DEUTSCHE TOP 50 EUROPE
DEUTSCHE EUROPEAN MID-CAP FUND
DEUTSCHE GERMAN EQUITY FUND
DEUTSCHE EUROPEAN BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
The Deutsche Top 50 Europe (the "Top 50 Europe"), Deutsche European Mid-Cap Fund
(the "European Mid-Cap Fund"), Deutsche German Equity Fund (the "German Equity
Fund") and Deutsche European Bond Fund (the "European Bond Fund") (each a "Fund"
and, collectively, the "Funds") are each a series of the Deutsche Funds, Inc.
(the "Corporation"), a management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund has its
own investment objective.
The Corporation seeks to achieve the investment objective of each Fund by
investing all of the Fund's investable assets in a corresponding
non-diversified, open-end management investment company (each, a "Portfolio"
and, collectively, the "Portfolios") listed in Appendix A.
Each Portfolio is a series of the Deutsche Portfolios (the "Portfolio Trust"),
an open-end investment company organized as a trust under the laws of the State
of New York. Each Portfolio has the same investment objective as its
corresponding Fund. There can be no assurance that any Fund or any Portfolio
will achieve its investment objective.
Shares of each Fund are offered in two classes known as Class A Shares and Class
B Shares (individually and collectively referred to as "Shares" as the context
may require). This Statement of Additional Information relates to both classes
of the above-mentioned Shares.
Deutsche Fund Management, Inc. ("DFM"), a registered investment adviser and an
indirect subsidiary of Deutsche Bank AG, a major global financial institution,
is the investment manager (the "Manager") of each Portfolio. DWS International
Portfolio Management GmbH is the investment adviser (the "DWS "or the"Adviser")
of each Portfolio. This Statement of Additional Information is not a prospectus
and should be read in conjunction with the relevant Fund's Prospectus dated
February 23, 1998 (as revised), a copy of which may be obtained from the
Corporation at the address noted below.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
The date of this Statement of Additional
Information is February 23, 1998 (as revised).
Edgewood Services, Inc., Distributor
G02179-10 (3/98)
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I
TABLE OF CONTENTS
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INVESTMENT OBJECTIVE AND POLICIES 1
Equity Investments 1
Investment Companies 1
Participation Certificates 1
Short-Term Instruments 2
Zero Coupon Obligations 2
Options 2
Foreign Currency Exchange Transactions3
Futures Contracts and Options on Futures Contracts 3
Risk Management 6
THE GERMAN SECURITIES MARKETS 7
Equity Markets 7
Stock Indices 8
Primary Markets 9
Role of Banks in German Capital Markets 9
INVESTMENT RESTRICTIONS 10
Non-Fundamental Investment Restrictions 11
DIRECTORS, TRUSTEES, AND OFFICERS 13
Directors of the Corporation and Trustees of the Portfolio Trust13
Officers of the Corporation 13
Compensation Table--Directors of the Corporation 14
Compensation Table--Trustees of the Portfolio Trust 14
MANAGER 16
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ADVISER 17
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ADMINISTRATOR 17
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OPERATIONS AGENT 18
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ADMINISTRATIVE AGENT 19
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DISTRIBUTOR 19
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TRANSFER AGENT, CUSTODIAN, AND FUND ACCOUNTANT 20
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INDEPENDENT ACCOUNTANTS 20
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PURCHASE OF SHARES 20
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Conversion to Federal Funds 20
REDEMPTION OF SHARES 21
Redemption in Kind 21
Elimination of the Contingent Deferred Sales Charge 21
EXCHANGE OF SHARES 21
NET ASSET VALUE 22
Fixed Income Securities 22
Other Securities 22
PERFORMANCE DATA 23
Total Return Quotations 23
Yield 23
General 23
Economic and Market Information 26
PORTFOLIO TRANSACTIONS 26
TAXES 27
United States Taxation 27
DESCRIPTION OF SHARES 30
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ADDITIONAL INFORMATION 31
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APPENDIX A 33
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Funds and Corresponding Portfolios 33
APPENDIX B--DESCRIPTION OF SECURITY RATINGS 33
Standard & Poor's Corporate and Municipal Bonds 33
Moody's Corporate and Municipal Bonds33
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13
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the information contained in each Fund's Prospectus
concerning the investment objectives, policies and techniques of the Portfolios.
The descriptions are general and may not be applicable in certain countries in
which the Portfolios invest.
EQUITY INVESTMENTS
As discussed in each Fund's Prospectus, each Portfolio may invest in the equity
securities of domestic and foreign issuers to the extent consistent with its
investment objectives and policies. Equity investments may or may not pay
dividends and may or may not carry voting rights. Common stock occupies the most
junior position in a company's capital structure. Preferred stock generally
carries preferential rights to dividends and amounts payable upon liquidation of
the issuer, but may have no voting rights. 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 and to receive interest or dividends until the holder elects to convert.
The provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible securities, the
holder's claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of common shareholders.
INVESTMENT COMPANIES
Up to 5% of the total assets of each Portfolio may be invested in shares of
investment companies, provided these shares are offered to the public without
limitation on the number of shares, the shareholders have the right to redeem
their shares, and have investment policies consistent with those of the
Portfolio. Each Portfolio may not own more than 3% of the total outstanding
voting stock of any other investment company. As a shareholder of another
investment company, a Portfolio would bear, along with other shareholders, its
PRO RATA portion of the other investment company's expenses, including advisory
fees.
Subject to the foregoing limitations, shares of another securities investment
fund managed by the Manager or the Adviser or by another investment adviser
affiliated with the Manager or the Adviser through a substantial direct or
indirect interest may be purchased, subject to certain limitations, if the other
investment fund according to its investment policies is specialized in a
specific geographic area or economic sector. A Portfolio would not, however, pay
a sales charge when investing in an investment company managed by the Manager,
the Adviser or their affiliates. In addition, no management or advisory fees
would be paid by a Portfolio with respect to its assets which are invested in
investment companies managed by the Manager, the Adviser or their affiliates.
PARTICIPATION CERTIFICATES
Certain companies have issued participation certificates which entitle the
holder to participate only in dividend distributions, generally at rates above
those declared on the issuers' common stock, but not to vote, nor usually to any
claim for assets in liquidation. Participation certificates trade like common
stock on their respective stock exchanges. Such securities may have higher
yields; however, they may be less liquid than common stock. The Adviser believes
that certain participation certificates have potential for long-term
appreciation, depending on their price relative to that of the issuer's equity
securities, if publicly traded, and other criteria.
SHORT-TERM INSTRUMENTS
Although it is intended that the assets of each Portfolio stay invested in the
securities described above and in each Fund's Prospectus to the extent practical
in light of each Portfolio's investment objective and long-term investment
perspective, assets of each Portfolio may be invested in bank deposits and money
market instruments maturing in less than 12 months to meet anticipated expenses
or for day-to-day operating purposes and when, in the Adviser's opinion, it is
advisable to adopt a temporary defensive position because of unusual and adverse
conditions affecting the equity or fixed income markets. In addition, when a
Portfolio experiences large cash inflows through additional investments by its
investors or the sale of portfolio securities, and desirable securities that are
consistent with its investment objective are unavailable in sufficient
quantities, assets may be held in short-term investments for a limited time
pending availability of such securities. Bank deposits and money market
instruments include credit balances and bank certificates of deposit, discounted
treasury notes and bills issued by the Federal Republic of Germany ("FRG"), the
states of the FRG, the European Union, other member states of the OECD or
quasi-government entities of any of the foregoing.
ZERO COUPON OBLIGATIONS
Each Portfolio may also invest in zero coupon obligations, such as zero coupon
bonds. Zero coupon obligations pay no current interest, and as a result their
prices tend to be more volatile than those of securities that offer regular
payments of interest. In order to pay cash distributions representing income on
zero coupon obligations, a Portfolio may have to sell other securities on
unfavorable terms, and these sales may generate taxable gains for investors in
the corresponding Fund.
OPTIONS
Each Portfolio may write call and put options and purchase call and put options
on securities. A Portfolio will write options on securities for the purpose of
increasing its return on such securities and/or to protect the values of its
portfolio.
The buyer of a typical put option can expect to realize a gain if the price of
the underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs). A call buyer
typically attempts to participate in potential price increases of the instrument
underlying the option with risk limited to the cost of the option if security
prices fall. At the same time, the buyer can expect to suffer a loss if security
prices do not rise sufficiently to offset the cost of the option (limited to the
amount of the premium paid, plus related transaction costs). A Portfolio may
seek to terminate its position in a put option it writes before exercise by
purchasing an offsetting option in the market at its current price. If the
market is not liquid for a put option the Portfolio has written, however, the
Portfolio must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to post margin as
discussed below.
If the price of the underlying instrument rises, a put writer would generally
expect to profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would expect to
suffer a loss. This loss should be less than the loss from purchasing and
holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline. The
characteristics of writing call options are similar to those of writing put
options, except that writing calls generally is a profitable strategy if prices
remain the same or fall. Through receipt of the option premium a call writer
offsets part of the effect of a price decline. At the same time, because a call
writer must be prepared to deliver the underlying instrument in return for the
strike price, even if its current value is greater, a call writer gives up some
ability to participate in security price increases.
Transactions in options, futures contracts, options on futures contracts and
forward contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
All options purchased or sold by a Portfolio will be traded on a securities
exchange.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio may enter into foreign currency exchange transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or
anticipated securities transactions. Each Portfolio may also enter into foreign
currency transactions to hedge against a change in foreign currency exchange
rates that would affect the value of existing investments denominated or
principally traded in a foreign currency. Each Portfolio other than the Provesta
Portfolio and the Investa Portfolio may also, in circumstances where the Adviser
considers it appropriate, enter into foreign currency exchange transactions for
the purpose of hedging the value of such Portfolios against currencies other
than the U.S. dollar. To conduct the hedging discussed above, a Portfolio would
generally enter into a forward contract to sell the foreign currency in which
the investment is denominated in exchange for U.S. dollars or other currency in
which the Adviser desires to protect the value of the Portfolio.
Although these transactions are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is difficult, and the successful execution of a hedging strategy is
highly uncertain.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Portfolio may purchase or sell futures contracts and purchase put and call
options, including put and call options on futures contracts. In addition, each
Portfolio may purchase put and call options on futures. Futures contracts
obligate the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index.
Futures contracts and options on futures contracts may be entered into on
foreign exchanges. Investors should recognize that transactions involving
foreign securities or foreign currencies, and transactions entered into in
foreign countries may involve considerations and risks not typically associated
with investing in U.S. markets.
FUTURES CONTRACTS
When a Portfolio purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date
and price or to make or receive a cash payment based on the value of a
securities index or a financial instrument. When a Portfolio sells a
futures contract, it agrees to sell a specified quantity of the underlying
instrument at a specified future date and price or to receive or make a
cash payment based on the value of a securities index or a financial
instrument. When a Portfolio purchases or sells a futures contract, the
value of the futures contract tends to increase and decrease in tandem
with the value of its underlying instrument or index. The price at which
the purchase and sale will take place is fixed when a Portfolio enters
into the contract. Futures can be held until their delivery dates or the
positions can be (and normally are) closed out, by entering into an
opposing contract, before then.
