<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON: March 1, 2000
REGISTRATION NO. 333-58979/811-08875
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]
---------------
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
KATHERINE L. STONER, ESQ.
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 526-5251
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
THE CORPORATION TRUST COMPANY
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
Copy to: JOHN A. DUDLEY, ESQ.
SULLIVAN & WORCESTER, LLP 1025
CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
---------------
It is proposed that this filing will become effective (check
appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on March 1, 2000 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
---------------
================================================================================
<PAGE> 2
American General Series Portfolio Company 2
Class A Shares
Class B Shares
March 1, 2000
The American General Series Portfolio Company 2 (the "Series Company") is an
open-end mutual fund made up of separate Funds (the "Funds"). In this
prospectus, "we", "us", and "our" refers to the American General Fund Group.
ACTIVELY MANAGED EQUITY FUNDS:
THESE FUNDS INVEST MOSTLY IN STOCKS AND ARE DESIGNED TO INCREASE THE VALUE OF
YOUR INVESTMENT OVER THE LONG TERM.
American General International Growth Fund ("International Growth Fund")
American General International Value Fund ("International Value Fund")
American General Large Cap Growth Fund ("Large Cap Growth Fund")
American General Large Cap Value Fund ("Large Cap Value Fund")
American General Mid Cap Growth Fund ("Mid Cap Growth Fund")
American General Mid Cap Value Fund ("Mid Cap Value Fund")
American General Small Cap Growth Fund ("Small Cap Growth Fund")
American General Small Cap Value Fund ("Small Cap Value Fund")
American General Socially Responsible Fund ("Socially Responsible Fund")
BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")
INCOME FUNDS:
THESE FUNDS ARE DESIGNED TO PROVIDE CURRENT INCOME WHILE CONSERVING CAPITAL.
American General Core Bond Fund ("Core Bond Fund")
American General Domestic Bond Fund ("Domestic Bond Fund")
American General High Yield Bond Fund ("High Yield Bond Fund")
American General Municipal Bond Fund ("Municipal Bond Fund")
American General Strategic Bond Fund ("Strategic Bond Fund")
INDEX EQUITY FUNDS:
THESE FUNDS TRACK DIFFERENT INDICES IN ORDER TO PROVIDE GROWTH OVER THE LONG
TERM.
American General Mid Cap Index Fund ("Mid Cap Index Fund")
American General Small Cap Index Fund ("Small Cap Index Fund")
American General Stock Index Fund ("Stock Index Fund")
LIFESTYLE FUNDS:
THESE FUNDS ALLOCATE ASSETS TO OTHER AMERICAN GENERAL FUNDS IN ORDER TO PROVIDE
A DIVERSIFIED, LESS RISKY INVESTMENT.
American General Conservative Growth Lifestyle Fund ("Conservative Growth
Lifestyle Fund")
American General Growth Lifestyle Fund ("Growth Lifestyle Fund")
American General Moderate Growth Lifestyle Fund ("Moderate Growth Lifestyle
Fund")
MONEY MARKET FUNDS:
THESE FUNDS PROVIDE LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")
American General Municipal Money Market Fund ("Municipal Money Market Fund")
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The SEC maintains an internet website at http://www.sec.gov that contains the
Statement of Additional Information ("SAI"), material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 9
Domestic Bond Fund 13
Growth Lifestyle Fund 16
High Yield Bond Fund 20
International Growth Fund 23
International Value Fund 25
Large Cap Growth Fund 28
Large Cap Value Fund 31
Mid Cap Growth Fund 33
Mid Cap Index Fund 36
Mid Cap Value Fund 38
Moderate Growth Lifestyle Fund 41
Money Market Fund 44
Municipal Bond Fund 46
Municipal Money Market Fund 49
Small Cap Growth Fund 51
Small Cap Index Fund 54
Small Cap Value Fund 57
Socially Responsible Fund 60
Stock Index Fund 63
Strategic Bond Fund 65
MORE ABOUT PORTFOLIO INVESTMENTS 68
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 73
SHAREHOLDER ACCOUNT INFORMATION 78
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 86
FINANCIAL HIGHLIGHTS 99
</TABLE>
2
<PAGE> 4
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE
- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Balanced
INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks balanced accomplishment of (i) conservation of principal and (ii)
long-term growth of capital and income through investment in fixed-income and
equity securities. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in a combination of fixed-income and equity securities in order
to maintain the value of your principal investment and provide you with capital
growth and income over the long term. We select securities for the Fund's
portfolio by identifying fixed-income (bonds and preferred stock) and equity
(stock) securities that represent fundamental values at reasonable prices. We
implement this philosophy using a system of portfolio managers, under which a
different group of portfolio managers makes investment decisions for the
fixed-income and equity portions of the Fund.
Fixed-income Portion: Up to 75% of the Fund's total assets may be invested in
fixed-income securities rated A or better by Moody's Investors Service
("Moody's") or Standard & Poor ("S&P") or of comparable investment quality. The
Sub-Adviser is not required to sell the security, however, if the rating is
downgraded. At all times, at least 25% of the Fund's total assets are invested
in fixed-income senior securities. The Fund may hold up to 20% of its total
assets in high-yielding, high risk fixed-income securities ("junk bonds").
Equity Portion: Up to 75% of the Fund's total assets may be invested in equity
securities listed on national securities exchanges or in the national
over-the-counter market, NASDAQ. Equity securities include American Depositary
Receipts ("ADRs"), which are certificates issued by a U.S. depositary bank,
representing foreign shares held by the bank. ADRs carry the same currency,
political and economic risks as the underlying foreign shares. Up to 10% of the
Fund's total assets may be invested in the securities of U.S. small
capitalization companies ("Small Caps"). Small Caps are companies that have
total assets (capitalization) of approximately $150 million to $1.25 billion.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
3
<PAGE> 5
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities involves significantly greater credit risk, market risk
and interest rate risk than higher rated fixed-income securities, achievement of
the Fund's investment objective is dependent upon the Sub-Adviser's investment
analysis. Accordingly, the Fund's investments may be worth less than what the
Fund paid for them.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 BALANCED FUND GRAPH]
ANNUAL RETURN CLASS A = 12.03%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 6.69%
Worst Quarter: Class A 3rd 1999 (5.14)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a broad measure of market performance
and to a blend of two indices ("Balanced Blend"). The Balanced Blend is composed
of 40% Lehman Brothers Government and Corporate Index and 60% S&P 500 Index.
Each is a widely recognized, unmanaged index. The average total return table
shows returns with the maximum front-end sales charge deducted. No sales charge
has been applied to the indices used for comparison in the table. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 9.07%
Average Annual Total Return Class B: 9.42%
40% Lehman Brothers Government and
Corporate Bond/60% S&P 500 14.64%
</TABLE>
4
<PAGE> 6
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(1) 5%-Footnote(2)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
------------------------------ ------- -------
<S> <C> <C>
Management fees 0.80% 0.80%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.42% 0.96%
----- -----
Total annual fund operating expenses 2.47% 2.76%
===== =====
Fee waiver and/or expense reimbursement (1.40)% (0.94)%
----- -----
Net Expenses 1.07% 1.82%
===== =====
</TABLE>
- ---------------
(1) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% contingent deferred sales charge ("CDSC"). Redemptions within 2
years will be charged a CDSC of 0.50%.
(2) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$678 $896 $1,132 $1,810
Class B 1 Year 3 Years 5 Years 10 Years
$701 $903 $1,103 $2,142
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$185 $573 $986 $2,142
</TABLE>
- --------------------------------------------------------------------------------
CONSERVATIVE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Growth Lifestyle Fund or the
Moderate Growth Lifestyle Fund. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
5
<PAGE> 7
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 5%-15%
(These Funds invest at least 65% in non-U.S.
companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the Investment Company
Act of 1940 (the "1940 Act") because it invests in a limited number of the
Underlying Funds. However, the Underlying Funds themselves are diversified
companies.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
6
<PAGE> 8
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
7
<PAGE> 9
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[CONSERVATIVE GROWTH LIFESTYLE GRAPH]
ANNUAL RETURN CLASS A = 13.70%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 10.88%
Worst Quarter: Class A 3rd 1999 (2.95)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: 5.84%
Average Annual Total Return Class B: 7.21%
Conservative Growth Lifestyle Blended
Benchmark 12.32%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(3) 5%-Footnote(4)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.10% 0.10%
Distribution and service (12b-1) fees None None
Other expenses 0.00% 0.00%
---- ----
Total annual fund operating expenses 0.10% 0.10%
==== ====
</TABLE>
- ---------------
(3) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(4) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.
8
<PAGE> 10
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.12% 1.87%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed-income securities. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in medium to high quality
fixed-income securities rated investment grade or higher, or in securities
issued or guaranteed by the U.S. Government, mortgage-backed or asset-backed
securities. U.S. Government securities are securities issued or guaranteed by
the U.S. Government which are supported by the full faith and credit of the U.S.
Government; the right of the issuer to borrow from the U.S. Treasury; the credit
of the issuing government agency; or the authority of the U.S. Government to
purchase obligations of the agency. A portion of the 65% may also be invested in
U.S. dollar-denominated fixed-income securities issued by foreign issuers,
although the Fund currently intends to limit these investments to no more than
40% of its total assets. The Sub-Adviser is not required to dispose of a
security if its rating is downgraded. Up to 10% of the Fund's total assets may
be invested in lower quality fixed-income securities ("junk bonds"), those rated
below Baa3 by Moody's and BBB by S&P.
Up to 35% of the Fund's total assets may be invested in interest-bearing
short-term investments, such as commercial paper, bankers' acceptances, bank
certificates of deposit, and other cash equivalents and cash. Equity securities,
including common or preferred stocks, convertible securities, and warrants, may
comprise up to 20% of the Fund's total assets. See "More About Portfolio
Investments."
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, 469% for the fiscal year ended October 31, 1999.
The rate of portfolio turnover is calculated by dividing the lesser of the
amount of purchases or sales of
9
<PAGE> 11
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's
10
<PAGE> 12
current financial condition, which may be better or worse than the rating
indicates. Credit ratings are only one factor VALIC or a Sub-Adviser relies on
in evaluating lower-rated fixed-income securities. The analysis by VALIC or the
Sub-Adviser of a lower rated security may also include consideration of the
issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, regulatory concerns, and
responsiveness to changes in business conditions and interest rates. VALIC or
the Sub-Adviser also may consider relative values based on anticipated cash
flow, interest or dividend coverage, balance sheet analysis, and earnings
prospects.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[CORE BOND FUND GRAPH]
ANNUAL RETURN CLASS A = (1.04)%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 3rd 1999 0.40%
Worst Quarter: Class A 2nd 1999 (1.25)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (5.24)%
Average Annual Total Return Class B: (5.99)%
Lehman Brothers Aggregate Bond Index 0.53%
</TABLE>
11
<PAGE> 13
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(5) 5%-Footnote(6)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
------------------------------ ------- -------
<S> <C> <C>
Management fees 0.48% 0.48%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.86% 0.74%
----- -----
Total annual fund operating expenses 1.59% 2.22%
===== =====
Fee waiver and/or expense reimbursement (0.54)% (0.42)%
----- -----
Net Expenses 1.05% 1.80%
===== =====
</TABLE>
- ---------------
(5) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(6) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$577 $793 $1,028 $1,701
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>
12
<PAGE> 14
- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments primarily in investment grade fixed-income securities and
other income producing securities. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in investment grade U.S.
corporate fixed-income securities, rated at least A by Moody's or S&P, in
securities issued or guaranteed by the U.S. Government, Yankee bonds, or in
mortgage-backed or asset-backed securities. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. The
Sub-Adviser is not required to dispose of a security if its rating is
downgraded.
Up to 35% of total assets may be invested in non-U.S. investment grade
intermediate and long-term corporate fixed-income securities rated at least A by
Moody's or S&P, including Eurodollar fixed-income securities, securities issued
or guaranteed by the Canadian Government, its provinces or their
instrumentalities, or interest bearing short-term investments, such as
commercial paper, bankers' acceptances, bank certificates of deposit and other
cash equivalents and cash. Currently, Eurodollar fixed-income securities will be
limited to no more than 20% of the Fund's total assets.
To increase the Fund's earning potential, we may use up to 25% of the Fund's
assets to make some higher risk investments in mortgage-related securities or
bonds rated less than A by Moody's or S&P. No minimum rating requirement applies
to these junk bonds. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
13
<PAGE> 15
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[AG 2 BALANCED FUND GRAPH]
ANNUAL RETURN CLASS A = (3.31)%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 3rd 1999 (0.35)%
Worst Quarter: Class A 1st 1999 (1.60)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
14
<PAGE> 16
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: (6.03)%
Average Annual Total Return Class
B: (6.58)%
Lehman Brothers Aggregate Bond
Index 0.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(7) 5%-Footnote(8)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.60% 0.60%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.45% 0.95%
----- -----
Total annual fund operating expenses 2.30% 2.55%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.27)% (0.77)%
----- -----
Net Expenses 1.03% 1.78%
----- -----
----- -----
</TABLE>
- ---------------
(7) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(8) A CDSC is imposed on the proceeds of Class B shares redeemed within 5 years,
subject to certain exceptions. The charge is a percentage of net asset value at
the time of purchase or redemption, whichever is less, and declines from 5% in
the first year that shares are held, to 4% in the second year, 3% in the third
year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$575 $787 $1,017 $1,679
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$697 $891 $1,083 $2,100
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$181 $561 $965 $2,100
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth through investments in a combination of the Series Company Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S.
companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
16
<PAGE> 18
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
17
<PAGE> 19
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 BALANCED FUND GRAPH]
ANNUAL RETURN CLASS A = 28.92%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 20.47%
Worst Quarter: Class A 3rd 1999 (2.27)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 12.80%
Average Annual Total Return Class B: 14.52%
Growth Lifestyle Blended Benchmark Index 18.54%
</TABLE>
18
<PAGE> 20
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
<S> <C> <C>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(9) 5%-Footnote(10)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.10% 0.10%
Distribution and service (12b-1) fees None None
Other expenses 0.00% 0.00%
----- -----
Total annual fund operating expenses 0.10% 0.10%
----- -----
----- -----
</TABLE>
- ---------------
(9) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(10) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.21% 1.96%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
19
<PAGE> 21
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investment in a diversified portfolio of high yielding, high risk
fixed-income securities. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in below-investment grade
U.S. and foreign junk bonds. These high yielding, high risk fixed-income
securities are rated below Baa3 by Moody's and BBB- by S&P. Up to 15% can be
rated below Caa3 by Moody's or CCC- by S&P. The Fund may also invest up to 35%
of total assets in below-investment grade foreign fixed-income securities.
To balance this risk, the Fund may invest up to 35% in investment grade
securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In
addition, the Fund may invest up to 15% in zero coupon securities (securities
not paying current cash interest), and up to 20% of total assets in equity
securities. Equity securities includes common or preferred stocks, warrants, and
convertible securities. The Sub-Adviser is not required to dispose of a bond
that is downgraded to below-investment grade. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
20
<PAGE> 22
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[HIGH YIELD BOND FUND GRAPH]
ANNUAL RETURN CLASS A = 4.05%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 1st 1999 3.89%
Worst Quarter: Class A 3rd 1999 (1.51)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney High Yield
Market Index, a widely recognized, unmanaged index covering a significant
portion of the below-investment grade U.S. corporate bond market. The average
total return table shows returns with the maximum front-end
21
<PAGE> 23
sales charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: (2.58)%
Average Annual Total Return Class B: (3.18)%
Salomon Smith Barney High Yield Market Index 4.24%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(11) 5%-Footnote(12)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.68% 0.68%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.08% 0.69%
----- -----
Total annual fund operating expenses 2.01% 2.37%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.76)% (0.37)%
----- -----
Net Expenses 1.25% 2.00%
----- -----
----- -----
</TABLE>
- ---------------
(11) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(12) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$596 $853 $1,130 $1,919
Class B 1 Year 3 Years 5 Years 10 Years
$718 $956 $1,195 $2,332
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$203 $628 $1,079 $2,332
</TABLE>
22
<PAGE> 24
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Jacobs Asset Management
INVESTMENT OBJECTIVE
Seeks to provide long-term capital appreciation by investing in equity
securities of non-U.S. companies, the majority of which are expected to be in
developed markets. The Fund may invest across the capitalization spectrum,
although it intends to emphasize smaller capitalization stocks. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts ("GDRs"). ADRs are certificates issued
by a U.S. depositary bank, representing foreign shares held by the bank, to
facilitate trading in foreign securities. GDRs and EDRs are very similar to
ADRs. Generally, ADRs are designed for use in U.S. securities markets and EDRs
are designed for use in European securities markets. GDRs are designed for use
when the issuer is raising capital in more than one market simultaneously, such
as the issuer's local market and the U.S. ADRs, EDRs and GDRs each carry the
same currency, political and economic risks as the underlying foreign shares.
