DEUTSCHE TOP 50 WORLD (CLASS A SHARES AND CLASS B SHARES) DEUTSCHE TOP 50 EUROPE
(CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES) DEUTSCHE TOP 50 ASIA (CLASS
A SHARES AND CLASS B SHARES) DEUTSCHE TOP 50 US (CLASS A SHARES, CLASS B SHARES
AND CLASS C SHARES) DEUTSCHE EUROPEAN MID-CAP FUND (CLASS A SHARES, CLASS B
SHARES AND CLASS C SHARES) DEUTSCHE GERMAN EQUITY FUND (CLASS A SHARES, CLASS B
SHARES AND CLASS C SHARES) DEUTSCHE JAPANESE EQUITY FUND (CLASS A SHARES AND
CLASS B SHARES) DEUTSCHE GLOBAL BOND FUND (CLASS A SHARES AND CLASS B SHARES)
DEUTSCHE EUROPEAN BOND FUND (CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES)
STATEMENT OF ADDITIONAL INFORMATION
The Deutsche Top 50 World (the "Top 50 World"), Deutsche Top 50 Europe (the "Top
50 Europe"), Deutsche Top 50 Asia (the "Top 50 Asia"), Deutsche Top 50 US (the
"Top 50 US"), Deutsche European Mid-Cap Fund (the "European Mid-Cap Fund"),
Deutsche German Equity Fund (the "German Equity Fund"), Deutsche Japanese Equity
Fund (the "Japanese Equity Fund"), Deutsche Global Bond Fund (the "Global Bond
Fund") and the 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 Maryland corporation incorporated on May 22, 1997,
and a management investment company registered under the Investment Company Act
of 1940 (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.
Each Fund offers two classes of shares known as Class A Shares and Class B
Shares. In addition, Top 50 Europe, Top 50 US, European Mid-Cap Fund, German
Equity Fund and the European Bond Fund offer a third class of shares known as
Class C Shares (Class A Shares, Class B Shares and Class C Shares are
individually and collectively referred to as "Shares" as the context may
require). This Statement of Additional Information relates to all 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 Adviser") of each
Portfolio except the Top 50 US Portfolio. Deutsche Bank Securities Investment
Management Inc. is the investment adviser of the Top 50 US Portfolio (the "DBSIM
Adviser" and together with the DWS Adviser or severally as the context may
require, the "Adviser"). This Statement of Additional Information is not a
prospectus and should be read in conjunction with the relevant Fund's Prospectus
dated October 31, 1998, a copy of which may be obtained from the Corporation at
the address noted below.
5800 CORPORATE DRIVE
PITTSBURGH, PA 15237-7010
The date of this Statement of Additional Information is supplemented on
February 8, 1999.
Edgewood Services, Inc., Distributor
G02179-03 (2/99)
<PAGE>
I
TABLE OF CONTENTS
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES 1
Equity Investments 1
Investment Companies 1
Participation Certificates 1
Short-Term Instruments 1
Zero Coupon Obligations 2
Options 2
Foreign Currency Exchange Transactions 2
European Currency Unification 3
Futures Contracts and Options on Futures Contracts 4
Risk Management 6
THE GERMAN SECURITIES MARKETS 7
Equity Markets 7
Stock Indices 8
Primary Markets 10
Role of Banks in German Capital Markets 10
JAPANESE EQUITY SECURITIES MARKETS 10
INVESTMENT RESTRICTIONS 14
Non-Fundamental Investment Restrictions 15
DIRECTORS, TRUSTEES, AND OFFICERS 17
Directors of the Corporation and Trustees
of the Portfolio Trust 17
Officers of the Corporation and the Portfolio
Trust (unless otherwise noted) 17
Compensation Table--Directors of the Corporation and Trustees of the Portfolio
Trust 19
Fund Ownership 20
MANAGER 21
ADVISER 23
ADMINISTRATOR 24
OPERATIONS AGENT 24
ADMINISTRATIVE AGENT 25
DISTRIBUTOR 26
TRANSFER AGENT, CUSTODIAN, AND FUND
ACCOUNTANT 27
INDEPENDENT ACCOUNTANTS 28
PURCHASE OF SHARES 28
Conversion to Federal Funds 28
Purchasing Shares with Securities 28
REDEMPTION OF SHARES 28
Redemption in Kind 29
Elimination of the Contingent Deferred Sales Charge 29
EXCHANGE OF SHARES 29
NET ASSET VALUE 29
Fixed Income Securities 29
Other Securities 30
PERFORMANCE DATA 30
Total Return Quotations 30
Yield 31
General 32
Information and Comparisons Relating to the Funds, Secondary Market
Trading, Net Asset Size, Performance and Tax Treatment32
Economic and Market Information 33
PORTFOLIO TRANSACTIONS 34
Portfolio Turnover 35
TAXES 36
United States Taxation 36
DESCRIPTION OF SHARES 38
ADDITIONAL INFORMATION 39
FINANCIAL STATEMENTS 39
APPENDIX A 40
APPENDIX B--DESCRIPTION OF SECURITY RATINGS41
<PAGE>
8
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 except the Top 50 US 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. The Top 50 US Portfolio may invest up to
5% of its total assets in the securities of any one investment company and
invest in the aggregate up to 10% of its total assets in the securities of
investment companies as a group. 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 ("Germany"),
the states of Germany, the European Union, other member states of the
Organization for Economic Cooperation and Development ("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 or, in the case of the Top 50 US Portfolio, will be purchased or sold
by securities dealers (in the case of over-the-counter, or "OTC," options) that
meet creditworthiness standards approved by the Portfolio Trust's Board of
Trustees. In the case of OTC options, the Top 50 US Portfolio relies on the
dealer from which it purchased the option to perform if the option is exercised.
Thus, when the Portfolio purchases an OTC option, it relies on the dealer from
which it purchased the option to make or take delivery of the underlying
securities. Failure by the dealer to do so would result in the loss of the
premium paid by the Portfolio as well as loss of the expected benefit of the
transaction.
The staff of the Securities and Exchange Commission ("SEC") has taken the
position that, in general, purchased OTC options and the underlying securities
used to cover written OTC options are illiquid securities. However, the Top 50
US Portfolio may treat as liquid the underlying securities used to cover written
OTC options, provided it has arrangements with certain qualified dealers who
agree that such Portfolio may repurchase any option it writes for a maximum
price to be calculated by a predetermined formula. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
<PAGE>
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio (except the Top 50 US 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.
