Rule 497(c)
Registration No. 333-45959
E.I.I. REALTY SECURITIES FUND
Prospectus
June 8, 1998
Institutional Shares
Adviser Shares
Investor Shares
(888) 323-8912
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Table of Contents
FUND EXPENSES................................................................2
INTRODUCTION.................................................................3
FUND DESCRIPTION.............................................................5
SECURITIES IN WHICH THE FUND INVESTS.........................................7
RISK FACTORS.................................................................8
OTHER INFORMATION ABOUT THE FUND............................................10
INVESTING WITH E.I.I........................................................12
THE ORGANIZATION, MANAGEMENT, AND SERVICE PROVIDERS OF THE FUND.............14
ADDITIONAL INFORMATION......................................................15
OTHER SECURITIES IN WHICH THE FUND MAY INVEST AND INVESTMENT TECHNIQUES.....16
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FUND EXPENSES
The following information is provided to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly.
Shareholder Transaction Expenses
(as a percentage of the offering price)
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Sales Charge Imposed on Purchases None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
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You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund. These
expenses are charged directly to the Fund. Expenses include management fees as
well as the costs of maintaining accounts, administering the Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on projected expenses of the Fund.
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
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Institutional Adviser Investor
Shares Shares Shares
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<S> <C> <C> <C>
Management Fees 0.75% 0.75% 0.75%
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Administration Fees 0.15%* 0.25% 0.25%
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Shareholder Servicing Fees 0.00% 0.25% 0.25%
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Rule 12b-1 Distribution Fees 0.00% 0.00% 0.75%**
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Other Expenses 0.10% 0.10% 0.10%
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Total Fund Operating Expenses 1.00% 1.35% 2.10%
</TABLE>
*After fee waiver. Without the fee waiver, the Administration Fee for the
Institutional Shares would have been 0.25%. **Long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales loads permitted
by the National Association of Securities Dealers.
The following example, which is in the prospectus of every mutual fund, is
intended to provide investors with an opportunity to compare the expenses of the
Fund to the expenses of other mutual funds. The example is only an illustration
and does not depict the actual expenses or returns of the Fund. The expenses
used in the example are those listed in the Annual Fund Operating Expenses
Table. The example assumes a $1,000 investment, a 5% annual return, and
redemption at the end of each time period.
Institutional Adviser Investor
Shares Shares Shares
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1 Year $10 $14 $21
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3 Years $32 $43 $66
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INTRODUCTION
This prospectus describes the E.I.I. Realty Securities Fund (the "Fund"), a
series of the E.I.I. Realty Securities Trust. The Fund is a non-diversified,
open-end investment management company. This prospectus explains the objectives,
policies, strategies, and risks of the Fund. You should read this prospectus
before investing in the Fund and keep it for future reference. A detailed
Statement of Additional Information (the "SAI") describing the Fund also is
available for your review. The SAI has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into, and is
legally a part of, this prospectus. If you would like a free copy of the SAI,
please request one by calling us at (888) 323-8912. Additional information,
including this Prospectus and the SAI, may be obtained by accessing the Internet
Web site maintained by the SEC (http://www.sec.gov).
Investment Objective and Policies
The investment objective of the Fund is to provide the diversification and total
return potential of investments in real estate. The Fund will seek to achieve
this objective by buying the shares of companies whose business it is to own,
operate, develop, and manage real estate. Typically, an investment in commercial
real estate provides a significant current return, with additional appreciation
potential. As such, a critical objective of the Fund is to achieve total returns
which include a significant component of current income, which may serve to
provide portfolio stability during periods of overall market fluctuations. (Over
the 10 year period ending 12/31/97, the National Association of Real Estate
Investment Trusts ("NAREIT") Equity Index achieved an annualized total return of
14.17%, which was comprised of 8.15% in current income and 5.57% of capital
appreciation.) Capital appreciation within the Fund also will be pursued by
targeting companies with the highest risk-adjusted total return potential. The
Fund intends to invest at least 80% of its assets in the securities of companies
in the real estate industry, with a primary emphasis on Real Estate Investment
Trusts ("REITs"). In addition, the Fund may invest in other securities as
described in "Other Investments."
The Fund may achieve its investment objective by investing all of its assets in
another investment company having substantially the same investment objective
and policies as the Fund instead of investing directly in the underlying
securities.
E.I.I. Realty Securities, Inc. ("E.I.I."), the Fund's investment adviser,
believes that investments in real estate offer a total return potential which
may serve as an effective portfolio diversifier for many investors. In addition,
E.I.I. believes that, for most investors, the most convenient and effective way
to invest in real estate is through the ownership of a diversified portfolio of
real estate securities. Real estate securities, and more specifically, REITs,
provide investors with many of the features particular to both real estate
investments and publicly-traded securities, providing investors with a practical
and efficient means to include professionally-managed real estate in an
investment portfolio.
WHY REAL ESTATE? Investments in real estate offer the following benefits over
investments in other asset classes:
o Relatively low historical correlation to the equity market
o Relatively high levels of potential current income from contractual
rental streams
o A potential hedge against inflation from rising asset values and the
possibility of passing through higher costs to tenants
WHY REAL ESTATE SECURITIES? An investment in a portfolio of real estate
securities offers the following benefits in addition to those provided by direct
real estate investments:
o Diversification of risk of real estate investments
o Market pricing of publicly-traded shares (instead of appraisal-based
valuations)
o Enhanced liquidity, which aids in investment speed as well as
portfolio rebalancing
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WHY E.I.I.? E.I.I. and its parent company, European Investors Incorporated, have
been professionally managing real estate securities portfolios on behalf of
their clients for more than a decade and have consistently outperformed their
primary benchmark (the NAREIT Equity Index) by an average margin of more than
300 basis points on an annualized basis, before fees. The collective client base
of E.I.I. and European Investors Incorporated includes an array of investors
ranging from foreign and domestic high net worth individuals to U.S.
foundations, endowments, and corporate pension plans. In addition, European
Investors Incorporated serves as the adviser or sub-adviser for several offshore
funds investing with substantially the same investment objective as the Fund.
The chart below shows the historical performance of all of the real estate
accounts managed by E.I.I. and European Investors Incorporated, which have
substantially the same investment objective as the Fund. E.I.I. manages domestic
accounts and European Investors Incorporated manages offshore accounts using the
same personnel and philosophy. The data, calculated on an average annual total
return basis, is provided to illustrate E.I.I.'s past performance in managing
accounts in accordance with the same investment objective, policies, and
strategies as those of the Fund. These accounts consist of separate and distinct
portfolios and their performance is not indicative of past or future performance
of the Fund. As of June o, 1998, the Fund had not commenced investment
operations and therefore did not have a performance record of its own.
PAST PERFORMANCE OF ALL REAL ESTATE SECURITIES ACCOUNTS OF E.I.I.
REALTY SECURITIES (E.I.I.) & EUROPEAN INVESTORS INCORPORATED
REAL ESTATE SECURITIES COMPOSITE AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
STANDARD
ANNUAL RETURNS THROUGH DECEMBER 31, 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 DEVIATION
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
E.I.I. Composite* 13.06% 12.09% -11.69% 34.39% 19.34% 19.60% 6.53% 17.06% 35.80% 22.15% 13.61%
Wilshire Real Estate Securities 24.18% 2.37% -33.46% 20.03% 7.40% 15.23% 1.64% 13.65% 36.87% 19.80% 18.79%
Index
NAREIT Equity Index 13.49% 8.84% -15.35% 35.70% 14.59% 19.65% 3.17% 15.27% 35.27% 20.26% 14.87%
CUMULATIVE RETURNS 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
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E.I.I. Composite* 13.06% 26.73% 11.92% 50.41% 79.50% 114.68% 128.70% 167.71% 263.53% 344.04%
Wilshire Real Estate Securities 24.18% 27.12% -15.41% 1.54% 9.05% 25.66% 27.73% 45.16% 98.68% 138.01%
Index
NAREIT Equity Index 13.49% 23.52% 4.56% 41.88% 62.58% 94.54% 100.70% 131.34% 212.93% 276.33%
CUMULATIVE SUMMARY
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1 YEAR 3 YEAR 5 YEAR 10 YEAR
E.I.I. Composite* 22.15% 94.20% 147.40% 344.00%
Wilshire Real Estate Securities 19.80% 86.35% 137.17% 138.01%
Index
NAREIT Equity Index 20.26% 87.51% 131.84% 276.33%
</TABLE>
*The above performance is calculated on a time weighted basis by geometrically
linking each quarter in the year and is shown net of fees. This method of
calculation differs from the SEC method. These accounts were not subject to the
restrictions and diversification requirements of the Investment Company Act of
1940, as amended, or the restrictions and diversification requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended. However, these
accounts historically have been run in a manner that would have been in
compliance with these restrictions and requirements but for the fact that income
was predominantly reinvested rather than distributed as required by Subchapter
M. If the accounts had been subject to these restrictions and requirements, the
returns might have been adversely affected.
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[Chart comparing performance of E.I.I., Wilshire Real Estate Securities Index,
and NAREIT Equity Index]
Performance is shown net of a 1% management fee, as well as all brokerage and
trading expenses. The Composite includes all of the real estate securities
accounts of E.I.I. and European Investors Incorporated except for: (i) foreign
funds where the performance is stated net of fees and withholding taxes and is
therefore not comparable and (ii) new accounts where the cash position is not
yet comparable to other portfolios and certain accounts with unique objectives
and restrictions. As these accounts become fully invested they are added to the
Composite.