The Fund may invest up to 40% of total assets in the equity securities of
issuers located in emerging market countries. An "emerging market country" is
any country which, in the opinion of the Sub-Adviser, is generally considered to
be an emerging or developing country by the international financial community,
including the International Bank for Reconstruction and Development (known as
"The World Bank") and the International Finance Corporation. The Fund will focus
its emerging market investments on those countries in which the Sub-Adviser
believes the economies are developing and the markets are becoming more
sophisticated.
We will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. Our goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities, including those of smaller capitalization companies ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
23
<PAGE> 25
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[INTERNATIONAL GROWTH GRAPH]
ANNUAL RETURN CLASS A = 56.04%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 44.40%
Worst Quarter: Class A 1st 1999 (0.49)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 8.42%
Average Annual Total Return Class B: 9.00%
Salomon Smith Barney Primary Market Index 25.58%
</TABLE>
24
<PAGE> 26
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(13) 5%-Footnote(14)
Maximum account fee None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.90% 0.90%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.53% 1.25%
----- -----
Total annual fund operating expenses 2.68% 3.15%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.28)% (1.00)%
----- -----
Net Expenses 1.40% 2.15%
----- -----
----- -----
</TABLE>
- ---------------
(13) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(14) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$709 $993 $1,298 $2,163
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$732 $1,000 $1,270 $2,487
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$218 $673 $1,155 $2,487
</TABLE>
- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
25
<PAGE> 27
INVESTMENT OBJECTIVE
Seeks to provide growth of capital and future income through investments
primarily in securities of non-U.S. issuers and securities whose principal
markets are outside of the United States. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign securities.
Since the Fund normally intends to be fully invested, foreign equity securities
will usually represent closer to 80-85% of the Fund's total assets. While the
assets of the Fund can be invested with geographical flexibility, the emphasis
will be on securities of companies located in Europe, Canada, Australia, and the
Far East, giving due consideration to economic, social, and political
developments, currency risks and the liquidity of various national markets.
Up to 90% of the amount invested in foreign securities may be invested in put
and call options on foreign currencies and forward currency contracts. A put
option on foreign currency is a security that gives the Fund the right to sell a
particular foreign currency within a stated period of time. A call option on
foreign currency gives the Fund the right to buy a particular foreign currency
within a stated period of time. A forward currency contract is an agreement to
buy or sell foreign currency at an agreed-upon price and date.
The Fund may invest in the equity securities of issuers located in emerging
market countries. An "emerging market country" is any country which, in the
opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (known as "The World
Bank") and the International Finance Corporation. The Fund will focus its
emerging market investments on those countries in which the Sub-Adviser believes
the economies are developing and the markets are becoming more sophisticated.
This Fund may invest up to 10% of total assets in the securities of foreign
small capitalization companies ("Foreign Small Caps"). Foreign Small Caps are
companies that have total assets (capitalization) of approximately $150 million
to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in put
and call options, futures, swaps, structured securities and other derivative
instruments. These instruments may be leveraged so that small changes may
produce disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
26
<PAGE> 28
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[INTERNATIONAL VALUE GRAPH]
ANNUAL RETURN CLASS A = 65.99%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 27.19%
Worst Quarter: Class A 3rd 1999 7.78%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 35.93%
Average Annual Total Return Class B: 37.70%
Salomon Smith Barney Primary
Market Index 25.58%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge(load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(15) 5%-Footnote(16)
Maximum account fee None None
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 1.00% 1.00%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.40% 1.06%
----- -----
Total annual fund operating expenses 2.65% 3.06%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.36)% (1.02)%
----- -----
Net Expenses 1.29% 2.04%
----- -----
----- -----
</TABLE>
- ---------------
(15) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(16) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$699 $961 $1,243 $2,047
Class B 1 Year 3 Years 5 Years 10 Years
$722 $968 $1,215 $2,374
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$207 $640 $1,099 $2,374
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management
INVESTMENT OBJECTIVE
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary objective. This investment objective can
be changed by the Board of Trustees, without the approval of the Fund
shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in the equity securities of
large cap U.S. issuers. Large cap U.S. issuers include the largest 1,000
companies by market capitalization traded in the United States.
The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment
28
<PAGE> 30
Research Department, other industry sources and objective quantitative analysis.
Next, the Fund's investment portfolio is constructed by balancing expected
returns against portfolio risk, trading fees and investment objectives. The Fund
is intended to be constructed with minimum deviations from the sector, risk
statistics and macroeconomic sensitivity of the Fund's benchmark, the Russell
1000(R) Growth Index. A proprietary multi-factor model is used in seeking to
ensure risks taken are both intended and are warranted due to expected return.
Lastly, the Fund is traded regularly and rebalanced in seeking to ensure all
positions are in line with current market outlooks and benchmark weights.
The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. GDRs are very
similar to ADRs. Generally, ADRs are designed for use in the United States
securities markets, while GDRs are designed for use when the issuer is raising
capital in more than one market simultaneously, such as the issuer's local
market and the U.S. ADRs and GDRs each carry the same currency, political and
economic risks as the underlying foreign shares. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instruments.
These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
29
<PAGE> 31
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG LARGE CAP GROWTH FUND GRAPH]
ANNUAL RETURN CLASS A = 37.12%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 23.86%
Worst Quarter: Class A 3rd 1999 (2.43)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Growth Index. The
Russell 1000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 1000(R) Growth Index measures the performance
of the 1,000 largest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 28.18%
Average Annual Total Return Class B: 29.70%
Russell 1000(R) Growth Index 34.25%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(17) 5%-Footnote(18)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.55% 0.55%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.23% 0.79%
----- -----
Total annual fund operating expenses 2.03% 2.34%
===== =====
Fee waiver and/or expense reimbursement (0.93)% (0.49)%
----- -----
Net Expenses 1.10% 1.85%
===== =====
</TABLE>
- ---------------
(17) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(18) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
30
<PAGE> 32
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$681 $905 $1,147 $1,843
Class B 1 Year 3 Years 5 Years 10 Years
$704 $912 $1,119 $2,174
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$188 $582 $1,002 $2,174
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers
INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index through investment in equity securities. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
The Russell 1000(R) Value Index is a sub-index of the Russell 1000(R) Index,
which measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values. As of June 30, 1999, the latest Russell index
reconstitution date, the average market capitalization in the Russell 1000(R)
Index was $12.1 billion.
INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data. The
constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
31
<PAGE> 33
Market Risk also refers to the risk that the value of the securities purchased
by the Fund may decline as a result of economic, political or market conditions
or an issuer's financial circumstances. Because the Fund maintains sector
weights at a similar level to that of the Index, your investment may experience
similar changes in value and share similar risks. In order to avoid unintended
exposures to economic factors, including the direction of the economy, interest
rates, energy prices and inflation, we maintain the proportion of equity
securities from different economic sectors in this Fund's portfolio at a level
similar to that of the Index.
Quantitative Method Risk: The different factors that go into the quantitative
analysis can be changed periodically. The weight of each factor may also change;
thus, the analytical model may have different historical or future performance
compared to the Fund.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH] ANNUAL RETURN CLASS A = 5.27%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 12.65%
Worst Quarter: Class A 3rd 1999 (9.73)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Value Index. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 8.24%
Average Annual Total Return Class B: 8.92%
Russell 1000(R) Value Index 16.53%
</TABLE>
32
<PAGE> 34
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(19) 5%-Footnote(20)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.38% 0.98%
----- -----
Total annual fund operating expenses 2.13% 2.48%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.08)% (0.68)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>
- ---------------
(19) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(20) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$676 $890 $1,122 $1,788
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
33
<PAGE> 35
INVESTMENT OBJECTIVE
Seeks capital appreciation principally through investments in medium
capitalization equity securities, such as common and preferred stocks and
securities convertible into common stocks. Current income is a secondary
objective. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization of $1 to $10 billion. We will
seek to achieve capital appreciation through an opportunistic investment
strategy with a growth bias. This Fund will purchase equity securities of those
companies that appear to be undervalued relative to their growth potential in
the securities markets, because the companies are presently out of favor, not
well known or possess value that is not currently recognized by the investment
community. The Sub-Adviser uses a "bottom up" approach to select specific
investments, employing analysis that contains elements of traditional dividend
discount and earnings yield models, establishes predicted relative valuation for
equity and fixed-income markets, and determines the attractiveness of individual
securities through evaluation of growth and risk characteristics of the
underlying company relative to the overall equity market. Although the Fund's
portfolio securities generally will be acquired for the long term, they may be
sold under some of the following circumstances when the Sub-Adviser believes
that: a) the anticipated price appreciation has been achieved or is no longer
probable; b) alternative investments offer superior total return prospects; or
c) fundamentals change adversely.
Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 BALANCED FUND GRAPH]
ANNUAL RETURN CLASS A = 3.29%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 16.76%
Worst Quarter: Class A 3rd 1999 (11.92)%
</TABLE>
34
<PAGE> 36
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Growth Index. The
Russell Midcap(TM) Growth Index focuses on Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values. The average total
return table shows returns with the maximum front-end sales charge deducted. No
sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: (2.92)%
Average Annual Total Return Class B: (2.90)%
Russell Midcap(TM) Growth Index 37.66%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(21) 5%-Footnote(22)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.65% 0.65%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.46% 1.09%
----- -----
Total annual fund operating expenses 2.36% 2.74%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.32)% (0.95)%
----- -----
Net Expenses 1.04% 1.79%
----- -----
----- -----
</TABLE>
- ---------------
(21) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(22) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$675 $887 $1,117 $1,777
Class B 1 Year 3 Years 5 Years 10 Years
$698 $894 $1,088 $2,110
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$182 $564 $971 $2,110
</TABLE>
35
<PAGE> 37
- --------------------------------------------------------------------------------
MID CAP INDEX FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
The Mid Cap Index Fund seeks to provide investment results that are similar to
the performance of the S&P 400 Mid Cap Index ("Index"). As a group, the
investment results, before expenses, are expected to approximate the total
return (the combination of capital changes and income) of selected common stocks
that statistically reflect the Index. This investment objective can be changed
by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
An index fund tries to match its target index as closely as possible, in the
stocks owned, the proportions of each stock owned, and in overall performance.
The Mid Cap Index Fund seeks to match the investment performance of the S&P 400
Mid Cap Index. The S&P 400 Mid Cap Index is composed of 400 domestic stocks,
chosen for market size, liquidity, and industry group representation. Four
industry groups are represented: Industrials, Utilities, Financials, and
Transportation. The S&P 400 Mid Cap Index holds each stock in proportion to its
total value in the stock market.
The Fund invests at least 65% of total assets in companies that are listed in
the Index. Since it may not be possible for this Fund to buy every stock
included in the Index, or in the same proportions, the Fund invests in a
sampling of common stocks in the Index. The common stocks of the S&P Mid Cap 400
Index to be included in the Fund will be selected utilizing a statistical
sampling technique known as "optimization." This process selects stocks for the
Fund so that various industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and
dividend yields) closely approximate those of the Index. The common stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole.
Generally, an index fund tries to mirror the target index and its performance.
The performance will not match exactly, though, because the index fund incurs
operating expenses and other investment overhead as part of its normal
operations. The index is an unmanaged group of securities, so it does not have
these expenses. An investor cannot invest directly in an index. These
differences between an index fund and its index are called tracking differences.
The tracking difference should be very small, about 0.05%. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, before expenses, is considered to be good, while a correlation of 1.00 is
perfect.
The tracking differences are reviewed daily by VALIC for each of the index
funds. If an index fund does not accurately track an index, VALIC will rebalance
the Fund's portfolio by selecting securities which will provide a more
representative sampling of the securities in the index as a whole or the sector
diversification within the index, as appropriate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Investment Style Risk: The Index is made up of the stocks of many medium sized
U.S. companies, which generally includes companies that are valued from $1
billion to approximately $7 billion. Medium-sized companies tend to be more
established and stable than small companies, and are faster growing than large
companies, but may be somewhat more volatile than large companies.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Market Risk may also occur because of daily changes in value. The Index
fluctuates every day, depending on changes in the stock market. Stock markets
often have times when the prices rise and fall every day or every few days.
There is no guarantee that the value of your investment will increase.
36
<PAGE> 38
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[MID CAP INDEX GRAPH] ANNUAL RETURN CLASS A = 13.85%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 16.72%
Worst Quarter: Class A 3rd 1999 (8.39)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the S&P Mid Cap 400 Index. The average
total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: 12.15%
Average Annual Total Return Class B: 13.05%
S&P Mid Cap 400 Index 21.07%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(23) 5%-Footnote(24)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.28% 0.28%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.14% 1.01%
----- -----
Total annual fund operating expenses 1.67% 2.29%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.84)% (0.71)%
----- -----
Net Expenses 0.83% 1.58%
----- -----
----- -----
</TABLE>
- ---------------
(23) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(24) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
37
<PAGE> 39
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$655 $825 $1,010 $1,545
Class B 1 Year 3 Years 5 Years 10 Years
$678 $831 $980 $1,883
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Year 5 Year 10 Year
$161 $499 $861 $1,883
</TABLE>
- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.
INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund invests at least 65% of total assets in equity securities of medium
capitalization established companies, using a value-oriented investment approach
intended to increase capital with reasonable risk. Medium capitalization
companies include companies with the characteristics of companies included in
the Russell Midcap(TM) Index. As of June 30, 1999, the largest company included
in the Russell Midcap(TM) Index had an approximate market capitalization of
$11.2 billion, while the average market capitalization was approximately $3.9
billion.
We choose securities we believe are undervalued based on strong fundamentals,
including a low price-to-earnings ratio, consistent cash flow, and the company's
track record through all parts of the market cycle. When selecting securities
for this Fund, we also consider other factors, including ownership by a
company's management of the company's stock and the dominance of a company in
its particular field. Up to 35% of the Fund's total assets may be invested in
other equity securities, including common and preferred stocks, convertible
securities, and related equities. See "More About Portfolio Investments."
The Fund may participate in the Initial Public Offering ("IPO") market, and a
portion of the Funds' returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will
experience significant improvement in performance by investing in IPOs.
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, % for the fiscal year ended October 31, 1999. The
rate of portfolio turnover is calculated by dividing the lesser of the amount of
purchases or sales of portfolio securities during the fiscal year by the average
of the value of the portfolio securities. A high rate of portfolio turnover
generally involves correspondingly greater brokerage commission expenses, thus
increasing the Fund's operating expenses. The Fund's active trading strategy may
cause the Fund to have a relatively high amount of short-term capital gains,
which are taxable to you at your ordinary income tax rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
38
<PAGE> 40
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[MID CAP VALUE GRAPH] ANNUAL RETURN CLASS A = 23.96%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 16.58%
Worst Quarter: Class A 3rd 1999 (11.34)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Value Index. The
Russell Midcap(TM) Value Index measures the performance of the 800 smallest
companies in the Russell 1000(R) Index, focusing on those with lower
price-to-book ratios and lower forecasted growth values. The Russell 1000(R)
Index is a sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index
follows the 3,000 largest U.S. companies, based on total market capitalization.
The average total return table shows returns with the maximum front-end sales
charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 13.32%
Average Annual Total Return Class
B: 13.71%
Russell Midcap(TM) Value Index 5.70%
</TABLE>
39
<PAGE> 41
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(25 5%-Footnote(26)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.43% 1.02%
----- -----
Total annual fund operating expenses 2.43% 2.77%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.14)% (0.73)%
----- -----
Net Expenses 1.29% 2.04%
----- -----
----- -----
</TABLE>
- ---------------
(25) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(26) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$699 $961 $1,243 $2,047
Class B 1 Year 3 Years 5 Years 10 Years
$722 $968 $1,215 $2,374
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$207 $640 $1,099 $2,374
</TABLE>
40
<PAGE> 42
- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth and current income through investments in a combination of the
Series Company Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Growth Lifestyle Fund. This investment objective
can be changed by the Board of Trustees, without the approval of the Fund
shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small capitalization
companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization
companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large capitalization
companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least 65% of
which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
INVESTMENT RISKS
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's
41
<PAGE> 43
economies. Because the Fund's assets will be adjusted only periodically, there
should not be any sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
42
<PAGE> 44
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[Moderate Growth Lifestyle] ANNUAL RETURN CLASS A = 18.66%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.20%
Worst Quarter: Class A 3rd 1999 (3.28)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 8.58%
Average Annual Total Return Class B: 10.26%
Moderate Growth Lifestyle Blended Benchmark 15.02%
</TABLE>
43
<PAGE> 45
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(27) 5%-Footnote(28)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.10% 0.10%
Distribution and service (12b-1) fees None None
Other expenses 0.00% 0.00%
----- -----
Total annual fund operating expenses 0.10% 0.10%
----- -----
----- -----
</TABLE>
- ---------------
(27) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(28) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Total Combined Operating Expenses: 1.15% 1.90%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$585 $605 $628 $697
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$535 $379 $184 $129
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Stability
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
44
<PAGE> 46
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. In accordance with
Rule 2a-7 of the 1940 Act, such securities must mature in 13 months or less and
the Fund must have a dollar-weighted average portfolio maturity of 90 days or
less. These practices are designed to reduce risk and minimize any fluctuation
in the share price.