EUROPEAN CURRENCY UNIFICATION
Eleven of the fifteen member countries of the European Union ("EU") are about to
adopt a single European currency, the euro. The euro will become legal tender in
these countries effective January 1, 1999. The countries participating in the
European Monetary Union ("EMU") are Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The four EU
members not participating in the EMU are Great Britain, Denmark, Sweden and
Greece. A new European Central Bank ("ECB") has been created to manage the
monetary policy of the new unified region. On the same day, the exchange rates
among the EMU member countries will be permanently fixed. National currencies
will continue to circulate until they are replaced by euro coins and bank notes
by July 1, 2002.
This change is likely to impact significantly the European capital markets in
which the Portfolios of the Top 50 World, Top 50 Europe, European Mid-Cap,
German Equity, Global Bond, and European Bond Funds invest a portion of their
assets. The biggest changes will be the additional risks that the Portfolios
will face in pursuing their investment objectives. All of the risks described
below may increase the volatility of the price of securities that are traded
principally in EMU member countries.
UNCERTAINTIES AS UNIFICATION NEARS
TAXES. The U.S. Treasury has determined that euro conversion will not
cause a U.S. taxpayer to realize gain or loss to the extent the
taxpayer's rights and obligations are altered solely by reason of the
euro conversion. However, other changes that may occur contemporaneously
to indices, accrual periods, holiday conventions, or other features may
require the realization of gain or loss by the Portfolios.
VOLATILITY OF CURRENCY EXCHANGE RATES. Exchange rates between the U.S.
dollar and European currencies could become more volatile and
unstable, particularly between now and January 1, 1999.
CAPITAL MARKET REACTION. Uncertainty in the lead-up to introduction of
the euro may lead to a shift by institutional money managers away from
European currencies and into other currencies. This reaction may make
markets less liquid and thus more difficult for the Portfolios to pursue
their investment strategies.
CONVERSION COSTS. European issuers of securities in which the Funds
invest, particularly those that deal in goods and services, may face
substantial costs. These costs may not be accurately predicted by such
issuers and therefore may present another risk factor impacting such
issuers' profitability and creditworthiness.
<PAGE>
UNCERTAINTIES AFTER UNIFICATION OF CURRENCY
CONTRACT CONTINUITY. Some financial contracts may become unenforceable
when the currencies are unified. These financial contracts may include
bank loan agreements, master agreements for swaps and other derivatives,
master agreements for foreign exchange and currency option transactions
and debt securities. The risk of unenforceability may arise in a number
of ways. For example, a contract used to hedge against exchange rate
volatility between two EU currencies will become "fixed," rather than
"variable," as part of the conversion since the currencies have, in
effect, disappeared for exchange purposes.
The European Council has enacted laws and regulations designed to ensure
that financial contracts will continue to be enforceable after
conversion. There is no guarantee, however, that these laws will be
completely effective in preventing disputes from arising. Disputes and
litigation over these contract issues could negatively impact the
Portfolios' portfolio holdings and may create uncertainties in the
valuation of financial contracts the Portfolios hold.
ECB POLICYMAKING. As the ECB and European market participants search for
a common understanding of policy targets and instruments, interest rates
and exchange rates could become more volatile.
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.
<PAGE>
THE GERMAN SECURITIES MARKETS
EQUITY MARKETS
Equity securities trade on the country's eight regional stock exchanges
(Frankfurt, Dusseldorf, Munich, Hamburg, Berlin, Stuttgart, Hannover and
Bremen), of which Frankfurt accounted for approximately 78% of the total volume
as of August 31, 1998. 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 OF THE YEAR ENDED
DECEMBER 31, 1997 (2) DECEMBER 31, 1997 (2)
1992 $348.14 DM 561.89 $ 876.8 DM 1,415.2
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
1997 825.23 1,483.85 2,067.4 3,717.4
1998* 981.73 1,731.28 1,932.01 3,406.83
(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.
* Year-to-date as of August 31, 1998.
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 (Neuer Markt) 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 approximately 70% of the total equity
capital of German exchange-listed companies. Trading in these shares accounts
for approximately 74% 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.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN(1)
1992 1993 1994 1995 1996 1997 1998*
<S> <C> <C> <C> <C> <C> <C> <C>
DAX (2.09)% 46.71% (7.06)% 6.99% 28.17% 47.11% 13.75%
CDAX (6.39)% 44.56% (5.83)% 4.75% 22.14% 40.83% 12.32%
Dollar-adjusted DAX (8.33)% 36.85% 4.12% 15.60% 18.17% 27.63% 17.14%
Dollar-adjusted CDAX (12.36)% 34.85% 5.50% 13.17% 12.61% 22.18% 15.68%
</TABLE>
(1) Based on U.S. dollar returns.
* Year-to-date as of August 31, 1998.
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 as of August 31, 1998 represented 24.2% of total trading volume on
the German stock exchanges: Daimler Benz AG with DM 312 billion, Deutsche Bank
AG with DM 242 billion, Siemens AG with DM 190 billion, SAP AG with DM 175
billion, and VW AG with DM 173 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.
<PAGE>
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 AUGUST 31, 1998
DAX CDAX
Automobile 13.33% 4.85%
Construction -- 9.43%
Chemicals 20% 8.63%
Mergers -- 5.93%
Electronics Industry 6.67% 6.20%
Brewery -- 5.39%
Hypo Banks -- 1.62%
Banks 13.33% --
Credit Banks -- 4.31%
Traffic -- 1.08%
Mechanical Engineering 10% 14.02%
Paper -- 2.43%
Utilities 13.33% 5.12%
Steel and Raw Materials 6.67% 2.70%
Textile -- 4.85%
Insurance 6.67% 7.01%
Consumer Goods 10% 16.44%
Total 100.00% 100.00%
(1) The DAX Index is comprised of 30 stocks representing approximately 75% of
the market capitalization of the Frankfurt stock exchange.
(2) The CDAX Index is comprised of 371 stocks (subject to adjustments).
PRIMARY MARKETS
The amount of funds raised in equity financings in 1998 as of August 31, was
equal to DM 2,380 million while the number of financings was 34. 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 1997 1998*
Value 804 833 1,246 6,495 24,807 4,961 2,380
*As of August 31, 1998
Source: Deutsche Borse AG.
<PAGE>
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, subject to certain conditions. Directly and through its various
wholly-owned affiliates abroad, Deutsche Bank is a major player 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 by the Portfolio.
