cap Value Fund Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 6.36%
Class A American Skandia #5000149000 Calabasas, CA 91372
ASAF Neuberger Berman Mid-Cap Value Fund N/A N/A N/A
Class B, C and X
ASAF Oppenheimer Large-Cap Growth Fund Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 6.24%
Class A American Skandia #5000149000 Calabasas, CA 91372
ASAF Oppenheimer Large-Cap Growth Fund N/A N/A N/A
Class B, C and X
ASAF Marsico Capital Growth Fund N/A N/A N/A
Class A, B, C and X
ASAF Janus Capital Growth Fund N/A N/A N/A
Class A, B, C and X
ASAF Lord Abbett Growth and Income Fund Wells Fargo TTEE P.O. Box 9800 MAC #2141-028 MTL FD 6.00%
Class A American Skandia #5000149000 Calabasas, CA 91372
ASAF Lord Abbett Growth and Income Fund N/A N/A N/A
Class B, C and X
ASAF INVESCO Equity Income Fund N/A N/A N/A
Class A, B, C and X
ASAF American Century Strategic Balanced N/A N/A N/A
Fund Class A, B, C and X
ASAF Federated High Yield Bond Fund N/A N/A N/A
Class A, B, C and X
ASAF Total Return Bond Fund N/A N/A N/A
Class A and B
ASAF Total Return Bond Fund Donaldson Lufkin Jenrette P.O. Box 2052 7.32%
Class C Securities Corporation Jersey City, NJ 07303
ASAF Total Return Bond Fund N/A N/A N/A
Class X
ASAF JPM Money Market Fund Trustar Retirement Services Ttee 1746 Executive Drive 10.39%
Class A Oconomowoc Residential Program Oconomowoc, WI 53066
401(k) Profit Sharing Plan
Trustar Trustee 150 N. Broad Street 5.60%
FBO Parkway Corporation Retirement Philadelphia, PA 19102
Plan
ASAF JPM Money Market Fund N/A N/A N/A
Class B, C and X
</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:
PFPC Trust Company, 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. The Chase Manhattan Bank, 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), the ASAF AIM International Equity Fund, 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 and dividend paying agent for the Company.
INDEPENDENT ACCOUNTANTS:
PricewaterhouseCoopers LLP, 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.
Legal Counsel:
Stradley Ronon Stevens & Young, LLP, located at 2600 Commerce Square,
Philadelphia, PA 19103-7098, 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.
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.
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements of each Fund for the period ended October
31, 1998, together with the notes thereto and the report of
PricewaterhouseCoopers LLP, are attached to this SAI.
[To be filed by future amendment]
<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.
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>
<TABLE>
<CAPTION>
PART C: OTHER INFORMATION
ITEM 23. Exhibits
<S> <C> <C> <C>
(i) (a). (1) Articles of Incorporation of Registrant.
(iii) (2) Amendment to Articles of Incorporation of Registrant dated July 3, 1997.
(iv) (3) Amendment to Articles of Incorporation of Registrant dated July 17, 1997.
(vi) (4) Articles Supplementary of Registrant dated December 29, 1997.
(viii) (5) Articles Supplementary of Registrant dated August 14, 1998.
(viii) (6) Articles Supplementary of Registrant dated December 18, 1998.
(i) (b). By-laws of Registrant.
(c). None.
(ii) (d). (1) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for
the ASAF Founders International Small
Capitalization Fund.
(2) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF AIM International Equity Fund.
(v) (3) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Janus Overseas Growth Fund.
(viii) (4) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Janus Small-Cap Growth Fund.
(ii) (5) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF T.Rowe Price Small Company Value Fund.
(vii) (6) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Neuberger Berman Mid-Cap Growth Fund.
(vii) (7) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Neuberger Berman Mid-Cap Value Fund.
(viii) (8) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Oppenheimer Large-Cap Growth Fund.
(vii) (9) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Marsico Capital Growth Fund.
(10) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Bankers Trust Managed Index 500 Fund.
(v) (11) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Lord Abbett Growth and Income Fund.
(12) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF MFS Growth with Income Fund.
(ii) (13) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for
the ASAF American Century Strategic Balanced
Fund.
(ii) (14) Form of Investment Management Agreement
between Registrant and American Skandia
Investment Services, Incorporated for the
ASAF Federated High Yield Bond Fund.
(vii) (15) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Founders Asset Management
LLC for the ASAF Founders International
Small Capitalization Fund.
(v) (16) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Janus Capital Corporation
for the ASAF Janus Overseas Growth Fund.
(17) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and A I M Capital Management,
Inc. for the ASAF AIM International Equity
Fund.
(ix) (18) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Janus Capital Corporation
for the ASAF Janus Small-Cap Growth Fund.
(ii) (19) 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.
(vii) (20) 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.
(vii) (21) 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.
(ix) (22) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and OppenheimerFunds, Inc. for
the ASAF Oppenheimer Large-Cap Growth Fund.