FUND DESCRIPTION
Investment Philosophy
E.I.I.'s investment philosophy is to achieve attractive risk-adjusted total
returns by investing primarily in a diversified portfolio of real estate
securities of companies which it deems to be of the highest quality available in
the marketplace. In this regard, E.I.I. deems high-quality companies to be
candidates for the portfolio when a number of the following conditions are met:
o Experienced, dedicated management teams are in place which have
significant inside ownership of shares, have capital markets
expertise, and have a pro-shareholder orientation
o The companies have long-term strategies which position them for
sustainable cash flow growth
o The balance sheets of the individual companies are positioned to
enable significant growth
Investment Policies
The Fund will pursue its investment objective by investing at least 80% of its
total assets in the equity or convertible securities of U.S. companies (with a
primary emphasis on REITs) which are principally engaged in the ownership,
construction, management, financing, or sale of residential, commercial, or
industrial real estate. Principally engaged means at least 50% of a company's
revenues are derived from such real estate activities or at least 50% of the
fair market value of a company's assets are invested in real estate.
Under normal market conditions, the Fund will invest substantially all of its
assets in:
o Income producing real estate securities (including equity, mortgage,
and hybrid REITs)
o Real Estate Operating Companies ("REOCs")
o Securities convertible into common stocks (including convertible
preferred stocks, rights, warrants, etc.) of real estate companies
o Real estate related fixed-income securities (such as convertible
debentures, unsecured debentures, mortgage backed securities, etc.)
The Fund also may invest:
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o up to 20% of its total assets in securities of foreign real estate
companies, many of which have substantial holdings of U.S. real estate
securities
Investment Strategies
E.I.I.'s investment process employs a combination of a "top-down," macro level
analysis by its Investment Committee, together with rigorous "bottom-up,"
fundamental securities and real estate research and analysis on individual
companies by its analyst team.
Investment Committee Decision Process:
E.I.I.'s Investment Committee analyzes national and regional economic trends and
the market for different types of real estate including residential, retail,
hotel, industrial, and office properties. In addition, the Investment Committee
makes assessments of the economic environment, securitization trends, etc., and
then derives an investment strategy formulated to take advantage of perceived
opportunities.
Analyst Team Decision Process:
E.I.I.'s analyst team tracks a universe of more than 125 individual companies
which are analyzed for potential investment. Companies are evaluated on both a
quantitative and a qualitative basis in order to determine which companies may
provide attractive risk-adjusted returns.
E.I.I.'s analyst team evaluates and analyzes companies based upon the following
criteria:
Qualitative Analysis:
o Management strength
o Business strategy
o Financial strength
o Competitive advantages within the marketplace
Quantitative Analysis:
o Cash flow and dividend growth prospects
o Risk-adjusted total return expectations using numerous methodologies
o Real estate analysis using capitalization rates, values on a square
footage basis, etc.
o Balance sheet strength and relative cost of capital
Integral parts of E.I.I.'s investment process include
o performing individual property and market evaluations which are
important to understanding the company's portfolio
o verifying that the company's assets are consistent with management's
stated strategy
o finding and reviewing any problems relating to the company's
properties
o evaluating the company's properties and their position in the markets
o assessing the quality of property management.
About the Investment Adviser
The Fund has entered into an investment advisory agreement with E.I.I. E.I.I.
was formed in 1993 and is a registered investment adviser providing real estate
securities portfolio management services to U.S. tax-exempt institutions and
other investors. E.I.I. is a wholly-owned subsidiary of European Investors
Incorporated, which is a registered investment adviser providing both general
securities and real estate securities portfolio management services. E.I.I. and
European Investors Incorporated are owned by management.
European Investors Incorporated was founded in 1983 to provide investment
services primarily to foreign investors (with a focus in Europe) in the United
States by managing securities portfolios as well
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as providing direct real estate advisory services and corporate advisory
services. From these combined efforts, European Investors Incorporated
determined that securitized real estate could serve as an alternative means of
acquiring real estate assets and developed a portfolio management service
specifically in this area, which now caters to both foreign and domestic
investors. European Investors Incorporated commenced research into real estate
securities as a separate portfolio product in 1986, began managing real estate
securities portfolios in 1987, and is a recognized leader in real estate
securities investment management.
E.I.I. and European Investors Incorporated collectively have a diversified
client base that includes investors in twelve countries, encompassing taxable
and tax-exempt investors, individuals, and institutions, including over 60
domestic institutional investors. As of December 31, 1997, the combined
companies have approximately $1.6 billion invested in real estate securities on
behalf of clients. They also manage several offshore real estate investment
funds with assets of approximately $300 million.
Portfolio Management Personnel
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RICHARD J. ADLER is a Managing Director of E.I.I. Mr. Adler serves as investment
strategist for E.I.I. and co-portfolio manager of the Fund, to which he provides
investment strategy as well as expertise in convertible and other securities.
Mr. Adler is a 1968 graduate of Yale University with a B.A. degree in Economics
and earned an M.B.A. from Harvard Business School with Honors in 1973. He has
served as an officer in the U.S. Navy and was a Vice President of Goldman, Sachs
& Co. in New York from 1973 to 1983, where he worked with foreign investors.
CYDNEY C. DONNELL is a Managing Director of E.I.I. Ms. Donnell serves as
co-portfolio manager of the Fund, jointly responsible for its day-to-day
operations. Ms. Donnell has served as a REIT analyst or portfolio manager for
E.I.I. since the inception of its real estate securities investment management
business in 1987. Prior to joining E.I.I., Ms. Donnell was a real estate lending
officer at Republic Bank Corporation from 1983 to 1986. Ms. Donnell graduated
magna cum laude from Texas A&M in 1981 with a degree in Finance and received an
M.B.A. from Southern Methodist University in 1982. She has served as a member of
the NAREIT Board of Governors.
DAVID P. O'CONNOR is a Managing Director of E.I.I. Mr. O'Connor serves as
co-portfolio manager of the Fund, jointly responsible for its day-to-day
operations. Mr. O'Connor has served as a REIT analyst or co-portfolio manager
for E.I.I. since February, 1994. Prior to joining E.I.I., Mr. O'Connor served as
an investment executive at Kidder, Peabody, and Co., Inc., where he specialized
in real estate securities. From 1987 to 1992, Mr. O'Connor was employed by a
management affiliate of Presidential Realty Corp. (an AMEX Listed REIT) and
subsequently served as a real estate analyst at Lane Webber Properties, a
private real estate development and investment firm. Mr. O'Connor is a 1986
graduate of the Boston College School of Management and received an M.S. in Real
Estate Development and Investment from New York University.
SECURITIES IN WHICH THE FUND INVESTS
A REIT is a corporation or a business trust that combines the capital of many
investors for investment primarily in income-producing real estate or real
estate-related loans or interests. The shares of a REIT are often freely traded
on a major stock exchange. A REIT must meet certain requirements contained in
the Internal Revenue Code of 1986, as amended (the "Code"), in which case it
generally does not pay federal corporate income tax. Generally, a REIT is
required to invest a substantial portion of its assets in interests in real
estate (including mortgages and other REITs) or cash and government securities,
derive most of its income from rents from real property or interest on loans
secured by mortgages on real property, and distribute to shareholders annually
substantially all of its otherwise taxable income. Most states honor this
federal income tax treatment and do not require REITs to pay state income tax.
As a result, nearly all of a REIT's income can be distributed to shareholders
without the imposition of a
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corporate level income tax. However, unlike a partnership, a REIT cannot pass
its tax losses through to its investors.
REITs are characterized as equity REITs, mortgage REITs, and hybrid REITs.
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The Fund will invest predominantly in equity REITs. Equity REITs, which may
include operating or finance companies, own real estate directly and the value
of, and income earned by, these REITs depends upon the income of the underlying
properties and the rental income they earn. Equity REITs also can realize
capital gains (or losses) by selling properties that have appreciated (or
depreciated) in value. Mortgage REITs can make construction, development, or
long-term mortgage loans and are sensitive to the credit quality of the
borrower. Mortgage REITs derive their income from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. REITs also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation, and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the Investment Company Act of 1940,
as amended (the "Investment Company Act").
For more information about other securities in which the Fund can invest, see
"Other Securities in Which the Fund May Invest and Investment Techniques" and
the SAI.
PORTFOLIO TURNOVER
It is anticipated that the portfolio turnover rate for the Fund in any one year
will not exceed 60%, which is lower than the turnover rate for many comparable
real estate securities funds. A lower portfolio turnover rate will result in a
lower rate of net realized capital gains to the Fund and will decrease the
portion of the Fund's distributions constituting taxable capital gains.
RISK FACTORS
The Fund is designed for long-term investors. The Fund is subject to the risks
common to all mutual funds and the risks common to mutual funds that invest in
equity securities, real estate securities, foreign securities, and fixed-income
securities. In addition, the Fund is subject to the risks related to direct
investment in real estate. By itself, the Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
This prospectus describes some of the risks that you may assume as an investor
in the Fund. Some limitations on the Fund's investments are described in the
section that follows. "Other Securities in Which the Fund May Invest and
Investment Techniques" at the end of this prospectus provides additional
information on the securities in which the Fund can invest. As with any mutual
fund, there is no guarantee that the Fund will earn income or show a positive
total return over time. The Fund's price, yield, and total return will
fluctuate.