JAPANESE EQUITY SECURITIES MARKETS
Listed securities in Japan trade on three Main Japanese Exchanges (the Nagoya
Stock Exchange, the Osaka Securities Exchange and the Tokyo Stock Exchange (the
"TSE")) and five regional stock exchanges (the Fukuoka Stock Exchange, the
Hiroshima Stock Exchange, the Kyoto Stock Exchange, the Niigata Stock Exchange
and the Sapporo Stock Exchange). The TSE is the largest and most prestigious of
the exchanges and is widely regarded as the central marketplace for all of
Japan.
There are two widely followed price indices in Japan for listed securities. The
Nikkei Stock Average ("NSA") is the arithmetic average of 225 selected stocks
computed by a private corporation. The Tokyo Stock Price Index ("TOPIX"),
published by the TSE, is the composite index of all common stock listed on the
First Section of the TSE. TOPIX reflects the change in the aggregate market
value of the common stocks as compared to the aggregate market value of those
stocks as of the close on January 4, 1968.
<PAGE>
The following table sets forth the NSA and TOPIX for 1987 through August 31,
1998 and yen and dollar-adjusted total return information for those time
periods.
NSA TOPIX
TOTAL RETURN(1) TOTAL RETURN(1)
DOLLAR DOLLAR
INDEX (Y) ADJUSTED INDEX (Y) ADJUSTED
1987 21,564.00 15.31% 50.54% 1,725.83 10.89% 44.77%
1988 30,159.00 39.86% 35.61% 2,357.03 36.57% 32.42%
1989 38,915.87 29.04% 12.21% 2,881.37 22.25% 6.31%
1990 23,848.71 -38.72% -35.08% 1,733.83 -39.83% -36.26%
1991 22,983.77 -3.63% 4.75% 1,714.68 -1.10% 7.49%
1992 16,924.95 -26.36% -26.33% 1,307.66 -23.74% -23.71%
1993 17,417.24 2.91% 15.02% 1,439.31 10.07% 23.03%
1994 19,723.06 13.24% 27.00% 1,559.09 8.32% 21.48%
1995 19,868.15 0.74% -2.85% 1,577.70 1.19% -2.41%
1996 19,361.35 -2.55% -13.06% 1,470.94 -6.77% -16.83%
1997 15,258.74 -21.19% -29.65% 1,175.03 -20.12% -28.69%
1998* 14,107.89 -7.54% -15.37% 1,106.49 -5.83% -11.78%
(1) Total return is the percent change in the index from the start of the
year to the end.
* Year-to-date as of August 31, 1998.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1998); Monthly
Statistics Report (Dec. 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995,
1996, 1997, Aug. 1998).
The Japanese stock and real estate markets of the late 1980s have been dubbed
"bubble" markets because they were characterized by dramatic increases in the
volume of trading and transactions as well as in prices of stock and land. Such
increases were driven by investors' expectations that stock and land prices
would rise even further for the foreseeable future, thereby justifying (in their
minds) their over-priced investments in Japanese stock and real estate. Many of
such investments were financed with secured loans from Japan's banks and
so-called "non-bank banks" (i.e., companies that are not licensed by the
Minister of Finance to engage in the business of commercial banking but that are
primarily engaged in the business of commercial lending).
The collapse of the "bubble" stock market in 1990 had a material adverse impact
on the financial situation of various participants therein. Such collapse also
led to various problems involving irregular practices in the securities
business, such as compensation to favored customers by securities companies for
trading and other losses. The decline in stock prices has raised the cost of
capital for industry and has reduced the value of stock holdings by banks and
corporations. These effects have, in turn, contributed to the recent weakness in
Japan's economy and could continue to have an adverse impact in the future.
Further, recent events, not only in Japan but in other countries in the Asian
region, as well as in Russia, may negatively impact the Funds. Such events
include currency volatility and depreciation, high interest rates, banking
sector crises, market volatility, political instability and declining asset
values. Taken together, these and other factors are likely to: (1) have a
material adverse effect on economic growth and (2) increase volatility in the
prices at which securities and other financial instruments are traded. As a
result, there can be no assurance that the political and economic developments
in this and other parts of the world will not have a material adverse effect on
the net asset value of the Funds investing a significant portion of their assets
in the securities of issuers domiciled in, or deriving a large percentage of
their revenues from, such countries.
<PAGE>
The following table sets forth the aggregate trading volume and the value of
Japanese stocks on the eight Japanese stock exchanges for the years 1989 through
1997, and year-to-date as of August 31, 1998. Trading on the TSE represented
over 89% of trading volume in each year.
VOLUME VALUE
YEAR (MILLIONS OF SHARES) ((Y) BILS.)
1989 256,296 386,395
1990 145,837 231,837
1991 107,844 134,160
1992 82,563 80,456
1993 101,172 106,123
1994 105,936 114,622
1995 120,148 115,840
1996 126,496 136,170
1997 130,657 151,450
1998* 92,959 83.761
*Year-to-date as of August 31, 1998.
Source: Tokyo Stock Exchange, Fact Book 1998.
The Main Japanese Exchanges divide listed companies into First and Second
Sections. Generally, larger, established companies are assigned to the First
Section. Such companies meet more stringent listing criteria relating to the
size and business condition of the issuing company, the liquidity of its
securities and other factors pertinent to investor protection. At the end of
August 31, 1998, 1,333 Japanese companies were listed on the First Section of
the TSE. Newly listed and smaller companies are assigned to the Second Section.
At the end of August 31, 1998, 486 Japanese companies were listed on the Second
Section of the TSE. In an effort to increase the number of companies listed on
the Second Section, the Second Section listing requirements prescribed by each
of the Main Japanese Exchanges were lowered in 1996.
The 20 leading Japanese companies on the TSE, by market value, represented 31.3%
of the total market value of the TSE at August 31, 1998. As of August 31, 1998,
three industrial groups accounted for approximately 67% of the total market
value of the TSE: banks, 50%; chemicals, 9%; and retail trade, 8%. The following
table sets forth the number of companies listed on the TSE and market value by
industrial group for year-end 1998.
NUMBER OF MARKET VALUES
COMPANIES ((Y) BILS.)