(23) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Marsico Capital Management,
LLC for the ASAF Marsico Capital Growth
Fund.
(24) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Bankers Trust Company for
the ASAF Bankers Trust Managed Index 500
Fund.
(v) (25) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Lord, Abbett & Co. for the
ASAF Lord Abbett Growth and Income Fund.
(26) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Massachusetts Financial
Services Company for the ASAF MFS Growth with
Income Fund.
(iii) (27) 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) (28) Form of Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Federated Investment
Counseling for the ASAF Federated High Yield
Bond Fund.
(ii) (e). (1) Form of Underwriting and Distribution
Agreement between Registrant and American
Skandia Marketing, Incorporated.
(iii) (2) Form of Sales Agreement with American Skandia
Marketing, Incorporated.
(f). None.
(ii) (g). (1) Form of Custody Agreement between Registrant and PNC Bank.
(ii) (2) Form of Custody Agreement between Registrant and Morgan Stanley Trust Company.
(vi) (3) Form of Amendment to Custody Agreement between Registrant and PNC Bank.
(viii) (4) Form of Foreign Custody Manager Delegation Amendment.
(ii) (h). (1) Form of Administration Agreement between Registrant and PFPC Inc.
(ii) (2) Form of Transfer Agency and Service Agreement between Registrant and State Street Bank
and Trust Company.
(vii) (3) Form of Administration Agreement between Registrant and American Skandia Investment
Services, Incorporated.
(vii) (4) Form of Amendment to Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company.
(i). Opinion and Consent of Counsel to Registrant.
(j). (1) Consent of Independent Public Accountants of Registrant
(2) Consent of Independent Public Accountants of American Skandia Master Trust
(iii) (3) Consent of Caplin & Drysdale.
(v) (4) Opinion of Caplin & Drysdale
(iii) (5) Consent of Rogers & Wells.
(v) (6) Opinion of Rogers & Wells.
(k). None.
(ii) (l). Form of Share Purchase Agreement.
(ii) (m). (1) Form of Distribution and Service Plan for Class A Shares.
(ii) (2) Form of Distribution and Service Plan for Class B Shares.
(ii) (3) Form of Distribution and Service Plan for Class C Shares.
(ii) (4) Form of Distribution and Service Plan for Class X Shares.
(vi) (5) Form of Distribution and Service Plan for New Class X Shares.
(n). Financial Data Schedules.
(vi) (o). Form of Rule 18f-3 Plan.
</TABLE>
- --------------------------------------
(i) Incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A as filed with the Securities and Exchange
Commission (the "Commission") on March 10, 1997.
(ii) Incorporated by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on June 4, 1997.
(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.
(vi) Incorporated by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on June 5, 1998.
(vii) Incorporated by reference to Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on August 18, 1998.
(viii) Incorporated by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on December 31, 1998.
(ix) Incorporated by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A as filed with the
Commission on February 26, 1999.
ITEM 24. 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.
ITEM 25. 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 26. 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 9, 1999, 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) A I M Capital Management, Inc., 11
Greenway Plaza, Suite 100, Houston, TX 77046 (d) Janus Capital Corporation, 100
Fillmore Street, Denver, Colorado 80206-4923; (e) T. Rowe Price Associates,
Inc., 100 East Pratt Street, Baltimore, Maryland 21209; (f) Neuberger Berman
Management Inc. 605 Third Avenue, New York, NY 10158; (g) OppenheimerFunds,
Inc., Two World Trade Center, New York, NY 10048-0203; (h) Marsico Capital
Management, LLC, 1200 17th Street, Denver, CO 80202; (i) Bankers Trust Company,
One Bankers Trust Plaza, New York, NY 10006 (j) Lord, Abbett & Co., The General
Motors Building, 767 Fifth Avenue, New York, NY 10153; (k) Massachusetts
Financial Services Company, 500 Boylston Street, Boston, Massachusetts 02116 (l)
INVESCO Funds Group, Inc., 7800 East Union Avenue, Denver, Colorado 80217-3706;
(m) American Century Investment Management, Inc. (formally named, "Investors
Research Corporation"), Twentieth Century Tower, 4500 Main Street, Kansas City,
Missouri 64111; (n) Federated Investment Counseling, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779; (o) Pacific Investment Management Company,
840 Newport Center Drive, Suite 360, Newport Beach, California 92660; and (p)
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 27. 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>
Patricia J. Abram Senior Vice Present & National None
Sales Manager, Variable Life
Gordon C. Boronow Deputy Chief Executive Officer & Vice President
Director
Kimberly A. Bradshaw Vice President & National None
Sales Manager/ Qualified Plans
Jan R. Carendi Chairman, Chief Executive Officer & President, Principal Executive Officer
Director & Director
Robert Brinkman Senior Vice President, National None
Sales Manager
Kathleen A. Chapman Assistant Corporate Secretary None
Lucinda C. Ciccarello Vice President, Mutual Funds None
Wade A. Dokken President, Deputy Chief Executive None
Officer & Director
Ian Kennedy Senior Vice Present, Customer None
Service
T. Richard Kennedy General Counsel None
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, None
Chief Financial Officer & Director
Eileen S. McCann Vice President, Key Accounts None
Marketing
David R. Monroe Senior Vice President, Treasurer None
and Corporate Controller
Michael A. Murray Vice President & National Sales None
Manager/American Skandia Advisor
Funds, Inc.