The investments this Fund may buy include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements
- - Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- - Asset-backed securities
- - Loan participations
- - Adjustable rate securities
- - Variable Rate Demand Notes
- - Illiquid and restricted securities (limited to 10% of the Fund's net assets at
all times)
- - Rule 144A securities (liquid)
INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Money Market Fund
varies daily depending on short-term interest rates.
Because of the following principal risks, the value of your investment may
fluctuate:
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[MONEY MARKET CHART GRAPH] ANNUAL RETURN CLASS A = 4.60%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 1.24%
Worst Quarter: Class A 1st 1999 1.02%
</TABLE>
45
<PAGE> 47
The table shows the Fund's seven-day yield as of a recent date. Please call
Customer Service at 1-877-999-2434 for the most current yield information. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<CAPTION>
<S> <C> <C>
Average Annual Total Return Class A: 4.54%
Average Annual Total Return Class B: (1.07)%
New York City 30-day Primary CD Rate 4.38%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None 5%-Footnote(29)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.25% 0.25%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.92% 0.98%
----- -----
Total annual fund operating expenses 1.42% 2.23%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.62)% (0.68)%
----- -----
Net Expenses 0.80% 1.55%
----- -----
----- -----
</TABLE>
- ---------------
(29) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$82 $257 $447 $999
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$684 $831 $973 $1,867
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$159 $494 $853 $1,867
</TABLE>
- --------------------------------------------------------------------------------
MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
46
<PAGE> 48
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in fixed-income securities that are exempt from regular
federal income taxation. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT STRATEGY
The Fund invests at least 80% of total assets in investment grade municipal
fixed-income securities, such as municipal bonds, municipal notes, and other
municipal obligations. Investment grade bonds are those rated at least Baa3 by
Moody's or BBB- by S&P or Fitch, or of comparable quality. The municipal notes
are short-term obligations rated high quality or better by Moody's, S&P, or
Fitch. If the Fund invests in municipal securities issued for certain private
purposes, a portion of the Fund's dividends may be subject to the alternative
minimum tax.
The Fund may invest up to 20% of total assets in taxable fixed-income
securities, including money market instruments, U.S. Government obligations, and
other investment grade securities rated as above. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. See
"More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
47
<PAGE> 49
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[MUNICIPAL BOND GRAPH] ANNUAL RETURN CLASS A = (5.75)%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 (0.18)%
Worst Quarter: Class A 3rd 1999 (2.51)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Seven Through Long
Municipal Bond Index, a widely recognized, unmanaged index of long-term
municipal bonds. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (10.32)%
Average Annual Total Return Class B: (11.28)%
Lehman Brothers Seven Through
Long Municipal Bond Index (2.79)%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 4.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(30) 5%-Footnote(31)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.18% 1.06%
----- -----
Total annual fund operating expenses 1.93% 2.56%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.88)% (0.76)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>
- ---------------
(30) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(31) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
48
<PAGE> 50
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$577 $793 $1,028 $1,701
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Stability
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market securities that are exempt from regular federal income
taxation. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income that is exempt from
federal income tax. We use 95% of the Fund's total assets to buy short-term
securities that are rated within the highest rating category for short-term
fixed-income securities by at least two nationally recognized rating services or
unrated securities of comparable investment quality. These eligible securities
must mature, after giving effect to any demand features, in 13 months or less
and the Fund must have a dollar-weighted average portfolio maturity of 90 days
or less. These practices are mandated by Rule 2a-7 of the 1940 Act and are
designed to reduce risk and minimize fluctuation in the share price. If the Fund
invests in municipal securities issued for certain private purposes, a portion
of the Fund's dividends may be subject to the alternative minimum tax.
The investments this Fund may buy include:
- - Municipal fixed-income securities with remaining maturities of 13 months or
less
- - Commercial paper sold by municipalities rated at least MIG1 or MIG2 by
Moody's or A1 or A2 by S&P
- - Variable rate demand notes
- - Auction rate preferred stock and other adjustable rate obligations that are
exempt from federal income taxation
- - Illiquid and restricted securities, limited to 10% of the Fund's net assets
at all times
- - Rule 144A securities (liquid)
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
49
<PAGE> 51
INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Municipal Money
Market Fund varies daily depending on short-term interest rates.
Because of the following principal risks, the value of your investment may
fluctuate:
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[MUNICIPAL MONEY MARKET GRAPH] ANNUAL RETURN CLASS A = 2.28%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 0.66%
Worst Quarter: Class A 1st 1999 0.44%
</TABLE>
The table shows the Fund's seven-day yield as of a recent date. Please call
Customer Service at 1-877-999-2434 for the most current yield information. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 2.18%
Average Annual Total Return Class B: (3.58)%
Appropriate Benchmark N/A
</TABLE>
50
<PAGE> 52
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None 5%-Footnote(32)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.14% 1.19%
----- -----
Total annual fund operating expenses 1.89% 2.69%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.84)% (0.89)%
----- -----
Net Expenses 1.05% 1.80%
----- -----
----- -----
</TABLE>
- ---------------
(32) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$107 $334 $580 $1,287
Class B 1 Year 3 Years 5 Years 10 Years
$699 $897 $1,093 $2,121
Without redemptions, your costs would be:
Class B 1 Year 3 Years 5 Years 10 Years
$183 $567 $976 $2,121
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
51
<PAGE> 53
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $1.25 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) Growth Index. Within each
industry, the Fund invests in equity securities that the Sub-Adviser's research
and valuation process indicate are undervalued. The greater a company's
estimated worth compared to the current market price of its equity securities,
the more undervalued the company.
The Fund may invest up to 35% of total assets in other equity securities of U.S.
and foreign large and medium capitalization issuers, including those equities
listed above, and the securities of investment companies. Large and medium
capitalization issuers are those companies with total assets of approximately $1
billion or more. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
52
<PAGE> 54
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[SMALL CAP GROWTH GRAPHIC] ANNUAL RETURN CLASS A = 62.21%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 42.79%
Worst Quarter: Class A 1st 1999 (0.86)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Growth Index. The
Russell 2000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 2000(R) Growth Index measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 33.65%
Average Annual Total Return Class
B: 35.40%
Russell 2000(R) Growth Index 29.28%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(33) 5%-Footnote(34)
Maximum account fee None None
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- -------------------------------------------------------- ---------- ---------------
Management fees 0.85% 0.85%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.34% 0.98%
----- -----
Total annual fund operating expenses 2.44% 2.83%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.04)% (0.68)%
----- -----
Net Expenses 1.40% 2.15%
----- -----
----- -----
</TABLE>
- ---------------
(33) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(34) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
53
<PAGE> 55
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
Class A 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$709 $993 $1,298 $2,163
</TABLE>
<TABLE>
<CAPTION>
Class B 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$732 $1,000 $1,270 $2,487
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<CAPTION>
Class B 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$218 $673 $1,155 $2,487
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP INDEX FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
The Small Cap Index Fund seeks to provide investment results that are similar to
the total return of the Russell 2000(R) Index. ("Index"). As a group, the
investment results, before expenses, are expected to approximate the total
return (the combination of capital changes and income) of selected common stocks
that statistically reflect the Index. This investment objective can be changed
by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
An index fund tries to match its target index as closely as possible, in the
stocks owned, the proportions of each stock owned, and in overall performance.
The Small Cap Index Fund seeks to match the investment performance of the
Russell 2000(R) Index. The Russell 2000(R) Index is a sub-index of the Russell
3000(R) Index, which follows the 3,000 largest U.S. companies based on total
market capitalization. The Russell 2000(R) Index measures the performance of the
2,000 smallest companies in the Russell 3000(R) Index, and represents about 8%
of the total market capitalization of the Russell 3000(R) Index. The average
market capitalization in the Russell 2000(R) Index is $526.4 million as of June
30, 1999. As of the same date, the largest company in the Index had a market
capitalization of nearly $1.350 billion.
The Fund invests at least 65% of total assets in companies that are listed in
the Index. Since it may not be possible for this Fund to buy every stock
included in the Index, or in the same proportions, the Fund invests in a
sampling of common stocks in the Index. The common stocks of the Russell 2000(R)
Index to be included in the Fund will be selected utilizing a statistical
sampling technique known as "optimization." This process selects stocks for the
Fund so that various industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and
dividend yields) closely approximate those of the Index. The common stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole.
Generally, an index fund tries to mirror the target index and its performance.
The performance will not match exactly, though, because the index fund incurs
operating expenses and other investment overhead as part of its normal
operations. The index is an unmanaged group of securities, so it does not have
these expenses. An investor cannot invest directly in an index. These
differences between an index fund and its index are called tracking differences.
The tracking difference should be very small, about 0.05%. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, before expenses, is considered to be good, while a correlation of 1.00 is
perfect.
54
<PAGE> 56
The tracking differences are reviewed daily by VALIC for each of the index
funds. If an index fund does not accurately track an index, VALIC will rebalance
the Fund's portfolio by selecting securities which will provide a more
representative sampling of the securities in the index as a whole or the sector
diversification within the index, as appropriate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Index Risk: The Russell 2000(R) Index includes many small U.S. companies. Some
of these companies often do not have the financial strength needed to do well in
difficult times. Also, they often sell limited numbers of products, which can
make it harder for them to compete with medium and large companies. However,
because they are small, their common stock prices may fluctuate more over the
short-term, but they have more potential to grow. This means their common stock
value may offer greater potential for appreciation. An index fund holding a
large sampling of the 2,000 stocks in the Russell 2000(R) Index avoids the risks
of individual stock selection and seeks to provide the return of the
smaller-sized company sector of the market. Because this Fund invests in many of
the common stocks tracked by this Index, your investment will experience similar
changes in value and share similar risks such as market risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
55
<PAGE> 57
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[SMALL CAP INDEX GRAPH] ANNUAL RETURN CLASS A = 18.35%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 17.15%
Worst Quarter: Class A 3rd 1999 (6.44)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Index. The average
total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return Class A: 4.92%
Average Annual Total Return Class B: 5.53%
Russell 2000 Index(R) 14.87%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(35) 5%-Footnote(36)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.28% 0.28%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.16% 1.09%
----- -----
Total annual fund operating expenses 1.69% 2.37%
----- -----
------- -------
Fee waiver and/or expense reimbursement (0.86)% (0.79)%
----- -----
Net Expenses 0.83% 1.58%
----- -----
------- -------
</TABLE>
- ---------------
(35) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(36) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
56
<PAGE> 58
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$655 $825 $1,010 $1,545
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$678 $831 $980 $1,883
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$161 $499 $861 $1,883
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)
INVESTMENT OBJECTIVE+
Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGIES
This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $1.25 billion and companies included in
the Russell 2000(R) Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.
Actively Managed Portion: In analyzing and selecting investments for the
actively managed portion of the Fund's investment portfolio, we look for market
themes and changes that signal opportunity. We seek companies with lower
price-to-earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. At any given time, this portion of the Fund's
investment portfolio will be invested in a diversified group of small
capitalization equity securities in several industries. The Fund will invest
primarily in U.S. companies with seasoned management or a track record as part
of a larger company.
Passively Managed Portion: This portion of the Fund is comprised of a sampling
of stocks in the Index that, as a group, should reflect its performance. Since
it may not be possible for this Fund to buy every stock included in the Index or
in the same proportions, the Fund will select stocks to purchase by utilizing a
statistical sampling technique known as "optimization." This process selects
stocks for the Fund so that various industry weightings, market capitalizations
and fundamental characteristics (e.g. price-to-book, price-to-earnings,
debt-to-asset ratios and dividend yields) closely approximate those of the
Index. The stocks held by the Fund are weighted to make the Fund's aggregate
investment characteristics similar to those of the Index as a whole.
The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U. S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the U.S. Government; the right of the issuer to borrow from
the U.S. Treasury; the credit of the issuing government agency; or the authority
of the U.S. Government to purchase obligations of the agency. See "More About
Portfolio Investments."
57
<PAGE> 59
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
58
<PAGE> 60
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[SMALL CAP VALUE GRAPH] ANNUAL RETURN CLASS A = (4.75%)
<TABLE>
<S> <C> <C>
Best Quarter: Class A 2nd 1999 11.72%
Worst Quarter: Class A 1st 1999 (12.69)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Value Index. The
Russell 2000(R) Value Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 2000(R) Value Index measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, focusing on those
with lower price-to-book ratios and lower forecasted growth values. The average
total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class A: (11.68)%
Average Annual Total Return Class B: (11.72)%
Russell 2000(R) Value Index 0.72%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(37) 5%-Footnote(38)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.61% 1.33%
----- -----
Total annual fund operating expenses 2.61% 3.08%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.38)% (1.10)%
----- -----
Net Expenses 1.23% 1.98%
----- -----
----- -----
</TABLE>
- ---------------
(37) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(38) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
59
<PAGE> 61
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$693 $943 $1,213 $1,983
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$716 $950 $1,185 $2,311
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$201 $622 $1,068 $2,311
</TABLE>
- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in equity
securities, in companies which meet the social criteria established for the
Fund. This investment objective can be changed by the Board of Trustees, without
the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund will invest at least 80% of total assets in the equity securities of
companies meeting the Fund's social criteria. To find out which companies meet
the Fund's social criteria, we rely on industry classifications, research
services such as the Investor Responsibility Research Center ("IRRC").
The Fund does not invest in companies that are significantly engaged in:
- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.
At least once a year, the IRRC surveys state laws to see if there are any new or
revised state laws that govern or affect the investments of public funds. If the
survey shows that at least 20 states have adopted laws that restrict public
funds from being invested in a clearly definable category of investments, this
category is automatically added to our social criteria list.
Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs carry the
same currency, political and economic risks as the underlying foreign shares.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
60
<PAGE> 62
INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:
Foreign Securities Risk:
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:
Political risk - the chance of a change in government and the assets of the
company being taken away.
Currency risk - a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment
valued in U.S. dollars will decline even if the value of the foreign stock
or bond is unchanged.
Limited information - foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are
used to getting. To minimize taxes they may not report some income or they
may report higher expenses.
Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk - the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk - the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Social Criteria Risk: If a company stops meeting the Fund's social criteria
after the Fund invested in it, the Fund will sell these investments even if this
means the Fund loses money. Also, if the Fund changes its social criteria and
the companies the Fund has already invested in no longer qualify, the Fund will
sell these investments, even if this means the Fund loses money. Social criteria
screening will limit the availability of investment opportunities for the Fund
more than for funds having no such criteria.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[SOCIALLY RESPONSIBLE GRAPH] ANNUAL RETURN CLASS A = 18.30%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.11%
Worst Quarter: Class A 3rd 1999 (6.97)%
</TABLE>
61
<PAGE> 63
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The Index
approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 15.48%
Average Annual Total Return Class
B: 16.50%
S&P 500 Index 25.67%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(39) 5%-Footnote(40)
Maximum account fee None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.25% 0.25%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.47% 1.24%
----- -----
Total annual fund operating expenses 1.97% 2.49%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.17)% (0.94)%
----- -----
Net Expenses 0.80% 1.55%
----- -----
----- -----
</TABLE>
- ---------------
(39) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(40) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$652 $816 $994 $1,512
Class B 1 Year 3 Years 5 Years 10 Years
$675 $822 $964 $1,851
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$158 $490 $846 $1,851
</TABLE>
62
<PAGE> 64
- --------------------------------------------------------------------------------
STOCK INDEX FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
The Stock Index Fund seeks to provide investment results that are similar to the
total return of the S&P 500 Index ("Index"). As a group, the investment results,
before expenses, are expected to approximate the total return (the combination
of capital changes and income) of selected common stocks that statistically
reflect the Index. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
An index fund tries to match its target index as closely as possible, in the
stocks owned, the proportions of each stock owned, and in overall performance.