When a Portfolio purchases or sells a futures contract, it is required to
make an initial margin deposit. Although the amount may vary, initial
margin can be as low as 1% or less of the notional amount of the contract.
Additional margin may be required as the contract fluctuates in value.
Since the amount of margin is relatively small compared to the value of
the securities covered by a futures contract, the potential for gain or
loss on a futures contract is much greater than the amount of the
Portfolio's initial margin deposit.
OPTIONS ON FUTURES
Put and call options on futures contracts may be purchased by each
Portfolio in order to protect against declines in values of portfolio
securities or against increases in the cost of securities to be acquired.
Unlike a futures contract, which requires parties to buy or sell the
underlying financial instrument or make a cash settlement payment based on
changes in the price of the financial instrument on an agreed date, an
option on a futures contract entitles its holder to decide on or before a
future date whether to enter into such a contract. If the holder decides
not to exercise its option, the holder may close out the option position
by entering into an offsetting transaction or may decide to let the option
expire and forfeit the premium thereon. The purchaser of an option on a
futures contract pays a premium for the option but makes no initial margin
payments or daily payments of cash in the nature of "variation" margin
payments to reflect the change in the value of the underlying contract as
does a purchaser or seller of a futures contract. The seller of an option
on a futures contract receives the premium paid by the purchaser and may
be required to pay initial margin. Amounts equal to the initial margin and
any additional collateral required on any options on futures contracts
sold by a Portfolio are paid by that Portfolio into a segregated account
as required by the 1940 Act and the SEC's interpretations thereunder.
Purchase of options on futures contracts may present less risk in hedging
a Portfolio than the purchase or sale of the underlying futures contracts
since the potential loss is limited to the amount of the premium plus
related transaction costs.
COMBINED POSITIONS
Each Portfolio may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, a
Portfolio may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose
risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at
one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult
to open and close out.
OPTIONS ON SECURITIES INDICES
Each Portfolio is also permitted to purchase call and put options on any
securities index based on securities in which the Portfolio may invest.
Options on securities indices are similar to options on securities, except
that the exercise of securities index options is settled by cash payment
and does not involve the actual purchase or sale of securities. In
addition, these options are designed to reflect price fluctuations in a
group of securities or segment of the securities market rather than price
fluctuations in a single security. A Portfolio, in purchasing index
options for hedging purposes, is subject to the risk that the value of its
portfolio securities may not change as much as that of an index because
the Portfolio's investments generally will not match the composition of an
index.
WARRANTS
Each Portfolio may purchase warrants which, like options on futures
contracts and options on securities indices, entitle the holder to
purchase or sell a futures contract or to a cash payment reflecting the
price fluctuation in an index of securities. A Portfolio may also purchase
warrants that entitle the holder to a cash payment reflecting the
fluctuation in the value of certain financial futures contracts. Warrants
on futures contracts and warrants on securities indices differ from the
equivalent options in that: (1) they are securities issued by a financial
institution/special purpose issuer rather than contracts entered into with
a futures exchange and (2) they are traded on a securities exchange rather
than on a futures exchange. The use of warrants will generally entail the
same risks that are associated with a Portfolio's positions in options on
futures and options on securities indices.
OTHER LIMITATIONS
The Commodity Exchange Act prohibits U.S. persons, such as a Portfolio,
from buying or selling certain foreign futures contracts or options on
such contracts. Accordingly, each Portfolio will not engage in foreign
futures or options transactions unless the contracts in question may
lawfully be purchased and sold by U.S. persons in accordance with
applicable Commodity Futures Trading Commission ("CFTC") regulations or
CFTC staff advisories, interpretations and no action letters. In addition,
in order to assure that a Portfolio will not be considered a "commodity
pool" for purposes of CFTC rules, the Portfolio will enter into
transactions in futures contracts or options on futures contracts only if
(1) such transactions constitute BONA FIDE hedging transactions, as
defined under CFTC rules or (2) no more than 5% of the Portfolio's net
assets are committed as initial margin or premiums to positions that do
not constitute BONA FIDE hedging transactions.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized options and futures
contracts available will not match a Portfolio's current or anticipated
investments exactly. Each Portfolio may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of a Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match a
Portfolio's investments well. Options and futures contracts prices are
affected by such factors as current and anticipated short term interest
rates, changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from differing
levels of demand in the options and futures markets and the securities
markets, from structural differences in how options and futures and
securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Portfolio may purchase or sell options and
futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate
for differences in volatility between the contract and the securities,
although this may not be successful in all cases. If price changes in a
Portfolio's options or futures positions are poorly correlated with its
other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid market will exist for any particular option
or futures contract at any particular time even if the contract is traded
on an exchange. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts and may halt trading
if a contract's price moves up or down more than the limit in a given day.
On volatile trading days when the price fluctuation limit is reached or a
trading halt is imposed, it may be impossible for a Portfolio to enter
into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise,
it could prevent prompt liquidation of unfavorable positions, and could
potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired.
POSITION LIMITS
Futures exchanges can limit the number of futures and options on futures
contracts that can be held or controlled by an entity. If an adequate
exemption cannot be obtained, a Portfolio or its Adviser may be required
to reduce the size of its futures and options positions or may not be able
to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS
Each Portfolio intends to comply with Section 4.5 of the regulations under
the Commodity Exchange Act, which limits the extent to which a Portfolio
can commit assets to initial margin deposits and option premiums. In
addition, each Portfolio will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual
funds, and if the guidelines so require, will set aside appropriate liquid
assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures
contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a
large percentage of a Portfolio's assets could impede portfolio management
or a Portfolio's ability to meet redemption requests or other current
obligations.
RISK MANAGEMENT
Each Portfolio may employ non-hedging risk management techniques. Examples of
such strategies include synthetically altering the duration of a portfolio or
the mix of securities in a portfolio. For example, if the Adviser wishes to
extend maturities in a fixed income portfolio in order to take advantage of an
anticipated decline in interest rates, but does not wish to purchase the
underlying long term securities, it might cause the Portfolio to purchase
futures contracts on long-term debt securities. Similarly, if the Adviser wishes
to decrease fixed income securities or purchase equities, it could cause a
Portfolio to sell futures contracts on debt securities and purchase futures
contracts on a stock index. Because these risk management techniques involve
leverage, they include, as do all leveraged transactions, the possibility of
losses as well as gains that are greater than if these techniques involved the
purchase and sale of the securities themselves rather than their synthetic
derivatives.
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THE GERMAN SECURITIES MARKETS
EQUITY MARKETS
Equity securities trade on the country's eight regional stock exchanges
(Frankfurt, Dusseldorf, Munich, Hamburg, Berlin, Stuttgart, Hanover and Bremen),
of which Frankfurt accounted for approximately 79.5% of the total volume in
1996. While trading in listed securities is not legally or otherwise confined to
the exchanges, they are believed to handle the largest part of trading volume in
equity transactions.
MARKET CAPITALIZATION AND TRADING VOLUME
OF EQUITY SECURITIES ON GERMAN STOCK EXCHANGES(1)
(IN BILLIONS)
MARKET TRADING VOLUME FOR
CAPITALIZATION AS THE YEAR ENDED
OF DECEMBER 31(2) DECEMBER 31(2)
1992 $348.14 DM561.89 $876.8 DM1,415.2
1993 463.48 800.10 1,150.3 1,985.8
1994 499.25 773.88 1,302.9 2,017.9
1995 544.89 781.10 1,146.8 1,643.9
1996 635.95 988.77 1,487.6 2,312.9
(1) Excluding stocks of foreign-domiciled companies and investment companies.
(2) U.S. dollar equivalents calculated at year-end exchange rates. The
figures for 1992 through 1994 include warrants.
Sources: Deutsche Borse AG and the Deutsche Bundesbank.
German stock exchanges offer three different market segments within which stocks
are traded:
(i)The official market (AMTLICHER HANDEL) comprises trading in shares which
have been formally admitted to official listing by the admissions committee
of the stock exchange concerned, based upon disclosure in the listing
application or "prospectus."
(ii) The regulated, unlisted market (GEREGELTER MARKET) comprises trading in
shares not admitted to official listing. Companies admitted to this market
segment are exempt from publishing a full listing prospectus, but are
required to submit an offering memorandum. Admission is granted by a special
committee which is also responsible for the supervision of the establishment
of prices.
(iii) The unofficial unregulated telephone or over-the-counter market
(FREIVERKEHR) comprises trading in securities that have not followed any
special listing procedure. It includes trading in securities by telephone or
on the stock exchange premises, between banks or through floor brokers prior
to or after official trading hours.
For an official listing, the German stock exchanges and pertinent legislation
require public disclosure of all information about an issuer considered material
to an evaluation of the securities to be listed. Applications must further
provide the latest annual financial statements of the issuer with explanatory
notes, including disclosure of any liabilities not shown therein. They must also
furnish details of the issuer to be listed. Generally, DM 0.5 million par value
(i.e., 10,000 shares of DM 50 par value) is considered to be the minimum amount
suitable for full listing. Applications for admission to regulated unlisted
trading must contain essentially similar information as that required for full
listing, but in a condensed form that may be submitted as a memorandum. However,
the document, in lieu of being published, may be deposited with paying agents so
long as reference is made in one of the official stock exchange publications.
Markets in listed securities are generally of the auction type, but a
substantial amount of listed securities also changes hands in inter-bank dealer
markets both on and off the stock exchanges. Prices for active stocks, including
those of larger companies, are quoted continuously during stock exchange hours.
Less active listed and stocks admitted to trading in the regulated unlisted
market are quoted only once a day.
Options on both domestic and foreign stocks have been traded since 1970 although
trading activity is relatively low. There is also active trading in share
warrants, generally issued in conjunction with bonds.
As set forth below under "Role of Banks in German Capital Markets," German
banks, brokers and selected domestic investment trusts are regular members of
the stock exchanges. Banks may deal on a net basis for their own account, as
well as for accounts of domestic and foreign institutional customers during or
after regular stock exchange hours.
STOCK INDICES
Two principal stock indices in Germany are the DAX Index (DEUTSCHER AKTIENINDEX;
i.e., German Stock Index) and the CDAX German Composite Index (COMPOSITE
DEUTSCHER AKTIENINDEX). The DAX Index is composed of the 30 most actively traded
German blue-chip stocks. It represents over 69% of the total equity capital of
German exchange-listed companies. Trading in these shares accounts for
approximately 75% of the stock volume traded on the German exchanges. The CDAX
German Composite Index comprises all German stocks listed in the official market
at the Frankfurt Stock Exchange.
Set forth in the table below is information concerning the total return of the
DAX Index and CDAX Index for each of the periods indicated.