THE FOLLOWING RISKS ARE COMMON TO ALL MUTUAL FUNDS:
MARKET RISK is the risk that the market value of a security will
fluctuate, depending on the supply and demand for that type of
security. As a result of this fluctuation, a security may be
worth less than the price the Fund originally paid for it, or
less than the security was worth at an earlier time. Market
risk may affect a single security, an industry, a sector of
the economy, or the entire market, and is common to all
investments.
MANAGER RISK is the risk that the Fund's investment adviser may use a
strategy that does not produce the intended result. Manager
risk also refers to the possibility that the Fund's investment
adviser may fail to execute an investment strategy effectively
and thus fail to achieve its objective.
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THE FOLLOWING RISK IS COMMON TO MUTUAL FUNDS THAT INVEST IN EQUITY SECURITIES:
EQUITY RISK is the risk that the value of the security will fluctuate
in response to changes in earnings or other conditions
affecting the issuer's profitability. Unlike debt securities,
which have preference to a company's earnings and cash flow,
equity securities are entitled to the residual value after the
company meets its other obligations. For example, holders of
debt securities have priority over holders of equity
securities to a company's assets in the event of bankruptcy.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN REAL ESTATE
SECURITIES:
REAL ESTATE RISK is the risk that the value of a security will
fluctuate because of changes in property values, vacancies of
rental properties, overbuilding, changes in local laws,
increased property taxes and operating expenses, and other
risks associated with real estate. While the Fund will not
invest directly in real estate, it may be subject to the risks
associated with direct ownership. Equity REITs may be affected
by changes in property value, while mortgage REITs may be
affected by credit quality.
REGULATORY RISK is the risk that certain REITs may fail to qualify for
pass-through of income under federal tax law or to maintain
their exemption from the registration requirements under
federal securities laws.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN FOREIGN
SECURITIES:
FOREIGN ISSUER RISK is the risk that foreign issuers may not be
subject to uniform accounting, auditing and financial
reporting standards and practices used by domestic issuers. In
addition, foreign securities markets may be less liquid, more
volatile, and less subject to governmental supervision than in
the U.S. Investments in foreign countries could be affected by
factors not present in the U.S., including expropriation,
confiscation of property, and difficulties in enforcing
contracts.
CURRENCY RISK is the risk that fluctuations in the exchange rates
between the U.S. dollar and foreign currencies may negatively
affect an investment. Adverse changes in rates may erode or
reverse gains produced by investments denominated in foreign
currencies.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN FIXED INCOME
SECURITIES:
INTEREST RATE RISK. The value of a fixed income security typically
changes in the opposite direction from a change in interest
rates. When interest rates go up, the value of a fixed-rate
security typically goes down. When interest rates go down, the
value of these securities typically goes up. Generally, the
market values of securities with longer maturities are more
sensitive to changes in interest rates.
INFLATIONRISK is the risk that inflation will erode the purchasing
power of the cash flows generated by fixed income securities
held by the Fund. Fixed-rate debt securities are more
susceptible to this risk than floating-rate debt securities.
REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be
reinvested at a lower interest rate. Generally, interest rate
risk and reinvestment risk have offsetting effects.
CREDIT (OR DEFAULT) RISK is the risk that the issuer of a fixed
income security will be unable to make timely payments of
interest or principal.
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OTHER INFORMATION ABOUT THE FUND
Diversification Requirements.
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The SEC and IRS have certain requirements with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis. These
diversification provisions and requirements are discussed further in the SAI.
o SEC Requirement: The Fund is not "diversified" according to certain
federal securities provisions regarding diversification of its assets.
As a non-diversified investment company, the Fund may devote a larger
portion of its assets to the securities of a single issuer than if it
were diversified.
o IRS Requirement: The Fund intends to comply with certain federal tax
requirements regarding the diversification of its assets. Generally,
under those requirements, the Fund must invest at least 50% of its
total assets so that no more than 5% of its total assets are invested
in the securities of any one issuer (excluding U.S. Government
securities).
Investment Performance
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The performance of the Fund may be advertised by comparing it to other mutual
funds with similar objectives and policies. Performance information also may
appear in various publications. Performance information is contained in the
annual and semi-annual reports. You may obtain a copy of the annual and
semi-annual reports free of charge by calling (888) 323-8912.
The "30-day yield" is an "annualized" figure-the amount you would earn if you
stayed in the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 30-day yield, the Fund's net
investment income per share for the most recent 30 days is divided by the
maximum offering price per share. To calculate "total return," the Fund starts
with the total number of shares that you can buy for $1,000 at the beginning of
the period. Then the Fund adds all dividends and distributions paid as if they
were reinvested in additional shares. This takes into account the Fund's
dividend distributions, if any. The total number of shares is multiplied by the
net asset value on the last day of the period and the result is divided by the
initial $1,000 investment to determine the percentage gain or loss. For periods
of more than one year, the cumulative total return is adjusted to get an average
annual total return. Yield is a measure of net dividend income. Average annual
total return is a hypothetical measure of past dividend income plus capital
appreciation. It is the sum of all parts of the Fund's investment return for
periods greater than one year. Total return is the sum of all parts of the
Fund's investment return. Whenever you see information on a Fund's performance,
do not consider the past performance to be an indication of the performance you
could expect by making an investment in the Fund today.
Past performance does not guarantee future results. You may obtain the current
30-day yield by calling (888) 323-8912. Shareholder Servicing representatives
are available from 8:00 a.m. to 6:00 p.m. Eastern time Monday through Friday.
Share Price
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The Fund's daily share price, called its net asset value (the "NAV") is useful
to you as a shareholder because the NAV, multiplied by the number of Fund shares
you own, gives you the dollar amount and value of your investment. The Fund's
NAV is calculated each business day as of the close of the New York Stock
Exchange (normally at 4:00 p.m. Eastern time). Shares are purchased at the next
share price calculated after your investment instructions are received and
accepted. A business day is a day on which the New York Stock Exchange is open
for trading or any day in which enough trading has occurred in the securities
held by the Fund to affect the NAV materially.
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The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
NAV = Total Assets - Liabilities
--------------------------
Number of Shares Outstanding
Dividends, Distributions, and Taxes
- -----------------------------------
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net dividends or interest
earned on investments after expenses. As with any investment, you should
consider the tax consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. The Fund pays any net capital gains realized as dividends at least
annually. Distributions can be received in one of the following ways:
REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of the Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
CASH OPTION: A check will be mailed to you no later than 7 days after the pay
date.
INCOME EARNED OPTION: Dividends can be reinvested automatically in the Fund and
your capital gains can be paid in cash, or capital gains can be reinvested and
dividends paid in cash.
DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under normal
circumstances, a dividend will be transferred within 7 days of the dividend
payment date. The bank account must have a registration identical to that of
your Fund account.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at (888) 323-8912.
You should check the Fund's distribution schedule before you invest. If you buy
shares of the Fund shortly before it makes a distribution, some of your
investment may come back to you as a taxable distribution.
Important Information about Taxes
o The Fund intends to qualify as a regulated investment company, in
which case it will pay no federal income tax on the earnings or
capital gains it distributes to its shareholders.
o Ordinary dividends from the Fund are taxable as ordinary income;
dividends from the Fund's long-term capital gains are taxable as
capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares. It
is likely that they will also be subject to state and local taxes.
o Dividends from interest on certain U.S. Government obligations held by
the Fund may be exempt from some state and local taxes. You will
receive a statement at the end of each year showing which dividends
are exempt. The Fund, however, expects dividends of this kind to be
minimal.
o Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
o Generally, any gain or loss from a sale (redemption) of shares of the
Fund must be recognized for tax purposes. This gain or loss generally
will be long-term capital gain or loss if you held your shares of the
Fund for more than one year. If you are an individual, your long-term
capital gain will be taxed
11
<PAGE>
at the lowest rate applicable to capital gains if you held your shares
for more than 18 months at the time of the sale or redemption.
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.
Statements and Reports
- ----------------------
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, account activity will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. By January 31 of each year, you will
be mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
INVESTING WITH E.I.I.
The following sections describe how to open an account, how to access
information on your account, and how to purchase, exchange, and redeem shares of
the Fund.
The Fund offers three classes of shares: Institutional Shares, Adviser Shares,
and Investor Shares.
INSTITUTIONAL SHARES. The minimum investment for Institutional Shares is
$1,000,000. This minimum may be reduced to certain institutional clients of
E.I.I. in E.I.I.'s sole discretion.
ADVISER SHARES. The minimum investment for Adviser Shares is $100,000. Employees
and officers of E.I.I. and its affiliates and immediate family members can
purchase Adviser Shares without being subject to the minimum investment.
INVESTOR SHARES. The minimum investment for Investor Shares is $5,000.
How to Purchase Shares
- ----------------------
Shares can be purchased in a number of different ways. You can send in your
investment by check or wire transfer. All you need to do to get started is to
fill out an application.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state. If your account falls below
the minimum initial investment as a result of redemptions by you, we may ask you
to re-establish the minimum investment. If you do not do so within 60 days, we
may close your account and send you the value of your account. If you would like
to make additional investments after your account is already established, use
the Investment Stub attached to your statement and send it with your check to
the address indicated.
SYSTEMATIC INVESTMENT PLAN
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank account information and the amount
and frequency of your investment. You can select monthly, quarterly,
semi-annual, or annual investments. You should attach a voided personal check so
the proper information can be obtained. You must first meet the minimum
investment
12
<PAGE>
requirement of $5,000, then we will make automatic withdrawals of the amount you
indicate ($25 or more) from your bank account and invest it into shares of the
Fund.