The Stock Index Fund seeks to match the investment performance of the S&P 500
Index. The S&P 500 Index is composed of 500 common stocks which are chosen by
Standard & Poor's Corporation. The Index approximates the general distribution
of industries in the U.S. economy, and captures the price performance of a large
cross-section of the publicly traded stock market. The Index is
capitalization-weighted, meaning that it holds each stock in proportion to its
total value in the stock market.
The Fund invests at least 65% of total assets in a sampling of common stocks in
the Index that, as a group, should reflect its performance. Since it may not be
possible for this Fund to buy every stock included on this Index or in the same
proportions, the common stocks of the S&P 500 Index to be included in the Fund
will be selected utilizing a statistical sampling technique known as
"optimization." This process selects common stocks for the Fund so that various
industry weightings, market capitalizations (total value) and fundamental
characteristics (e.g., price-to-book, price-to-earnings, debt-to-asset ratios
and dividend yields) closely approximate those of the S&P 500 Index. The stocks
held by the Fund are weighted to make the Fund's aggregate investment
characteristics similar to those of the Index as a whole. For information on how
closely the fund may track the index, see "More on Index Funds and Tracking an
Index" below.
Generally, an index fund tries to mirror the target index and its performance.
The performance will not match exactly, though, because the index fund incurs
operating expenses and other investment overhead as part of its normal
operations. The index is an unmanaged group of securities, so it does not have
these expenses. An investor cannot invest directly in an index. These
differences between an index fund and its index are called tracking differences.
The tracking difference should be very small, about 0.05%. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, before expenses, is considered to be good, while a correlation of 1.00 is
perfect.
The tracking differences are reviewed daily by VALIC for each of the index
funds. If an index fund does not accurately track an index, VALIC will rebalance
the Fund's portfolio by selecting securities which will provide a more
representative sampling of the securities in the index as a whole or the sector
diversification within the index, as appropriate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:
Index Risk: The S&P 500 Index includes the common stock of many large,
well-established companies. These companies usually have the financial strength
to weather difficult financial times. However, the value of any common stock can
rise and fall over short and long periods of time. This Fund, which holds nearly
all of the 500 common stocks in the S&P 500 Index, avoids the risk of individual
stock selection and seeks to provide the return of the large company sector of
the market.
Foreign Securities Risk:
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:
Political risk - the chance of a change in government and the assets of the
company being taken away.
Currency risk - a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment
valued in U.S. dollars will decline even if the value of the foreign stock
or bond is unchanged.
63
<PAGE> 65
Limited information - foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are
used to getting. To minimize taxes they may not report some income or they
may report higher expenses.
Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk - the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk - the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[STOCK INDEX CHART GRAPH] ANNUAL RETURN CLASS A = 20.39%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 14.39%
Worst Quarter: Class A 3rd 1999 (6.38)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The Index
approximates the general distribution of industries in the U.S. economy, and
captures the price performance of a large cross-section of the publicly traded
stock market. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: 17.21%
Average Annual Total Return Class
B: 17.55%
S&P 500 Index 25.67%
</TABLE>
64
<PAGE> 66
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
- ---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75% None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) Footnote(41) 5%-Footnote(42)
Maximum account fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- ------------------------------ ------- -------
<S> <C> <C>
Management fees 0.27% 0.27%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.01% 0.71%
----- -----
Total annual fund operating expenses 1.53% 1.98%
----- -----
----- -----
Fee waiver and/or expense reimbursement (0.71)% (0.41)%
----- -----
Net Expenses 0.82% 1.57%
----- -----
----- -----
</TABLE>
- ---------------
(41) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(42) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$654 $822 $1,005 $1,534
Class B 1 Year 3 Years 5 Years 10 Years
$677 $828 $975 $1,872
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$160 $496 $856 $1,872
</TABLE>
- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
65
<PAGE> 67
INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of income producing
securities. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including
- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)
Up to 25% of the Fund's total assets may be invested in foreign emerging market
debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may also
invest up to 20% of total assets in equity securities, such as common and
preferred stocks, convertible securities, and warrants.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's
66
<PAGE> 68
are considered to be below investment grade. Fixed-income securities with a
below investment grade rating present a comparatively greater risk of default in
the timely payment of interest and principal than fixed-income securities rated
as investment grade. These lower rated securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Because investment in lower rated fixed-income securities
(commonly referred to as junk bonds) involves significantly greater credit risk,
market risk and interest rate risk than higher rated fixed-income securities
achievement of the Fund's investment objective is dependent upon the
Sub-Adviser's investment analysis. Accordingly, the Fund's investments may
become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[STRATEGIC BOND GRAPH] ANNUAL RETURN CLASS A = 4.53%
<TABLE>
<S> <C> <C>
Best Quarter: Class A 4th 1999 3.30%
Worst Quarter: Class A 2nd 1999 (0.84)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return Class
A: (2.60)%
Average Annual Total Return Class
B: (3.29)%
Lehman Brothers Aggregate Bond
Index 0.53%
</TABLE>
67
<PAGE> 69
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
---------------- ------- -------
<S> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a percentage of offering
price) 5.75% None
Maximum deferred sales charge (load)
(as a percentage of purchase or redemption
proceeds, whichever is lower) Footnote(43) 5%-Footnote(44)
Maximum account fee None None
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
- -------------------------------------------------------- ---------- ---------------
Management fees 0.60% 0.60%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.63% 1.48%
----- -----
Total annual fund operating expenses 2.48% 3.08%
----- -----
----- -----
Fee waiver and/or expense reimbursement (1.33)% (1.18)%
----- -----
Net Expenses 1.15% 1.90%
----- -----
----- -----
</TABLE>
- ---------------
(43) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(44) A CDSC is imposed on the proceeds of Class B shares redeemed within 5
years, subject to certain exceptions. The charge is a percentage of net asset
value at the time of purchase or redemption, whichever is less, and declines
from 5% in the first year that shares are held, to 4% in the second year, 3% in
the third year, 2% in the fourth year, and 1% in the fifth year.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class A 1 Year 3 Years 5 Years 10 Years
$587 $823 $1,079 $1,811
Class B 1 Year 3 Years 5 Years 10 Years
$708 $926 $1,144 $2,227
</TABLE>
Without redemptions, your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class B 1 Year 3 Years 5 Years 10 Years
$193 $597 $1,027 $2,227
</TABLE>
- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
Each Fund's principal investment strategies and risks are summarized above. More
information about types of portfolio investments is shown below. Funds may
invest in other investments and may use investment techniques not described in
this prospectus. All Money Market Fund investments must comply with Rule 2a-7 of
the 1940 Act, which allows the purchase of only high quality money market
instruments. The Lifestyle Funds invest in other Funds described in this
Prospectus and thus are not specifically mentioned below. Please refer to the
SAI for more information about investments.
ASSET-BACKED SECURITIES
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders.
68
<PAGE> 70
Examples of assets supporting asset-backed securities include credit card
receivables, retail installment loans, home equity loans, auto loans, and
manufactured housing loans. All of the Funds except International Growth Fund,
International Value Fund, Large Cap Growth, and Mid Cap Growth may invest in
asset-backed securities.
DEPOSITARY RECEIPTS
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. ADRs in which a Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs. All of the Funds except for
the Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund and the
Strategic Bond Fund may purchase ADRs.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Index Fund, Small Cap Growth Fund, Small Cap Value Fund,
Socially Responsible Fund, and the Stock Index Fund may invest in EDRs and GDRs.
The Large Cap Growth Fund may invest in GDRs but may not invest in EDRs.
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund and the Municipal Money
Market Fund, though equities may not be a primary strategy for each Fund.
Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.
Stocks are not the only type of equity security. Other equity securities include
but are not limited to convertible securities, depository receipts, warrants,
rights and partially paid shares, investment company securities, real estate
securities, convertible bonds and foreign equity securities, such as ADRs, GDRs
and EDRs.
FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short-, medium- and long-term
obligations, including notes and bonds. Fixed-income securities may have fixed,
variable, or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed-income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
Bonds are one type of fixed-income security and are sold by governments on the
local, state, and federal levels, and by companies. There are many different
kinds of bonds. For example, each bond issue has specific terms. U.S. Government
bonds are guaranteed to pay interest and principal by the federal government.
Revenue bonds are usually only paid from the revenue of the issuer. An example
of that would be an airport revenue bond. Debentures are a very common type of
corporate bond (a bond sold by a company). Payment of interest and return of
principal is subject to the company's ability to pay. Convertible bonds are
corporate bonds that can be exchanged for stock.
The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Municipal Bond Fund, Small Cap
Growth Fund, Small Cap Value, and Strategic Bond Fund may also invest in
below-investment grade bonds.
69
<PAGE> 71
Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short-term (generally less than 12 months), intermediate (one to
10 years), and long-term (10 years or more). Commercial paper is a specific type
of corporate or short-term note. In fact, it's very short-term, being paid in
less than 270 days, though most commercial paper matures in 50 days or less.
Bonds are not the only type of fixed-income security. Other fixed-income
securities include, for example, U.S. and foreign corporate fixed-income
securities, including convertible securities (bonds, debentures, notes and other
similar instruments) and corporate commercial paper; mortgage-related and other
asset-backed securities; inflation-indexed bonds issued by both governments and
corporations; structured notes, including hybrid or "indexed" securities,
preferred or preference stock, catastrophe bonds, and loan participations; bank
certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; fixed-income securities
issued by states or local governments and their agencies, authorities and other
instrumentalities; obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and obligations of international agencies or
supranational entities. Fixed-income securities may be acquired with warrants
attached.
FOREIGN CURRENCY
Funds buy foreign currencies when they believe the value of the currency will
increase. If it does increase, they sell the currency for a profit. If it
decreases they will experience a loss. Generally, the International Growth Fund
and the International Value Fund may also buy and sell foreign currencies to
settle transactions for foreign securities bought or sold in the Fund. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund and
the Small Cap Value Fund may invest in foreign currency.
FOREIGN SECURITIES
Securities of foreign issuers may be denominated in foreign currencies, except
with respect to the Money Market Fund and the Core Bond Fund which may only
invest in U.S. dollar-denominated securities of foreign issuers. The Large Cap
Growth Fund may only invest in the equity securities of foreign issuers that are
traded in the United States. Generally, all of the Funds may invest in foreign
securities except for Mid Cap Growth Fund, Municipal Bond Fund, and the
Municipal Money Market Fund.
Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed-income securities
issued by foreign governments, corporations and supranational organizations, and
ADRs, EDRs and GDRs. See "Depositary Receipts".
FUTURES AND OPTIONS
Futures and options are considered derivative securities, since the value of the
future or option is derived in part from the value and characteristics of
another security. A "future" is a contract which involves the sale of a security
for future delivery. An "option" gives the buyer the opportunity to buy or sell
a security at a set price on or before a date specified in the contract. A call
option buyer thinks the stock price may go up in the future, while a put option
buyer thinks the stock price may go down. All of the Funds except for
International Growth Fund, Mid Cap Growth Fund, Money Market Fund and Municipal
Money Market Fund may invest in derivatives.
The Funds use stock and bond futures to invest cash and cash equivalents to:
- - Write (sell) exchange traded covered put and call options on securities and
stock indices.
- - Purchase exchange traded put and call options on securities and stock indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- - Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.
ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. Non-money market funds may invest up to
15% in illiquid securities, while money market funds are limited to 10%. This
restriction applies at all times to all assets.
A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold in the public market. Securities eligible for sale
under Rule 144A and commercial paper offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, are not deemed by VALIC or the Fund's
Sub-Adviser to be illiquid solely by reason of being restricted. Instead, VALIC
or the Sub-Adviser will determine whether such securities are liquid based on
trading markets and pursuant to guidelines adopted by the Series Company's Board
of Trustees. If VALIC or the Sub-Adviser concludes that a security is not
liquid, that investment will be included within the Fund's limitation on
illiquid securities.
70
<PAGE> 72
INVESTMENT COMPANIES
All of the Funds may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by an investment company in which it invests.
INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Index Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Index Fund, and Stock Index Fund may invest in investment
funds.
LOAN PARTICIPATIONS
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All of the Funds except the Mid Cap Value Fund may invest in loan
participations.
MONEY MARKET SECURITIES
A money market security is high quality when it is rated in one of the two
highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-Adviser. All
the Funds may invest in money market securities, though it is not a primary
strategy for all Funds.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.s of high quality money
market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Mid Cap Index Fund, Money
Market Fund, Small Cap Index Fund, Socially Responsible Fund, and the Stock
Index Fund may invest in mortgage-related securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans
secured by residential or commercial real property. Payments of interest and
principal on these securities are generally made monthly, in effect "passing
through" monthly payments made by the individual borrowers on the mortgage loans
which underlie the securities. Mortgage-related securities are subject to
interest rate risk and prepayment risk.
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized mortgage obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity, coupon, and prepayment preference. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds.
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to
71
<PAGE> 73
attract and retain tenants. Commercial mortgage-backed securities may be less
liquid and exhibit greater price volatility than other types of mortgage-related
or asset-backed securities.
REAL ESTATE SECURITIES
Real estate securities are securities issued by companies that invest in real
estate or interests therein. All of the Funds except for the Domestic Bond Fund
and the High Yield Bond Fund may invest in real estate securities and real
estate investment trusts ("REITs"). REITs are generally publicly traded on the
national stock exchanges and in the over-the-counter market and have varying
degrees of liquidity.
REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short-term loan (usually for one day to one week). The risk in a
repurchase agreement is the failure of the seller to be able to buy the security
back. If the value of the security declines, the Fund may have to sell at a
loss. A repurchase agreement of more than 7 days duration is illiquid. A Fund
may enter into repurchase agreements only with well-established securities
dealers or banks that are members of the Federal Reserve System. All the Funds
in this Prospectus may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A reverse repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. Under a
reverse repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
If a Fund's positions in reverse repurchase agreements or similar transactions
are not covered by liquid assets in a segregated account, such transactions
would be subject to the Funds' limitations on borrowings. The Funds will not
borrow money, except as provided in each Fund's investment restrictions. Reverse
repurchase agreements may be entered into by all Funds except the Mid Cap Growth
Fund.
The Core Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and the Strategic Bond Fund
may enter into dollar rolls. In a dollar roll transaction, a Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date.
STRUCTURED SECURITIES
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment. The Balanced
Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund, and the
Strategic Bond Fund may enter into structured securities.
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset. The Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, and the Strategic Bond Fund may enter into swap
agreements.
U.S. GOVERNMENT SECURITIES
All the Funds may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The U.S. Government does not guarantee the net
asset value of the Funds' shares. Some U.S. Government securities, such as
Treasury bills, notes and bonds, and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, the Tennessee Valley Authority and the Small
Business Authority are supported only by the credit of the instrumentality. U.S.
Government securities include securities that have no coupons, or have been
stripped of their unmatured interest coupons, individual interest coupons from
such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. Custodial receipts issued in
connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are, therefore, not U.S.
Government securities,
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although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.
VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated.
These instruments are issued pursuant to written agreements between their
issuers and holders. The agreements permit the holders to increase (subject to
an agreed maximum) and the holders and issuers to decrease the principal amount
of the notes, and specify that the rate of interest payable on the principal
fluctuates according to an agreed formula. The Balanced Fund, Core Bond Fund,
Domestic Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Mid Cap Value Fund, Municipal Bond Fund, and the Strategic Bond Fund may
invest in the variable amount demand master notes.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund and the Municipal Funds may also may
invest in participation VRDNs, which provide a Fund with an undivided interest
in underlying VRDNs held by major investment banking institutions. All the Funds
may invest in VRDNs.
WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities. All of the Funds except for the Mid Cap Growth Fund,
Money Market Fund, Municipal Bond Fund, and the Municipal Money Market Fund may
invest in warrants and rights.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will soon be on the market. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit. All of the Funds except the Mid
Cap Value Fund and the Money Market Fund may invest in when-issued securities.
- --------------------------------------------------------------------------------
WELCOME TO AMERICAN GENERAL CORPORATION
- --------------------------------------------------------------------------------
American General Corporation, with assets of $111 billion and shareholders'
equity of $15 billion as of December 31, 1999, is the parent company of one of
the nation's largest diversified financial services organizations. American
General's operating divisions deliver a wide range of retirement services, life
insurance, and consumer finance products and services to diverse markets through
focused distribution channels. American General, headquartered in Houston, was
incorporated as a general business corporation in Texas in 1980 and is the
successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC and American General Investment Management, L.P. ("AGIM"), is
2929 Allen Parkway, Houston, Texas 77019.
INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment adviser for all the Funds. VALIC had
approximately $61 billion in assets under management, as of December 31, 1999.