ANNUAL TOTAL RETURN(1)
FIRST
HALF
1992 1993 1994 1995 1996 1997(2)
DAX (2.09)% 46.71% (7.06)% 6.99% 28.17% 31.05%
CDAX (6.39)% 44.56% (5.83)% 4.75% 22.14% 29.96%
Dollar-adjusted DAX (8.33)% 36.85% 4.12% 15.60% 18.17% 16.83%
Dollar-adjusted CDAX (12.36)% 34.85% 5.50% 13.17% 12.61% 15.85%
(1) Based on U.S. dollar returns.
(2) Return as of June 30, 1997 (not annualized).
Trading volume tends to concentrate on the relatively few companies having both
large market capitalization and a broad distribution of their stock with few or
no large holders. The five companies having the largest annual trading volume of
their stock in 1996 represented 46.8% of total trading volume on the German
stock exchanges: Daimler-Benz AG with DM 261.9 billion, Siemens AG with DM 256.1
billion, Deutsche Bank AG with DM 216.8 billion, Bayer AG with DM 186.4 billion
and Volkswagen AG with DM 162.2 billion.
The actual float available for public trading is significantly smaller than the
aggregate market value cited above because of the large extent of long-term
holdings by non-financial corporations, family groups and banks. However, the
number of publicly traded shares has been increasing in recent years due to a
reduction in such holdings on the part of certain insurance companies and public
authorities. In addition, the continuing public offerings of equity securities
previously controlled by the federal government have contributed to the growing
size of the float.
Domestic institutional ownership of German equities, while large relative to
that by individuals, is less than that in certain other industrial countries.
The German Government is encouraging the expansion of private participation in
the equity markets, and has contributed to this process both directly, through
public sale of government-owned enterprises, as well as indirectly through
fiscal measures.
Set forth in the table below is information concerning the industry composition
of the DAX Index and CDAX Index.
INDUSTRY COMPOSITION OF DAX(1) AND CDAX(2)
INDEX AS OF DECEMBER 31, 1996
DAX CDAX
Banks and Insurance 28.0% 28.0%
Chemical Concerns/Pharmaceutical20.9% 20.1%
Auto Industry and Supply 13.7% 10.2%
Utilities and Energy -- --
Electronics Industry -- --
Mechanical Engineering 5.3% 5.7%
Steel and Raw Materials 4.0% 2.7%
Consumer Goods 3.5% 4.1%
Other 4.5% 6.0%
Total 100.0% 100.0%
(1) The DAX Index is comprised of 30 stocks representing approximately 69%
of the market capitalization of the German stock exchange.
(2) The CDAX Index is comprised of 374 stocks (subject to adjustments).
PRIMARY MARKETS
The amount of funds raised in equity financings in 1996 increased by DM 17,862
to DM 24,807 while the number of financings decreased by 6 to 14. The total
value of primary offerings for each of the previous five years of listed equity
issues is shown in the table below.
PRIMARY OFFERINGS OF LISTED EQUITY SECURITIES
BY DOMESTIC ISSUERS
(MILLIONS OF DM)
1992 1993 1994 1995 1996
Value 804 833 1,246 6,495 24,807
Source: Deutsche Borse AG.
ROLE OF BANKS IN GERMAN CAPITAL MARKETS
As is the case in other continental European developed countries, German
commercial and banking laws permit commercial banks to act, either directly or
indirectly, as investment bankers/underwriters, managers of mutual and other
investment funds and investment advisers, as well as securities broker/dealers.
Many German banks, including Deutsche Bank AG ("Deutsche Bank"), are members of
stock exchanges in their respective countries. Moreover, they may, directly or
indirectly, also provide other financial services such as life insurance,
mortgage lending and installment financing. Lastly, they may, and frequently do,
maintain long-term equity participations in industrial, commercial or financial
enterprises, including enterprises whose voting and other equity securities may
be publicly traded and/or listed on national securities exchanges. Recent
legislation requires notification of the newly established Securities Trading
Supervisory Office and publication if certain thresholds of participating in the
voting capital of a stock exchange listed corporation are passed.
Deutsche Bank, the parent of the Manager and the Investment Adviser, holds
significant participation in five listed German companies. The term
"significant" denotes direct ownership of over 25% of the voting equity which,
under German law, provides the holder with veto power in policy decisions, such
as a change of business objectives or major acquisitions. Deutsche Bank owns
equity interests ranging from 25% to 50% in holding companies that own
participations of 25% or more in an additional five listed German companies,
most of which are publicly owned. In addition, Deutsche Bank may maintain
trading positions in the securities of these and other (domestic and foreign)
companies, and may make trading markets in some of them, subject to limitations
imposed by applicable law, including the limitations of the German Stock
Exchange Law (BORSENGESETZ) of 1896, as amended. Deutsche Bank directors or
officers may, by virtue of such ownership or otherwise, be elected to the
Supervisory Boards of these and other companies. Deutsche Bank and its
affiliates may also have commercial lending relationships with companies whose
securities a Portfolio may acquire.
In their capacity as underwriters, German banks originate and manage new issues
of domestic and international fixed income and equity securities both in their
respective domestic primary market and in the Euromarket. Deutsche Bank
frequently acts as lead manager for domestic underwritten offerings of both debt
and equity securities. Under an SEC rule, the Portfolios may purchase securities
in offerings in which Deutsche Bank or one of its affiliates is the principal
underwriter. Directly and through its various wholly-owned affiliates abroad,
Deutsche Bank is a major factor in the Eurobond market. Although the Portfolio
will not purchase securities from or sell securities to Deutsche Bank, the
trading activities of Deutsche Bank as well as the investment positions and
underwriting activities in such securities could have either an adverse or
beneficial effect on the price of those securities already held in the Portfolio
or contemplated for purchase and, depending on the size of Deutsche Bank's
position, may or may not affect the availability of the securities for
investment of the Portfolio.
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding Portfolio are
identical, unless otherwise specified. Accordingly, references below to a Fund
also include its corresponding Portfolio unless the context requires otherwise;
similarly, references to a Portfolio also include its corresponding Fund unless
the context requires otherwise.
The investment restrictions below have been adopted by the Corporation with
respect to each Fund as indicated and by the Portfolio Trust with respect to
each Portfolio as indicated. Except where otherwise noted, these investment
restrictions are "fundamental" policies which, under the 1940 Act, may not be
changed without the vote of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of a Fund or a Portfolio, as the case may be. The
percentage limitations contained in the restrictions below apply at the time of
the purchase of securities except as otherwise noted. Whenever a Fund is
requested to vote on a change in the fundamental investment restrictions of its
corresponding Portfolio, the Corporation will hold a meeting of Fund
shareholders and will cast its votes as instructed by such Fund's shareholders.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified and except that the Corporation
may invest all of each Fund's assets in its corresponding Portfolio, each of the
Funds and its corresponding Portfolio may not:
1. Purchase any security if, as a result, 25% or more of its total assets would
be invested in securities of issuers in any single industry. This limitation
shall not apply to securities issued or guaranteed as to principal or
interest by the U.S. Government or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph
7 below, the issuance of shares in multiple classes or series, the purchase
or sale of options, futures contracts, forward commitments, swaps and
transactions in repurchase agreements are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed one-third of the Fund's total
assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with the redemption of interests in the Portfolio or Fund shares or to
finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets, (iii) in order to fulfill
commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) pursuant to
reverse repurchase agreements entered into by the Portfolio.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933, as amended (the
"1933 Act").
5. Purchase or sell real estate except that a Portfolio may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities that
are secured by real estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate acquired by the
Portfolio as a result of the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Portfolio may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
7. Make loans, except that the Portfolio (1) may lend portfolio securities with
a value not exceeding one-third of the Portfolio's total assets, (2) enter
into repurchase agreements, and (3) purchase all or a portion of an issue of
debt securities (including privately issued debt securities), bank loan
participation interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon the
original issuance of the securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of the
Funds and their corresponding Portfolios and may be changed by their respective
Directors or Trustees. These non-fundamental investment policies require that
each Fund and its corresponding Portfolio may not (except that the Corporation
may invest all of each Fund's assets in its corresponding Portfolio):
(i)Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection
with a merger, consolidation, reorganization, acquisition of assets or an
offer of exchange, provided that Provesta Portfolio and Investa Portfolio
shall each be limited to 5% in the amount of its total assets that may be
invested in the aggregate in securities of investment companies as a group.
Currently the 1940 Act prohibits a Portfolio from acquiring securities of
other investment companies if as a result (i) more than 5% of the value of a
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a
group, or (iii) more than 3% of the outstanding voting stock of any one
investment company will be owned by a Portfolio;
(ii) Acquire any illiquid investments, such as repurchase agreements with more
than seven days to maturity, if as a result thereof, more than 15% of the
market value of the Fund's net assets would be in investments that are
illiquid;
(iii) Invest more than 10% of its net assets in unlisted securities and Notes
(as defined in the Fund's prospectus);
(iv) Sell any security short, except to the extent permitted by the 1940 Act.
Transactions in futures contracts and options shall not constitute selling
securities short; or
(v) Purchase securities on margin, but a Portfolio may obtain such short term
credits as may be necessary for the clearance of transactions.
The DWS Funds are subject to regulation under the German Investment Companies
Act. Therefore, in addition to the investment policies discussed herein and in
the Prospectus, each Fund has adopted additional non-fundamental investment
policies. These non-fundamental investment policies require that each such Fund
and its corresponding Portfolio may not (except that the Corporation may invest
all of each Fund's assets in its corresponding Portfolio):
(i)Invest more than 10% of its net assets in the securities of any one issuer
or invest more than 40% of its net assets in the aggregate in the securities
of those issuers in which the Portfolio has invested in excess of 5% but not
more than 10% of its net assets. For purposes of this restriction, mortgage
bonds and municipal bonds as well as bonds and Notes issued by the FRG, the
states of the FRG, a member state of the European Union ("EU"), a state party
to the Convention on the European Economic Area ("CEEA"), a member state of
the Organization for Economic Cooperation and Development ("OECD") or the EU
shall be valued at half of their value. Bonds of credit institutions situated
in a member state of the EU or state party to the CEEA shall be valued at
half their value provided that the credit institutions are by law subject to
a special public supervision to protect the holders of such bonds and
provided the funds raised through the issue of such bonds are invested in
accordance with the legal provisions in assets, which provide sufficient
coverage for the ensuing liabilities throughout the entire life of the bonds
and which in case of deficiency of the issuer are earmarked for prior
redemption of principal and payment of interest. Securities and Notes issued
by companies in the same affiliated group shall be considered securities of
the same issuer (borrower);
(ii) Purchase bonds of the same issuer to the extent that their total value
exceeds 10% of the total value of the bonds outstanding of the same issuer.
This restriction does not apply to bonds issued by a national government, a
local authority of a member state of the EU, a state party to the CEEA or by
the EU, or if one of these bodies guarantees the payment of interest or the
repayment of principal. For purchases, the above limit need not be complied
with if the total value of the outstanding bonds of the same issuer cannot be
determined;
(iii) Purchase non-voting shares of the same issuer to the extent that the total
value exceeds 10% of the total value of non-voting shares of the issuer; and
(iv) Borrow money, except in amounts not to exceed 10% of the Fund's total
assets (including the amount borrowed).