SYSTEMATIC WITHDRAWAL PLAN
To enroll in the Systematic Withdrawal Plan, you should check this box on the
Account Application. This option permits investors to request withdrawal of a
specified dollar amount (minimum of $500) on either a monthly, quarterly, or
annual basis. We will need your bank account information and the amount and
frequency of your withdrawal. You should attach a voided personal check or
savings account deposit slip so the proper information can be obtained.
RETIREMENT PLANS
You can use the Fund as part of your retirement portfolio. Please contact the
Fund for details regarding an IRA or other retirement plan that works best for
your financial situation.
How to Redeem Shares
- --------------------
If we receive your request by 4:00 p.m. Eastern time, your redemption will be
processed the same day. Shares can be redeemed in one of the following ways:
o BY TELEPHONE The easiest way to redeem shares is by calling (888) 323-8912.
When you fill out your original application, be sure to check the box
marked "Telephone Authorization." Then when you are ready to redeem, call
us and tell us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via Automatic Clearing House
("ACH").
All telephone calls are recorded for your protection and measures are taken
to verify the identity of the caller. If we properly act on telephone
instructions and follow reasonable procedures to ensure against
unauthorized transactions, neither E.I.I., nor its servicing agents nor the
Transfer Agent will be responsible for any losses. If these procedures are
not followed, the Transfer Agent may be liable to you for losses resulting
from unauthorized instructions. If there is an unusual amount of market
activity and you cannot reach the Transfer Agent by telephone, consider
placing your order by mail.
o BY MAIL Use the Regular U.S. Mail or Overnight Mail Address to redeem
shares. Send us a letter of instruction indicating your Fund account
number, amount of redemption, and where to send the proceeds. All account
owners must sign. A signature guarantee is required for the following
redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account; or
o The check is not being made payable to the owner of the account;
A signature guarantee can be obtained from a financial institution such as
a bank, broker-dealer, credit union, clearing agency, or savings
association. There are a number of convenient ways to redeem shares of the
Fund. You can use the same mailing addresses listed for purchases. You will
earn dividends up to the date your redemption request is processed.
o BY WIRE If you want to redeem funds by wire, you must establish a Fund
account which will accommodate wire transactions. If you call by 4:00 p.m.
Eastern time, your funds will be wired on the next business day.
BY ACH A redemption will be transferred by ACH as long as the transfer is to a
domestic bank.
13
<PAGE>
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends declared will be included with the redemption proceeds.
Keep the following addresses handy for purchases, exchanges, or redemptions.
o Regular U.S. Mail Address
Send completed Account Application with your check, bank draft, or money
order to:
E.I.I. Realty Securities Fund
c/o PFPC
P.O. Box 8910
Wilmington, DE 19899-8910
o Overnight Mail Address
Use the following address ONLY for overnight packages:
E.I.I. Realty Securities Fund
c/o PFPC
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809-3710
o Wiring Instructions
The Transfer Agent does not charge a wire fee, but your originating bank
may charge a fee. Always call the Transfer Agent at (888) 323-8912 BEFORE
wiring funds to obtain a control number.
PNC Bank, N.A.
Philadelphia, PA
ABA # 0310-0005-3
Credit DDA # 86-0195-6004
For credit to E.I.I. Realty Securities Fund
Shareholder Name___________________________
Account No.________________________________
o ACH After your account is set up, your purchase amount can be transferred
by ACH. Only domestic members banks may be used. It takes about 15 days to
set up the ACH feature. Currently, there is no fee for ACH transfers.
THE ORGANIZATION, MANAGEMENT, AND SERVICE PROVIDERS OF THE FUND
Organization of the Fund
The Fund is a series of the E.I.I. Realty Securities Trust, a Delaware Business
Trust that was formed on December 22, 1997. The Fund's business affairs are
managed under the general supervision of the Board of Trustees. The Statement of
Additional Information contains the name and general business experience of each
Trustee. The Board of Trustees has the ability to establish new portfolios of
shares without shareholder approval.
Trustees
The Board of Trustees consists of Richard J. Adler, David P. O'Connor, Warren K.
Greene, Richard W. Hutson, and Samuel R. Karetsky. Mr. Adler is the Chairman of
the Board of Trustees and Mr. O'Connor is the President and Treasurer of the
Fund. Mr. Adler and Mr. O'Connor are Managing Directors of E.I.I. Mr. Greene is
a Senior Vice President of TrendLogic Associates, Inc., a registered investment
adviser and commodity trading advisor, and was formerly the president of the
American Investors family of no-load mutual funds. Mr. Hutson is retired from
Hewitt Associates, an international human resources consulting firm, where he
was a senior principal. Mr. Karetsky is an asset management consultant and was
formerly Global Head of Private Client Services at Morgan Stanley & Co.
14
<PAGE>
Investment Adviser and Administrator
- ------------------------------------
E.I.I. is the Fund's investment adviser. The investment adviser manages the
Fund's business and investment activities. E.I.I. also serves as the Fund's
administrator, for which it is paid a fee at an annual rate of 0.25% (reduced to
0.15% for the Institutional Shares) of the Fund's average daily net assets.
E.I.I. may subcontract some of its administrative duties to other service
providers. E.I.I. has entered into a sub-administration contract with PFPC Inc.
under which E.I.I. pays PFPC Inc. to provide certain administrative services to
E.I.I.
The Sub-Administrator, Transfer Agent, and Custodian
- ----------------------------------------------------
PFPC Inc., a subsidiary of PNC Bank, N.A., is the Fund's sub-administrator and
transfer agent. PNC Bank, N.A. is the Fund's custodian.
Independent Auditors
- --------------------
Ernst & Young LLP serves as independent auditors to the Fund.
Legal Counsel
- -------------
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
Shareholder Servicing
- ---------------------
The Fund has adopted a Shareholder Servicing Plan for the Adviser Shares and the
Investor Shares. Under the Shareholder Servicing Plan, the Adviser will provide
shareholder services to its clients that invest in the Fund. The Fund also may
enter into shareholder service agreements pursuant to which a shareholder
servicing agent other than the Adviser performs shareholder services for its
customers who are shareholders of the Fund. In both instances, such services may
include establishing and maintaining accounts and records, processing dividend
and distribution payments, arranging for bank wires, assisting in transactions,
and changing account information. In exchange for these services, the Fund pays
up to 0.25% of the average daily net assets of the Adviser or Investor Shares
serviced by the Adviser or the agent. The Fund may enter into agreements with
various shareholder servicing agents, other financial institutions, and
securities brokers. Shareholder servicing agents may waive all or a portion of
their fee periodically.
Distribution Plan
- -----------------
Under Rule 12b-1 of the Investment Company Act, the Fund has adopted a
Distribution and Service Plan for the Investor Shares, pursuant to which the
Fund may pay up to 0.75% of the average daily net assets of the Investor Shares
for distribution assistance.
ADDITIONAL INFORMATION
Some additional information you should know about the Fund appears in the SAI.
If you would like to receive additional copies of any materials, please call the
Fund at (888) 323-8912. The Fund offers only the classes of shares described in
this prospectus, but at some future date, the Fund may offer additional classes
of shares through a separate prospectus.
Code of Ethics
- --------------
E.I.I. and the Fund have each adopted a Code of Ethics to which all investment
personnel and all other access persons to the Fund must conform. Investment
personnel must refrain from certain trading practices and are required to report
certain personal investment activities. Violations of the Code of Ethics can
result in penalties, suspension, or termination of employment.
Shareholder Communications
- --------------------------
You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from the Fund. In addition, you also will receive updated
prospectuses or supplements to this prospectus. The
15
<PAGE>
securities described in this prospectus and the SAI are not offered in any state
in which they may not be sold lawfully. No sales representative, dealer, or
other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.
OTHER SECURITIES IN WHICH THE FUND MAY INVEST AND INVESTMENT TECHNIQUES
The majority of the Fund's portfolio is made up of equity securities; however,
the Fund also is permitted to invest in the securities discussed below and in
the SAI.
The Fund may, for temporary defensive purposes, invest up to 100% of its assets
in cash, cash equivalents, and money market instruments.
OTHER SECURITIES IN WHICH THE FUND MAY INVEST
ASSET-BACKED SECURITIES--Asset-backed securities are a form of complex security.
The securitization techniques used for asset-backed securities are similar to
those used for mortgage-related securities. Asset-backed securities present
certain risks that are not presented by mortgage-backed securities. Primarily,
these securities may provide the Fund with a less effective security interest in
the related collateral than do mortgage-backed securities. Therefore, there is
the possibility that recoveries on the underlying collateral may not, in some
cases, be available to support payments on these securities.
CONVERTIBLE SECURITIES--Convertible securities have characteristics similar to
both fixed-income and equity securities. Convertible securities include bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted, or exchanged.
CORPORATE DEBT SECURITIES--Corporate debt securities include corporate bonds,
debentures, notes, and other similar instruments, including convertible
securities. Debt securities may be acquired with warrants attached. Corporate
income-producing securities also may include forms of preferred or preference
stock.
ILLIQUID SECURITIES--The Fund will not invest more than 10% of its net assets in
illiquid securities, not including restricted securities sold pursuant to Rule
144A, as described below.
INVESTMENT COMPANIES--The Fund may invest in securities issued by other
investment companies. Under the Investment Company Act, the Fund's investment in
such securities, subject to certain exceptions, currently is limited to (i) 3%
of the total voting stock of any one investment company, (ii) 5% of the Fund's
total assets with respect to any one investment company, (iii) 10% of the Fund's
total assets in the aggregate, and (iv) 100% of the Fund's total assets in
another investment company with a similar investment objective. Investments in
the securities of other investment companies may involve duplication of advisory
fees and certain other expenses.