VALIC and AGIM, a Sub-Adviser, are both members of the American General
Corporation group of companies. Each entity is a registered investment adviser
with the SEC. Several of VALIC's principal officers, directors and portfolio
managers hold similar positions with AGIM.
As Investment Adviser, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisers who make investment
decisions for most of the Funds.
In addition to the Funds shown in this prospectus, VALIC serves as investment
adviser to the Science & Technology Fund, which is sub-advised by T. Rowe Price.
The Science & Technology Fund is presented in a separate prospectus, also dated
March 1, 2000.
VALIC makes investment decisions for and is directly responsible for the
day-to-day management of the Lifestyle Funds, the Socially Responsible Fund, and
the Money Market Fund. The investment advisory agreement between VALIC and the
Series
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<PAGE> 75
Company provides for the Series Company to pay all expenses not specifically
assumed by VALIC. Examples of the expenses paid by the Series Company include
transfer agency fees, custodial fees, the fees of outside legal and auditing
firms, the costs of reports to shareholders and expenses of servicing
shareholder accounts. These expenses are allocated to each Fund in a manner
approved by the Board of Trustees.
Teresa Moro has been the Money Market Fund's portfolio manager and Vice
President and Investment Officer of the Series Company since its inception.
Since 1991, Ms. Moro has served as Vice President and Investment Officer of
American General Series Portfolio Company, a registered investment company
managed by VALIC and as Portfolio Manager of the American General Series
Portfolio Company Money Market Fund.
Magali E. Azema-Barac is responsible for the equity group. She heads the team
making investment decisions for each of the Index Funds, as well as Socially
Responsible Fund and the passively managed portion of the Small Cap Value Fund.
Ms. Azema-Barac joined American General in September, 1999. From 1995 to 1999,
she worked on the equity desk of USWest Investment Management Company in
Englewood, Colorado, where she incepted and managed an enhanced equity
portfolio.
HOW VALIC IS PAID FOR ITS SERVICES
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments. From time to time VALIC, the Sub-Advisers and/or the
Distributor may voluntarily undertake to reduce a Fund's expenses by reducing
the fees payable to them or bearing certain expenses.
<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Mid Cap Index Fund 0.28% on the first $500 million
0.27% on assets over $500 million
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
</TABLE>
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<PAGE> 76
<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Money Market Fund 0.25%
Municipal Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Municipal Money Market Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Small Cap Growth Fund 0.85%
Small Cap Index Fund 0.28% on the first $500 million
0.27% on assets over $500 million
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Stock Index Fund 0.27% on the first $500 million
0.26% on assets over $500 million
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>
INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are financial service
companies that specialize in certain types of investing. However, VALIC still
retains ultimate responsibility for managing the Funds. The Sub-Adviser's role
is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.
According to the agreements we have with the Sub-Advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-Advisers the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-Advisers
may buy and sell securities for each Fund with broker-dealers and other
financial intermediaries that they select. The Sub-Advisers may place orders to
buy and sell securities of these Funds with a broker-dealer affiliated with the
Sub-Adviser as allowed by law. This could include any affiliated futures
commission merchants.
The 1940 Act permits Sub-Advisers, under certain conditions, to place an order
to buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker cannot be greater than the
usual and customary brokers commission if the sale was completed on a securities
exchange. The Series Company has adopted procedures, as required by the 1940
Act, which provide that any commissions received by a Sub-Adviser's affiliated
broker may be considered reasonable and fair if compared to the commission
received by other brokers for the same type of securities transaction.
The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the SEC. The Series
Company and the Sub-Advisers have entered into written contracts, as required by
the 1940 Act, to allow the Sub-Adviser's affiliate to effect these types of
transactions for commissions.
VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
In selecting Sub-Advisers, the Trustees of the Series Company carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-Adviser; (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-Advisers' personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid by VALIC to each Sub-Adviser. The Sub-Advisory
fees are not paid by the Funds.
The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisers or replace
existing sub-advisers without first obtaining shareholder approval for the
change. The Board of Trustees, including a majority of the "independent"
Trustees, must approve each new sub-advisory agreement. This allows VALIC to act
more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90 days of the hiring of a new
sub-adviser. VALIC is responsible for selecting, monitoring, evaluating and
allocating assets to the Sub-advisers and oversees the Sub-advisers' compliance
with the relevant Fund's investment objective, policies and restrictions.
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<PAGE> 77
The Sub-Advisers are:
AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998
AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund, Municipal Bond Fund, Municipal Money Market Fund,
and the Strategic Bond Fund. AGIM was formed in 1998 as a successor to the
investment management division of American General Corporation, and is an
indirect wholly-owned subsidiary of American General Corporation. AGIM also
provides investment management and advisory services to pension and profit
sharing plans, financial institutions and other investors. Investment decisions
for the High Yield Bond Fund, Municipal Money Market Fund, Municipal Bond Fund,
and the Strategic Bond Fund are made by teams. Each team meets regularly to
review portfolio holdings and discuss purchase and sale activity.
Robert N. Kase, CFA, has been the Core Bond Fund's Portfolio Manager since
November 1998. He has been Investment Officer of VALIC since September 1998, and
Senior Portfolio Manager of AGIM since September 1998. Previously, Mr. Kase was
Senior Portfolio Manager with CL Capital Management, Inc. from September 1992
until July 1998.
Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc. from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined the Sub-adviser in
April 1998. Previously, Mr. Massie was Director of High Yield Research at
American General Corporation from August 1985 to April 1998.
BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983
Brown Capital is the Sub-Adviser for the Mid Cap Growth Fund. Brown Capital
served as investment adviser to approximately $4.6 billion in assets as of
December 31, 1999. Investment decisions for the Mid Cap Growth Fund are made by
a team of portfolio managers/analysts organized for that purpose. The team meets
regularly to review portfolio holdings and discuss purchase and sale activity.
CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931
Capital Guardian is the Sub-Adviser for the International Value Fund, the
Balanced Fund and the Domestic Bond Fund. Capital Guardian provides investment
management services to a limited number of large institutional clients such as
employee benefit funds, foundations and endowment funds. As of September 30,
1999, Capital Guardian had more than $275 billion in assets under management.
The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.
The portfolio managers for the fixed-income portion of the Fund include: (i) Jim
Mulally, Senior Vice President of the Sub-Adviser, who has been an investment
professional for 22 years and has been with the Sub-Adviser or an affiliate for
19 years; and (ii) Jim Baker, Vice President of the Sub-Adviser, who has been an
investment professional for 18 years and has been with the Sub-Adviser or an
affiliate for 11 years.
The portfolio managers for the U.S. large cap equity portion of the Fund
include: (i) David Fisher, Vice Chairman of the Sub-Adviser, who has been an
investment professional for 33 years and has been with the Sub-Adviser or an
affiliate for 29 years; (ii) Gene Stein, Executive Vice President of the
Sub-Adviser, who has been an investment professional for 27 years and has been
with the Sub-Adviser or an affiliate for 26 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 18 years and has been with the Sub-Adviser or an affiliate for
12 years; (iv) Ted Samuels, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 20 years and has been with the Sub-Adviser
or an affiliate for 18 years; and (v) Donnalisa Barnum, Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 13 years.
The portfolio managers for the U.S. small cap equity portion of the Fund
include: (i) Bob Kirby, Chairman Emeritus of the Sub-Adviser, who has been an
investment professional for 46 years and has been with the Sub-Adviser or an
affiliate for 33 years;
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<PAGE> 78
(ii) Michael Ericksen, Senior Vice President of the Sub-Adviser, who has been an
investment professional for 17 years and has been with the Sub-Adviser or an
affiliate for 11 years; and (iii) James Kang, Vice President of Capital Guardian
Research Company, an affiliate of the Sub-Adviser, who has been an investment
professional for 11 years and has been with the Sub-Adviser or an affiliate for
10 years.
The International Value Fund's portfolio managers include: (i) Robert Ronus,
President of the Sub-Adviser, who has been an investment professional for 30
years and has been with the Sub-Adviser or an affiliate for 25 years; (ii) David
Fisher, Vice Chairman of the Sub-Adviser, who has been an investment
professional for 33 years and has been with the Sub-Adviser or an affiliate for
29 years; (iii) Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., an affiliate of the Sub-Adviser, who has been an investment
professional for 27 years and has been with the Sub-Adviser or an affiliate for
26 years; (iv) Nancy Kyle, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 25 years and has been with the Sub-Adviser
or an affiliate for 8 years; (v) Nilly Sikorsky, Director of The Capital Group
of Companies, Inc., the ultimate parent of the Sub-Adviser, who has been an
investment professional for 36 years and has been with the Sub-Adviser or an
affiliate for 36 years; (vi) Lionel Sauvage, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 12 years and has been
with the Sub-Adviser or an affiliate for 12 years; (vii) Richard Havas, Sr.,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 17 years and has been with the Sub-Adviser or an affiliate for
13 years; and (viii) Rudolf Staehelin, Sr., Senior Vice President of Capital
International Research, Inc., an affiliate the Sub-Adviser, who has been an
investment professional for 21 years and has been with the Sub-Adviser or an
affiliate for 17 years.
James S. Baker and James R. Mulally serve as the Domestic Bond Fund's portfolio
managers. Mr. Baker, Vice President and fixed-income portfolio manager of an
affiliate of the Sub-Adviser, has focused on the application of quantitative
valuations to investment grade bonds and portfolios for the Sub-Adviser since
1987. Mr. Mulally, Senior Vice President, Director and Chairman of the
Sub-Adviser's Fixed-income Subcommittee, joined the Sub-Adviser in 1980.
FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)
FMA is the Sub-Adviser for the actively managed portion of the assets of the
Small Cap Value Fund. FMA is a wholly-owned subsidiary of United Asset
Management Corporation ("UAM"), and provides investment management services to
corporations, foundations, endowments, pension and profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of December 31, 1999,
UAM and its affiliates had over $203 billion in assets under management.
Investment decisions are made by a team that consists of portfolio managers and
analysts who specialize their research by sectors. Kathryn Vorisek is the lead
portfolio manager. The team meets regularly to review portfolio holdings and to
discuss purchase and sale activity.
GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869
GSAM is the Sub-Adviser for the Large Cap Growth Fund. As of September 1, 1999,
the Investment Management Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). The newly created entity
includes GSAM. GSAM provides a wide range of fully discretionary investment
advisory services, quantitatively driven and actively managed to U.S. and
international equity portfolios, U.S. and global fixed-income portfolios,
commodity and currency products and money market accounts. As of December 31,
1999, GSAM, along with other units of IMD, had assets under management of nearly
$500 billion.
The Large Cap Growth Fund is managed by the following individuals: Robert C.
Jones; Kent A. Clark; Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing
Director, joined the Sub-Adviser in 1989. Mr. Clark, Managing Director, joined
the Sub-Adviser's quantitative equity management team as a portfolio manager in
1992. Mr. Pinter, Vice President, joined the Sub-Adviser as a research analyst
in 1990, and became a portfolio manager in 1992. Ms. Brown, Vice President,
joined the Sub-Adviser in 1998. From 1984 to 1998, Ms. Brown was the director of
Quantitative Equity Research and served on the Investment Policy Committee at
Prudential Securities.
J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838
J.P. Morgan is the Sub-Adviser for the Small Cap Growth Fund. Known for its
commitment to proprietary research and its disciplined investment strategies,
J.P. Morgan provides asset management services to corporations, financial
institutions, governments and individuals. As of December 31, 1999, J.P. Morgan
and its affiliates employed over analysts and portfolio managers around
the world and had more than $340 billion in assets under management.
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<PAGE> 79
Candice Eggerss, Saira Malik and Carolyn Jones are the members of the
Sub-Adviser's team who will be primarily responsible for the day-to-day
management of the Small Cap Growth Fund. Ms. Eggerss, who has been with the
Sub-Adviser since 1996, is a Vice President and specializes in portfolio
investments in small capitalization technology companies. Prior to this, Ms.
Eggerss was employed at Weiss, Peck and Greer from April 1993 to April 1996. Ms.
Malik joined the Sub-Adviser in 1995 as a small company equity analyst and
portfolio manager after completing her graduate studies at the University of
Wisconsin. Ms. Jones has been with the Sub-Adviser since July 1998. Prior to
this, Ms. Jones served as a portfolio manager in J.P. Morgan's private banking
group and as a product specialist at Merrill Lynch Asset Management.
JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)
Jacobs Asset Management is the Sub-Adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation ("UAM") is a limited partner of, and owns a controlling
interest in, Jacobs Asset Management. Jacobs Asset Management provides
investment management and advisory services to corporations, unions, pensions
and profit-sharing plans, trusts and estates and other institutions and
investors. As of December 31, 1999, UAM and its affiliates had over $203 billion
in assets under management.
Investment decisions for the International Growth Fund are made by a team that
consists of portfolio managers and analysts who specialize their research by
region. Dan Jacobs, President, is the lead portfolio manager and has final
approval on purchase and sales. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.
NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939
NB Management is the Sub-Adviser for the Mid Cap Value Fund. NB Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of December 31, 1999, NB Management and its affiliates managed
approximately $54 billion in assets under management.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of the Sub-Adviser
and Mr. Gendelman is a managing director of Neuberger Berman, LLC. Messrs.
Gendelman and Mullick have been associated with the Sub-Adviser since 1994 and
1998, respectively. From 1993 to 1998, Mr. Mullick was a portfolio manager for
another investment adviser.
STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792
State Street Global Advisors is the Sub-Adviser for the Large Cap Value Fund.
State Street Global Advisors is an operating division of State Street Bank, a
wholly-owned subsidiary of State Street Corporation, which had more than $667
billion under management as of December 31, 1999.
The Large Cap Value Fund is managed by a team of investment professionals. In
addition to the ongoing activity of portfolio management, the team is
responsible for research focused on enhancing the Sub-Adviser's quantitative
process.
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
There are several references below to Customer Service or the Transfer Agent.
Customer Service and all Transfer Agent functions are provided by National
Financial Data Services, Inc., in Kansas City, Missouri.
TYPES OF ACCOUNTS
The different ways you may set up an account are listed below.
Individual
Individual accounts are owned by one person. You can designate a beneficiary for
the account if you choose to have a Transfer on Death account ("TOD").
Joint Tenants
Joint accounts can have two or more owners. You can set the account up as joint
tenants with rights of survival ("JTWROS"), which means that if one owner dies,
the other owner will receive the funds without going through probate court.
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<PAGE> 80
You can also choose joint tenants in common ("JTIC"). This means that each
tenant owns a specific portion of the account. We assume 50/50 ownership unless
we are otherwise notified. When one tenant dies, that portion of the account
belongs to the estate of the deceased.
Retirement Plans
Retirement plans provide individuals with tax-advantaged ways to save for
retirement, either with tax-deductible contributions, or tax-deferred growth.
Retirement accounts require special applications and have a lower initial
purchase requirement. Retirement accounts include:
Traditional Individual Retirement Accounts ("IRAs")
Roth IRAs
Roth Conversion IRAs
Rollover IRAs
Profit-Sharing or Money Purchase Pension Plans
Simplified Employee Pension ("SEP") IRAs
SIMPLE IRAs
401(k) Plans
Transfer or Gift to Minor
You can set up a custodial account for a child under your state's Uniform
Transfer or Gift to Minors Act ("UTMA" or "UGMA"). Any individual can give the
child up to $10,000 each year without paying the federal gift tax. The gift to
the child is irrevocable, meaning that it cannot be taken back. In addition, the
account and all the money in it must be conveyed to the child upon reaching the
age of majority, which is 18-21 in most states.
Trust
The trust must be established before the account is open. We need to know the
date of establishment and the name of the trustee.
Businesses or Organizations
You may open an account for your corporation, association, or partnership. The
application must be accompanied by a corporate resolution so that we know who is
authorized to transact on the account.
INVESTMENT MINIMUMS
The table below illustrates the minimum investment requirements for initial and
subsequent investments for any of the Funds.
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
- --------------- ---------- ----------
<S> <C> <C>
Retirement Plans $500 $50
UTMA/UGMA $250 $50
Automatic Investment Program $50 $50
All other accounts $2,000 $50
</TABLE>
AVAILABLE CLASSES OF SHARES
You may choose to purchase either Class A or Class B shares. The decision as to
which class is best for you depends on your investment goals, how much you want
to invest and how long you plan to keep the investment. The fees and expenses
are different for each Class and affect a Fund's total return. The fees and
expenses are shown in the Fee Table and Example of Expenses earlier in this
Prospectus.
Shares of the Money Market Fund and the Municipal Money Market Fund are sold
without a sales charge. You should choose Class A for a money market fund,
unless you intend to exchange the money market shares for Class B shares of
another fund.