The European Bond Fund is subject to an additional non-fundamental investment
restriction: no more than 10% of the value of its total assets will be invested
in equity securities (including warrants).
ALL FUNDS
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other
later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Adviser may classify issuers by industry based on
classifications used by Micropal, a leading company offering a
comprehensive and accurate performance measurement service specializing in
collective investment vehicles. Micropal monitors all the world's major
fund markets and has a range of clients from financial institutions to
individual investors. In the absence of such classification or if the
Adviser determines in good faith based on its own information that the
economic characteristics affecting a particular issuer make it more
appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to
be in the industry of their parents if their activities are primarily
related to financing the activities of their parents.
<PAGE>
DIRECTORS, TRUSTEES, AND OFFICERS
The Directors of the Corporation, Trustees of the Portfolio Trust and executive
officers of the Corporation, and principal occupations during the past five
years (although their titles may have varied during the period) and business
addresses are:
DIRECTORS OF THE CORPORATION AND TRUSTEES OF THE PORTFOLIO TRUST
Edward C. Schmults
Member of the Board of Directors of Green Point Financial Corp. Chairman of
the Board of Trustees of The Edna McConnell Clark Foundation. Director of The
Germany Fund, Inc. and The Central European Equity Fund, Inc. Senior Vice
President - External Affairs and General Counsel of GTE Corporation (prior to
1994). Mr. Schmults' address is Rural Route One, Box 788, Cuttingsville, VT
05738.
Robert H. Wadsworth
President of The Wadsworth Group, First Fund Distributors, Inc. and
Guinness Flight Investment Funds, Inc. Director of The Germany Fund, Inc., The
New Germany Fund, Inc. and The Central European Equity Fund, Inc. Vice President
of Professionally Managed Portfolios and Advisors Series Trust. Mr. Wadsworth's
address is Investment Company Administration Corp., 479 West 22nd Street, New
York, NY 10011.
Werner Walbroel
President and Chief Executive of the German American Chamber of Commerce,
Inc. Member of the United States German Youth Exchange Council. Director of TUV
Rheinland of North America, Inc. President and Director of German American
Partnership Program. Director of The Germany Fund, Inc., DB New World Fund,
Limited and LDC, and The Central European Equity Fund, Inc. Mr Walbroel's
address is German American Chamber of Commerce, Inc., 40 West 57th Street, New
York, NY 10019.
G. Richard Stamberger*
Managing Director of Deutsche Morgan Grenfell Inc. President, Deutsche
Morgan Grenfell Investment Management Inc. Director of The Germany Fund, Inc.
and The Central European Equity Fund, Inc. Managing Director of C.J. Lawrence,
Inc. (prior to 1993). Mr Stamberger's address is Deutsche Morgan Grenfell
Investment Management Inc., 31 West 52nd Street, New York, NY 10019.
Christian Strenger*
Managing Director of DWS Deutsche Gesellschaft fuer Wertpapiersparen mbH
(since 1991). Director of The Germany Fund, Inc., The New Germany Fund, Inc. and
The Central European Equity Fund, Inc. Managing Director of Deutsche Bank
Securities Corp. (prior to 1991). Mr. Strenger's address is DWS Deutsche
Gesellschaft fuer Wertpapiersparen mbH, Gruneburgweg 113-115, 60323 Frankfurt am
Main, Germany.
OFFICERS OF THE CORPORATION
Brian A. Lee*
President. President and Managing Director of DFM (since January 1997).
Director of Deutsche Bank Trust Company (since 1994). President and Chief
Operating Officer of Deutsche Bank Trust Company (1994-1997). Director of
Deutsche Bank Securities Corp. (1993-1994). Director of Value Line Securities,
Inc. (1992-1993). National Director and Head of Retail Sales and Service
Division, The Dreyfus Corporation (prior to 1992). Director, Boggy Creek Hole in
the Wall Gang Camp for Children. Trustee, Valley Hospital. Director, Capital
Sources Board, State of New Jersey.
<PAGE>
Joseph Cheung*
Treasurer. Vice President (since 1996), Assistant Vice President
(1994-1996) and Associate (1991-1994) of Deutsche Morgan Grenfell Inc. Treasurer
of the CountryBasketsSM Index Fund, Inc. (1996-1997). Assistant Secretary and
Assistant Treasurer of The Germany Fund, Inc., The Central European Equity Fund,
Inc. and the New Germany Fund, Inc. (since 1993).
Robert R. Gambee*
Secretary. Director of Deutsche Morgan Grenfell, Inc. (since 1992). First
Vice President of Deutsche Morgan Grenfell, Inc. (1987-1991). Treasurer and
Secretary of The Germany Fund, Inc., The Central European Equity Fund, Inc., and
the New Germany Fund, Inc.
Laura Weber*
Assistant Secretary and Assistant Treasurer. Associate of Deutsche Morgan
Grenfell Inc. (since June 1997). Manager of Raymond James Financial (1996-1997).
Portfolio Accountant of Oppenheimer Capital (1995-1996). Supervisor (1994-1995)
and Mutual Fund Accountant (1993-1994) of Alliance Capital Management.
* Is an "interested person" of the Corporation or the Portfolio Trust as that
term is defined in the 1940 Act.
Mr. Lee, Mr. Strenger and Mr. Stamberger own less than 1% of the shares of
Deutsche Bank AG, of which the Manager and Adviser are indirect subsidiaries.
The address of each officer of the Corporation is 31 West 52nd Street, New York,
NY 10019.
The Portfolio Trust does not have officers, but instead acts exclusively through
its Trustees and agents of the Portfolio Trust authorized by the Trustees.
COMPENSATION TABLE--DIRECTORS OF THE CORPORATION
AGGREGATE PENSION OR ESTIMATED TOTAL
COMPENSATION RETIREMENT BENEFITSESTIMATED ANNUAL COMPENSATION
FROM THE ACCRUED AS PART BENEFITS UPON FROM THE CORPORATION
CORPORATION OF FUND EXPENSES RETIREMENT AND FUND COMPLEX*
Edward C. Schmults,
Director $7,000 None None $44,750
Robert H. Wadsworth,
Director $7,000 None None $62,000
Werner Walbroel,
Director $7,000 None None $46,250
G. Richard Stamberger,*
Director None None None None
Christian Strenger,
Director None None None None
* The Fund Complex consists of the Corporation, the Portfolio Trust, The New
Germany Fund, Inc., The Central European Equity Fund, Inc. and The Germany
Fund, Inc.
COMPENSATION TABLE--TRUSTEES OF THE PORTFOLIO TRUST
AGGREGATE PENSION OR ESTIMATED TOTAL
COMPENSATION RETIREMENT BENEFITSESTIMATED ANNUAL COMPENSATION FROM
FROM THE ACCRUED AS PART BENEFITS UPON THE PORTFOLIO TRUST
PORTFOLIO TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX*
Edward C. Schmults,
Trustee $7,000 None None $44,750
Robert H. Wadsworth,
Trustee $7,000 None None $62,000
Werner Walbroel,
Trustee $7,000 None None $46,250
G. Richard Stamberger,*
Trustee None None None None
Christian Strenger,
Trustee None None None None
* The Fund Complex consists of the Corporation, the Portfolio Trust, The New
Germany Fund, Inc., The Central European Equity Fund, Inc. and The Germany
Fund, Inc.
The non-interested Directors of the Corporation receive a base annual fee of
$5,000 and $500 per meeting attended, plus expenses, which are paid jointly by
all series of the Corporation and allocated among the series based upon their
respective net assets.
The non-interested Trustees of the Portfolio Trust receive a base annual fee of
$5,000 and $500 per meeting attended, plus expenses, which are paid jointly by
all series of the Portfolio Trust and allocated among the series based upon
their respective net assets.
Neither the Corporation nor the Portfolio Trust requires employees, and none of
the Corporation's officers devotes full time to the affairs of the Corporation
or receive any compensation from a Fund or a Portfolio.
FUND OWNERSHIP
As of September 24, 1997, the Directors of the Corporation, Trustees of
the Portfolio Trust and officers of the Corporation as a group
beneficially owned no outstanding shares of the Corporation and none of
the beneficial interests in any Portfolio of the Portfolio Trust. As of
the same date, no person owned 5% or more of the outstanding voting stock
of any series of the Corporation or any Portfolio except the Corporation
owned 100% of the outstanding beneficial interests in each Portfolio and
Edgewood Services, Inc. owned 100% of the outstanding voting shares of
each Fund.
<PAGE>
MANAGER
The investment manager to each Portfolio is DFM, an indirect subsidiary of
Deutsche Bank AG, a major global banking institution headquartered in Germany.
DFM, with principal offices at 31 West 52nd Street, New York, New York 10019, is
a Delaware corporation and registered investment adviser under the Investment
Advisers Act of 1940.
Pursuant to an investment management agreement with the Portfolio Trust with
respect to each Portfolio (the "Management Agreement"), DFM acts as investment
manager to each Portfolio and, subject to the supervision of the Board of
Trustees of the Portfolio Trust, is responsible for, but may and has delegated
as described below, under "Adviser," the management of the investment operations
of each Portfolio's investments in accordance with its investment objective,
policies and restrictions. DFM also provides each Portfolio with overall
supervisory services over the other service providers and certain other
services. The investment management services DFM provides to each Portfolio are
not exclusive under the terms of the Management Agreement. DFM is free to render
similar investment management services to others.
The Management Agreement is dated July 28, 1997, and will remain in effect until
July 28, 1999, and from year to year thereafter, but only so long as the
agreement is specifically approved at least annually (i) by a vote of the
holders of a "majority of the outstanding voting securities" (as defined in the
1940 Act) of the related Portfolio, or by the Portfolio Trust's Trustees, and
(ii) by a vote of a majority of the Trustees of the Portfolio Trust who are not
parties to such Management Agreement or "interested persons" (as defined in the
1940 Act) of the Portfolio Trust, cast in person at a meeting called for the
purpose of voting on such approval. The Management Agreement was initially
approved at a meeting held on July 28, 1997. The Management Agreement will
terminate automatically if assigned and is terminable at any time without
penalty by a vote of a majority of the Portfolio Trust's Trustees, or by a vote
of the holders of a majority of the related Portfolio's outstanding voting
securities, on 60 days' written notice to the Manager and by the Manager on 90
days' written notice to the Portfolio Trust. The Management Agreement provides
that neither DFM nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss or expense in connection with the matters in
which the agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its obligations
and duties under the agreement. See "Additional Information."
As compensation for the services rendered and related expenses borne by DFM
under the Management Agreement with the Portfolio Trust with respect to each
Portfolio, DFM receives a fee from each of Top 50 Europe Portfolio, Provesta
Portfolio, Investa Portfolio and European Bond Portfolio, which is computed
daily and may be paid monthly, equal to 1.00%, 0.85%, 0.85% and 0.75%,
respectively, of the average daily net assets of such Portfolio on an annualized
basis for the Portfolio's then-current fiscal year.