MONEY MARKET INSTRUMENTS--The Fund may invest in the following types of money
market instruments:
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities that differ in their interest rates, maturities and times of
issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others
only by the credit of the agency or instrumentality.
BANK OBLIGATIONS. The Fund may purchase certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations, and other banking institutions.
16
<PAGE>
Commercial Paper. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
MORTGAGE-RELATED SECURITIES--Mortgage-related securities are secured, directly
or indirectly, by pools of mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others,
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The mortgage-related securities in
which the Fund may invest include the following:
o COMMERCIAL MORTGAGE-RELATED SECURITIES. The Fund may invest in commercial
mortgage-related securities, which generally are multi-class debt or
pass-through certificates secured by mortgage loans on commercial
properties.
o RESIDENTIAL MORTGAGE-RELATED SECURITIES. The Fund may invest in
mortgage-related securities representing participation interests in pools
of one- to four-family residential mortgage loans issued or guaranteed by
governmental agencies or instrumentalities, such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"), or
issued by private entities.
o COLLATERAL MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES.
Collateralized mortgage obligations or "CMOs" are multiclass bonds backed
by pools of mortgage pass-through certificates or mortgage loans.
RESTRICTED SECURITIES--The Fund may invest in securities that are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"). These securities are
sometimes referred to as private placements. Although securities which may be
resold only to "qualified institutional buyers" in accordance with the
provisions of Rule 144A under the 1933 Act are technically considered
"restricted securities," the Fund may purchase Rule 144A securities without
regard to the limitation on investments in illiquid securities described above,
provided that a determination is made that such securities have a readily
available trading market. E.I.I. will determine the liquidity of Rule 144A
securities under the supervision of the Fund's Board of Trustees. The liquidity
of Rule 144A securities will be monitored by E.I.I., and if as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holdings of illiquid securities will be reviewed to determine
what, if any, action is required to assure that the Fund does not exceed the
applicable percentage limitation for investments in illiquid securities.
ZERO COUPON SECURITIES--The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically and are likely to respond to a greater degree to changes in
interest rates than non-zero coupon securities having similar maturities and
credit qualities.
INVESTMENT TECHNIQUES
FORWARD COMMITMENTS--The Fund may purchase or sell securities on a forward
commitment, when-issued, or delayed delivery basis, which means delivery and
payment take place a number of days after the date of the commitment to purchase
or sell the securities at a predetermined price and/or yield. The Fund intends
to engage in forward commitments to increase its portfolio's financial exposure
to the types of securities in which it invests. Leveraging the portfolio in this
manner will increase the Fund's exposure to changes in interest rates and will
increase the volatility of its returns. At no time will the Fund have more than
15% of its assets committed to purchase securities on a forward commitment
basis.
LENDING PORTFOLIO SECURITIES--The Fund may lend securities from its portfolio to
brokers, dealers, and other financial institutions needing to borrow securities
to complete certain transactions. Loans of portfolio securities may not exceed
33-1/3% of the value of the Fund's total assets.
LEVERAGE--Leveraging exaggerates the effect on net asset value of any increase
or decrease in the market value of the Fund's portfolio. The Fund may borrow on
a short term basis in order to meet redemptions. Money borrowed for such
purposes is limited to 33-1/3% of the value of the Fund's total assets.
Typically, the Fund borrows by entering into reverse repurchase agreements with
banks, brokers, or dealers.
USE OF COMPLEX SECURITIES--The Fund may invest for hedging purposes in
derivative securities, such as futures and options. These instruments and
certain related risks are described more specifically under "Investment
Objective and Management Policies--Management Policies--Complex Securities" in
the Statement of Additional Information. Complex Securities can be volatile and
involve various types and degrees of risk, depending upon the characteristics of
the particular security and the portfolio as a whole. Such investments permit
the Fund to increase or decrease the level of risk, or change the character of
the risk, to which its portfolio is exposed in much the same way as the Fund can
increase or decrease the level of risk, or change the character of the risk, of
its portfolio by making investments in specific securities.
<PAGE>
Rule 497(c)
Registration No. 333-45959
STATEMENT OF ADDITIONAL INFORMATION
June 8, 1998
E.I.I. REALTY SECURITIES FUND
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information is incorporated by reference in its
entirety into the Prospectus and should be read in conjunction with the Trust's
current Prospectus, copies of which may be obtained by writing E.I.I. Realty
Securities Fund c/o PFPC Inc., P.O. Box 8910, Wilmington, DE 19899-8910 or
calling (888) 323-8912.
This Statement of Additional Information relates to the E.I.I.
Realty Securities Fund Prospectus which is dated June 8, 1998.
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES AND RISKS................................................ 2
INVESTMENT RESTRICTIONS...................................................... 3
MANAGEMENT................................................................... 4
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENTS........................ 5
DISTRIBUTION PLAN............................................................ 6
SHAREHOLDER SERVICING PLAN................................................... 7
ADMINISTRATIVE SERVICES AGREEMENT............................................ 7
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................... 8
ALLOCATION OF INVESTMENTS.................................................... 8
COMPUTATION OF NET ASSET VALUE............................................... 9
PURCHASE AND REDEMPTION OF SHARES............................................ 9
TAX MATTERS.................................................................. 9
PERFORMANCE CALCULATION......................................................14
GENERAL INFORMATION..........................................................15
REPORTS......................................................................16
<PAGE>
E.I.I. Realty Securities Trust (the "Trust") is a Delaware
business trust currently consisting of one series, E.I.I. Realty Securities Fund
(the "Fund"). The Fund is an open-end, non-diversified management investment
company. The Fund's investment objective is to provide the diversification and
total return potential of investments in real estate. The Fund will seek to
achieve this objective by buying the shares of companies whose business it is to
own, operate, develop, and manage real estate. Much of the information contained
in this Statement of Additional Information expands on subjects discussed in the
Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Fund's Prospectus.
INVESTMENT POLICIES AND RISKS
The following descriptions supplement the investment policies of the Fund set
forth in the Prospectus. The Fund's investments in the following securities and
other financial instruments are subject to the investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.
1. BORROWING
The Fund may, from time to time, borrow money to the maximum
extent permitted by the Investment Company Act of 1940, as amended (the
"Investment Company Act"), from banks at prevailing interest rates for temporary
or emergency purposes and investing in additional securities. The Fund's
borrowings are limited so that immediately after such borrowings the value of
assets (including borrowings) less liabilities (not including borrowings) is at
least three times the amount of the borrowings. Should the Fund, for any reason,
have borrowings that do not meet the above test, within three business days,
then the Fund must reduce such borrowings so as to meet the necessary test.
Under such a circumstance, the Fund may have to liquidate portfolio securities
at a time when it is disadvantageous to do so. Gains made with additional funds
borrowed generally will cause the net asset value of the Fund's shares to rise
faster than could be the case without borrowings. Conversely, if investment
results fail to cover the cost of borrowings, the net asset value of the Fund
could decrease faster than if there had been no borrowings.
2. REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements subject to
resale to a bank or dealer at an agreed upon price which reflects a net interest
gain for the Fund. The Fund will receive interest from the institution until the
time when the repurchase is to occur.
The Fund will always receive as collateral U.S. Government or
short-term money market securities whose market value is equal to at least 100%
of the amount invested by the Fund, and the Fund will make payment for such
securities only upon the physical delivery or evidence by book entry transfer to
the account of its custodian. If the seller institution defaults, the Fund might
incur a loss or delay in the realization of proceeds if the value of the
collateral securing the repurchase agreement declines and it might incur
disposition costs in liquidating the collateral. The Fund will attempt to
minimize such risks by entering into such transactions only with
well-capitalized financial institutions and specifying the required value of the
underlying collateral.
- 2 -
<PAGE>
Unlike the fundamental investment objective of the Fund set
forth above and the investment restrictions set forth below which may not be
changed without shareholder approval, the Fund has the right to modify the
investment policies described above without shareholder approval.
INVESTMENT RESTRICTIONS
The following fundamental policies and investment restrictions
have been adopted by the Fund and, except as noted, such policies and
restrictions cannot be changed without approval by the vote of a majority of the
outstanding voting shares of the Fund which, as defined by the Investment
Company Act, means the affirmative vote of the lesser of (a) 67% or more of the
shares of the Fund present at a meeting at which the holders of more than 50% of
the outstanding shares of the Fund are represented in person or by proxy or (b)
more than 50% of the outstanding shares of the Fund.
The Fund may not:
(1) issue senior securities;
(2) concentrate its investments in particular
industries other than the real estate industry. No more than
25% of the value of a Fund's assets will be invested in any
one industry other than the real estate industry. The Fund
will concentrate its investments in the real estate industry;
(3) make loans of money or securities other than (a)
through the purchase of publicly distributed bonds,
debentures, or other corporate or governmental obligations,
(b) by investing in repurchase agreements, and (c) by lending
its portfolio securities, provided the value of such loaned
securities does not exceed 33-1/3% of its total assets;
(4) borrow money in excess of 33-1/3% of the value of
a Fund's total assets from banks;
(5) buy or sell commodities or commodity contracts,
except the Fund may purchase or sell futures or options on
futures; and
(6) underwrite securities.