Brian O'Connor Vice President & National Sales None
Manager, Internal Wholesaling
M. Priscilla Pannell Corporate Secretary None
Kathleen A. Pritchard Vice President, National Key None
Accounts/Financial Institutions
Hayward L. Sawyer Executive Vice President, National None
Sales Manager & Director
Anders O. Soderstrom Executive Vice President None
Leslie S. Sutherland Vice President, National Accounts None
Manager
Amanda C. Sutyak Vice President None
Christian A. Thwaites Senior Vice President & National None
Marketing Director
Mary Toumpas Vice President & Compliance Director None
Bayard F. Tracy Senior Vice President, National None
Sales Manager & Director
Deborah G. Ullman Senior Vice President, Chief None
Operating Officer, Finance and
Business Operations & Director
</TABLE>
ITEM 28. Location of Accounts and Records
Records regarding the Registrant's securities holdings are maintained
at Registrant's Custodians, PFPC Trust Company, Airport Business Center,
International Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and
The Chase Manhattan Bank, 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 29. Management Services
None.
ITEM 30. Undertakings
None.
<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, duly authorized, in the City of Shelton, and State of
Connecticut, on the 23rd day of July, 1999.
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> <C>
/s/ Gordon C. Boronow* Vice President 7/23/99
Gordon C. Boronow
/s/ Jan R. Carendi* President, Principal Executive 7/23/99
Jan R. Carendi Officer & Director
/s/ David E.A. Carson* Director 7/23/99
David E.A. Carson
/s/ Richard G. Davy, Jr. Treasurer (Chief Financial and 7/23/99
Richard G. Davy, Jr. Accounting Officer)
/s/ Julian A. Lerner* Director 7/23/99
Julian A. Lerner
/s/ Thomas M. O'Brien* Director 7/23/99
Thomas M. O'Brien
/s/ F. Don Schwartz* Director 7/23/99
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, duly
authorized, in the City of Shelton, and State of Connecticut, on the 23rd day of
July, 1999.
AMERICAN SKANDIA MASTER TRUST
By: /s/ Eric C. Freed
Eric C. Freed
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Gordon C. Boronow* Vice President 7/23/99
Gordon C. Boronow
/s/ Jan R. Carendi* President (Chief Executive Officer) & 7/23/99
Jan R. Carendi Trustee
/s/ David E.A. Carson* Trustee 7/23/99
David E.A. Carson
/s/ Richard G. Davy, Jr.* Vice President (Controller) 7/23/99
Richard G. Davy, Jr.
/s/ Julian A. Lerner* Trustee 7/23/99
Julian A. Lerner
/s/Thomas M. O'Brien* Trustee 7/23/99
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 7/23/99
F. Don Schwartz
/s/ C. Ake Svensson* Treasurer 7/23/99
C. Ake Svensson
</TABLE>
*By: /s/ Eric C. Freed
Eric C. Freed
*Pursuant to Powers of Attorney previously filed.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Registration Statement Under
The Securities Act of 1933 and
The Investment Company Act of 1940
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
(d)(2) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF AIM
International Equity Fund.
(d)(10) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF
Bankers Trust Managed Index 500 Fund.
(d)(12) Form of Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for the ASAF MFS
Growth with Income Fund.
(d)(17) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and A I M Capital Management, Inc. for the
ASAF AIM International Equity Fund.
(d)(23) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Marsico Capital Management, Inc. for the
ASAF Marsico Capital Growth Fund.
(d)(24) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Bankers Trust Company for the ASAF Bankers
Trust Managed Index 500 Fund.
(d)(26) Form of Sub-advisory Agreement between American Skandia Investment
Services, Incorporated and Massachusetts Financial Services Company for the
ASAF MFS Growth with Income Fund.
(i) Opinion and Consent of Counsel to Registrant.
(j)(1) Consent of Independent Public Accountants of Registrant.
(j)(2) Consent of Independent Public Accountants of American
Skandia Master Trust.
</TABLE>
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
AMERICAN SKANDIA ADVISOR FUNDS, INC.
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Marsico Capital Management, LLC (the
"Sub-Adviser").
W I T N E S S E T H
WHEREAS, American Skandia Advisor Funds, Inc. (the "Company") is a Maryland
corporation organized with one or more series of shares and is registered as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "ICA"); and
WHEREAS, the Investment Manager and the Sub-Adviser each is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); and
WHEREAS, the Board of Directors of the Company (the "Directors") have engaged
the Investment Manager to act as investment manager for the ASAF Marsico Capital
Growth Fund (the "Fund"), one series of the Company, under the terms of a
management agreement, dated August 19, 1998, with the Company (the "Management
Agreement"); and
WHEREAS, the Investment Manager, acting pursuant to the Management Agreement,
wishes to engage the Sub-Adviser, and the Directors have approved the engagement
of the Sub-Adviser, to provide investment advice and other investment services
set forth below.