Class A features{
- - Front-end sales charge, except for money market funds
- - Reduced sales charges for larger purchases
- - Cumulative purchase discount (see Rights of Accumulation below)
- - No sales charges for purchases of $1 million or more
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<PAGE> 81
CLASS A SALES CHARGE TABLES
If you choose Class A shares, you will pay a sales charge at the time of each
purchase, except for the money market funds. These tables show the charges both
as a percentage of offering price and as a percentage of the amount you invest.
The term "offering price" includes the front-end sales charge. If you invest
more, the sales charge will be lower.
<TABLE>
<S> <C>
Equity Funds
Balanced Mid Cap Index
Conservative Growth Lifestyle Mid Cap Value
Growth Lifestyle Moderate Growth Lifestyle
International Growth Small Cap Growth
International Value Small Cap Index
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth Stock Index
</TABLE>
<TABLE>
<CAPTION>
YOUR SALES CHARGE AS A PERCENTAGE OF: MAXIMUM COMMISSION
INVESTMENT NET INVESTMENT OFFERING PRICE TO BROKER-DEALER
- ---------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000 6.10% 5.75% 5.25%
$25,000 - $49,999 5.82% 5.50% 5.00%
$50,000 - $99,999 4.99% 4.75% 4.25%
$100,000 - $249,999 3.90% 3.75% 3.25%
$250,000 - $499,999 2.56% 2.50% 2.00%
$500,000 - $999,999 2.04% 2.00% 1.75%
$1,000,000 or more No sales charge, but subject to See Payments to Broker-Dealers below
CDSC(45)
</TABLE>
<TABLE>
<S> <C>
Fixed-Income (Bond) Funds
Core Bond Municipal Bond
Domestic Bond Strategic Bond
High Yield Bond
</TABLE>
<TABLE>
<CAPTION>
YOUR SALES CHARGE AS A PERCENTAGE OF: MAXIMUM COMMISSION
INVESTMENT NET INVESTMENT OFFERING PRICE TO BROKER-DEALER
- ---------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $49,999 4.99% 4.75% 4.25%
$50,000 - $99,999 4.71% 4.50% 4.00%
$100,000 - $249,999 3.63% 3.50% 3.00%
$250,000 - $499,999 2.56% 2.50% 2.00%
$500,000 - $999,999 2.04% 2.00% 1.75%
$1,000,000 or more No sales charge, but subject to See Payments to Broker-Dealers below
CDSC(46)
</TABLE>
- ---------------
(45) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
(46) Purchases of $1 million or more which are redeemed within one year will be
charged a 1% CDSC. Redemptions within 2 years will be charged a CDSC of 0.50%.
When the sales charge on Class A Shares will be reduced or waived
- - Rights of Accumulation (cumulative purchase discount): Previous Class A
purchases may help you to qualify for a lower sales charge. The sales charge
is calculated by adding the dollar amount of the new purchase of shares to the
higher of the original cost or current value of Class A Fund shares previously
purchased.
- - Volume Discounts (groups or grouped accounts): Related accounts may be
aggregated for the purposes of receiving a reduced sales charge. You must
contact Customer Service to see if you or your group is eligible for a volume
discount purchase, and notice may be required for each subsequent purchase.
For purposes of determining eligibility for the volume discount, spouses and
their children under 21 years of age are treated as a single purchaser, as is
a trustee or other fiduciary of a single trust estate or a single fiduciary
account. An aggregate investment includes all shares of the Funds owned plus
the shares being purchased.
- - Letter of Intent: If you intend to purchase a specific amount over the next 13
months, it may be to your benefit to sign a Letter of Intent. This allows you
to receive a lower breakpoint for each purchase, based on the total amount you
intend to purchase.
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<PAGE> 82
Up to 5% of the total amount you intend to purchase may be held in escrow to
cover additional sales charges, just in case you do not purchase the total
amount. A Letter of Intent can be obtained by calling Customer Service at
1-877-999-2434.
- - Purchases of Class A Shares without sales charges: Class A Shares may be
purchased without a sales charge by:
1. Current and retired Trustees;
2. Current and retired employees of American General Corporation and its
affiliates;
3. Directors, officers, and employees (and when permitted, registered
representatives and their employees) of financial intermediaries that have
entered into a selling agreement with the Distributor;
4. Immediate family members (spouse, children under 21, grandchildren under 21,
and parents) of 1 through 3 above;
5. Financial institution trust departments investing an aggregate of $1 million
in the Funds;
6. Accounts for which broker-dealers, financial institutions, or financial
planners charge an account management fee (also called a wrap fee);
7. Tax-qualified plans with more than $1 million in plan assets;
8. Tax-qualified plans purchasing shares with loan repayments from participants;
and
9. By a Fund in connection with the acquisition of another investment company.
Class B features{
- - No front-end sales charges
- - Contingent deferred sales charge ("CDSC") on redemptions
- - Keeping the shares longer will reduce the CDSC
- - No CDSC is charged for shares acquired by reinvesting dividends or capital
gains
- - Class B shares automatically convert to Class A shares after 6 years
CLASS B CDSC TABLE
If you choose Class B shares, you will not pay an initial sales charge, but you
will have to pay a CDSC if the shares are sold within the first five years, as
shown below.
<TABLE>
<CAPTION>
YEAR 1 2 3 4 5 6
- ---- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Charge 5% 4% 3% 2% 1% 0%
</TABLE>
Shares not subject to a CDSC will be redeemed first, followed by shares held the
longest during the CDSC period. The amount of the CDSC is calculated as a
percentage of the lesser of the current market value or the original cost of the
shares being redeemed. This means that you do not pay a CDSC on any gain in the
value of the shares sold. The CDSC may be waived under certain circumstances.
When the CDSC will be waived
No CDSC will be charged for:
- - Exchanges of Class B Shares from one Fund to another
- - Required minimum distributions from tax-deferred retirement plans and IRAs
- - Redemptions from tax-deferred retirement plans for termination of employment,
participant loans, or hardship withdrawals
- - The return of an excess contribution or deferral, pursuant to sections
401(k)(8), 401(m)(6), 402(g)(2), or 408(d)(4) or (5) of the Internal Revenue
Code
- - Redemptions due to the death of an individual investor
- - Redemptions due to the deaths of all the investors, for a joint account
- - Redemptions taken due to a disability, as determined by the Social Security
Administration
- - Systematic withdrawals of at least $50, provided that the amounts withdrawn do
not exceed 12% of the account value, on an annual basis (you must have a
minimum balance of $5,000 to be eligible for this program)
- - Redemptions due to the failure to meet the minimum balance requirements
DISTRIBUTION AND SERVICE PLAN (EXCEPT FOR LIFESTYLE FUNDS)
Each Fund (except for the Lifestyle Funds) has adopted a Distribution and
Service Plan ("Plan") under Rule 12b-1 of the 1940 Act. The Plan allows each
Fund to pay distribution fees for the sale and distribution of its shares and
for services provided to shareholders. Each Fund paid service fees of 0.25% for
Class A Shares and 1% for Class B Shares during the most recent fiscal period.
Because these fees are paid out of a Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
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<PAGE> 83
PAYMENTS TO BROKER-DEALERS
The distribution and service fees are paid to the distributor of the Funds,
American General Distributors, Inc., an affiliate of VALIC (the "Distributor").
The Distributor may then pay broker-dealers a commission for selling Fund
Shares. The maximum commission for Class A Shares is shown above, as a
percentage of the offering price. The Distributor may pay a maximum commission
of 4.00% on Class B Shares at the time of purchase.
The Distributor may occasionally pay broker-dealers the full amount of the Class
A front-end sales charge as a special sales incentive. Broker-dealers may also
receive additional compensation and finder's fees, based on assets held through
the broker-dealer firm. Finder's fees may be paid on Class A Share purchases of
$1 million or more, excluding Money Market Funds. The finder's fee is 0.50% on
sales of $1 to $2 million, plus 0.40% on the next $1 million, and 0.25% on the
excess over $3 million.
The Distributor may also provide promotional incentives or payments to its
registered representatives, its affiliated broker-dealer, or to other
broker-dealers in connection with the sales of Fund Shares. These incentives or
payments may include payments for travel and lodging expenses incurred for
meetings and seminars of a business nature. The Distributor makes these payments
at its own expense, in accordance with rules set forth by the National
Association of Securities Dealers, Inc.
HOW SHARES ARE VALUED
The price of each Class of shares for a Fund is based on net asset value
("NAV"). NAV is computed by adding the value of a Fund's holdings plus other
assets, subtracting liabilities, and then dividing the result by the number of
shares outstanding. The NAV of each Class will be different, depending on the
number of Class shares outstanding.
Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. Some Funds hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when you will not be able to buy or sell your shares.
The Money Market Fund and the Municipal Money Market Fund and any securities
maturing within 60 days are valued according to the "amortized cost" method,
which is intended to stabilize the NAV at $1 per share.
The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4:00 p.m. Eastern
Time). Each Fund is open for business each day the NYSE is open. The NYSE is
closed on most federal holidays and Good Friday. Please note that there are some
federal holidays, however, such as Columbus Day and Veterans' Day, when the NYSE
is open and the Funds are open but purchases cannot be made due to the closure
of the banking system.
OPENING YOUR ACCOUNT
You may open an account through a registered representative or by completing the
enclosed application. Please be sure to indicate the Fund and the Class of
shares you wish to purchase.
Please take special care when completing your application that you sign up for
any services you may desire, including telephone privileges. If your bank is a
member of the Automated Clearing House ("ACH"), you may sign up for the
electronic transfer service. To sign up, you MUST include a voided check for a
checking account, or a deposit slip for a savings account. If you wish to add
services at a later date, a signature guarantee may be required.
Send the new account application and your purchase check to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502
If you purchase shares through a registered representative or financial
institution
You should read the program materials together with this Prospectus. Certain
features may be modified in these programs. Investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent.
GENERAL PURCHASE INFORMATION
If your purchase order is received by 3:00 p.m. Central Time, then your purchase
will be processed at the next NAV calculated after your order is received by the
Transfer Agent. Any check purchase received without an investment slip may cause
delayed crediting. All purchases must be made in U.S. dollars and should be
drawn only on U.S. banks. If your check does not clear your bank, you may be
charged a fee by the Transfer Agent. All purchases, except those made by wire,
will be on hold for 15 calendar days. Each Fund reserves the right to reject any
specific purchase order and may suspend the offering of shares in response to
conditions in the securities markets or for other reasons.
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<PAGE> 84
ADDITIONAL ACCOUNT PURCHASES
You may make additional purchases by contacting your registered representative
or by:
Mail
You may use the investment remittance slip attached to your account statement or
confirmations. Make your check payable to the Fund in which you are investing
and mail to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502
Wire
Please call 1-877-999-2434 before you send a wire purchase.
Your financial institution may charge you a fee for wiring funds.
Electronic Transfers -- $50 or more
If you have already signed up for our ACH service, you may call Customer Service
at 1-877-999-2434 to transfer money from your bank to the Fund through our
electronic transfer service. Your bank account will be debited for the desired
amount. Allow one or two business days after you place your request for the
transfer to take place. This ACH service allows you to purchase additional
shares quickly and conveniently without mail delays.
AUTOMATIC INVESTMENT PROGRAMS
Please call 1-877-999-2434 to set up an automatic investment program. You may
change amounts or Funds or discontinue a program at any time.
Automatic Investing
You may request an automatic ACH transfer of $50 or more from your bank to the
Fund. You may choose when you want this to occur, whether monthly, bimonthly,
quarterly, or some other time.
Payroll Deductions
You may make regular investments of $50 or more through automatic payroll
deduction you initiate through your employer. Your employer may have special
forms and other rules for this program.
Systematic Exchanges
If you have a Fund balance of at least $5,000, you may request an automatic
exchange of $25 or more from that Fund account to another Fund account. The
automatic exchange will occur once per month.
EXCHANGES OF SHARES FROM ONE FUND TO ANOTHER
Please call Customer Service at 1-877-999-2434 to make an exchange. You must
have telephone privileges for this service.
An exchange of shares occurs when you sell shares in one Fund and buy shares in
another Fund. Each exchange may produce a taxable gain or loss, unless in a
tax-deferred account.
Exchanges between accounts will only be accepted if the accounts are registered
identically.
Exchanges may be requested by mail or by telephone. Please refer to "Selling
Your Shares" for more details on requests by mail.
If you exchange Class A Shares of the Money Market Fund or the Municipal Money
Market Fund for Class A Shares of any other Fund with a sales charge, you will
pay a sales charge at the time of the exchange.
Shares may only be exchanged for shares of the same class of another Fund.
No CDSC is imposed on exchanges of Class B Shares subject to a CDSC at the time
of the exchange because the shares are still within the American General Fund
Group. The CDSC will be charged for all other sales.
Because excessive trading can increase Fund expenses and hurt performance for
other shareholders, we may refuse any exchange that we believe is due to market
timing or which may otherwise significantly affect a Fund.
We may modify these exchange policies upon 60 days' prior notice to
shareholders.
SELLING YOUR SHARES
When you request a redemption by 3:00 p.m. Central Time, the proceeds of the
sale will normally be mailed, wired, or sent by electronic transfer (ACH) the
next business day, provided all necessary documents have been received by the
Transfer Agent, and the funds are available for redemption. If your recent
purchase is on hold and not available for redemption, you may exchange it
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<PAGE> 85
into another Fund. We may hold payment of redemptions until your purchase check
has cleared, which may take up to 15 calendar days. The Funds have the right to
redeem shares in assets other than cash for redemption amounts exceeding, in any
90-day period, $250,000 or 1% of the net asset value of the affected Fund,
whichever is less.
When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but redemptions cannot be made due to the closure of the banking system.
You may sell shares by contacting your registered representative or by:
Telephone: Check redemptions, ACH, or bank wires
You may redeem up to $25,000 daily by calling Customer Service at 1-877-999-2434
before 3:00 p.m. Central Time. The proceeds of the sale may be sent only to
pre-authorized destinations, such as your address of record or your bank account
by wire or by ACH.
Bank wires must be for at least $500. You may be charged up to $25 for a wire to
your bank, and your bank may charge to receive the wire. International wires are
more expensive; therefore, the charge to you may be higher.
ACH transfers must be for at least $50. There is no charge for an ACH transfer.
Allow one or two business days after you place your request for the transfer to
take place.
Mail
Your written request should include the following information:
1. Your name, address, and daytime telephone number;
2. Your account number;
3. The name or number of the Fund from which you wish to sell shares;
4. The Class of Shares to be sold, if applicable;
5. The dollar or share amount of the sale; and
6. Your signature, guaranteed (see below).
Send the written request to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502
Special Requirements
A SIGNATURE GUARANTEE is required for any:
1. Redemption when the account address has been listed less than 30 days; or
2. Redemption to an address other than that on the account.
You may obtain a signature guarantee from:
1. A bank which is a member of the FDIC;
2. A trust company;
3. A member firm of a national securities exchange; or
4. Another eligible guarantor institution.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed."
A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE.
Check Writing -- Money Market Fund and Municipal Money Market Fund only
The Money Market Funds offer check writing privileges for Class A Shares. You
can choose this redemption option by completing the appropriate portions of the
account application. The Transfer Agent will provide you with a supply of
checks.
- - Checks may be written for $100 or more.
- - Checks will not be honored if you do not have enough money in your account to
cover the check, or if the money in the account is still on hold from a recent
purchase (see "General Purchase Information" above.)
- - If we do not honor a check, you may be charged a fee of $25.
- - You may not completely close your account by writing a check.
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<PAGE> 86
AUTOMATIC REDEMPTIONS
- - You may request an automatic monthly or quarterly ACH transfer of $50 or more
from the Fund to your bank, provided your account balance is $5,000 or more.
- - You may request a monthly or quarterly automatic check redemption of $50 or
more, provided your account balance is $5,000 or more.
REINSTATEMENT PRIVILEGE
If you redeem some or all of your Fund shares, you have up to 30 days to
reinvest all or part of your redemption proceeds in Class A shares of the Fund
without paying a sales charge. This privilege applies only to redemptions of
Class A shares on which an initial sales charge or CDSC was paid or to
redemptions of Class A shares of the Fund that you purchase by reinvesting
dividends or distributions. You must ask the Transfer Agent to apply this
privilege when you send your purchase.
MINIMUM ACCOUNT BALANCES
If the balance in your account falls below the required minimum initial
investment, you will be notified that you should bring the balance up to the
required minimum amount within 60 days. If your account remains below the
minimum required, it may be closed and the proceeds mailed to the address of
record.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividend and
distribution payments will vary between classes; dividend payments are
anticipated to be generally higher for Class A shares.