The following restrictions are non-fundamental and may be
changed by the Fund's Board of Trustees. Pursuant to such restrictions, the Fund
will not:
(1) make short sales of securities, other than short
sales "against the box," or purchase securities on margin
except for short-term credits necessary for clearance of
portfolio transactions, provided that this restriction will
not be applied to limit the use of options, futures contracts,
and related options, in the manner otherwise permitted by the
investment restrictions, policies, and investment program of
the Fund;
(2) purchase the securities of any other investment
company, if the Fund, immediately after such purchase or
acquisition, owns in the aggregate, (i) more than 3% of the
total outstanding voting stock of such investment company,
(ii) securities issued by such investment company having an
aggregate value in excess of 5% of the value of the total
assets of the Fund, (iii) securities issued by such investment
company and all
- 3 -
<PAGE>
other investment companies having an aggregate value in excess
of 10% of the value of the total assets of the Fund, or (iv)
unless the 100% of the total assets of the fund are invested
in the securities of another investment company with the same
investment objective;
(3) invest more than 10% of its net assets in
illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly
within seven days and in the usual course of business without
taking a materially reduced price. Such securities include,
but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A or securities offered
pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of
being unregistered. The Investment Adviser shall determine
whether a particular security is deemed to be liquid based on
the trading markets for the specific security and other
factors;
(4) invest more than 20% of its total assets in
securities of foreign issuers and ADRs are not considered to
be foreign securities for this purpose.
MANAGEMENT
The overall management of the business and affairs of the Fund
is vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust or the Fund and persons or companies
furnishing services to the Fund, including the Fund's agreement with an
investment adviser, custodian, and transfer agent. The day-to-day operations of
the Fund are delegated to the Fund's officers subject always to the investment
objectives and policies of each Fund and to general supervision by the Trust's
Board of Trustees.
The Trustees and officers and their principal occupations are
noted below. Unless otherwise indicated the address of each Trustee and
executive officer is 667 Madison Avenue, New York, New York 10021.
<TABLE>
<CAPTION>
Position(s) held Principal Occupation
Name, Address, and Age with the Fund During Past 5 Years
- ---------------------- ------------- -------------------
<S> <C> <C>
Richard J. Adler, Chairman of the Managing Director, E.I.I. Realty
667 Madison Avenue, Board of Trustees, Securities, Inc., June, 1993 to present;
New York, NY 10021, Chief Executive Managing Director, European Investors
51 Officer Incorporated and Vice President,
European Investors Corporate Finance,
Inc., April, 1983 to present.
David P. O'Connor Trustee, President, Managing Director, E.I.I. Realty
667 Madison Avenue, Treasurer Securities, Inc. and Vice President,
New York, NY 10021, European Investors Incorporated,
34 February, 1994 to present; Investment
Executive, Kidder, Peabody, and Co.,
Inc., 1992 to January, 1994
- 4 -
<PAGE>
Warren K. Greene, Trustee Senior Vice President,
One Fawcett Place, Suite 220 TrendLogic Associates, Inc.
Greenwich, CT 06830, January, 1995 to present; President,
62 Baker Weeks & Co., October, 1993 to
June, 1994.
Richard W. Hutson Trustee Retired/Part-time consultant to Hewitt
615 Innsbruck Court, Associates; November, 1996 to present;
Libertyville, IL 60048, Senior Principal, Hewitt Associates,
59 December, 1964 to October, 1996.
Samuel R. Karetsky, Trustee Managing Member, Samuel R. Karetsky
180 East 79th Street, LLC, March, 1997 to present;
New York, NY 10021, Managing Director, Morgan Stanley &
53 Co., June, 1995 to March, 1997;
Managing Director, OFFITBANK,
January, 1993 to June, 1995.
Cydney C. Donnell Vice President Managing Director, E.I.I. Realty
667 Madison Avenue, Securities, Inc., June, 1993 to present;
New York, NY 10021, Vice President, European Investors
39 Incorporated, and Vice President, EII
Realty Corp., September, 1986 to
present.
Peter J. Gavey Secretary Director of Business Development,
667 Madison Avenue, E.I.I. Realty Securities, Inc. February,
New York, NY 10021, 1998 to present; Director Rogers, Casey
31 Alternative Investments, May, 1993 to
February, 1998.
</TABLE>
The Fund may indemnify any person who was or is a Trustee,
officer, or employee of the Fund to the maximum extent permitted by the Delaware
business trust law; provided, however, that any such indemnification (unless
ordered by a court) shall be made by the Fund only as authorized in the specific
case upon a determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Board of Trustees, by
a majority vote of a quorum which consists of Trustees who are neither
"interested persons" of the Trust, as defined in Section 2(a)(19) of the
Investment Company Act, nor parties to the proceeding, or (ii) if the required
quorum is not obtained or if a quorum of such Trustees so directs, by
independent legal counsel in a written opinion. No indemnification will be
provided by the Fund to any Trustee or officer of the Fund for any liability to
the Fund or it shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of duty.
As of June 5, 1998, the Trustees and officers as a group did
not own beneficially any of the Fund's outstanding shares. Each disinterested
Trustee will receive $4,000 per annum and $1,500 per meeting, plus expenses of
attendance at Trustees meetings. "Interested" Trustees do not receive Trustees'
fees.
- 5 -
<PAGE>
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENTS
E.I.I. Realty Securities, Inc. (the "Investment Adviser" or
"E.I.I."), 667 Madison Avenue, New York, New York 10021, acts as the Investment
Adviser to the Fund under an investment advisory agreement (the "Agreement").
The Agreement provides that the Investment Adviser identify and analyze possible
investments for the Fund, determine the amount and timing of such investments,
and the form of investment. The Investment Adviser has the responsibility of
monitoring and reviewing the Fund's portfolio, and, on a regular basis, to
recommend the ultimate disposition of such investments. It is the Investment
Adviser's responsibility to cause the purchase and sale of securities in the
Fund's portfolio, subject at all times to the policies set forth by the Trust's
Board of Trustees. In addition, the Investment Adviser provides certain
administrative and managerial services to the Fund.
The Investment Adviser receives a fee from the Fund calculated
daily and payable monthly, for the performance of its services at an annual rate
of .75% of the average daily net assets of the Fund. The fee is accrued daily
for the purposes of determining the offering and redemption price of the Fund's
shares.
Under the terms of the Agreement, the Fund pays all of its
expenses (other than those expenses specifically assumed by the Investment
Adviser and the Fund's distributor) including the costs incurred in connection
with the maintenance of its registration under the Securities Act of 1933, as
amended, and the Investment Company Act, printing of prospectuses distributed to
shareholders, taxes or governmental fees, brokerage commissions, custodial,
transfer and shareholder servicing agents, expenses of outside counsel and
independent accountants, preparation of shareholder reports, and expenses of
Trustee and shareholder meetings.
The Agreement may be terminated without penalty on 60 days'
written notice by a vote of the majority of the Trust's Board of Trustees or by
the Investment Adviser, or by holders of a majority of the Fund's outstanding
shares. The Fund's Agreement will continue for two years from its effective date
and from year-to-year thereafter provided it is approved, at least annually, in
the manner described in the Investment Company Act. This requires that the
Agreement and any renewal thereof be approved by a vote of the majority of the
Fund's Trustees who are not parties thereto or interested persons of any such
party, cast in person at a meeting specifically called for the purpose of voting
on such approval.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule
12b-1 of the Investment Company Act (the "Plan") with respect to the Investor
shares of the Fund. The Plan provides that the Fund's Investor shares may incur
distribution expenses related to the sale of shares of up to .75% per annum of
the average daily net assets of the Fund's Investor shares.
The Plan provides that the Fund's Investor shares may finance
activities which are primarily intended to result in the sale of the Fund's
Investor shares, including, but not limited to, advertising, printing of
prospectuses and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature, and payments to
dealers and shareholder servicing agents including any affiliates who enter into
agreements with the Fund or its distributor.
In approving the Plan in accordance with the requirements of
Rule 12b-1 under the Investment Company Act, the Trustees (including the
"disinterested" Trustees, as defined in the Investment Company Act) considered
various factors and determined that there is a reasonable likelihood
- 6 -
<PAGE>
that the Plan will benefit the Fund and its shareholders. The Plan will continue
in effect from year to year if specifically approved annually (a) by the
majority of the Fund's outstanding Investor shares or by the Board of Trustees
and (b) by the vote of a majority of the disinterested Trustees. While the Plan
remains in effect, the Fund's Principal Financial Officer shall prepare and
furnish to the Board of Trustees a written report setting forth the amounts
spent by the Fund under the Plan and the purposes for which such expenditures
were made. The Plan may not be amended to increase materially the amount to be
spent for distribution without shareholder approval and all material amendments
to the Plan must be approved by the Board of Trustees and by the disinterested
Trustees cast in person at a meeting called specifically for that purpose. While
the Plan is in effect, the selection and nomination of the disinterested
Trustees shall be made by those disinterested Trustees then in office.
SHAREHOLDER SERVICING PLAN
The Fund has adopted a Shareholder Servicing Plan on behalf of
its Advisor Shares and Investor Shares. The Plan provides that the Fund may pay
financial institutions or other persons who provide certain services to the
Shares of the Fund (each, a "Service Provider") a shareholder services fee at
the annual rate of 0.25% of the average daily net assets of such Shares for
which the Service Provider provides services. Under the Plan, Service Providers
may make payments to financial institutions and other persons who provide
administrative services to their customers who may own Advisor or Investor
Shares of the Fund, which services may include, but are not limited to: (i)
establishing and maintaining accounts and records relating to shareholders; (ii)
processing dividend and distribution payments from the Fund on behalf of
shareholders; and (iii) responding to shareholder inquiries.