NOW, THEREFORE, the Investment Manager and the Sub-Adviser agree as follows:
1. Investment Services. The Sub-Adviser will formulate and implement a
continuous investment program for the Fund conforming to the investment
objective, investment policies and restrictions of the Fund as set forth in the
Prospectus and Statement of Additional Information of the Company as in effect
from time to time (together, the "Registration Statement"), the Articles of
Incorporation and By-laws of the Company, and any investment guidelines or other
instructions received by the Sub-Adviser in writing from the Investment Manager
from time to time. Any amendments to the foregoing documents will not be deemed
effective with respect to the Sub-Adviser until the Sub-Adviser's receipt
thereof. The appropriate officers and employees of the Sub-Adviser will be
available to consult with the Investment Manager, the Company and the Directors
at reasonable times and upon reasonable notice concerning the business of the
Company, including valuations of securities which are not registered for public
sale, not traded on any securities market or otherwise may be deemed illiquid
for purposes of the ICA; provided it is understood that the Sub-Adviser is not
responsible for daily pricing of the Fund's assets.
Subject to the supervision and control of the Investment Manager, which
in turn is subject to the supervision and control of the Directors, the
Sub-Adviser in its discretion will determine which issuers and securities will
be purchased, held, sold or exchanged by the Fund or otherwise represented in
the Fund's investment portfolio from time to time and, subject to the provisions
of paragraph 3 of this Agreement, will place orders with and give instructions
to brokers, dealers and others for all such transactions and cause such
transactions to be executed. Custody of the Fund will be maintained by a
custodian bank (the "Custodian") and the Investment Manager will authorize the
Custodian to honor orders and instructions by employees of the Sub-Adviser
designated by the Sub-Adviser to settle transactions in respect of the Fund. No
assets may be withdrawn from the Fund other than for settlement of transactions
on behalf of the Fund except upon the written authorization of appropriate
officers of the Company who shall have been certified as such by proper
authorities of the Company prior to the withdrawal.
The Sub-Adviser will not be responsible for the provision of
administrative, bookkeeping or accounting services to the Fund except as
specifically provided herein, as required by the ICA or the Advisers Act or as
may be necessary for the Sub-Adviser to supply to the Investment Manager, the
Fund or the Fund's shareholders the information required to be provided by the
Sub-Adviser hereunder. Any records maintained hereunder shall be the property of
the Fund and surrendered promptly upon request.
In furnishing the services under this Agreement, the Sub-Adviser will
comply with and use its best efforts to enable the Fund to conform to the
requirements of: (i) the ICA and the regulations promulgated thereunder; (ii)
Subchapter M of the Internal Revenue Code and the regulations promulgated
thereunder; (iii) other applicable provisions of state or federal law; (iv) the
Articles of Incorporation and By-laws of the Company; (v) policies and
determinations of the Company and the Investment Manager provided to the
Sub-Adviser in writing; (vi) the fundamental and non-fundamental investment
policies and restrictions applicable to the Fund, as set out in the Registration
Statement of the Company in effect, or as such investment policies and
restrictions from time to time may be amended by the Fund's shareholders or the
Directors and communicated to the Sub-Adviser in writing; (vii) the Registration
Statement; and (viii) investment guidelines or other instructions received in
writing from the Investment Manager. Notwithstanding the foregoing, the
Sub-Adviser shall have no responsibility to monitor compliance with limitations
or restrictions for which information from the Investment Manager or its
authorized agents is required to enable the Sub-Adviser to monitor compliance
with such limitations or restrictions unless such information is provided to the
Sub-adviser in writing. The Sub-Adviser shall supervise and monitor the
activities of its representatives, personnel and agents in connection with the
investment program of the Fund.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisers to provide investment advice and other
services to the Fund or to series or portfolios of the Company for which the
Sub-Adviser does not provide such services, or to prevent the Investment Manager
from providing such services itself in relation to the Fund or such other series
or portfolios.
The Sub-Adviser shall be responsible for the preparation and filing of
Schedule 13-G and Form 13-F on behalf of the Fund. The Sub-Adviser shall not be
responsible for the preparation or filing of any other reports required of the
Fund by any governmental or regulatory agency, except as expressly agreed in
writing.
2. Investment Advisory Facilities. The Sub-Adviser, at its expense, will furnish
all necessary investment facilities, including salaries of personnel, required
for it to execute its duties hereunder.
3. Execution of Fund Transactions. In connection with the investment and
reinvestment of the assets of the Fund, the Sub-Adviser is responsible for the
selection of broker-dealers to execute purchase and sale transactions for the
Fund in conformity with the policy regarding brokerage as set forth in the
Registration Statement, or as the Directors may determine from time to time, as
well as the negotiation of brokerage commission rates with such executing
broker-dealers. Generally, the Sub-Adviser's primary consideration in placing
Fund investment transactions with broker-dealers for execution will be to
obtain, and maintain the availability of, best execution at the best available
price.