Fishery, Agriculture & Forestry 7 77
Mining 8 74
Construction 115 1,029
Foods 63 1,053
Textiles & Apparels 49 642
Pulp & Paper 18 266
Chemicals 103 18,308
Pharmaceutical 34 9,744
Oil & Coal Products 10 221
Rubber Products 10 160
Glass & Ceramics Products 26 428
Iron & Steel 38 1,097
Nonferrous Metals 25 419
Metal Products 31 199
Machinery 103 1,204
Electric Appliances 135 2,522
Transportation Equipment 61 2,053
Precision Instruments 19 122
Other Products 38 373
Electric Power & Gas 14 1,989
Land Transportation 31 938
Marine Transportation 13 288
Air Transportation 4 175
Warehousing & Harbor
Transportation Services 12 52
Communication 4 377
Wholesale Trade 81 15,400
Retail Trade 74 16,945
Banks 98 100,442
Securities 18 9,765
Insurance 14 7,573
Other Financing Businesses 17 4,558
Real Estate 21 466
Services 39 517
Total 1,333 199,476
Manufacturing 763 38,811
Non-Manufacturing 570 160,665
Total 1,333 199,476
Source: Tokyo Stock Exchange, Fact Book 1998.
The amount of funds raised in equity financings by all the companies listed on
all eight Japanese stock exchanges year-to-date as of August 31, 1998, as
compared to calendar year 1997, decreased by 264.61 billion yen to 673.39
billion yen
<PAGE>
while the number of financings decreased by 28 to 114. The following table sets
forth the number of equity financings by companies listed on all eight of the
Japanese stock exchanges and the amount raised for each of 1992 through 1997,
and year-to-date as of August 31, 1998.
<TABLE>
<CAPTION>
RIGHTS PUBLIC PRIVATE EXERCISE
OFFERINGS OFFERINGS PLACEMENTS OF WARRANTS TOTAL
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT AMOUNT
OF RAISED OF RAISED OF RAISED OF RAISED RAISED
FINANCINGS ((Y)BILS.) FINANCINGs ((Y)BILS.) FINANCINgs ((Y)BILs.) FINANCIngS ((Y)BIlS.) ((Y)Bils.)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 20 111 3 4 22 102 127 203 419
1993 9 48 4 7 14 150 184 617 822
1994 2 10 18 237 8 239 180 451 935
1995 12 96 8 33 19 160 118 299 588
1996 9 337 36 305 20 218 187 673 1,533
1997 9 73 26 128 19 369 88 368 938
1998* 1 0.385 10 279 17 312 86 82 673.39
</TABLE>
* Year-to-date as of August 31, 1998.
Source: Tokyo Stock Exchange, Fact Book 1998.
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.
<PAGE>
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 (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 may (1) 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 non-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, except the Top 50 US and its corresponding Portfolio,
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 Germany, the
states of Germany, a member state of the EU, a state party to the Convention
on the European Economic Area ("CEEA"), a member state of the 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).
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 their principal occupations during the past
five years (although their titles may have varied during the period), business
addresses, and birthdates are:
DIRECTORS OF THE CORPORATION AND TRUSTEES OF THE PORTFOLIO TRUST
Richard R. Burt
Chairman of IEP Advisors, Inc. Chairman of the Board of Weirton Steel.
Member of the Board of Hollinger International. Member of the Board of Archer
Daniels Midland. Member of the Board of Homestake Mining. Director of the
Mitchell Hutchins family of funds. Member of the Textron Corporation
International Advisory Council. Partner with McKinsey & Company (1991-1994).
Previously U.S. Chief Negotiator in the Strategic Arms Reduction Talks (START)
with the former Soviet Union, and prior to that was U.S. Ambassador to the
Federal Republic of Germany (1985-1991). Amb. Burt's address is IEP Advisors,
LLP, 1275 Pennsylvania Avenue NW, 10th Floor, Washington, D.C. 20004, and his
birthdate is February 3, 1947.
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, and his birthdate is February
6, 1931.
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., The Central European Equity Fund, Inc., and DB New World
Portfolio, Ltd., DB New World Fund, Limited and LDC. Vice President of
Professionally Managed Portfolios and Advisors Series Trust. Mr. Wadsworth's
address is 4455 E. Camelback Road, Suite 261 E., Phoenix, AZ 85018, and his
birthdate is January 29, 1940.
Werner Walbroel
President and Chief Executive of the German American Chamber of Commerce,
Inc. President of European American Chamber of Commerce. 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 Portfolio, Ltd., 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, and his birthdate is August 28, 1937.
G. Richard Stamberger*
Former Managing Director of Deutsche Bank Securities Inc. Managing Director
of C.J. Lawrence, Inc. (prior to 1993). Mr. Stamberger's address is 921 Fox Hill
Lane, Scotch Plains, NJ 07076, and his birthdate is October 24, 1947.
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, and his birthdate
is May 28, 1943.
* Is an "interested person" of the Corporation or the Portfolio Trust as that
term is defined in the 1940 Act.
<PAGE>
OFFICERS OF THE CORPORATION AND THE PORTFOLIO TRUST (UNLESS OTHERWISE NOTED)
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. Mr. Lee's birthdate
is November 20, 1947.
Robert R. Gambee
Secretary
Director, Deutsche Bank Securities Inc. (since 1992). Chief Operating
Officer and Secretary of The Germany Fund, Inc., The Central European Equity
Fund, Inc., and The New Germany Fund, Inc. (since 1997). Secretary and Treasurer
of The Germany Fund, Inc. (1986-1997), The New Germany Fund, Inc. (1990-1997)
and The Central European Equity Fund, Inc. (1990-1997). First Vice President,
Deutsche Bank Securities, Inc. (1985-1991). Corporate Secretary, DB New World
Fund Limited. Secretary, Deutsche Bank
Investment Management, Inc. Mr. Gambee's birthdate is August 26, 1942.
Joseph Parascondola
Treasurer
Assistant Vice President of DFM (since January 1999). Assistant Vice
President and Assistant Manager of Weiss, Peck & Greer L.L.C. mutual funds
operations department (1995-1998). Mutual Fund Accounting Manager at Concord
Financial Group (1991-1995). Mr. Parascondola's birthdate is June 5, 1963.
Holger Naumann
Assistant Treasurer of the Portfolio Trust
Director of DFM (since January 1997). Head of Participations at DWS Deutsche
Gesellschaft fuer Wertpapiersparen mbH (since December 1995). Group Strategy
Department at Deutsche Bank AG (1992-1995). Mr. Naumann's address is DWS
Deutsche Gesellschaft fuer Wertpapiersparen mbH, Gruneburgweg 113-115, 60323
Frankfurt am Main, Germany, and his birthdate is May 17, 1962.
<PAGE>
Joseph Bernhart
Assistant Treasurer of the Portfolio Trust
Participations Department at DWS Deutsche Gesellschaft fuer Wertpapiersparen mbH
(since July 1997). DIH Deutsche Industrie-Holding GmbH & Co. KG (affiliate to
Deutsche Bank AG)( 1995 - 1997). Trainee, Deutsche Bank AG (1994-1995). Mr.