The Glass-Steagall Act and other applicable laws generally prohibit banks
(including foreign banks having U.S. operations, such as Deutsche Bank AG) from
engaging in the business of underwriting or distributing securities in the
United States, and the Board of Governors of the Federal Reserve System has
issued an interpretation to the effect that under these laws a bank holding
company registered under the Federal Bank Holding Company Act (or a foreign bank
subject to such Act's provisions) or certain subsidiaries thereof may not
sponsor, organize, or control a registered open-end investment company
continuously engaged in the issuance of its shares, such as the Corporation. The
interpretation does not prohibit a holding company (or such a foreign bank) or a
subsidiary thereof from acting as investment manager and custodian to such an
investment company. Deutsche Bank AG believes that DFM may perform the services
for the Portfolio Trust and the Corporation contemplated by the Management
Agreement without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. It is possible that future changes in federal
statutes and regulations concerning the permissible activities of banks or trust
companies, as well as further judicial or administrative decisions and
interpretations of present and future statutes and regulations, might prevent
DFM from continuing to perform such services for each Portfolio.
ADVISER
DFM has entered into an investment advisory agreement (the "Advisory Agreement")
dated July 28, 1997, on behalf of the Portfolio Trust with respect to each
Portfolio with DWS International Portfolio Management GmbH. It is the Adviser's
responsibility, under the overall supervision of DFM, to conduct the day-to-day
investment decisions of its respective Portfolio(s), arrange for the execution
of portfolio transactions and generally manage each Portfolio's investments in
accordance with its investment objective, policies and restrictions.
The Adviser is an indirect subsidiary of Deutsche Bank AG. For these services,
the Adviser receives from DFM a fee, which is computed daily and may be paid
monthly, equal to 0.75%, 0.60%,0.60% and 0.50% of the average daily net assets
of each of Top 50 Europe Portfolio, Provesta Portfolio, Investa Portfolio and
European Bond Portfolio, respectively, on an annualized basis for the
Portfolio's then-current fiscal year.
The Advisory Agreement is dated July 28, 1997, and will remain in effect until
July 28, 1999, and from year to year thereafter, but only so long as the
agreement is specifically approved at least annually (i) by a vote of the
holders of a "majority of the outstanding voting securities" (as defined in the
1940 Act) of the related Portfolio, or by the Portfolio Trust's Trustees, and
(ii) by a vote of a majority of the Trustees of the Portfolio Trust who are not
parties to such Advisory Agreement or "interested persons" (as defined in the
1940 Act) of the Portfolio Trust, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement was initially
approved at a meeting held on July 28, 1997. The Advisory Agreement will
terminate with respect to a Portfolio automatically if assigned or if the
Management Agreement is terminated with respect to that Portfolio and is
terminable at any time without penalty by a vote of a majority of the Portfolio
Trust's Trustees, or by a vote of the holders of a majority of the related
Portfolio's outstanding voting securities, on 60 days' written notice to the
relevant Adviser and by each Adviser on 90 days' written notice to the Manager
and the Portfolio Trust. The Advisory Agreement provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss or expense in connection with the matters in which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its obligations and duties
under the agreement. See "Additional Information."
For each Portfolio advised by the Adviser there is a corresponding DWS Fund, as
follows (having launch dates and net assets as of July 31, 1997, as indicated):
Provesta Portfolio--Provesta (November 1985, $1.04 billion), Investa
Portfolio--Investa (December 1956, $2.14 billion), European Bond
Portfolio--Eurorenta (November 1987, $2.21 billion) and Top 50 Europe
Portfolio--Europa (October 1995, $1.33 billion).
ADMINISTRATOR
Under the master agreement for administration services with the Corporation
("Administration Agreement"), Federated Services Company serves as administrator
to the Funds ("Administrator"). In connection with its responsibilities as
Administrator of the Funds, Federated Services Company, among other things (i)
prepares, files and maintains the Funds' governing documents, registration
statements and regulatory filings; (ii) prepares and coordinates the printing of
publicly disseminated documents; (iii) monitors declaration and payment of
dividends and distributions; (iv) projects and reviews the Funds' expenses; (v)
performs internal audit examinations; (vi) prepares and distributes materials to
the Directors of the Corporation; (vii) coordinates the activities of all
service providers; (viii) monitors and supervises collection of tax reclaims;
and (ix) prepares shareholder meeting materials.
The Administration Agreement between the Corporation and Federated Services
Company (dated July 28, 1997) with respect to each Fund has an initial term of
three years. Thereafter, the Administration Agreement will remain in effect
until terminated by either party thereto. The agreement is terminable by the
Corporation at any time after the initial term without penalty by a vote of a
majority of the Directors of the Corporation, or by a vote of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Corporation (see "Additional Information"). The Administration Agreement is
terminable by the Directors of the Corporation or shareholders of the Fund on 60
days' written notice to Federated Services Company. The agreement is terminable
by the Administrator on 90 days' written notice to the Corporation. The
Administration Agreement provides that neither Federated Services Company nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in its
services, except for willful misfeasance, bad faith or gross negligence or
reckless disregard of its obligations and duties under the Agreement. See
"Additional Information."
As Administrator of the Funds, Federated Services Company receives a fee from
each Fund, which is computed daily and may be paid monthly, at the annual rate
of 0.065% of the average daily net assets of each Fund up to $200 million and
0.0525% of the average daily net assets of each Fund greater than $200 million
for the Fund's then-current fiscal year. The Administrator of the Funds will
receive a minimum fee of $75,000 per Fund annually.
OPERATIONS AGENT
Under an operations agency agreement with the Portfolio Trust ("Operations
Agency Agreement"), Federated Services Company serves as operations agent to the
Portfolios ("Operations Agent"). In connection with its responsibilities as
Operations Agent of the Portfolios, Federated Services Company, among other
things, (i) prepares governing documents, registration statements and regulatory
filings; (ii) performs internal audit examinations (iii) prepares expense
projections; (iv) prepares materials for the Trustees of the Portfolio Trust;
(v) coordinates the activities of all service providers; (vi) conducts
compliance training for the Adviser; (vii) prepares investor meeting materials
and (viii) monitors and supervises collection of tax reclaims.
The Operations Agency Agreement between the Portfolio Trust and Federated
Services Company (dated July 28, 1997) with respect to each Portfolio has an
initial term of three years. Thereafter, the Operations Agency Agreement will
remain in effect until terminated by either party thereto. The agreement is
terminable by the Portfolio Trust at any time after the initial term without
penalty by a vote of a majority of the Trustees of the Portfolio Trust, or by a
vote of the holders of a "majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Portfolio Trust (see "Additional Information").
The Operations Agency Agreement is terminable by the Trustees of the Portfolio
Trust or investors of the Portfolio on 60 days' written notice to Federated
Services Company. The agreement is terminable by Federated Services Company on
90 days' written notice to the Portfolio Trust. The Operations Agency Agreement
provides that neither Federated Services Company nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in its services, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its
obligations and duties under the Agreement.
As Operations Agent of the Portfolios, Federated Services Company receives a fee
from each Portfolio, which is computed daily and paid monthly, at the annual
rate of 0.035% of the average daily net assets of each Portfolio for the
Portfolio's then-current fiscal year. The Operations Agent of the Portfolios
will receive a minimum fee of $60,000 per Portfolio annually and a minimum
aggregate fee for each Portfolio, corresponding Fund and any other fund
investing in the Portfolio, taken together, of $75,000 for the first year of the
Portfolio's operation and $125,000 for the second year, in each case payable to
the Operations Agent.
ADMINISTRATIVE AGENT
Under an administration agreement with the Portfolio Trust ("Administration
Agreement"), IBT Trust Company (Cayman) Ltd. ("IBT (Cayman)") serves as
administrative agent to the Portfolios ("Administrative Agent"). In connection
with its responsibilities as Administrative Agent of the Portfolios, IBT
(Cayman) (i) files and maintains governing documents, registration statements
and regulatory filings; (ii) maintains a telephone line; (iii) approves annual
expense budget; (iv) authorizes expenses; (v) distributes materials to the
Trustees of the Portfolio Trust; (vi) authorizes dividend distributions; (vii)
maintains books and records; (viii) files tax returns and (ix) maintains an
investor register.
The Administration Agreement between the Portfolio Trust and IBT (Cayman) (dated
July 28, 1997) with respect to each Portfolio has an initial term of three
years. Thereafter, the Administration Agreement will remain in effect until
terminated by either party thereto. The agreement is terminable by the Portfolio
Trust at any time after the initial term without penalty by a vote of a majority
of the Trustees of the Portfolio Trust, or by a vote of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio Trust (see "Additional Information"). The Administration Agreement
is terminable by the Trustees of the Portfolio Trust or investors of the
Portfolio on 60 days' written notice to IBT (Cayman). The agreement is
terminable by IBT (Cayman) on 90 days' written notice to the Portfolio. The
Administration Agreement provides that neither IBT (Cayman) nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in its services, except
for willful misfeasance, bad faith or gross negligence or reckless disregard of
its obligations and duties under the Agreement.
As Administrative Agent of the Portfolios, IBT (Cayman) receives a fee from each
Portfolio, which may be paid monthly, at the annual rate of $5,000.
DISTRIBUTOR
The distribution agreement (the "Distribution Agreement") (dated July 28, 1997)
between the Corporation and Edgewood Services, Inc. (the "Distributor") remains
in effect indefinitely, but only so long as such agreement is specifically
approved at least annually (i) by a vote of the holders of a "majority of the
outstanding voting securities" (as defined in the 1940 Act) of the related Fund,
or by the Corporation's Directors, and (ii) by a vote of a majority of the
Directors of the Corporation who are not parties to such Distribution Agreement
or "interested persons" (as defined in the 1940 Act) of the Corporation, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement terminates automatically if assigned by either party
thereto and is terminable with respect to each Fund at any time without penalty
by a vote of a majority of the Directors of the Corporation or by a vote of the
holders of a "majority of the outstanding voting securities" (as defined in the
1940 Act) of the Fund (see "Additional Information"). The Distribution Agreement
is terminable with respect to each Fund by the Corporation's Directors or
shareholders of a Fund on 60 days' written notice to Edgewood. The Agreement is
terminable by the Distributor on 90 days' written notice to the Corporation.
The Distributor is not obligated to sell any specific number of shares. Under a
plan adopted in accordance with Rule 12b-1 of the 1940 Act on July 28, 1997,
Class B Shares are subject to a distribution plan (the "Distribution Plan") and
Class A Shares and Class B Shares are subject to a service plan (the "Service
Plan").
Under the Distribution Plan, Class B Shares of each Fund will pay a fee to the
Distributor in an amount computed at an annual rate of 0.75% of the average
daily net assets of the Fund represented by Class B Shares to finance any
activity which is principally intended to result in the sale of Class B Shares
of the Fund subject to the Distribution Plan. A report of the amounts expended
pursuant to the Distribution Plan, and the purposes for which such expenditures
were incurred, must be made to the Directors of the Corporation for review at
least quarterly.