Consistent with this policy, the Sub-Adviser, in selecting
broker-dealers and negotiating brokerage commission rates, will take all
relevant factors into consideration, including, but not limited to: the best
price available; the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the Fund on a continuing basis. Subject to such policies and procedures as
the Directors may determine, the Sub-Adviser shall have discretion to effect
investment transactions for the Fund through broker-dealers (including, to the
extent permissible under applicable law, broker-dealers affiliated with the
Sub-Adviser) qualified to obtain best execution of such transactions who provide
brokerage and/or research services, as such services are defined in section
28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
to cause the Fund to pay any such broker-dealers an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage or research
services provided by such broker-dealer, viewed in terms of either that
particular investment transaction or the Sub-Adviser's overall responsibilities
with respect to the Fund and other accounts as to which the Sub-Adviser
exercises investment discretion (as such term is defined in section 3(a)(35) of
the 1934 Act). Allocation of orders placed by the Sub-Adviser on behalf of the
Fund to such broker-dealers shall be in such amounts and proportions as the
Sub-Adviser shall determine in good faith in conformity with its
responsibilities under applicable laws, rules and regulations. The Sub-Adviser
will submit reports on such allocations to the Investment Manager regularly as
requested by the Investment Manager, in such form as may be mutually agreed to
by the parties hereto, indicating the broker-dealers to whom such allocations
have been made and the basis therefor.
Subject to the foregoing provisions of this paragraph 3, the
Sub-Adviser may also consider sales of shares of the Fund, or may consider
recommendations of the Investment Manager that takes such sales into account, as
factors in the selection of broker-dealers to effect the Fund's investment
transactions. Notwithstanding the above, nothing shall require the Sub-Adviser
to use a broker-dealer which provides research services or to use a particular
broker-dealer which the Investment Manager has recommended.
4. Reports by the Sub-Adviser. The Sub-Adviser shall furnish the Investment
Manager monthly, quarterly and annual reports, in such form as may be mutually
agreed to by the parties hereto, concerning transactions and performance of the
Fund, including information required in the Registration Statement or
information necessary for the Investment Manager to review the Fund or discuss
the management of it. The Sub-Adviser shall permit the books and records
maintained with respect to the Fund to be inspected and audited by the Company,
the Investment Manager or their respective agents at all reasonable times during
normal business hours upon reasonable notice. The Sub-Adviser shall immediately
notify both the Investment Manager and the Company of any legal process served
upon it in connection with its activities hereunder, including any legal process
served upon it on behalf of the Investment Manager, the Fund or the Company. The
Sub-Adviser shall promptly notify the Investment Manager of any changes in any
information regarding the Sub-Adviser or the investment program for the Fund as
described in the Registration Statement.
5. Compensation of the Sub-Adviser. The amount of the compensation to the
Sub-Adviser is computed at an annual rate. The fee shall be payable monthly in
arrears, based on the average daily net assets of the Fund for each month, at
the annual rate set forth in Exhibit A to this Agreement.
In computing the fee to be paid to the Sub-Adviser, the net asset value
of the Fund shall be valued as set forth in the Registration Statement. If this
Agreement is terminated, the payment described herein shall be prorated to the
date of termination.
The Investment Manager and the Sub-Adviser shall not be considered as
partners or participants in a joint venture. The Sub-Adviser will pay its own
expenses for the services to be provided pursuant to this Agreement and will not
be obligated to pay any expenses of the Investment Manager, the Fund or the
Company. Except as otherwise specifically provided herein, the Investment
Manager, the Fund and the Company will not be obligated to pay any expenses of
the Sub-Adviser.
6. Delivery of Documents to the Sub-Adviser. The Investment Manager has
furnished the Sub-Adviser with true, correct and complete copies of each of the
following documents:
(a) The Articles of Incorporation of the Company, as in effect on the date
hereof;
(b) The By-laws of the Company, as in effect on the date hereof;
(c) The resolutions of the Directors approving the engagement of the
Sub-Adviser as portfolio manager of the Fund and approving the form of
this Agreement;
(d) The resolutions of the Directors selecting the Investment Manager as
investment manager to the Fund and approving the form of the
Management Agreement;
(e) The Management Agreement;
(f) The Code of Ethics of the Company and of the Investment Manager, as in
effect on the date hereof;
(g) The most recent Registration Statement;
(h) The Investment Manager's Form ADV as filed with the Securities and
Exchange Commission as of the date hereof; and
(i) A list of companies the securities of which are not to be bought or
sold for the Fund.
The Investment Manager will furnish the Sub-Adviser from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (h) above will be provided within 30 days of the time such
materials become available to the Investment Manager. Such amendments or
supplements as to item (i) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager. Any amendments or supplements to the foregoing will
not be deemed effective with respect to the Sub-Adviser until the Sub-Adviser's
receipt thereof. The Investment Manager will provide such additional information
as the Sub-Adviser may reasonably request in connection with the performance of
its duties hereunder.