Bernhart's address is DWS Deutsche Gesellschaft fuer Wertpapiersparen mbH,
Gruneburgweg 113-115, 60323 Frankfurt am Main, Germany, and his birthdate is May
7, 1966.
Unless otherwise noted, the address of each officer of the Corporation is 31
West 52nd Street, New York, NY 10019.
COMPENSATION TABLE--DIRECTORS OF THE CORPORATION AND TRUSTEES OF THE
PORTFOLIO TRUST
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM THE FROM THE CORPORATION,
CORPORATION THE PORTFOLIO TRUST,
AND THE AND THE
PORTFOLIO TRUST * FUND COMPLEX**+
Edward C. Schmults,
Director and Trustee $1,000 $45,750
Robert H. Wadsworth,
Director and Trustee $1,000 $63,000
Werner Walbroel,
Director and Trustee $1,000 $47,250
G. Richard Stamberger,
Director and Trustee None None
Christian Strenger,
Director and Trustee None None
Richard R. Burt,#
Director and Trustee None None
* Information is furnished for the fiscal year ended August 31, 1998.
** 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.
+ Information is furnished for the period from May 22, 1997, organization
date of the Corporation and the Portfolio Trust, to August 31, 1998.
# Amb. Richard R. Burt was elected as a Director of the Corporation, and a
Trustee of the Portfolio Trust, on October 9, 1998.
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.
<PAGE>
FUND OWNERSHIP
Shareholders owning 25% or more of the Funds may, for certain purposes, be
deemed to control the Funds, and therefore, may be able to affect the outcome of
certain matters presented for a vote of shareholders.
As of October 9, 1998, the Directors of the Corporation, Trustees of the
Portfolio Trust and Officers of the Corporation and the Portfolio Trust as a
group of record owned approximately 3,668 (23.51%) Class A Shares of the Top 50
World Fund, no outstanding Class B Shares of the Top 50 World Fund, and no
outstanding Shares of the Top 50 Europe Fund, Top 50 Asia Fund, Top 50 US Fund,
European Mid-Cap Fund, German Equity Fund, Japanese Equity Fund, Global Bond
Fund, and European Bond Fund.
As of October 9, 1998, Directors of the Corporation, Trustees of the Portfolio
Trust and Officers of the Corporation and the Portfolio Trust as a group owned
none of the beneficial interests in any of the Portfolio Trust. As of the same
date, no person owned 5% or more of the voting stock of any Portfolio except
that the Corporation owned 100% of the outstanding beneficial interests in each
Portfolio.
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Top 50 World Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 4,431 Shares (28.39%); Investors Bank & Trust Company, as
custodian for the IRA of a U.S. citizen, Boston, MA, owned approximately 3,668
Shares (23.51%); individuals residing in Belle Harbor, NY, owned approximately
1,257 Shares (8.06%); an individual residing in New York, NY, owned
approximately 1,088 Shares (6.97%); Federated Administrative Services,
Pittsburgh, PA, owned approximately 888 Shares (5.70%); and an individual
residing in New York, NY, owned approximately 831 Shares (5.33%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Top 50 World Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 8,586 Shares (99.87%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class A Shares of the Top 50 Europe Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 78,267 Shares (71.37%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Top 50 Europe Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 266,351 Shares (89.38%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Top 50 Asia Fund: Fidelity Investments
Institutional Operations Co. Inc. (as record holder for its clients), Covington,
KY, owned approximately 3,723 Shares (41.91%); Merrill Lynch Pierce Fenner &
Smith (as record holder for its clients), Jacksonville, FL, owned approximately
1,161 Shares (13.07%); Federated Administrative Services, Pittsburgh, PA, owned
approximately 888 Shares (10.01%); and an individual residing in New York, NY,
owned approximately 625 Shares (7.04%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class B Shares of the Top 50 Asia Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 10,827 Shares (68.50%); and Fox & Co., New York, NY, owned
approximately 4,965 Shares (31.41%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Top 50 US Fund: Deutsche Bank Securities
Inc. (as record holder for its clients), New York, NY, owned approximately
70,630 Shares (47.45%); an individual residing in San Juan, PR, owned
approximately 17,921 Shares (12.04%); and Miter & Co., Milwaukee, WI, owned
approximately 17,618 Shares (11.84%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class B Shares of the Top 50 US Fund: Parker Hunter Inc. (as
record holder for its clients), New Castle, PA, owned approximately 31,673
Shares (65.96%); Parker Hunter Inc. (as record holder for its clients),
Canfield, OH, owned approximately 9,962 Shares (20.75%); and Parker Hunter Inc.
(as record holder for its clients), Warren, OH, owned approximately 4,707 Shares
(9.80%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the European Mid-Cap Fund: Merrill Lynch
Pierce Fenner & Smith (as record holder for its clients), Jacksonville, FL,
owned approximately 114,480 Shares (63.61%); an individual in San Juan, PR,
owned approximately 17,041 Shares (9.47%); and Charles Schwab & Co. Inc., San
Francisco, CA, owned approximately 12,253 Shares (6.81%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the European Mid-Cap Fund: Merrill Lynch
Pierce Fenner & Smith (as record holder for its clients), Jacksonville, FL,
owned approximately 309,220 Shares (85.60%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the German Equity Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 22,304 Shares (53.04%); and Fidelity Investments Institutional
Operations Co. Inc. (as record holder for its clients), Covington, KY, owned
approximately 4,964 Shares (11.81%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class B Shares of the German Equity Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 16,491 Shares (82.26%); and Investors Bank & Trust Co., as
custodian for the IRA of a U.S.
citizen, Boston, MA, owned 2,239 Shares (11.17%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Japanese Equity Fund: Federated
Administrative Services, Pittsburgh, PA, owned approximately 888 Shares
(58.56%); individuals residing in Middletown, NJ, owned approximately 303 Shares
(20.01%); an individual residing in Summit, NJ, owned approximately 89 Shares
(5.90%); an individual residing in New York, NY, owned approximately 78 Shares
(5.14%); and an individual residing in New Canaan, CT, owned approximately 78
Shares (5.14%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Japanese Equity Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 33,323 Shares (100%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Global Bond Fund: individuals residing in
Colts Neck, NJ, owned approximately 2,250 Shares (31.91%); individuals residing
in Belle Harbor, NY, owned approximately 1,990 Shares (28.24%); an individual
residing in New York, NY, owned approximately 952 Shares (13.51%); Federated
Administrative Services, Pittsburgh, PA, owned approximately 902 Shares
(12.79%); and an individual residing in Fayeteville, NY, owned approximately 369
Shares (5.24%).