The Plan must be approved by a majority vote of the Board of
Trustees cast in person at a meeting called for the purpose of voting on the
Plan. The Plan will continue for two years from its effective date and from
year-to-year thereafter provided it is approved at least annually by the
Trustees of the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
E.I.I. will serve as the Fund's Administrator and has retained
PFPC, Inc. as the Sub- Administrator.
Administrator supervises administration of the Fund pursuant
to an Administrative Services Agreement with the Fund. Under the Administrative
Services Agreement, the Administrator supervises the administration of all
aspects of the Fund's operations, including the Fund's receipt of services for
which the Fund is obligated to pay, provides the Fund with general office
facilities, and provides, at the Fund's expense, the services of persons
necessary to perform such supervisory, administrative, and clerical functions as
are needed to operate the Fund effectively. Those persons, as well as certain
employees and Trustees of the Fund, may be directors, officers, or employees of
(and persons providing services to the Fund may include) E.I.I. and its
affiliates. For these services and facilities, E.I.I. receives with respect to
the Fund a fee computed and paid monthly at an annual rate of 0.25% of the
average daily net assets of the Fund, out of which E.I.I., and not the Fund,
pays the Sub- Administrator.
- 7 -
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, decisions
to buy and sell securities for the Fund are made by the Investment Adviser. The
Investment Adviser is authorized to allocate the orders placed by it on behalf
of the Fund to such unaffiliated brokers who also provide research or
statistical material or other services to the Fund or the Investment Adviser for
the Fund's use. Such allocation shall be in such amounts and proportions as the
Investment Adviser shall determine and the Investment Adviser will report on
said allocations regularly to the Board of Trustees indicating the unaffiliated
brokers to whom such allocations have been made and the basis therefor. In
addition, the Investment Adviser may consider sales of shares of the Fund and of
any other funds advised or managed by the Investment Adviser as a factor in the
selection of unaffiliated brokers to execute portfolio transactions for the
Fund, subject to the requirements of best execution. At times, the Fund also may
purchase portfolio securities directly from dealers acting as principals,
underwriters, or market makers. As these transactions are usually conducted on a
net basis, no brokerage commissions are paid by the Fund.
In selecting a broker to execute each particular transaction,
the Investment Adviser will take the following into consideration: the best net
price available; the reliability, integrity, and financial condition of the
broker; the size and difficulty in executing the order; and the value of the
expected contribution of the broker to the investment performance of the Fund on
a continuing basis. Accordingly, the cost of the brokerage commissions to the
Fund in any transaction may be greater than that available from other brokers if
the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the Board
of Trustees may determine, the Investment Adviser shall not be deemed to have
acted unlawfully or to have breached any duty solely by reason of its having
caused the Fund to pay an unaffiliated broker that provides research services to
the Investment Adviser for the Fund's use an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission another
broker would have charged for effecting the transaction, if the Investment
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the research service provided by such broker viewed
in terms of either that particular transaction of the Investment Adviser's
ongoing responsibilities with respect to the Fund.
ALLOCATION OF INVESTMENTS
The Investment Adviser has other advisory clients, some of
which have similar investment objectives to the Fund. As such, there will be
times when the Investment Adviser may recommend purchases and/or sales of the
same portfolio securities for the Fund and its other clients. In such
circumstances, it will be the policy of the Investment Adviser to allocate
purchases and sales among the Fund and its other clients in a manner which the
Investment Adviser deems equitable, taking into consideration such factors as
size of account, concentration of holdings, investment objectives, tax status,
cash availability, purchase cost, holding period, and other pertinent factors
relative to each account. Simultaneous transactions may have an adverse effect
upon the price or volume of a security purchased by the Fund.
- 8 -
<PAGE>
COMPUTATION OF NET ASSET VALUE
The Fund will determine the net asset value of its shares once
daily as of the close of trading on the New York Stock Exchange (the "Exchange")
on each day that the Exchange is open. It is expected that the Exchange will be
closed on Saturdays and Sundays and on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The Fund may make or cause to be made a more frequent
determination of the net asset value and offering price, which determination
shall reasonably reflect any material changes in the value of securities and
other assets held by the Fund from the immediately preceding determination of
net asset value. The net asset value is determined by dividing the market value
of the Fund's investments as of the close of trading plus any cash or other
assets (including dividends receivable and accrued interest) less all
liabilities (including accrued expenses) by the number of the Fund's shares
outstanding. Securities traded on the New York Stock Exchange or the American
Stock Exchange will be valued at the last sale price, or if no sale, at the mean
between the latest bid and asked price. Securities traded in any other U.S. or
foreign market shall be valued in a manner as similar as possible to the above,
or if not so traded, on the basis of the latest available price. Securities sold
short "against the box" will be valued at market as determined above; however,
in instances where the Fund has sold securities short against a long position in
the issuer's convertible securities, for the purpose of valuation, the
securities in the short position will be valued at the "asked" price rather than
the mean of the last "bid" and "asked" prices. Where there are no readily
available quotations for securities they will be valued at a fair value as
determined by the Board of Trustees acting in good faith.
PURCHASE AND REDEMPTION OF SHARES
A complete description of the manner by a which the Fund's
shares may be purchased and redeemed appears in the Prospectus under the
headings "Purchase of Shares" and "Redemption of Shares" respectively.
TAX MATTERS
The following is only a summary of certain additional federal
income tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund will elect to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund will not be subject to
federal income tax on the portion of its net investment income (i.e., taxable
interest, dividends, and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
for a taxable year that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
Distributions by the Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions
- 9 -
<PAGE>
of income and gains of the taxable year and will, therefore, count towards
satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities),
and other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies.
The Fund also must satisfy an asset diversification test in
order to qualify as a regulated investment company. Under this test, at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (limited, for this purpose, in respect of any one issuer to no
more than 5% of the value of the Fund's total assets and to no more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of its total assets may be invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or of two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option with
respect to a security is treated as issued by the issuer of the security rather
than the issuer of the option.
If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company to the extent that it fails to distribute in each calendar
year an amount equal to 98% of its ordinary income for such calendar year and
98% of its capital gain net income for the one-year period ended on October 31
of such calendar year (or, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for
- 10 -
<PAGE>
the excise tax. However, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
Fund Distributions
Distributions by the Fund from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income. To the
extent attributable to qualifying dividends received by the Fund, ordinary
income dividends may qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax). However, because
distributions received by the Fund from real estate investment trusts ("REITs")
are not qualifying dividends, distributions by the Fund generally will not be
eligible for the dividends-received deduction. In addition, a dividend received
by the Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less than
46 days (91 days in the case of certain preferred stock), excluding for this
purpose under the rules of Code section 246(c)(3) and (4) any period during
which the Fund has an option to sell, is under a contractual obligation to sell,
has made and not closed a short sale of, is the grantor of a deep-in-the-money
or otherwise nonqualified option to buy, or has otherwise diminished its risk of
loss by holding other positions with respect to such (or substantially
identical) stock; (2) to the extent that the Fund is under an obligation
(pursuant to a short sale or otherwise) to make related payments with respect to
positions in substantially similar or related property; or (3) to the extent
that the stock on which the dividend is paid is treated as debt-financed under
the rules of Code section 246A. The 46-day holding period must be satisfied
during the 90-day period beginning 45 days prior to each applicable ex-dividend
date; the 91-day holding period must be satisfied during the 180-day period
beginning 90 days before each applicable ex-dividend date. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent that it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder generally will be required
to take the full amount of any dividend received from the Fund into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Distributions by the Fund from net long-term capital gains are
taxable to a shareholder as long-term capital gains regardless of the length of
time the shares on which such distributions are paid have been held by the
shareholder. However, shareholders should note that any loss realized upon the
sale or redemption of shares held for six months or less will be treated as a
long-term capital loss to the extent of any distribution of long-term capital
gain to the shareholder with respect to such shares.
- 11 -
<PAGE>
If the Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Distributions by the Fund that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund. Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the Fund into account in the year in which the distributions are made. However,
dividends declared in October, November, or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Backup Withholding
The Fund will be required in certain cases to withhold and
remit to the Internal Revenue Service 31% of ordinary income dividends and
capital gain dividends and the proceeds of redemption of shares paid to any
shareholder (1) who failed to provide to the Fund a correct taxpayer
identification number, (2) who is subject to backup withholding for failure to
report properly the receipt of interest or dividend income, or (3) who has
failed to certify to the Fund that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Redemption of Shares
A shareholder will recognize gain or loss on the redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the redemption and the shareholder's adjusted tax basis in the shares redeemed.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the
redemption. In general, any gain or loss arising from (or treated as arising
from) the redemption of shares of the Fund will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rates applicable to capital gains if the
holder has held such shares for more than 18 months at the time
- 12 -
<PAGE>
of the redemption. Any capital loss arising from the redemption of shares held
for six months or less will be treated as a long-term capital loss to the extent
of the amount of capital gain dividends received on such shares. For this
purpose, the special holding period rules of Code section 246(c)(3) and (4)
(discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of shares.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Taxation of Certain Mortgage REITs
The Fund may invest in REITs that hold residual interests in
real estate mortgage investment conduits ("REMICs"). Under Treasury Regulations
that have not yet been issued, but may apply retroactively, the portion of the
Fund's income from a REIT that is attributable to the REIT's residual interest
in a REMIC (referred to in the Code as an "excess inclusion") will be allocated
to shareholders of the Fund in proportion to the dividends received by them with
the same consequences as if the shareholders held their proportionate share of
the REMIC residual interest directly. In general, excess inclusion income
allocated to shareholders (1) cannot be offset by net operating losses (subject
to a limited exception for certain thrift institutions) and (2) will constitute
unrelated business taxable income to entities that are subject to tax on
unrelated business income (including a qualified pension plan, an individual
retirement account, a 401(k) plan, a Keogh plan, or other tax-exempt entity),
thereby potentially requiring such entity to file a federal income tax return
and remit tax on its excess inclusion income. In addition, if at any time during
any taxable year a "disqualified organization" (as defined in the Code) is a
record holder of a share in the Fund, then the Fund will be subject to tax, at
the highest federal income tax rate imposed on corporations, on that portion of
its excess inclusion income for the taxable year that is allocable to the
disqualified organization.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to such foreign shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount
of the dividend. Such foreign shareholder generally would be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Fund, capital
gain dividends, and amounts retained by the Fund that are designated as
undistributed capital gains.