<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Municipal Money Market Fund
Dividends declared daily and paid monthly:
Core Bond Municipal Bond
Domestic Bond Strategic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Index
Large Cap Value Small Cap Value
Mid Cap Growth Socially Responsible
Mid Cap Index Stock Index
Dividends paid semi-annually:
International Growth
International Value
</TABLE>
DIVIDEND PAYMENT OPTIONS
Dividends and any distributions are automatically reinvested in the same Fund
without a sales charge, unless you elect to have dividends paid in cash or in
shares of the Money Market Fund or the Municipal Money Market Fund. You may make
this election on the account application.
BUYING A DIVIDEND
(Not Applicable to Money Market Funds)
At the time of purchase, the share price of each class may reflect undistributed
income, capital gains or unrealized appreciation of securities. Any income or
capital gains from these amounts which are later distributed to you are fully
taxable. On the record date for a distribution, share value is reduced by the
amount of the distribution. If you buy shares just before the record date
("buying a dividend") you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.
FEDERAL TAXES
In January, each Fund will mail you Form 1099-DIV indicating the federal tax
status of dividends and any capital gain distributions paid to you during the
past year. Generally, dividends and distributions are taxable in the year they
are paid.
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<PAGE> 87
However, any dividends and distributions paid in January but declared during the
prior three months are taxable in the year declared. Dividends and distributions
are taxable to you regardless of whether they are taken in cash or reinvested.
Dividends, including short-term capital gains, are taxable as ordinary income,
except that the Municipal Money Market Fund and Municipal Bond Fund intend to
pay dividends which are tax-exempt on the Federal level. Income exempt from
federal tax may be subject to state and local taxes. Distributions from
long-term capital gains are taxable as long-term capital gains, regardless of
how long you have owned shares.
FOR NON-MONEY MARKET FUNDS
You may realize a capital gain or loss when you sell or exchange shares. This
capital gain or loss will be short- or long-term, depending on how long you have
owned the shares which were sold. In January, these Funds will mail you Form
1099-B indicating the total amount of all sales, including exchanges. You should
keep your account statements to help determine the cost basis of the shares to
report on your tax returns.
TAXPAYER IDENTIFICATION NUMBER
If we do not have your correct Social Security or Taxpayer Identification Number
("TIN") and a signed certified application or Form W-9, Federal law requires us
to withhold 31% of your reportable dividends, and possibly 31% of certain
redemptions. In addition, you may be subject to a fine by the Internal Revenue
Service. We reserve the right to reject any new account or any purchase order
for failure to supply a certified TIN.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The line graphs on the following pages reflect how an initial $10,000 investment
made on each Fund's inception date, November 2, 1998, would have changed in
value by the end of the first fiscal year, October 31, 1999.
Each line graph also shows how each Fund's benchmark index performed during that
same period. An investor cannot invest directly in one of the benchmark indices.
Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.
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<PAGE> 88
into another Fund. We may hold payment of redemptions until your purchase check
has cleared, which may take up to 15 calendar days. The Funds have the right to
redeem shares in assets other than cash for redemption amounts exceeding, in any
90-day period, $250,000 or 1% of the net asset value of the affected Fund,
whichever is less.
When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but redemptions cannot be made due to the closure of the banking system.
You may sell shares by contacting your registered representative or by:
Telephone: Check redemptions, ACH, or bank wires
You may redeem up to $25,000 daily by calling Customer Service at 1-877-999-2434
before 3:00 p.m. Central Time. The proceeds of the sale may be sent only to
pre-authorized destinations, such as your address of record or your bank account
by wire or by ACH.
Bank wires must be for at least $500. You may be charged up to $25 for a wire to
your bank, and your bank may charge to receive the wire. International wires are
more expensive; therefore, the charge to you may be higher.
ACH transfers must be for at least $50. There is no charge for an ACH transfer.
Allow one or two business days after you place your request for the transfer to
take place.
Mail
Your written request should include the following information:
1. Your name, address, and daytime telephone number;
2. Your account number;
3. The name or number of the Fund from which you wish to sell shares;
4. The Class of Shares to be sold, if applicable;
5. The dollar or share amount of the sale; and
6. Your signature, guaranteed (see below).
Send the written request to:
American General Fund Group
P.O. Box 219502
Kansas City, MO 64141-9502
Special Requirements
A SIGNATURE GUARANTEE is required for any:
1. Redemption when the account address has been listed less than 30 days; or
2. Redemption to an address other than that on the account.
You may obtain a signature guarantee from:
1. A bank which is a member of the FDIC;
2. A trust company;
3. A member firm of a national securities exchange; or
4. Another eligible guarantor institution.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed."
A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE.
Check Writing -- Money Market Fund and Municipal Money Market Fund only
The Money Market Funds offer check writing privileges for Class A Shares. You
can choose this redemption option by completing the appropriate portions of the
account application. The Transfer Agent will provide you with a supply of
checks.
- - Checks may be written for $100 or more.
- - Checks will not be honored if you do not have enough money in your account to
cover the check, or if the money in the account is still on hold from a recent
purchase (see "General Purchase Information" above.)
- - If we do not honor a check, you may be charged a fee of $25.
- - You may not completely close your account by writing a check.
87
<PAGE> 89
AUTOMATIC REDEMPTIONS
- - You may request an automatic monthly or quarterly ACH transfer of $50 or more
from the Fund to your bank, provided your account balance is $5,000 or more.
- - You may request a monthly or quarterly automatic check redemption of $50 or
more, provided your account balance is $5,000 or more.
REINSTATEMENT PRIVILEGE
If you redeem some or all of your Fund shares, you have up to 30 days to
reinvest all or part of your redemption proceeds in Class A shares of the Fund
without paying a sales charge. This privilege applies only to redemptions of
Class A shares on which an initial sales charge or CDSC was paid or to
redemptions of Class A shares of the Fund that you purchase by reinvesting
dividends or distributions. You must ask the Transfer Agent to apply this
privilege when you send your purchase.
MINIMUM ACCOUNT BALANCES
If the balance in your account falls below the required minimum initial
investment, you will be notified that you should bring the balance up to the
required minimum amount within 60 days. If your account remains below the
minimum required, it may be closed and the proceeds mailed to the address of
record.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividend and
distribution payments will vary between classes; dividend payments are
anticipated to be generally higher for Class A shares.
<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Municipal Money Market Fund
Dividends declared daily and paid monthly:
Core Bond Municipal Bond
Domestic Bond Strategic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Index
Large Cap Value Small Cap Value
Mid Cap Growth Socially Responsible
Mid Cap Index Stock Index
Dividends paid semi-annually:
International Growth
International Value
</TABLE>
DIVIDEND PAYMENT OPTIONS
Dividends and any distributions are automatically reinvested in the same Fund
without a sales charge, unless you elect to have dividends paid in cash or in
shares of the Money Market Fund or the Municipal Money Market Fund. You may make
this election on the account application.
BUYING A DIVIDEND
(Not Applicable to Money Market Funds)
At the time of purchase, the share price of each class may reflect undistributed
income, capital gains or unrealized appreciation of securities. Any income or
capital gains from these amounts which are later distributed to you are fully
taxable. On the record date for a distribution, share value is reduced by the
amount of the distribution. If you buy shares just before the record date
("buying a dividend") you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.
FEDERAL TAXES
In January, each Fund will mail you Form 1099-DIV indicating the federal tax
status of dividends and any capital gain distributions paid to you during the
past year. Generally, dividends and distributions are taxable in the year they
are paid.
88
<PAGE> 90
However, any dividends and distributions paid in January but declared during the
prior three months are taxable in the year declared. Dividends and distributions
are taxable to you regardless of whether they are taken in cash or reinvested.
Dividends, including short-term capital gains, are taxable as ordinary income,
except that the Municipal Money Market Fund and Municipal Bond Fund intend to
pay dividends which are tax-exempt on the Federal level. Income exempt from
federal tax may be subject to state and local taxes. Distributions from
long-term capital gains are taxable as long-term capital gains, regardless of
how long you have owned shares.
FOR NON-MONEY MARKET FUNDS
You may realize a capital gain or loss when you sell or exchange shares. This
capital gain or loss will be short- or long-term, depending on how long you have
owned the shares which were sold. In January, these Funds will mail you Form
1099-B indicating the total amount of all sales, including exchanges. You should
keep your account statements to help determine the cost basis of the shares to
report on your tax returns.
TAXPAYER IDENTIFICATION NUMBER
If we do not have your correct Social Security or Taxpayer Identification Number
("TIN") and a signed certified application or Form W-9, Federal law requires us
to withhold 31% of your reportable dividends, and possibly 31% of certain
redemptions. In addition, you may be subject to a fine by the Internal Revenue
Service. We reserve the right to reject any new account or any purchase order
for failure to supply a certified TIN.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The line graphs on the following pages reflect how an initial $10,000 investment
made on each Fund's inception date, November 2, 1998, would have changed in
value by the end of the first fiscal year, October 31, 1999.
Each line graph also shows how each Fund's benchmark index performed during that
same period. An investor cannot invest directly in one of the benchmark indices.
Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.
89
<PAGE> 91
AMERICAN GENERAL BALANCED FUND
[GRAPH]
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
[GRAPH]
90
<PAGE> 92
AMERICAN GENERAL LARGE CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL LARGE CAP VALUE FUND
[GRAPH]
91
<PAGE> 93
AMERICAN GENERAL MID CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL MID CAP INDEX FUND
[GRAPH]
92
<PAGE> 94
AMERICAN GENERAL MID CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
[GRAPH]
93
<PAGE> 95
AMERICAN GENERAL MONEY MARKET FUND
[GRAPH]
AMERICAN GENERAL MUNICIPAL BOND FUND
[GRAPH]
94
<PAGE> 96
AMERICAN GENERAL MUNICIPAL MARKET FUND
[GRAPH]
AMERICAN GENERAL SMALL CAP GROWTH FUND
[GRAPH]
95
<PAGE> 97
AMERICAN GENERAL SMALL CAP INDEX FUND
[GRAPH]
AMERICAN GENERAL SMALL CAP VALUE FUND
[GRAPH]
96
<PAGE> 98
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
[GRAPH]
AMERICAN GENERAL STOCK INDEX FUND
[GRAPH]
97
<PAGE> 99
AMERICAN GENERAL STRATEGIC BOND FUND
[GRAPH]
The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Balanced Fund 9.07% 9.42%
Conservative Growth Lifestyle Fund 5.84% 7.21%
Core Bond Fund (5.24)% (5.99)%
Domestic Bond Fund (6.03)% (6.58)%
Growth Lifestyle Fund 12.80% 14.52%
High Yield Bond Fund (2.58)% (3.18)%
International Growth Fund 8.42% 9.00%
International Value Fund 35.93% 37.70%
Large Cap Growth Fund 28.18% 29.70%
Large Cap Value Fund 8.24% 8.92%
Mid Cap Growth Fund (2.92)% (2.90)%
Mid Cap Index Fund 12.15% 13.05%
Mid Cap Value Fund 13.32% 13.71%
Moderate Growth Lifestyle Fund 8.58% 10.26%
Money Market Fund 4.54% (1.07)%
Municipal Bond Fund (10.32)% (11.28)%
Municipal Money Market Fund 2.18% (3.58)%
Small Cap Growth Fund 33.65% 35.40%
Small Cap Index Fund 4.92% 5.53%
Small Cap Value Fund (11.68)% (11.72)%
Socially Responsible Fund 15.48% 16.50%
Stock Index Fund 17.21% 17.55%
Strategic Bond Fund (2.60)% (3.29)%
</TABLE>
98
<PAGE> 100
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single Fund share. The total return numbers in the
tables represent the rate that an investor would have earned or lost on an
investment in a Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by Ernst & Young, L.P., whose reports, along
with the Fund's financial statements, are included in the Annual Report, which
is available upon request and which is incorporated into this document by this
reference.