The Distribution Plan provides that it may not be amended to increase materially
the costs which a Fund may bear pursuant to the Distribution Plan without
shareholder approval and that other material amendments of the Distribution Plan
must be approved by the Directors of the Corporation, and by the Directors who
have no direct or indirect financial interest in the operation of the
Distribution Plan or any related agreement and are not "interested persons" (as
defined in the 1940 Act) of the Corporation ("Qualifying Directors"), by vote
cast in person at a meeting called for the purpose of considering such
amendments. While the Distribution Plan is in effect, the selection and
nomination of the Directors of the Corporation have been committed to the
discretion of the Qualifying Directors. The Distribution Plan has been approved,
and is subject to annual approval, by the Directors of the Corporation and the
Qualifying Directors, by vote cast in person at a meeting called for the purpose
of voting on the Distribution Plan. The Qualifying Directors voted to approve
the Distribution Plan at a meeting held on July 28, 1997. The Distribution Plan
is terminable with respect to the Class B Shares of a Fund at any time by a vote
of a majority of the Qualifying Directors or by vote of the holders of a
majority of the Class B Shares of that Fund.
TRANSFER AGENT, CUSTODIAN, AND FUND ACCOUNTANT
Federated Shareholder Services Company, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, serves as the transfer agent and dividend disbursing
agent for each Fund. As Transfer Agent and Dividend Disbursing Agent, Federated
Shareholder Services Company is responsible for maintaining account records
detailing the ownership of Fund shares and for crediting income, capital gains
and other changes in share ownership to shareholder accounts. Investors Bank &
Trust Company, 200 Clarendon Street, Boston, MA 02116 acts as the custodian of
each Fund's and each Portfolio's assets. Pursuant to the Custodian Contract with
the Portfolio Trust, IBT is responsible for maintaining the books and records of
portfolio transactions and holding portfolio securities and cash. In the case of
foreign assets held outside the United States, IBT employs various subcustodians
who were approved in accordance with the regulations of the SEC. The Custodian
maintains portfolio transaction records. IBT Fund Services (Canada) Inc., One
First Canadian Place, King Street West, Suite 2800, P.O. Box 231, Toronto,
Ontario M5X1C8, provides fund accounting services to the Funds and the
Portfolios including (i) calculation of the daily net asset value for the Funds
and the Portfolios; (ii) monitoring compliance with investment portfolio
restrictions, including all applicable federal and state securities and other
regulatory requirements; and (iii) monitoring each Fund's and Portfolio's
compliance with the requirements applicable to a regulated investment company
under the Code.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Corporation are Price Waterhouse LLP, 1177
Avenue of the Americas, New York, NY 10036. The independent accountants of the
Portfolio Trust are Price Waterhouse LLP, Kaya W.F.G. (Jombi), Mensing #18, P.O.
Box 46, Curacao, Netherlands Antilles. The independent accountants conduct
annual audits of financial statements, assist in the preparation and/or review
of federal and state income tax returns and provide consulting as to matters of
accounting and federal and state income taxation for each Fund or Portfolio, as
the case may be.
PURCHASE OF SHARES
Except under certain circumstances described in a Fund's Prospectus, Shares are
sold at their net asset value (plus a sales charge on Class A shares only) on
days the New York Stock Exchange is open for business. The procedure for
purchasing shares is explained in each Prospectus under "Purchase of Shares."
CONVERSION TO FEDERAL FUNDS
It is each Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Shareholder Services Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.
REDEMPTION OF SHARES
Each Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after a Fund receives the
redemption request. Redemption procedures are explained in each Fund's
Prospectus under "Redemption of Shares." Although the transfer agent does not
charge for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000. Class B Shares
redeemed within six years of purchase and applicable Class A Shares redeemed
within one year of purchase may be subject to a contingent deferred sales
charge. The amount of the contingent deferred sales charge is based upon the
amount of the administrative fee paid at the time of purchase by the Distributor
to the financial institution for services rendered, and the length of time the
investor remains a shareholder in a Fund. Should Financial Intermediaries elect
to receive an amount less than the fee that is stated in a Fund's Prospectus for
servicing a particular shareholder, the contingent deferred sales charge and/or
holding period for that particular shareholder will be reduced accordingly.
Since portfolio securities of each Portfolio may be traded on foreign exchanges
which trade on Saturdays or on holidays on which a Fund will not make
redemptions, the net asset value of each class of Shares of a Fund may be
significantly affected on days when shareholders do not have an opportunity to
redeem their Shares.
REDEMPTION IN KIND
Although the Corporation intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio. In such a case,
the portfolio instruments to be distributed as redemption proceeds would be
valued in the same way as the Portfolio determines net asset value. The
portfolio instruments will be selected in a manner that the Directors of the
Corporation and Trustees of the Portfolio deem fair and equitable. To the extent
available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The Systematic Withdrawal Program permits the shareholder to request withdrawal
of a specified dollar amount (minimum $100) on either a monthly or quarterly
basis from accounts with $10,000 minimum at the time the shareholder elects to
participate in the Systematic Withdrawal Program. The amounts that a shareholder
may withdraw under a Systematic Withdrawal Program that qualify for elimination
of the contingent deferred sales charge may not exceed 12% annually with
reference initially to the value of the Class B Shares upon establishment of the
Systematic Withdrawal Program and then as calculated at the fiscal year end.
Amounts that exceed the 12% annual limit for redemption, as described, will be
subject to the contingent deferred sales charge. In determining the
applicability of the contingent deferred sales charge, the 12 month holding
requirement for any new Class B Shares received through an exchange will include
the period for which the exchanged Class B Shares were held. However, for
purposes of meeting the $10,000 minimum account value requirement, Class B Share
account values will not be aggregated.
EXCHANGE OF SHARES
An investor may exchange shares from any series of the Deutsche Funds, Inc. (a
"Deutsche Fund") into any other Deutsche Fund, as described under "Exchange of
Shares" in each Fund's Prospectus. For complete information, the prospectus as
it relates to each Fund into which a transfer is being made should be read prior
to the transfer. Requests for exchange are made in the same manner as requests
for redemptions. See "Redemption of Shares." Shares of a Fund to be acquired are
purchased for settlement when the proceeds from redemption become available. The
Corporation reserves the right to discontinue, alter or limit the exchange
privilege at any time.
NET ASSET VALUE
Each Fund computes its net asset value once daily on Monday through Friday as
described under "Net Asset Value" in the Prospectus. The net asset value will
not be computed on the day the following legal holidays are observed: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On days when
U.S. trading markets close early in observance of these holidays, each Fund and
its corresponding Portfolio would expect to close for purchases and redemptions
at the same time. The days on which net asset value is determined are the Fund's
business days.
The net asset value of a Fund is equal to the value of such Fund's investment in
its corresponding Portfolio (which is equal to that Fund's pro rata share of the
total investment of the Fund and of any other investors in the Portfolio less
the Fund's pro rata share of the Portfolio's liabilities) less the Fund's
liabilities.
FIXED INCOME SECURITIES
The fixed income portion of the Portfolios and portfolio securities with a
maturity of 60 days or more, including securities that are listed on an exchange
or traded over the counter, are valued using prices supplied daily by an
independent pricing service or services that (i) are based on the last sale
price on a national securities exchange or, in the absence of recorded sales, at
the average of readily available closing bid and asked prices on such exchange
or at the average of readily available closing bid and asked prices in the
over-the-counter market, if such exchange or market constitutes the broadest and
most representative market for the security and (ii) in other cases, take into
account various factors affecting market value, including yields and prices of
comparable securities, indication as to value from dealers and general market
conditions. If such prices are not supplied by a Portfolio's independent pricing
service, such securities are priced in accordance with procedures adopted by the
Trustees of the Portfolio Trust. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method.
OTHER SECURITIES
The value of investments listed on a U.S. securities exchange, other than
options on stock indexes, is based on the last sale prices on the New York Stock
Exchange at 4:00 p.m. (U.S.Eastern time) or, in the absence of recorded sales,
at the average of readily available closing bid-and-asked prices on such
exchange. Securities listed on a foreign exchange considered by the Adviser to
be a primary market for the securities are valued at the last quoted sale price
available before the time when net assets are valued. Unlisted securities, and
securities for which the Adviser determines the listing exchange is not a
primary market, are valued at the average of the quoted bid-and-asked prices in
the over-the-counter market. The value of each security for which readily
available market quotations exist is based on a decision as to the broadest and
most representative market for such security. For purposes of calculating net
asset value, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the prevailing market rates
available at the time of valuation.
Options on stock indexes traded on U.S. national securities exchanges are valued
at the close of options trading on such exchanges which is currently 4:10 p.m.
(U.S.Eastern time). Stock index futures and related options, which are traded on
U.S. futures exchanges, are valued at their last sales price as of the close of
such futures exchanges which is currently 4:15 p.m. (U.S.Eastern time). Options,
futures contracts and warrants traded on a foreign stock exchange or on a
foreign futures exchange are valued at the last price available before the time
when the net assets are valued. Securities or other assets for which market
quotations are not readily available (including certain restricted and illiquid
securities) are valued at fair value in accordance with procedures established
by and under the general supervision and responsibility of the Trustees of the
Portfolio Trust. Such procedures include the use of independent pricing services
that use prices based upon yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions.
Trading in securities on most foreign exchanges and over-the-counter markets is
normally completed before the close of the New York Stock Exchange and may also
take place on days on which the New York Stock Exchange is closed. If events
materially affecting the value of securities occur between the time when the
exchange on which they are traded closes and the time when a Portfolio's net
asset value is calculated, such securities will be valued at fair value in
accordance with procedures established by and under the general supervision of
the Trustees.
PERFORMANCE DATA
From time to time, a Fund may quote performance in reports, sales literature and
advertisements published by the Corporation. Current performance information for
a Fund may be obtained by calling the number provided on the cover page of this
Statement of Additional Information. See also "Management of the Corporation and
the Portfolio Trust - Performance Information" in the Prospectus.
TOTAL RETURN QUOTATIONS
As required by regulations of the SEC, the annualized total return of a Fund for
a period is computed by assuming a hypothetical initial payment of $1,000. It is
then assumed that all of the dividends and distributions by a Fund over the
period are reinvested. It is then assumed that at the end of the period, the
entire amount is redeemed. The annualized total return is then calculated by
determining the annual rate required for the initial payment to grow to the
amount which would have been received upon redemption.
Average annual total return for each class of Shares of the Funds is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming the annual
reinvestment of all dividends and distributions.
Any applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price or
the net asset value of Shares redeemed.
Aggregate total returns, reflecting the cumulative percentage change over a
measuring period, may also be calculated.
YIELD
The yield for each class of Shares of the Funds is determined by dividing the
net investment income per share (as defined by the SEC) earned by any class of
Shares over a 30-day period by the maximum offering price per share of the
respective class on the last day of the period. This value is annualized using
semi-annual compounding. This means that the amount of income generated during
the 30-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by a Fund because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to the shareholders.