If the income from the Fund is (or is treated as) effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then ordinary income dividends, capital gain dividends, and any gains realized
upon the sale of shares of the Fund will be subject to U.S. federal income tax
at the rates applicable to U.S. citizens or domestic corporations. If at least
50% of the value of the Fund is represented by shares of REITs that are
"domestically controlled" within the meaning of section 897(h) of the Code or is
represented by shares of classes of REIT stock that (1) constitute not more than
5% of such classes and (2) are "regularly traded on an established securities
market" within the meaning of section 897(c)(3) of the Code, a foreign
shareholder should not be subject to withholding tax under the Foreign
Investment in Real Property Tax Act ("FIRPTA") with respect to gain arising from
the sale or redemption of shares. In addition, foreign shareholders should not
be subject to withholding under FIRPTA on distributions of the Fund's net
capital gain (designated as capital gain by the Fund).
- 13 -
<PAGE>
In the case of foreign shareholders other than corporations,
the Fund may be required to withhold U.S. federal income tax at a rate of 31% on
distributions and the proceeds of redemptions that are otherwise exempt from
withholding tax (or taxable at a reduced treaty rate) unless such shareholders
furnish the Fund with proper notification of their foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies may differ from
the rules for U.S. federal income taxation described above. Shareholders are
urged to consult their tax advisers as to the consequences of these and other
state and local tax rules affecting investment in a Fund.
PERFORMANCE CALCULATION
For purposes of quoting and comparing the performance of the
Fund to that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be stated in terms
of total return. Under rules promulgated by the Securities and Exchange
Commission ("SEC"), a fund's advertising performance must include total return
quotations calculated according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5, or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment, made at
the beginning of the 1, 5, or 10
year period, at the end of such
period (or fractional portion
thereof.)
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters, updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover 1, 5, and 10 year periods of the Fund's existence or
such shorter period dating from the effectiveness of the Fund's Registration
Statement. In calculating the ending redeemable value, all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the Prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value. Any recurring account charges that might in the future
be imposed by the Fund would be included at that time.
- 14 -
<PAGE>
In addition to the total return quotations discussed above,
the Fund may advertise its yield based on a 30-day (or one month) period ended
on the date of the most recent balance sheet included in the Fund's
Post-Effective Amendment to its Registration Statement, computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
a-b
YIELD = 2[( ----- +1)^6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (1) computing the yield to maturity of
each obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the Fund's portfolio (assuming a month of 30 days), and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the SEC's
rules. In addition, all advertisements containing performance data of any kind
will include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
GENERAL INFORMATION
ORGANIZATION AND DESCRIPTION OF SHARES OF THE FUND
The Trust was organized as a Delaware business trust under the
laws of the state of Delaware. The Trust's Certificate of Trust was filed
December 22, 1997. The Trust's Declaration of Trust, dated as of December 22,
1997, permits the Trustees to issue an unlimited number of shares of beneficial
interest with a par value of $0.01 per share in the Trust in an unlimited number
of series of shares. The Trust consists of one series, E.I.I. Realty Securities
Fund. Each share of beneficial interest has one vote and shares equally in
dividends and distributions when and if declared by the Fund and in the Fund's
net assets upon liquidation. All shares, when issued, are fully paid and
nonassessable. There are no preemptive, conversion, or exchange rights. Fund
shares do not have cumulative voting rights
- 15 -
<PAGE>
and, as such, holders of at least 50% of the shares voting for Trustees can
elect all Trustees and the remaining shareholders would not be able to elect any
Trustees. The Board of Trustees may classify or reclassify any unissued shares
of the Trust into shares of any series by setting or changing in any one or more
respects, from time to time, prior to the issuance of such shares, the
preference, conversion, or other rights, voting powers, restrictions,
limitations as to dividends, or qualifications of such shares. Any such
classification or reclassification will comply with the provisions of the
Investment Company Act. Shareholders of each series as created will vote as a
series to change, among other things, a fundamental policy of the Fund and to
approve the Investment Advisory Agreement and Distribution Plan.
The Trust is not required to hold annual meetings of
shareholders but will hold special meetings of shareholders when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders also
have, in certain circumstances, the right to remove one or more Trustees without
a meeting.
REPORTS
Shareholders receive reports at least semi-annually showing
the Fund's holdings and other information. In addition, shareholders receive
annual financial statements that have been audited by the Fund's independent
auditors.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Trustees
E.I.I. Realty Securities Fund
We have audited the accompanying statement of assets and liabilities of E.I.I.
Realty Securities Fund (the "Fund"), a series of the E.I.I. Realty Securities
Trust, as of May 11, 1998. This statement of assets and liabilities is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this statement of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material aspects, the financial position of E.I.I.
Realty Securities Fund at May 11, 1998, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
June 1, 1998
<PAGE>
FINANCIAL STATEMENT
E.I.I. Realty Securities Trust
Statement of Assets and Liabilities
May 11, 1998
E.I.I. Realty
Securities Fund
---------------
Assets:
Cash.................................................. $100,000
Deferred organization expenses (Note 1)............... 182,799
-------
Total Assets....................................... 282,799
-------
Liabilities:
Organization expenses payable (Note 1)................ 182,799
-------
Net Assets: $100,000
=======
Net Assets:
Common Stock, $0.01 par value,
unlimited shares authorized;
10,000 shares (Institutional
Class) issued and outstanding ........................ $ 100
Capital surplus....................................... 99,900
--------
Net Assets............................................ $100,000
=======
Net Asset value per share............................. $ 10.00
========
NOTE 1
E.I.I. Realty Securities Trust was incorporated in the State of
Delaware on December 22, 1997 and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. E.I.I. Realty
Securities Trust may offer one or more portfolios of its shares; at present only
shares of E.I.I. Realty Securities Fund (the "Fund") are being offered. The Fund
may offer three classes of shares; Institutional, Adviser and Investor. Shares
of all classes represent equal pro-rata interests in the Fund, except that each
class will bear different expenses which will reflect the difference in the
range of services to be provided to them.
<PAGE>
Costs incurred and to be incurred in connection with the organization
of E.I.I. Realty Securities Trust and the Fund will be paid or advanced by E.I.I
Realty Securities, Inc. and reimbursed by the Fund over a period of not more
than five years. Organizational costs will be deferred and amortized on a
straight line basis over a period not to exceed five years from the commencement
of the Fund's operations. If any of the 10,000 initial shares (the "Initial
Shares") of the Fund are redeemed by a holder thereof during the amortization
period, the redemption proceeds will be reduced by the pro-rata share of the
unamortized organizational expenses in the same ratio as the number of Initial
Shares being redeemed bears to the number of Initial Shares outstanding at the
time of redemption. As of May 11, 1998, the Fund has had no operations other
than the sale to E.I.I. Realty Securities, Inc. of 10,000 Institutional Shares
for $100,000 on May 11, 1998.
NOTE 2
The Fund has entered into an Investment Advisory Agreement with E.I.I.
Realty Securities, Inc. (the "Adviser" or "E.I.I.") for day-to-day portfolio
management services to be provided by the Adviser. The Investment Advisory
Agreement provides for the Adviser to receive a fee calculated daily and payable
monthly at an annual rate of 0.75% of the Fund's average daily net assets. The
Investment Advisory Agreement will initially be effective for a two-year period
and thereafter will be approved on an annual basis.
E.I.I. will also provide administrative services to the Fund. Under the
Administrative Services Agreement, E.I.I. will receive a fee payable monthly at
an annual rate of 0.25% of the Fund's average daily net assets for the Adviser
and Investor Share Classes and reduced to 0.15% for the Institutional Share
Class. E.I.I. has entered into a sub-administration contract with PFPC Inc.
under which E.I.I. pays PFPC Inc. to provide certain administrative services to
E.I.I.
The Fund has also adopted a Distribution and Service Plan for the
Investor Share Class under which the Fund may pay up to 0.75% of the average
daily net assets of the Investor Share Class for distribution assistance.
The Fund has adopted a Shareholder Servicing Plan for the Adviser and
Investor Share Classes. Under the Shareholder Servicing Plan, the Adviser will
provide shareholder services to its clients that invest in the Fund. The Fund
may also enter into shareholder service agreements pursuant to which a
shareholder servicing agent other than the Adviser performs shareholder services
for its customers who are shareholders of the Fund. In exchange for these
services, the Fund pays up to 0.25% of the average daily net assets of the
Adviser or Investor Shares serviced by the Adviser or the agent (collectively,
the "Shareholder Servicing Agents"). Shareholder Servicing Agents may waive all
or a portion of their fee periodically.