As of October 9, 1998, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Global Bond Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 618 Shares (100%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the European Bond Fund: Fidelity Investments
Institutional Operations Co. Inc. (as record holder for its clients), Covington,
KY, owned approximately 2,467 Shares (39.54%); Merrill Lynch Pierce Fenner &
Smith (as record holder for its clients), Jacksonville, FL, owned approximately
1,625 Shares (26.05%); Federated Administrative Services, Pittsburgh, PA, owned
approximately 899 Shares (14.41%); an individual residing in Medfield, MA, owned
approximately 386 Shares (6.19%); an individual residing in Fayeteville, NY,
owned approximately 358 Shares (5.75%); and individuals residing in Freeport,
NY, owned approximately 350 Shares (5.61%).
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class B Shares of the European Bond Fund: Merrill Lynch Pierce
Fenner & Smith (as record holder for its clients), Jacksonville, FL, owned
approximately 5,850 Shares (87.66%); and an individual residing in New York, NY,
owned approximately 811 Shares (12.16%).
The identities of the above-named shareholders can be obtained by contacting the
Funds' transfer agent, Federated Shareholder Services Company, Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
MANAGER
The investment manager to each Portfolio is DFM, an indirect subsidiary of
Deutsche Bank, 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
<PAGE>
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 World Portfolio, Top 50 Europe
Portfolio and Top 50 Asia Portfolio, each Equity Portfolio (except the foregoing
three Top 50 Portfolios) and each Bond Portfolio, which is computed daily and
may be paid monthly, equal to 1.00%, 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.
From the Portfolios' commencement of operations through August 31, 1998, DFM
earned management fees as follows:
COMMENCEMENT
PORTFOLIO OF OPERATIONS MANAGEMENT FEE
Top 50 World Portfolio 10/2/97 $ 76,939
Top 50 Europe Portfolio 10/2/97 87,638
Top 50 Asia Portfolio 10/14/97 189,797
Top 50 US Portfolio 10/2/97 70,740
Provesta Portfolio 10/17/97 31,021
Investa Portfolio 10/17/97 21,527
Japanese Equity Portfolio 10/20/97 11,948
Global Bond Portfolio 10/15/97 20,623
European Bond Portfolio 10/17/97 21,836
The Glass-Steagall Act and other applicable laws generally prohibit banks
(including foreign banks having U.S. operations, such as Deutsche Bank) 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 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 except Top 50 US Portfolio with the DWS Adviser and with respect to
Top 50 US Portfolio with the DBSIM Adviser. 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 DWS Adviser and
DBSIM Adviser are each an indirect subsidiary of Deutsche Bank AG. For these
services, the respective Adviser receives from DFM a fee, which is computed
daily and may be paid monthly, equal to 0.75%, 0.60% and 0.50% of the average
daily net assets of each of Top 50 World, Top 50 Europe and Top 50 Asia
Portfolio, each Equity Portfolio (except the foregoing Top 50 Portfolios) and
each Bond Portfolio, respectively, on an annualized basis for the Portfolio's
then-current fiscal year. From the Portfolios' commencement of operations
through August 31, 1998, the Adviser earned advisory fees as follows:
COMMENCEMENT
PORTFOLIO OF OPERATIONS ADVISORY FEE
Top 50 World Portfolio 10/2/97 $ 57,704
Top 50 Europe Portfolio 10/2/97 65,728
Top 50 Asia Portfolio 10/14/97 142,347
Top 50 US Portfolio 10/2/97 49,934
Provesta Portfolio 10/17/97 21,897
Investa Portfolio 10/17/97 15,195
Japanese Equity Portfolio 10/20/97 8,433
Global Bond Portfolio 10/15/97 13,748
European Bond Portfolio 10/17/97 14,557
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 DWS Adviser there is a corresponding DWS Fund,
as follows (having launch dates and net assets as of August 31, 1998, as
indicated): Provesta Portfolio--Provesta (November 1985, $1.10 billion), Investa
Portfolio--Investa (December 1956, $2.80 billion), Japanese Equity
Portfolio--DWS-Japan Fonds (April 1992, $326 million), Global Bond
Portfolio--Inter Renta (July 1969, $10.84 billion), European Bond
Portfolio--Eurorenta (November 1987, $2.46 billion), Top 50 World Portfolio--Top
50 Welt (January 1997, $2.92 billion), Top 50 Europe Portfolio--Europa (October
1995, $1.85 billion), and Top 50 Asia Portfolio--Top 50 Asian (April 1996, $387
million).
<PAGE>
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 receives a minimum
fee of $75,000 per Fund annually, except that during the first two years of the
agreement 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 Fund's operation and $125,000 for the second year will be paid to
the Operations Agent (as defined below) and the Administrator.
From the Funds' commencement of operations through August 31, 1998, the
Administrator earned administrative fees as follows:
COMMENCEMENT
FUNDS OF OPERATIONS ADMINISTRATIVE FEE
Top 50 World 10/2/97 $ 226
Top 50 Europe 10/2/97 700
Top 50 Asia 10/14/97 197
Top 50 US 10/2/97 1,064
European Mid-Cap Fund 10/17/97 941
German Equity Fund 10/17/97 276
Japanese Equity Fund 10/20/97 182
Global Bond Fund 10/15/97 196
European Bond Fund 10/17/97 183
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
receives a minimum fee of $60,000 per Portfolio annually, except that during the
first two years of the agreement minimum aggregate fees 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, will be paid to the Operations Agent and the
Administrator.
From the Portfolios' commencement of operations through August 31, 1998, the
Operations Agent earned operations agency fees as follows:
COMMENCEMENT OPERATIONS
PORTFOLIO OF OPERATIONS AGENT FEE
Top 50 World Portfolio 10/2/97 $67,036
Top 50 Europe Portfolio 10/2/97 66,445
Top 50 Asia Portfolio 10/14/97 61,738
Top 50 US Portfolio 10/2/97 66,335
Provesta Portfolio 10/17/97 64,498
Investa Portfolio 10/17/97 65,197
Japanese Equity Portfolio 10/20/97 65,332
Global Bond Portfolio 10/15/97 65,603
European Bond Portfolio 10/17/97 65,157
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
<PAGE>
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.