To the extent that Financial Intermediaries and broker-dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
GENERAL
The performance of each of the classes of Shares will vary from time to time
depending upon market conditions, the composition of a Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in advertising
a Fund's shares, including appropriate market indices or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
Information and Comparisons Relating to the Funds, Secondary Market
Trading, Net Asset Size, Performance and Tax Treatment
Information regarding various aspects of each Fund, including the net asset size
thereof, as well as the performance and the tax treatment of Fund shares, may be
included from time to time in advertisements, sales literature and other
communications as well as in reports to current or prospective investors.
Information may be provided to prospective investors to help such investors
assess their specific investment goals and to aid in their understanding of
various financial strategies. Such information may present current economic and
political trends and conditions and may describe general principles of investing
such as asset allocation, diversification and risk tolerance, as well as
specific investment techniques.
Information regarding the net asset size of a Fund may be stated in
communications to prospective or current investors for one or more time periods,
including annual, year-to-date or daily periods. Such information may also be
expressed in terms of the total number of Fund Shares outstanding as of one or
more time periods. Factors integral to the size of a Fund's net assets, such as
the volume and activity of purchases and redemptions of Fund Shares, may also be
discussed, and may be specified from time to time or with respect to various
periods of time. Comparisons of such information during various periods may also
be made and may be expressed by means of percentages.
Information may be provided to investors regarding capital gains distributions
by the Funds, including historical information relating to such distributions.
Comparisons between the Funds and other investment vehicles such as mutual funds
may be made regarding such capital gains distributions, including the expected
effects of differing levels of portfolio adjustments on such distributions and
the potential tax consequences thereof.
Information may also be provided in communications to prospective or current
investors comparing and contrasting the relative advantages of investing in Fund
Shares as compared to other investment vehicles, such as mutual funds, both on
an individual and a group basis (e.g., stock index mutual funds). Such
information may include comparisons of costs, expense ratios, expressed either
in dollars or basis points, stock lending activities, permitted investments and
hedging activities (e.g., engaging in options or futures transactions), price
volatility and portfolio turnover data and analyses. In addition, such
information may quote, reprint or include portions of financial, scholarly or
business publications or periodicals, including model allocation schedules or
portfolios as the foregoing relate to the comparison of Fund Shares to other
investment vehicles, current economic financial and political conditions,
investment philosophy or techniques or the desirability of owning Fund Shares.
Such information may be provided both before and after deduction of sales
charges.
Information on the performance of a Fund on the basis of changes in net asset
value per fund share, with or without reinvesting all dividends and/or any
distributions of capital in additional Fund Shares, may be included from time to
time in a Fund's performance reporting. The performance of a Fund may also be
compared to the performance of money managers as reported in market surveys such
as SEI Fund Evaluation Survey (a leading data base of tax-exempt fund) or mutual
funds such as those reported by Lipper Analytical Services, Morningstar,
Micropal, Money Magazine's Fund Watch or Wiesenberger Investment Companies
Service, each of which measures performance following their own specific and
well-defined calculation measures, or of the NYSE Composite Index, the American
Stock Exchange Index (indices of stocks traded on the New York and American
Stock Exchanges, respectively), the Dow Jones Industrial Average (an index of 30
widely traded industrial common stocks), any widely recognized foreign stock and
bond index or similar measurement standards during the same period of time.
Information relating to the relative net asset value performance of Fund Shares
may be compared against a wide variety of investment categories and asset
classes, including common stocks, small capitalization stocks, ADRs, long and
intermediate term corporate and government bonds, Treasury bills, futures
contracts, the rate of inflation in the United States (based on the Consumer
Price Index ("CPI") or other recognized indices) and other capital markets and
combinations thereof. Historical returns of the capital markets relating to a
Fund may be provided by independent statistical studies and sources, such as
those provided to Ibbotson Associates. The performance of these capital markets
is based on the returns of different indices. Information may be presented using
the performance of these and other capital markets to demonstrate general
investment strategies. So, for example, performance of Fund Shares may be
compared to the performance of selected asset classes such as short-term U.S.
Treasury bills, long-term U.S. Treasury bonds, long-term corporate bonds,
mid-capitalization stocks, small capitalization stocks and various classes of
foreign stocks and may also be measured against the rate of inflation as set
forth in well-known indices (such as the CPI). Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
Performance of Fund Shares may also be compared to that of other indices or
compilations that may be developed and made available to the investing public in
the future. Of course, such comparisons will only reflect past performance of
Fund Shares and the investment categories, indices or compilations chosen and no
guarantees can be made of future results regarding the performance of either
Fund Shares or the asset classes chosen for such comparisons.
Comparative performance information may be used from time to time in advertising
each Fund's shares. The performance of the:
o Top 50 Europe may be compared to MSCI-Europe Index;
o European Mid-Cap Fund may be compared to the DAX Composite Index ("CDAX"),
Financial Times ("FT")/Standard & Poor's Medium-Small Cap Europe Index,
Deutscher Aktien Index ("DAX"), DSX Mid-Cap, and Morgan Stanley Capital Index
("MSCI") - Europe Index;
o German Equity Fund may be compared to DAX, CDAX, MSCI-Europe Index, and
FT-Europe Index;
o European Bond Fund may be compared to JPM European Government Bond Index,
Salomon Brothers European World Government Bond Index, and EFFAS Government
Bond Index;
Each index is an unmanaged index of common security prices, converted into U.S.
dollars where appropriate. Any index selected by a Fund for information purposes
may not compute total return in the same manner as the Funds and may exclude,
for example, dividends paid, brokerage and other fees.
Information comparing the portfolio holdings relating to a particular Fund, with
those of relevant stock indices or other investment vehicles, such as mutual
funds or futures contracts, may be advertised or reported by the Fund. Equity
analytic measures, such as price/earnings ratio, price/book value and price/cash
flow and market capitalizations, may be calculated for the portfolio holdings
and may be reported on an historical basis or on the basis of independent
forecasts.
Information may be provided by a Fund on the total return for various composites
of the different Funds. These composite returns might be compared to other
securities or indices utilizing any of the comparative measures that might be
used for the individual Fund, including correlations, standard deviation, and
tracking error analysis.
Past results may not be indicative of future performance. The investment return
and net asset value of shares of each Fund will fluctuate so that the shares,
when redeemed, may be worth more or less than their original cost.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Funds may include discussions of
economic, financial and political developments and their effect on the
securities market. For example, such advertisements and/or sales literature may
include statements such as the following, setting forth the Manager's views on
certain trends and/or opportunities: European companies are among the world's
strongest, from which an investor could derive potential benefits by investing
in high-quality European companies with strong balance sheets; Europe's stock
markets are growing quickly because Europeans are turning to equities, seeking
higher long-term return potential, which creates opportunities for non-European
investors; the advent of the European Monetary Union, and the resultant single
currency is expected to spur dramatic change by galvanizing Europe into a
single, globally competitive economy; and European companies are working to
improve shareholder value through restructuring aimed at operating more
efficiently and meeting performance targets. Such discussions may also take the
form of commentary on these developments by Fund or Portfolio managers and their
views and analysis on how such developments could affect the Funds. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute.
PORTFOLIO TRANSACTIONS
The Portfolio Trust trades securities for a Portfolio if it believes that a
transaction net of costs (including custodian charges) will help achieve the
Portfolio's investment objective. Changes in a Portfolio's investments are made
without regard to the length of time a security has been held, or whether a sale
would result in the recognition of a profit or loss. Therefore, the rate of
turnover is not a limiting factor when changes are appropriate. Specific
decisions to purchase or sell securities for a Portfolio are made by its
portfolio manager who is an employee of the Adviser.
The portfolio manager may serve other clients of the Adviser in a similar
capacity.
The primary consideration in placing portfolio securities transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of the Portfolios and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Adviser normally seeks to deal directly with the primary
market makers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Adviser on the tender of a
Portfolio's securities in so-called tender or exchange offers.
In connection with the selection of such brokers or dealers and the placing of
such orders, the Adviser seeks for each Portfolio in its best judgment, prompt
execution in an effective manner at the most favorable price. Subject to this
requirement of seeking the most favorable price, securities may be bought from
or sold to broker-dealers who have furnished statistical, research and other
information or services to the Adviser or the Portfolio, subject to any
applicable laws, rules and regulations.
The investment advisory fee that each Portfolio pays to the Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through the use of the services, avoid the
additional expenses which would be incurred if it should attempt to develop
comparable information through its own staff or obtain such services
independently.
In certain instances there may be securities that are suitable as an investment
for a Portfolio as well as for one or more of the Adviser's other clients.
Investment decisions for the Portfolios and for the Adviser's other clients are
made with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect the
price of or the size of the position obtainable in a security for a Portfolio.
When purchases or sales of the same security for a Portfolio and for other
portfolios managed by the Adviser occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large volume purchases or sales.
TAXES
The following information supplements and should be read in conjunction with the
sections in the Prospectus entitled "The Fund--Dividends and Distributions and
"--Taxes."
UNITED STATES TAXATION
GENERAL
Each Fund intends to qualify and intends to remain qualified as a
regulated investment company (a "RIC") under Subchapter M of the Code. As
a RIC, a Fund must, among other things: (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to loans of
stock and securities, gains from the sale or other disposition of stock,
securities or foreign currency and other income (including but not limited
to gains from options, futures, and forward contracts) derived with
respect to its business of investing in such stock, securities or foreign
currency; (b) derive less than 30% of its gross income from the sale or
other disposition of stock, securities, options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies) held less than three months; and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the value of
the Fund's total assets is represented by cash, U.S. Government
securities, investments in other RICs 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
the securities of other RICs). As a RIC, a Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net
investment income and capital gains that it distributes to its
shareholders, provided that at least 90% of its net investment income and
realized net short-term capital gains in excess of net long-term capital
losses for the taxable year is distributed. Legislation recently passed by
Congress eliminates the short-short rule described above in clause (b) and
makes certain other changes. Consult your tax adviser for further details.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of capital
gains over capital losses) for each calendar year. Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.
Any dividend declared by a Fund in October, November or December of any
calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not
later than such December 31 so long as the dividend is actually paid by
the Fund during January of the following calendar year.
If a Portfolio purchases shares in certain foreign investment entities,
referred to as "passive foreign investment companies," the Fund may be
subject to U.S. federal income tax, and an additional charge in the nature
of interest, on a portion of any "excess distribution" from such company
or gain from the disposition of such shares, even if the distribution or
gain is paid by the Fund as a dividend to its shareholders. If the Fund
were able and elected to treat a passive foreign investment company as a
"qualified electing fund," in lieu of the treatment described above, the
Fund would be required each year to include in income, and distribute to
shareholders in accordance with the distribution requirement set forth
above, the Fund's pro rata share of the ordinary earnings and net capital
gains of the company, whether or not distributed to the Fund. Under
proposed Regulations, if finalized, or proposed legislation, if enacted,
the Fund could instead elect to mark-to-market the shares annually, in
which case the treatment provided in the first sentence above also would
not apply.