7. Delivery of Documents to the Investment Manager. The Sub-Adviser has
furnished the Investment Manager with true, correct and complete copies of each
of the following documents:
(a) The Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission as of the date hereof;
(b) The Sub-Adviser's most recent balance sheet;
(c) Separate lists of persons who the Sub-Adviser wishes to have
authorized to give written and/or oral instructions to Custodians of
Company assets for the Fund; and
(d) The Code of Ethics of the Sub-Adviser, as in effect on the date
hereof.
The Sub-Adviser will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements will be
provided within 30 days of the time such materials become available to the
Sub-Adviser. Any amendments or supplements to the foregoing will not be deemed
effective with respect to the Investment Manager until the Investment Manager's
receipt thereof. The Sub-Adviser will provide additional information as the
Investment Manager may reasonably request in connection with the Sub-Adviser's
performance of its duties under this Agreement.
8. Confidential Treatment. The parties hereto understand that any information or
recommendation supplied by the Sub-Adviser in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Company or such persons the Investment Manager may
designate in connection with the Fund. The parties also understand that any
information supplied to the Sub-Adviser in connection with the performance of
its obligations hereunder, particularly, but not limited to, any list of
securities which may not be bought or sold for the Fund, is to be regarded as
confidential and for use only by the Sub-Adviser in connection with its
obligation to provide investment advice and other services to the Fund.
9. Representations of the Parties. Each party hereto hereby further represents
and warrants to the other that: (i) it is registered as an investment adviser
under the Advisers Act and is registered or licensed as an investment adviser
under the laws of all jurisdictions in which its activities require it to be so
registered or licensed; and (ii) it will use its reasonable best efforts to
maintain each such registration or license in effect at all times during the
term of this Agreement; and (iii) it will promptly notify the other if it ceases
to be so registered, if its registration is suspended for any reason, or if it
is notified by any regulatory organization or court of competent jurisdiction
that it should show cause why its registration should not be suspended or
terminated; and (iv) it is duly authorized to enter into this Agreement and to
perform its obligations hereunder.
The Sub-Adviser further represents that it has adopted a written Code
of Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Adviser shall be
subject to such Code of Ethics, and shall not be subject to any other Code of
Ethics, including the Investment Manager's Code of Ethics, unless specifically
adopted by the Sub-Adviser. The Investment Manager further represents and
warrants to the Sub-Adviser that (i) the appointment of the Sub-Adviser by the
Investment Manager has been duly authorized and (ii) it has acted and will
continue to act in connection with the transactions contemplated hereby, and the
transactions contemplated hereby are, in conformity with the ICA, the Company's
governing documents and other applicable law.
10. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations hereunder, the Sub-Adviser
shall not be liable to the Company, the Fund, the Fund's shareholders or the
Investment Manager for any act or omission resulting in any loss suffered by the
Company, the Fund, the Fund's shareholders or the Investment Manager in
connection with any service to be provided herein. The Federal laws impose
responsibilities under certain circumstances on persons who act in good faith,
and therefore, nothing herein shall in any way constitute a waiver or limitation
of any rights which the Company, the Fund or the Investment Manager may have
under applicable law.
11. Other Activities of the Sub-Adviser. The Investment Manager agrees that the
Sub-Adviser and any of its partners or employees, and persons affiliated with
the Sub-Adviser or with any such partner or employee, may render investment
management or advisory services to other investors and institutions, and that
such investors and institutions may own, purchase or sell, securities or other
interests in property that are the same as, similar to, or different from those
which are selected for purchase, holding or sale for the Fund. The Investment
Manager further acknowledges that the Sub-Adviser shall be in all respects free
to take action with respect to investments in securities or other interests in
property that are the same as, similar to, or different from those selected for
purchase, holding or sale for the Fund. The Investment Manager understands that
the Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients or
class of clients in the allocation of investment opportunities, so that to the
extent practical, such opportunities will be allocated among the Sub-Adviser's
clients over a period of time on a fair and equitable basis. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation (i) to purchase or
sell, or recommend for purchase or sale, for the Fund any security which the
Sub-Adviser, its partners, affiliates or employees may purchase or sell for the
Sub-Adviser or such partner's, affiliate's or employee's own accounts or for the
account of any other client of the Sub-Adviser, advisory or otherwise, or (ii)
to abstain from the purchase or sale of any security for the Sub-Adviser's other
clients, advisory or otherwise, which the Investment Manager has placed on the
list provided pursuant to paragraph 6(i) of this Agreement.