The Portfolio Trust has entered into an administrative agreement with IBT
(Cayman). As Administrative Agent of the Portfolios, IBT (Cayman) receives a fee
from each Portfolio, which is computed daily and paid monthly at an annual rate
of 0.025% on the first $200 million, 0.02% on the next $800 million and 0.01% on
assets in excess of $1 billion, subject to a minimum of $40,000 during the first
year of the Portfolio's operations, $45,000 in the second year of operations and
$50,000 in the third year.
From the Portfolios' commencement of operations through August 31, 1998, the
Administrative Agent earned Administrative Agency fees as follows:
COMMENCEMENT ADMINISTRATIVE
PORTFOLIO OF OPERATIONS AGENT FEE
Top 50 World Portfolio 10/2/97 $36,556
Top 50 Europe Portfolio 10/2/97 36,556
Top 50 Asia Portfolio 10/14/97 35,112
Top 50 US Portfolio 10/2/97 36,556
Provesta Portfolio 10/17/97 34,889
Investa Portfolio 10/17/97 34,889
Japanese Equity Portfolio 10/20/97 34,445
Global Bond Portfolio 10/15/97 35,111
European Bond Portfolio 10/17/97 34,889
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 (and
amended on July 13, 1998), Class B Shares and Class C Shares are subject to a
distribution plan (the "Distribution Plan") and Class A Shares, Class B Shares
and Class C Shares are subject to a service plan (the "Service Plan").
Under the Distribution Plan, Class B Shares and Class C Shares 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 and Class C Shares to
finance any activity which is principally intended to result in the sale of
Class B Shares and Class C 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.
<PAGE>
From the Funds' commencement of operations through August 31, 1998, the
Distributor earned service fees as follows:
COMMENCEMENT
FUNDS OF OPERATIONS SERVICE FEE
Top 50 World 10/2/97 $ 226
Top 50 Europe 10/2/97 2,049
Top 50 Asia 10/14/97 112
Top 50 US 10/2/97 3,444
European Mid-Cap Fund 10/17/97 2,973
German Equity Fund 10/17/97 415
Japanese Equity Fund 10/20/97 61
Global Bond Fund 10/15/97 113
European Bond Fund 10/17/97 60
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 meetings held on July 28, 1997 and July 13, 1998. The
Distribution Plan is separately terminable with respect to the Class B Shares or
Class C 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 respective Class B
Shares or Class C 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 ("Transfer Agent" and "Dividend Disbursing Agent"). 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 ("IBT"),
200 Clarendon Street, Boston, MA 02116 acts as the custodian of each Fund's and
each Portfolio's assets ("Custodians"). 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.
<PAGE>
INDEPENDENT ACCOUNTANTS
The independent accountants of the Corporation and the Portfolio Trust are
PricewaterhouseCoopers LLP (formerly, Price Waterhouse LLP), 1177 Avenue of the
Americas, New York, NY 10036. 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 ("NYSE") is open for business. The procedure
for purchasing Shares is explained in each Prospectus under "Purchase of
Shares."
Each Fund has authorized one or more brokers to accept on its behalf purchase
and redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on each Fund's behalf.
Each Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Shareholder orders will be priced at a Fund's net asset value next
computed after they have been accepted by an authorized broker or the broker's
authorized designee.
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.
PURCHASING SHARES WITH SECURITIES
Each Fund may accept securities in exchange for its Shares. Each Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser(s) that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund and must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund Shares on the day the securities are valued. One Share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
Shares, a gain or loss may be realized by the investor.
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 and Class C 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
<PAGE>
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
<PAGE>
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 NYSE generally
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 NYSE and may also take place on days
on which the NYSE 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.
<PAGE>
Any applicable contingent deferred sales charge ("CDSC") 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.
The Funds' total return based on offering price for Class A Shares and Class B
Shares for the period from commencement of operations through August 31, 1998
were:
<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN
COMMENCEMENT WITH WITHOUT
FUND OF OPERATIONS SALES LOAD/CDSC SALES LOAD/CDSC
<S> <C> <C> <C>
Top 50 World - Class A 10/2/97 -6.65% -1.20%
Top 50 World - Class B 5/4/98 -15.79% -11.36%
Top 50 Europe - Class A 10/2/97 -1.49% 4.24%
Top 50 Europe - Class B 3/30/98 -11.46% -6.80%
Top 50 Asia - Class A 10/14/97 -38.17% -34.56%
Top 50 Asia - Class B 5/5/98 -29.47% -25.76%
Top 50 US - Class A 10/2/97 -4.59% 0.96%
Top 50 US - Class B 3/18/98 -16.70% -12.32%
European Mid-Cap Fund - Class A 10/17/97 7.50% 13.76%
European Mid-Cap Fund - Class B 3/30/98 -4.60% 0.40%
German Equity Fund - Class A 10/17/97 9.32% 15.68%
German Equity Fund - Class B 3/16/98 -3.96% 1.04%
Japanese Equity Fund - Class A 10/20/97 -25.53% -21.20%
Japanese Equity Fund - Class B 8/10/98 -7.96% -3.12%
Global Bond Fund - Class A 10/15/97 -0.83% 3.85%
European Bond Fund - Class A 10/17/97 1.38% 6.17%
European Bond Fund - Class B 6/25/98 -1.56% 3.44%
</TABLE>
There is no similar performance information to report for Class B Shares of the
Global Bond Fund through August 31, 1998 since there were no public sales. Class
C Shares of the Funds were not available prior to September 1, 1998.
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.
The yields for the Class A Shares of the Global Bond Fund and Class A Shares and
Class B Shares of the European Bond Fund for the thirty-day period ended August
31, 1998, were 3.62%, 3.20% and 2.65%, respectively. There is no similar
performance information to report for Class B Shares of the Global Bond Fund
through August 31, 1998 since there were no public sales. Class C Shares of the
Funds were not available prior to September 1, 1998.
<PAGE>
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 NYSE and the American
Stock Exchange, 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
<PAGE>
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:
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 the Morgan Stanley Capital
Index ("MSCI") - Europe Index;
German Equity Fund may be compared to the DAX, CDAX, MSCI-Germany Index,
and the FT-Europe Index;
Japanese Equity Fund may be compared to the Tokyo Price Index ("TOPIX"),
Nikkei-225 Index, and the MSCI Japan Index;
Global Bond Fund may be compared to the JPM Global Government Bond Index,
and the Salomon Brothers World Government Bond Index;
European Bond Fund may be compared to the JPM European Government Bond
Index, Salomon Brothers European World Government Bond Index, and the EFFAS
Government Bond Index;
Top 50 World may be compared to the MSCI-World Index;
Top 50 Europe may be compared to the MSCI-Europe Index;
Top 50 Asia may be compared to the MSCI Pacific Index and MSCI Pacific ex
Japan Index;
Top 50 US may be compared to Standard & Poor's 500 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
<PAGE>
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.