Gains or losses attributable to disposition of foreign currency or to
foreign currency contracts, or to fluctuations in exchange rates between
the time a Portfolio accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time a Portfolio
actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses,
if any, on the disposition of debt securities held by a Portfolio and
denominated in foreign currency are also treated as ordinary income or
loss to the extent such gains or losses are attributable to fluctuations
in exchange rates between the acquisition and disposition dates. These
gains and losses increase or decrease the amount of the Fund's net
investment income available for distribution rather than its net capital
gains.
Forward currency contracts, options and futures contracts entered into by
a Portfolio may create "straddles" for U.S. federal income tax purposes
and this may affect the character and timing of gains or losses realized
by a Portfolio on forward currency contracts, options and futures
contracts or on the underlying securities. "Straddles" may also result in
the loss of the holding period of underlying securities for purposes of
the 30% gross income test described above, and therefore, a Portfolio's
ability to enter into forward currency contracts, options and futures
contracts may be limited.
Dividends paid from net investment income will generally be taxable to a
shareholder as ordinary income. Regardless of the length of time a
shareholder has held his shares, distributions designated as being from a
Fund's net long-term capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) will be taxable as such.
Distributions in excess of a Fund's current and accumulated earnings and
profits will be treated as a tax-free return of capital to the extent of
the shareholder's basis in his shares and as a capital gain thereafter.
FOREIGN TAXES
As set forth in the Prospectus under "Taxation," the Funds are expected to
be subject to foreign withholding and other taxes with respect to income
received from sources within certain foreign countries. Each Fund that is
liable for foreign income taxes, including such withholding taxes, expects
to meet the requirements of the Code for "passing through" to its
shareholders the foreign taxes paid, but there can be no assurance that it
will be able to do so. Under the Code, if more than 50% of the value of a
Portfolio's total assets at the close of any taxable year consists of
stock or securities of foreign corporations, its corresponding Fund may
elect to treat the proportionate share of foreign income taxes paid by the
Fund as paid directly by the Fund's shareholders. If the Fund elects to
pass through foreign taxes to the shareholders, no deduction for such
foreign taxes may be claimed by a shareholder who does not itemize
deductions and no deduction is available in computing an individual
shareholder's alternative minimum tax liability. A shareholder who is a
nonresident alien individual or a foreign corporation may be subject to
U.S. withholding tax on the income resulting from the election described
in this paragraph, but may not be able to claim a credit or deduction
against such U.S. tax for the foreign taxes treated as having been paid by
such shareholder. A tax-exempt shareholder will not ordinarily benefit
from this election. Shareholders who choose to utilize a credit (rather
than a deduction) for foreign taxes will be subject to the limitation that
the credit may not exceed the shareholder's U.S. tax (determined without
regard to the availability of the credit) attributable to his or her total
foreign source taxable income. For this purpose, the portion of dividends
and distributions paid by a Fund from its foreign source net investment
income will be treated as foreign source income. A Portfolio's gains and
losses from the sale of securities will generally be treated as derived
from U.S. sources and certain foreign currency gains and losses likewise
will be treated as derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source "passive
income," such as the portion of dividends received from a Portfolio that
qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, a shareholder
may be unable to claim a credit for the full amount of his proportionate
share of the foreign income taxes paid by a Portfolio.
Additionally, Congress has passed legislation under which the foreign tax
credit for taxes withheld with respect to dividends received by a
Portfolio would be disallowed if the Portfolio has not held the shares of
the foreign corporation for a 16-day period (or 46-day period in the case
of preferred shares) overlapping the dividend payment date and during
which the Portfolio is not protected from risk of loss. If the Fund elects
to pass through foreign taxes to the shareholders, the proposed
legislation would also deny such credit where the shareholder of the Fund
does not satisfy the above holding requirement with respect to its shares
in the Fund. There can be no assurances as to whether such legislation
will be enacted into law, and, if so, what its effective date might be.
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the
particular circumstances of each shareholder, shareholders are advised to
consult their own tax advisers.
STATE AND LOCAL TAXES
Each Fund may be subject to state or local taxes in jurisdictions in which
that Fund is deemed to be doing business. In addition, the treatment of a
Fund and its shareholders in those states that have income tax laws might
differ from treatment under the federal income tax laws. For example, a
portion of the dividends received by shareholders may be subject to state
income tax. Shareholders should consult their own tax advisors with
respect to any state or local taxes.
FOREIGN SHAREHOLDERS
Distributions of net investment income and realized net short-term capital
gains in excess of net long-term capital losses to a shareholder who, as
to the United States, is a non-resident alien individual, fiduciary of a
foreign trust or estate, foreign corporation or foreign partnership (a
"foreign shareholder") will be subject to U.S. withholding tax at the rate
of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case
the dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic corporations.
Distributions of net long-term capital gains to foreign shareholders will
not be subject to U.S. tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States
or, in the case of a shareholder who is a non-resident alien individual,
the shareholder was present in the United States for more than 182 days
during the taxable year and certain other conditions are met.
In the case of a foreign shareholder who is a nonresident alien individual
and who is not otherwise subject to withholding as described above, a Fund
may be required to withhold U.S. federal income tax at the rate of 31%
unless IRS Form W-8 is provided. See "Taxation" in the Prospectus.
Transfers by gift of shares of a Fund by a foreign shareholder who is a
nonresident alien individual will not be subject to U.S. federal gift tax,
but the value of shares of the Fund held by such a shareholder at his or
her death will be includible in his or her gross estate for U.S. federal
estate tax purposes.
REPORTS TO SHAREHOLDERS
The Fund will make annual reports of the federal income tax status of
distributions to owners of shares. Such reports will set forth the dollar
amounts of dividends from net investment income and long-term capital
gains and, if the Fund elects to pass through foreign taxes, the
shareholder's portion of the foreign income taxes paid to each country and
the portion of the dividends that represents income derived from sources
within each country.
The foregoing discussion is based on U.S. federal tax laws in effect on
October 10, 1997. These laws are subject to change by legislative or
administrative action, possibly with retroactive effect.
THE FOREGOING DISCUSSION IS A SUMMARY ONLY AND IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. PROSPECTIVE INVESTORS IN SHARES OF A
FUND SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE TAX CONSEQUENCES OF
INVESTING IN SUCH SHARES, INCLUDING THE CONSEQUENCES UNDER STATE, LOCAL
AND OTHER TAX LAWS.
DESCRIPTION OF SHARES
The Corporation is an open-end management investment company organized as a
Maryland corporation on May 22, 1997. The Articles of Incorporation currently
permit the Corporation to issue 17,500,000,000 shares of common stock, par value
$0.001 per share, of which 10,000,000 shares have been classified as shares of
each Fund. The Corporation currently consists of eleven such series and two
classes of shares for each Fund known as Class A Shares and Class B Shares.
Shareholders are entitled to one vote for each share held on matters on which
they are entitled to vote. Shareholders in the Corporation do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Corporation may elect all of the Directors of the
Corporation if they choose to do so and in such event the other shareholders in
the Corporation would not be able to elect any Director. The Corporation is not
required and has no current intention to hold meetings of shareholders annually,
but the Corporation will hold special meetings of shareholders when in the
judgment of the Corporation's Directors it is necessary or desirable to submit
matters for a shareholder vote. Shareholders have under certain circumstances
(e.g., upon application and submission of certain specified documents to the
Directors by a specified number of shareholders) the right to communicate with
other shareholders in connection with requesting a meeting of shareholders for
the purpose of removing one or more Directors. Shareholders also have the right
to remove one or more Directors without a meeting by a declaration in writing by
a specified number of shareholders. Shares have no preference, pre-emptive,
conversion or similar rights (except the automatic conversion of Class B Shares
into Class A Shares as discussed in the Prospectus under "Purchase of Shares").
Shares, when issued, are fully paid and non-assessable.
Stock certificates are not issued by the Corporation except upon written
request. No certificates will be issued for fractional shares.
The Articles of Incorporation of the Corporation contain a provision permitted
under Maryland Corporation Law which under certain circumstances eliminates the
personal liability of the Corporation's Directors to the Corporation or its
shareholders.
The Articles of Incorporation and the By-Laws of the Corporation provide that
the Corporation indemnify the Directors and officers of the Corporation to the
full extent permitted by the Maryland Corporation Law, which permits
indemnification of such persons against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Corporation. However, nothing in the Articles of Incorporation
or the By-Laws of the Corporation protects or indemnifies a Director or officer
of the Corporation against any liability to the Corporation or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Interests in a Portfolio have no preference, preemptive, conversion or similar
rights and are fully paid and non-assessable. The Portfolio Trust is not
required to hold annual meetings of investors, but will hold special meetings of
investors when, in the judgment of its Trustees, it is necessary or desirable to
submit matters for an investor vote. Each investor is entitled to a vote in
proportion to the share of its investment in a Portfolio.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectuses, the
term "majority of the outstanding voting securities" (as defined in the 1940
Act) currently means the vote of (i) 67% or more of the outstanding voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present in person or represented by proxy; or
(ii) more than 50% of the outstanding voting securities, whichever is less.
Fund shareholders receive semi-annual reports containing unaudited financial
statements and annual reports containing financial statements audited by
independent auditors.
A shareholder's right to receive payment with respect to any redemption may be
suspended or the payment of the redemption proceeds postponed: (i) during
periods when the New York Stock Exchange or foreign stock exchange is closed for
other than weekends and holidays or when regular trading on such Exchange is
restricted as determined by the Securities and Exchange Commission by rule or
regulation, (ii) during periods in which an emergency exists which causes
disposal of, or evaluation of the net asset value of, portfolio securities to be
unreasonable or impracticable, or (iii) for such other periods as the SEC may
permit.
Telephone calls to any Fund, the Transfer Agent, the Distributor, or Financial
Intermediaries with respect to shareholder servicing may be tape recorded. With
respect to the securities offered hereby, this Statement of Additional
Information and the Prospectuses do not contain all the information included in
the Corporation's Registration Statement filed with the SEC under the 1933 Act
and the Corporation's and the Portfolio Trust's Registration Statement filed
under the 1940 Act. Pursuant to the rules and regulations of the SEC, certain
portions have been omitted. The Registration Statement including the exhibits
filed therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
<PAGE>
APPENDIX A
FUNDS AND CORRESPONDING PORTFOLIOS
The Corporation seeks to achieve the investment objective of each Fund by
investing all of the Fund's investable assets in the corresponding
non-diversified, open-end management investment company (each, a "Portfolio" and
collectively the "Portfolios") listed below:
TOP 50 EUROPE--Top 50 Europe Portfolio (US Dollar), ("Top 50 Europe Portfolio")
EUROPEAN MID-CAP FUND--Provesta Portfolio (US Dollar), ("Provesta Portfolio")
GERMAN EQUITY FUND--Investa Portfolio (US Dollar), ("Investa Portfolio")
EUROPEAN BOND FUND--European Bond Portfolio (US Dollar), ("European Bond
Portfolio").
APPENDIX B--DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S CORPORATE AND MUNICIPAL BONDS
AAA--Debt rated AAA has the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in 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 it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BONDS
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 by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
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 sometime 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.