12. Continuance and Termination. This Agreement shall remain in full force and
effect for one year from the date hereof, and is renewable annually thereafter
by specific approval of the Directors or by vote of a majority of the
outstanding voting securities of the Fund. Any such renewal shall be approved by
the vote of a majority of the Directors who are not interested persons under the
ICA, cast in person at a meeting called for the purpose of voting on such
renewal. This Agreement may be terminated without penalty at any time by the
Investment Manager or the Sub-Adviser upon 60 days written notice, and will
automatically terminate in the event of (i) its "assignment" by either party to
this Agreement, as such term is defined in the ICA, subject to such exemptions
as may be granted by the Securities and Exchange Commission by rule, regulation
or order, or (ii) upon termination of the Management Agreement, provided the
Sub-Adviser has received prior written notice thereof.
13. Notification. The Sub-Adviser will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Adviser with
responsibility for making investment decisions in relation to the Fund (the
"Portfolio Manager(s)") or who have been authorized to give instructions to the
Custodian. The Sub-adviser shall be responsible for reasonable out-of-pocket
costs and expenses incurred by the Investment Manager, the Fund or the Company
to amend or supplement the Company's prospectus to reflect a change in Portfolio
Manager(s) or otherwise to comply with the ICA, the Securities Act of 1933, as
amended (the "1933 Act") or any other applicable statute, law, rule or
regulation, as a result of such change; provided, however, that the Sub-Adviser
shall not be responsible for such costs and expenses where the change in
Portfolio Manager(s) reflects the termination of employment of the Portfolio
Manager(s) with the Sub-Adviser and its affiliates or is the result of a request
by the Investment Manager or is due to other circumstances beyond the
Sub-Adviser's control.
Any notice, instruction or other communication required or contemplated
by this Agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different recipient and/or address for such
party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: John Birch
Senior Vice President & Chief Operating Officer
Sub-Adviser: Marsico Capital Management, LLC
1200 17th Street
Suite 1300
Denver, Colorado 80202
Attention: Barbara Japha, Esq.
Company: American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Attention: Eric C. Freed, Esq.
14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless the
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the ICA ("affiliated person") of the Investment Manager and each person, if
any who, within the meaning of Section 15 of the 1933 Act, controls
("controlling person") the Investment Manager, against any and all losses,
claims, damages, liabilities or litigation (including reasonable legal and other
expenses), to which the Investment Manager or such affiliated person or
controlling person of the Investment Manager may become subject under the 1933
Act, the ICA, the Advisers Act, under any other statute, law, rule or regulation
at common law or otherwise, arising out of the Sub-Adviser's responsibilities
hereunder (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser's
employees or representatives or any affiliate of or any person acting on behalf
of the Sub-Adviser, or (2) as a result of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any amendment thereof or any supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading, if such a statement or
omission was made in reliance upon and in conformity with written information
furnished by the Sub-Adviser to the Investment Manager, the Fund, the Company or
any affiliated person of the Investment Manager, the Fund or the Company or upon
verbal information confirmed by the Sub-Adviser in writing, or (3) to the extent
of, and as a result of, the failure of the Sub-Adviser to execute, or cause to
be executed, portfolio investment transactions according to the requirements of
the ICA; provided, however, that in no case is the Sub-Adviser's indemnity in
favor of the Investment Manager or any affiliated person or controlling person
of the Investment Manager deemed to protect such person against any liability to
which any such person would otherwise be subject by reason of willful
misconduct, bad faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations and duties under this
Agreement.
The Investment Manager agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser and each controlling
person of the Sub-Adviser, if any, against any and all losses, claims, damages,
liabilities or litigation (including reasonable legal and other expenses), to
which the Sub-Adviser or such affiliated person or controlling person of the
Sub-Adviser may become subject under the 1933 Act, the ICA, the Advisers Act,
under any other statute, law, rule or regulation, at common law or otherwise,
arising out of the Investment Manager's responsibilities as investment manager
of the Fund (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Investment Manager, any of the Investment
Manager's employees or representatives or any affiliate of or any person acting
on behalf of the Investment Manager, or (2) as a result of any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including any amendment thereof or any supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, if
such a statement or omission was made other than in reliance upon and in
conformity with written information furnished by the Sub-Adviser, or any
affiliated person of the Sub-Adviser or other than upon verbal information
confirmed by the Sub-Adviser in writing; provided, however, that in no case is
the Investment Manager's indemnity in favor of the Sub-Adviser or any affiliated
person or controlling person of the Sub-Adviser deemed to protect such person
against any liability to which any such person would otherwise be subject by
reason of willful misconduct, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement. It is agreed that the Investment Manager's
indemnification obligations under this Section 14 will extend to expenses and
costs (including reasonable attorneys fees) incurred by the Sub-Adviser as a
result of any litigation brought by the Investment Manager alleging the
Sub-Adviser's failure to perform its obligations and duties in the manner
required under this Agreement unless judgment is rendered for the Investment
Manager.
15. Conflict of Laws. The provisions of this Agreement shall be subject to all
applicable statutes, laws, rules and regulations, including, without limitation,
the applicable provisions of the ICA and rules and regulations promulgated
thereunder. To the extent that any provision contained herein conflicts with any
such applicable provision of law or regulation, the latter shall control. The
terms and provisions of this Agreement shall be interpreted and defined in a
manner consistent with the provisions and definitions of the ICA. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall continue in
full force and effect and shall not be affected by such invalidity.