Deutsche Bank AG or one of its subsidiaries or affiliates may act as one of
the agents of the Portfolios in the purchase and sale of portfolio securities or
futures transactions when, in the judgment of the Adviser, that firm will be
able to obtain a price and execution at least as favorable as other qualified
brokers. As one of the principal brokers for the Portfolios, Deutsche Bank AG
may receive brokerage commissions or other transaction-related compensation from
the Portfolios.
For the fiscal year ended August 31, 1998, the Portfolios paid $52,582.83 in
brokerage commissions to Deutsche Bank AG, an affiliated broker, which
represents 12.42% of the aggregate brokerage commissions paid and 16.06% of the
aggregate principal amount of trades by affiliated brokers.
For the fiscal year ended August 31, 1998, the Portfolios paid $46,008.34 in
brokerage commissions to Deutsche Bank Securities, New York, an affiliated
broker, which represents 10.87% of the aggregate brokerage commissions paid and
21.13% of the aggregate principal amount of trades by affiliated brokers.
For the fiscal year ended August 31, 1998, the Portfolios paid $8,815.65 in
brokerage commissions to Morgan Grenfell Asia Securities, Ltd., an affiliated
broker, which represents 2.08% of the aggregate brokerage commissions paid and
2.06% of the aggregate principal amount of trades by affiliated brokers.
For the fiscal year ended August 31, 1998, the Portfolios paid $2,937.36 in
brokerage commissions to Deutsche Morgan Grenfell, an affiliated broker, which
represents 0.69% of the aggregate brokerage commissions paid and 0.78% of the
aggregate principal amount of trades by affiliated brokers.
PORTFOLIO TURNOVER
The Adviser does not anticipate that portfolio turnover will result in adverse
tax consequences. However, the relative performance of the Portfolios'
investments may make a realignment of the Portfolios' portfolios desirable from
time to time. The frequency of such portfolio realignments will be determined by
market conditions. Higher portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs that the Fund will bear
directly.
For the period from October 2, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Top 50 World Portfolio was 125%. The
portfolio turnover rate is representative of only 11 months of activity.
For the period from October 2, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Top 50 Europe Portfolio was 27%. The
portfolio turnover rate is representative of only 11 months of activity.
For the period from October 14, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Top 50 Asia Portfolio was 54%. The
portfolio turnover rate is representative of only 10 months of activity.
For the period from October 2, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Top 50 US Portfolio was 24%. The
portfolio turnover rate is representative of only 11 months of activity.
For the period from October 17, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Provesta Portfolio was 82%. The
portfolio turnover rate is representative of only 10 months of activity.
For the period from October 17, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Investa Portfolio was 93%. The
portfolio turnover rate is representative of only 10 months of activity.
For the period from October 20, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Japanese Equity Portfolio was 95%. The
portfolio turnover rate is representative of only 10 months of activity.
For the period from October 15, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the Global Bond Portfolio was 43%. The
portfolio turnover rate is representative of only 10 months of activity.
For the period from October 17, 1997 (commencement of operations) to August 31,
1998, the portfolio turnover rate of the European Bond Portfolio was 177%. The
portfolio turnover is representative of only 10 months of activity.
<PAGE>
TAXES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH THE
SECTIONS IN THE PROSPECTUS ENTITLED "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; and (b) 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. Investors should
consult their 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 new legislation, effective for the
Funds' taxable years beginning after December 31, 1997, the Fund may
instead elect to mark-to-market the shares annually, in which case the
interest charge described in the first sentence above 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.
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 "Taxes," 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
(except the Top 50 US) 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.
Under new legislation 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, such credit would be denied where the
shareholder of the Fund does not satisfy the above holding requirement
with respect to its Shares in the Fund.
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.
<PAGE>
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 "Taxes" 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
the date hereof. 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 250,000,000 shares have been classified as Shares of
each Fund. The Corporation currently consists of eleven such series and two
classes of Shares for 10 of the Funds known as Class A Shares and Class B
Shares. Five of the Funds also offer Class C Shares and one Fund offers Class Y
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 accountants.
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 NYSE 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 SEC 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.
FINANCIAL STATEMENTS
Audited financial statements for Class A Shares and Class B Shares (except for
the Global Bond Fund) of the Funds for the period from commencement of
operations through August 31, 1998 are incorporated herein by reference to the
Annual Reports of the Funds dated August 31, 1998 (File Nos. 333-7008 and
811-8227). A copy of each such report will be provided without charge to each
person receiving this Statement of Additional Information. Class B Shares of the
Global Bond Fund did not have any operations through August 31, 1998. Class C
Shares were not offered before September 1, 1998.
<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 WORLD--Top 50 World Portfolio (US Dollar), ("Top 50 World Portfolio")
TOP 50 EUROPE--Top 50 Europe Portfolio (US Dollar), ("Top 50 Europe Portfolio")
TOP 50 ASIA--Top 50 Asia Portfolio (US Dollar), ("Top 50 Asia Portfolio")
TOP 50 US--Top 50 US Portfolio (US Dollar), ("Top 50 US Portfolio"),
(collectively, the "Top 50 Funds"), (collectively, the "Top 50 Portfolios")
EUROPEAN MID-CAP FUND--Provesta Portfolio (US Dollar), ("Provesta Portfolio")
GERMAN EQUITY FUND--Investa Portfolio (US Dollar), ("Investa Portfolio")
JAPANESE EQUITY FUND--Japanese Equity Portfolio (US Dollar), ("Japanese Equity
Portfolio"), (collectively with the Top 50 Funds, the "Equity Funds"),
(collectively with the Top 50 Portfolios, the "Equity Portfolios")
GLOBAL BOND FUND--Global Bond Portfolio (US Dollar), ("Global Bond Portfolio")
EUROPEAN BOND FUND--European Bond Portfolio (US Dollar), ("European Bond
Portfolio"), (collectively, the Bond Funds), (collectively, the Bond Portfolios)
<PAGE>
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.
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE
OFFER CONTAINED THEREIN AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
CORPORATION OR THE DISTRIBUTOR. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL
INFORMATION DO NOT CONSTITUTE AN OFFER BY ANY FUND OR BY THE DISTRIBUTOR TO SELL
OR SOLICIT ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUNDS OR THE
DISTRIBUTOR TO MAKE SUCH OFFER IN SUCH JURISDICTIONS.
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