16. Amendments, Waivers, etc. Provisions of this Agreement may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought. This Agreement (including Exhibit A hereto) may be amended at any
time by written mutual consent of the parties, subject to the requirements of
the ICA and rules and regulations promulgated and orders granted thereunder.
17. Governing State Law. This Agreement is made under, and shall be governed by
and construed in accordance with, the laws of the State of Connecticut.
18. Severability. Each provision of this Agreement is intended to be severable.
If any provision of this Agreement is held to be illegal or made invalid by
court decision, statute, rule or otherwise, such illegality or invalidity will
not affect the validity or enforceability of the remainder of this Agreement.
<PAGE>
The effective date of this agreement is February 8, 1999.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
- ----------------------------------- -----------------------------------
John Birch
Vice President & Chief Operating Officer
Date: ____________________________ Date: ____________________________
Attest: ____________________________ Attest: __________________________
<PAGE>
American Skandia Advisor Funds, Inc.
ASAF Marsico Capital Growth Fund
Sub-Advisory Agreement
EXHIBIT A
An annual rate of .45% of the average daily net assets of the Fund.
To be filed by future amendment
To be filed by future amendment
Stradley Ronan Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Telephone (215) 564-8000
Fax (215) 564-8120
Direct Dial: (215) 564-8042
July 23, 1999
American Skandia Advisor Funds, Inc
One Corporate Drive
Shelton, Connecticut 06484
<TABLE>
<CAPTION>
<S> <C>
Re: American Skandia Advisor Funds, Inc. Form N-1A
Post-effective Amendment No. 7 to the Registration Statement under the Securities Act of 1933
Amendment No. 10 to the Registration Statement under the Investment Company Act of 1940
Securities Act Registration No. 333-23017
Investment Company Act No. 811-08085
CIK #1035018
Legal Opinion-Securities Act of 1933
</TABLE>
Ladies and Gentlemen:
We have examined the Articles of Incorporation, as amended and
supplemented, (the "Articles") of American Skandia Advisor Funds, Inc. (the
"Fund"), a series corporation organized under the laws of the State of Maryland,
the By-Laws of the Fund, and the resolutions adopted by the Fund's Board of
Directors organizing the business of the Fund, all as amended to date, and the
various pertinent proceedings we deem material. We have also examined the
Notification of Registration and the Registration Statement filed with the U.S.
Securities and Exchange Commission (the "Commission") under the Investment
Company Act of 1940 (the "Investment Company Act") and the Securities Act of
1933 (the "Securities Act"), all as amended to date, as well as other items we
deem material to this opinion. As to various questions of fact material to our
opinion, we have relied upon statements and certificates of officers and
representatives of the Fund, public officials and others.
The Fund is authorized by its Articles to issue five billion,
five-hundred thousand (5,500,000,000) shares of common stock with a par value of
$.001 per share. The Fund currently issues shares of sixteen (16) series and
proposes to issue shares of three (3) additional series when the above captioned
Post-effective Amendment to the Registration Statement (the "Post-effective
Amendment") becomes effective. The Articles designate, or authorize the
Directors to designate, one or more series or classes of shares of the Fund, and
allocate, or authorizes the Directors to allocate, shares of common stock to
each such series or class. The Articles also empower the Directors to designate
any additional series or classes and allocate shares to such series or classes.
The Registration Statement, which is deemed to register an
indefinite number of shares of the Fund pursuant to the provisions of Rule 24f-2
under the Investment Company Act. You have further advised us that the Fund has
filed, and each year hereafter will timely file, a Notice pursuant to Rule 24f-2
perfecting the registration of the shares sold by the Fund during each fiscal
year during which such registration of an indefinite number of shares remains in
effect.
You have also informed us that the shares of the Fund have
been, and will continue to be, sold in accordance with the Fund's usual method
of distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in accordance
with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long
as the Fund remains a valid and subsisting corporation under the laws of the
State of Maryland, and the registration of an indefinite number of shares of the
Fund, the remains effective, the authorized shares of the Fund when issued for
the consideration set by the Board of Directors pursuant to the Articles, and
subject to compliance with Rule 24f-2, will be legally outstanding, fully-paid,
and non-assessable shares, and the holders of such shares will have all the
rights provided for with respect to such holding by the Articles and the laws of
the State of Maryland.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement of the Fund, and any amendments thereto (including
the Post-Effective Amendment), covering the registration of the shares of the
Fund under the Securities Act and the applications, registration statements or
notice filings, and amendments thereto, filed in accordance with the securities
laws of the several states in which shares of the Fund are offered, and we
further consent to reference in the registration statement of the Fund to the
fact that this opinion concerning the legality of the issue has been rendered by
us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/Robert K. Fulton
Robert K. Fulton
To be filed by future amendment
To be filed by future amendment