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS A SHARES
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------------------
STOCK MID CAP SMALL CAP INTERNATIONAL LARGE CAP MID CAP
INDEX INDEX INDEX GROWTH GROWTH GROWTH
FUND FUND FUND FUND FUND FUND
--------- ------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.11 0.10 0.10 0.10 (0.01) (0.03)
Net realized and unrealized gain (loss) on
securities 2.32 1.80 1.03 1.40 3.61 0.33
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 2.43 1.90 1.13 1.50 3.60 0.30
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.11) (0.10) (0.10) -- -- --
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.11) (0.10) (0.10) -- -- --
------ ------ ------ ------ ------ ------
Net asset value at end of period $12.32 $11.80 $11.03 $11.50 $13.60 $10.30
====== ====== ====== ====== ====== ======
TOTAL RETURN 24.36% 19.00% 11.32% 15.03% 36.00% 3.01%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.82% 0.83% 0.83% 1.40% 1.10% 1.04%
Ratio of expenses to average net assets before
expense reductions 1.53% 1.67% 1.69% 2.68% 2.03% 2.36%
Ratio of net investment income (loss) to
average net assets 1.08% 0.91% 0.97% 1.06% (0.10)% (0.31)%
Portfolio turnover rate 14% 44% 48% 91% 65% 25%
Number of shares outstanding at end of period
(000's) 457 272 263 143 203 172
Net assets at the end of period (000's) $5,634 $3,209 $2,900 $1,650 $2,760 $1,769
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL LARGE CAP MID CAP SMALL CAP SOCIALLY
GROWTH VALUE VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND FUND FUND
--------- ------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) (0.07) 0.04 0.09 0.06 0.11 0.10
Net realized and unrealized gain (loss) on
securities 4.24 4.38 1.39 1.97 (0.73) 2.15
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 4.17 4.42 1.48 2.03 (0.62) 2.25
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- (0.09) (0.05) (0.11) (0.10)
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions -- -- (0.09) (0.05) (0.11) (0.10)
------ ------ ------ ------ ------ ------
Net asset value at end of period $14.17 $14.42 $11.39 $11.98 $ 9.27 $12.15
====== ====== ====== ====== ====== ======
TOTAL RETURN 41.80% 44.22% 14.85% 20.23% (6.29)% 22.53%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.40% 1.29% 1.05% 1.29% 1.23% 0.80%
Ratio of expenses to average net assets before
expense reductions 2.44% 2.65% 2.13% 2.43% 2.61% 1.97%
Ratio of net investment income (loss) to
average net assets (0.71)% 0.38% 0.93% 0.51% 1.15% 0.87%
Portfolio turnover rate 128% 32% 66% 177% 91% 24%
Number of shares outstanding at end of period
(000's) 171 134 178 144 148 137
Net assets at the end of period (000's) $2,424 $1,936 $2,028 $1,728 $1,371 $1,663
</TABLE>
99
<PAGE> 101
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS A SHARES CONTINUED
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
HIGH YIELD STRATEGIC DOMESTIC CORE MUNICIPAL
BALANCED BOND BOND BOND BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ---------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.21 0.81 0.67 0.50 0.50 0.36
Net realized and unrealized gain (loss) on securities 1.36 (0.57) (0.45) (0.63) (0.55) (0.93)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 1.57 0.24 0.22 (0.13) (0.05) (0.57)
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.21) (0.81) (0.67) (0.50) (0.50) (0.36)
Distributions from net realized gain on securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.21) (0.81) (0.67) (0.50) (0.50) (0.36)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.36 $ 9.43 $ 9.55 $ 9.37 $ 9.45 $ 9.07
====== ====== ====== ====== ====== ======
TOTAL RETURN 15.72% 2.28% 2.26% (1.34)% (0.52)% (5.84)%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.07% 1.25% 1.15% 1.03% 1.05% 1.05%
Ratio of expenses to average net assets before expense
reductions 2.47% 2.01% 2.48% 2.30% 1.59% 1.93%
Ratio of net investment income (loss) to average net
assets 1.98% 5.69% 6.92% 5.21% 4.43% 3.69%
Portfolio turnover rate 62% 72% 183% 98% 469% 9%
Number of shares outstanding at end of period (000's) 159 4 136 208 14 332
Net assets at the end of period (000's) $1,809 $ 34 $1,298 $1,948 $ 130 $3,005
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
------------------------------------------------------------
MUNICIPAL MODERATE CONSERVATIVE
MONEY MONEY GROWTH GROWTH GROWTH
MARKET MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND FUND
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.04 0.02 0.07 0.14 0.21
Net realized and unrealized gain (loss) on securities -- -- 1.91 1.39 1.02
------ ------ ------ ------ ------
Total income (loss) from investment operations 0.04 0.02 1.98 1.53 1.23
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.04) (0.02) (0.06) (0.13) (0.20)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.04) (0.02) (0.06) (0.13) (0.20)
------ ------ ------ ------ ------
Net asset value at end of period $ 1.00 $ 1.00 $11.92 $11.40 $11.03
====== ====== ====== ====== ======
TOTAL RETURN 4.54% 2.18% 19.65% 15.20% 12.30%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.80% 1.05% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before
expense reductions 1.42% 1.89% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net
assets 4.58% 2.18% 0.63% 1.33% 2.01%
Portfolio turnover rate N/A N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 7,549 3,651 162 168 162
Net assets at the end of period (000's) $7,549 $3,651 $1,929 $1,918 $1,790
</TABLE>
100
<PAGE> 102
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS B SHARES
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------------------------------------
STOCK MID CAP SMALL CAP INTERNATIONAL LARGE CAP MID CAP
INDEX INDEX INDEX GROWTH GROWTH GROWTH
FUND FUND FUND FUND FUND FUND
---------- ---------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------- ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.02 0.01 0.02 0.02 (0.05) (0.07)
Net realized and unrealized gain (loss) on
securities 2.23 1.79 1.03 1.38 3.52 0.28
------- ------ ------ ------ ------ ------
Total income (loss) from investment
operations 2.25 1.80 1.05 1.40 3.47 0.21
------- ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.02) (0.01) (0.02) -- -- --
Distributions from net realized gain on
securities -- -- -- -- -- --
------- ------ ------ ------ ------ ------
Total distributions (0.02) (0.01) (0.02) -- -- --
------- ------ ------ ------ ------ ------
Net asset value at end of period $ 12.23 $11.79 $11.03 $11.40 $13.47 $10.21
======= ====== ====== ====== ====== ======
TOTAL RETURN 22.55% 18.05% 10.53% 14.00% 34.70% 2.10%
======= ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.57% 1.58% 1.58% 2.15% 1.85% 1.79%
Ratio of expenses to average net assets
before expense reductions 1.98% 2.29% 2.37% 3.15% 2.34% 2.74%
Ratio of net investment income (loss) to
average net assets 0.37% 0.17% 0.23% 0.24% (0.86)% (1.08)%
Portfolio turnover rate 14% 44% 48% 91% 65% 25%
Number of shares outstanding at end of period
(000's) 1,229 376 305 248 657 357
Net assets at the end of period (000's) $15,040 $4,433 $3,361 $2,826 $8,853 $3,652
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL LARGE CAP MID CAP SMALL CAP SOCIALLY
GROWTH VALUE VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND FUND FUND
----------- ------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) (0.10) (0.03) 0.01 -- 0.03 0.02
Net realized and unrealized gain (loss) on
securities 4.14 4.30 1.38 1.87 (0.74) 2.13
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations 4.04 4.27 1.39 1.87 (0.71) 2.15
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- (0.01) (0.02) (0.03) (0.02)
Distributions from net realized gain on
securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions -- -- (0.01) (0.02) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Net asset value at end of period $14.04 $14.27 $11.38 $11.85 $ 9.26 $12.13
====== ====== ====== ====== ====== ======
TOTAL RETURN 40.40% 42.70% 13.92% 18.71% (7.09)% 21.50%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 2.15% 2.04% 1.80% 2.04% 1.98% 1.55%
Ratio of expenses to average net assets
before expense reductions 2.83% 3.06% 2.48% 2.77% 3.08% 2.49%
Ratio of net investment income (loss) to
average net assets (1.44)% (0.40)% 0.17% (0.26)% 0.42% 0.09%
Portfolio turnover rate 128% 32% 66% 177% 91% 24%
Number of shares outstanding at end of period
(000's) 368 261 434 384 248 243
Net assets at the end of period (000's) $5,170 $3,731 $4,939 $4,555 $2,296 $2,943
</TABLE>
101
<PAGE> 103
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS B SHARES CONTINUED
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
------------------------------------------------------------------------
HIGH YIELD STRATEGIC DOMESTIC CORE MUNICIPAL
BALANCED BOND BOND BOND BOND BOND
FUND FUND FUND FUND FUND FUND
-------- ---------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.09 0.74 0.59 0.44 0.42 0.28
Net realized and unrealized gain (loss) on securities 1.35 (0.57) (0.45) (0.62) (0.55) (0.94)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations 1.44 0.17 0.14 (0.18) (0.13) (0.66)
------ ------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.09) (0.74) (0.59) (0.44) (0.42) (0.28)
Distributions from net realized gain on securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions (0.09) (0.74) (0.59) (0.44) (0.42) (0.28)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.35 $ 9.43 $ 9.55 $ 9.38 $ 9.45 $ 9.06
====== ====== ====== ====== ====== ======
TOTAL RETURN 14.42% 1.53% 1.48% 1.89% (1.27)% (6.75)%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.82% 2.00% 1.90% 1.78% 1.80% 1.80%
Ratio of expenses to average net assets before
expense reductions 2.76% 2.37% 3.08% 2.55% 2.22% 2.56%
Ratio of net investment income (loss) to average net
assets 1.29% 7.30% 6.21% 4.63% 4.10% 2.98%
Portfolio turnover rate 62% 72% 183% 98% 469% 9%
Number of shares outstanding at end of period (000's) 552 69 179 600 31 450
Net assets at the end of period (000's) $6,261 $ 652 $1,704 $5,633 $ 294 $4,074
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------------
MUNICIPAL MODERATE CONSERVATIVE
MONEY MONEY GROWTH GROWTH GROWTH
MARKET MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND FUND
-------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.04 0.01 0.06 0.12 0.18
Net realized and unrealized gain (loss) on
securities -- -- 1.89 1.41 1.05
------ ------ ------ ------ ------
Total income (loss) from investment operations 0.04 0.01 1.95 1.53 1.23
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.04) (0.01) (0.05) (0.11) (0.17)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.04) (0.01) (0.05) (0.11) (0.17)
------ ------ ------ ------ ------
Net asset value at end of period $ 1.00 $ 1.00 $11.90 $11.42 $11.06
====== ====== ====== ====== ======
TOTAL RETURN 3.93% 1.42% 19.52% 15.26% 12.21%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.55% 1.80% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before
expense reductions 2.23% 2.69% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average
net assets 3.97% 1.42% 0.66% 1.40% 2.11%
Portfolio turnover rate N/A N/A 9% 11% 10%
Number of shares outstanding at end of period
(000's) 6,058 2,841 413 486 532
Net assets at the end of period (000's) $6,058 $2,841 $4,915 $5,553 $5,880
</TABLE>
102
<PAGE> 104
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.
Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.
You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:
Telephone: 1-877-999-2434
American General Web-Site Address: http://www.agfundgroup.com
You can review the Funds' reports and SAI at the public Reference Room of the
SEC.
You can get text only copies:
- For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.
- Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.
Investment Company Act File No. 811-08875 (AGSPC 2)
VA 10856 VER. 3/00
103
<PAGE> 105
American General Series Portfolio Company 2
Institutional Class I Shares
March 1, 2000
The American General Series Portfolio Company 2 (the "Series Company") is an
open-end mutual fund made up of separate Funds (the "Funds"). In this
prospectus, "we", "us", and "our" refers to the American General Fund Group.
Institutional Class I Shares of these Funds are available to you only through an
employer retirement plan. Different employer plans choose different combinations
of funds, so all of the funds discussed in this prospectus may not be available
in your plan. Please check your employer-provided plan documents for available
investments.
ACTIVELY MANAGED EQUITY FUNDS:
THESE FUNDS INVEST MOSTLY IN STOCKS AND ARE DESIGNED TO INCREASE THE VALUE OF
YOUR INVESTMENT OVER THE LONG TERM.
American General International Growth Fund ("International Growth Fund")
American General International Value Fund ("International Value Fund")
American General Large Cap Growth Fund ("Large Cap Growth Fund")
American General Large Cap Value Fund ("Large Cap Value Fund")
American General Mid Cap Growth Fund ("Mid Cap Growth Fund")
American General Mid Cap Value Fund ("Mid Cap Value Fund")
American General Small Cap Growth Fund ("Small Cap Growth Fund")
American General Small Cap Value Fund ("Small Cap Value Fund")
American General Socially Responsible Fund ("Socially Responsible Fund")
BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")
INCOME FUNDS:
THESE FUNDS ARE DESIGNED TO PROVIDE CURRENT INCOME WHILE CONSERVING CAPITAL.
American General Core Bond Fund ("Core Bond Fund")
American General Domestic Bond Fund ("Domestic Bond Fund")
American General High Yield Bond Fund ("High Yield Bond Fund")
American General Strategic Bond Fund ("Strategic Bond Fund")
LIFESTYLE FUNDS:
THESE FUNDS ALLOCATE ASSETS TO OTHER AMERICAN GENERAL FUNDS IN ORDER TO PROVIDE
A DIVERSIFIED, LESS RISKY INVESTMENT.
American General Conservative Growth Lifestyle Fund ("Conservative Growth
Lifestyle Fund")
American General Growth Lifestyle Fund ("Growth Lifestyle Fund")
American General Moderate Growth Lifestyle Fund ("Moderate Growth Lifestyle
Fund")
MONEY MARKET FUND:
THIS FUND PROVIDES LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The SEC maintains an internet website at http://www.sec.gov that contains the
Statement of Additional Information ("SAI"), material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 9
Domestic Bond Fund 12
Growth Lifestyle Fund 15
High Yield Bond Fund 18
International Growth Fund 21
International Value Fund 23
Large Cap Growth Fund 26
Large Cap Value Fund 28
Mid Cap Growth Fund 30
Mid Cap Value Fund 32
Moderate Growth Lifestyle Fund 34
Money Market Fund 38
Small Cap Growth Fund 40
Small Cap Value Fund 42
Socially Responsible Fund 45
Strategic Bond Fund 47
MORE ABOUT PORTFOLIO INVESTMENTS 50
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 54
ACCOUNT INFORMATION 60
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 62
FINANCIAL HIGHLIGHTS 72
</TABLE>
2
<PAGE> 107
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE
- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Balanced
INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks balanced accomplishment of (i) conservation of principal and (ii)
long-term growth of capital and income through investment in fixed-income and
equity securities. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in a combination of fixed-income and equity securities in order
to maintain the value of your principal investment and provide you with capital
growth and income over the long term. We select securities for the Fund's
portfolio by identifying fixed-income (bonds and preferred stock) and equity
(stock) securities that represent fundamental values at reasonable prices. We
implement this philosophy using a system of portfolio managers, under which a
different group of portfolio managers makes investment decisions for the
fixed-income and equity portions of the Fund.
Fixed-income Portion: Up to 75% of the Fund's total assets may be invested in
fixed-income securities rated A or better by Moody's Investors Service
("Moody's") or Standard & Poor ("S&P") or of comparable investment quality. The
Sub-Adviser is not required to sell the security, however, if the rating is
downgraded. At all times, at least 25% of the Fund's total assets are invested
in fixed-income senior securities. The Fund may hold up to 20% of its total
assets in high-yielding, high risk fixed-income securities ("junk bonds").
Equity Portion: Up to 75% of the Fund's total assets may be invested in equity
securities listed on national securities exchanges or in the national
over-the-counter market, NASDAQ. Equity securities include American Depositary
Receipts ("ADRs"), which are certificates issued by a U.S. depositary bank,
representing foreign shares held by the bank. ADRs carry the same currency,
political and economic risks as the underlying foreign shares. Up to 10% of the
Fund's total assets may be invested in the securities of U.S. small
capitalization companies ("Small Caps"). Small Caps are companies that have
total assets (capitalization) of approximately $150 million to $1.25 billion.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
3
<PAGE> 108
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities involves significantly greater credit risk, market risk
and interest rate risk than higher rated fixed-income securities, achievement of
the Fund's investment objective is dependent upon the Sub-Adviser's investment
analysis. Accordingly, the Fund's investments may be worth less than what the
Fund paid for them.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 Balanced Fund Class 1]
ANNUAL RETURN CLASS A = 12.13%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 6.75%
Worst Quarter: 3rd 1999 (5.19)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a broad measure of market performance
and to a blend of two indices ("Balanced Blend"). The Balanced Blend is composed
of 40% Lehman Brothers Government and Corporate Index and 60% S&P 500 Index.
Each is a widely recognized, unmanaged index. The average total return table
shows returns with the maximum front-end sales charge deducted. No sales charge
has been applied to the indices used for comparison in the table. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 15.92%
40% Lehman Brothers Government
and Corporate Index/60%
S&P 500 Index 14.64%
</TABLE>
4
<PAGE> 109
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.80%
Other expenses 1.77%
-----
Total annual fund operating expenses 2.57%
=====
Fee waiver and/or expense reimbursement (1.62)%
-----
Net Expenses 0.95%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$97 $303 $526 $1,171
</TABLE>
- --------------------------------------------------------------------------------
CONSERVATIVE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Growth Lifestyle Fund or the
Moderate Growth Lifestyle Fund. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor.
5
<PAGE> 110
Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 5%-15%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the Investment Company
Act of 1940 (the "1940 Act") because it invests in a limited number of the
Underlying Funds. However, the Underlying Funds themselves are diversified
companies.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
6
<PAGE> 111
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
7
<PAGE> 112
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[AG 2 Conservative Growth Lifestyle Class I]
ANNUAL RETURN CLASS A = 13.63%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 10.90%
Worst Quarter: 3rd 1999 (2.96)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 12.24%
Conservative Growth Lifestyle
Blended Benchmark 12.32%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.00%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
8
<PAGE> 113
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed-income securities. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in medium to high quality
fixed-income securities rated investment grade or higher, or in securities
issued or guaranteed by the U.S. Government, mortgage-backed or asset-backed
securities. U.S. Government securities are securities issued or guaranteed by
the U.S. Government which are supported by the full faith and credit of the U.S.
Government; the right of the issuer to borrow from the U.S. Treasury; the credit
of the issuing government agency; or the authority of the U.S. Government to
purchase obligations of the agency. A portion of the 65% may also be invested in
U.S. dollar-denominated fixed-income securities issued by foreign issuers,
although the Fund currently intends to limit these investments to no more than
40% of its total assets. The Sub-Adviser is not required to dispose of a
security if its rating is downgraded. Up to 10% of the Fund's total assets may
be invested in lower quality fixed-income securities ("junk bonds"), those rated
below Baa3 by Moody's and BBB by S&P.
Up to 35% of the Fund's total assets may be invested in interest-bearing
short-term investments, such as commercial paper, bankers' acceptances, bank
certificates of deposit, and other cash equivalents and cash. Equity securities,
including common or preferred stocks, convertible securities, and warrants, may
comprise up to 20% of the Fund's total assets. See "More About Portfolio
Investments."
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, 469% for the fiscal year ended October 31, 1999.
The rate of portfolio turnover is calculated by dividing the lesser of the
amount of purchases or sales of portfolio securities during the fiscal year by
the average of the value of the portfolio securities. A high rate of portfolio
turnover generally involves correspondingly greater brokerage commission
expenses, thus increasing the Fund's operating expenses. The Fund's active
trading strategy may cause the Fund to have a relatively high amount of
short-term capital gains, which are taxable to you at your ordinary income tax
rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
9
<PAGE> 114
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
10
<PAGE> 115
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[AG 2 CORE BOND FUND CLASS I]
ANNUAL RETURN CLASS A = (0.92)%
<TABLE>
<S> <C> <C>
Best Quarter: 3rd 1999 0.42%
Worst Quarter: 2nd 1999 (1.23)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Lehman Brothers Aggregate Bond Index 0.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.48%
Other expenses 1.29%
=====
Total annual fund operating expenses 1.77%
-----
Fee waiver and/or expense reimbursement (0.84)%
-----
Net Expenses 0.93%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
11
<PAGE> 116
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$95 $297 $516 $1,147
</TABLE>
- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments primarily in investment grade fixed-income securities and
other income producing securities. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in investment grade U.S.
corporate fixed-income securities, rated at least A by Moody's or S&P, in
securities issued or guaranteed by the U.S. Government, Yankee bonds, or in
mortgage-backed or asset-backed securities. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. The
Sub-Adviser is not required to dispose of a security if its rating is
downgraded.
Up to 35% of total assets may be invested in non-U.S. investment grade
intermediate and long-term corporate fixed-income securities rated at least A by
Moody's or S&P, including Eurodollar fixed-income securities, securities issued
or guaranteed by the Canadian Government, its provinces or their
instrumentalities, or interest bearing short-term investments, such as
commercial paper, bankers' acceptances, bank certificates of deposit and other
cash equivalents and cash. Currently, Eurodollar fixed-income securities will be
limited to no more than 20% of the Fund's total assets.
To increase the Fund's earning potential, we may use up to 25% of the Fund's
assets to make some higher risk investments in mortgage-related securities or
bonds rated less than A by Moody's or S&P. No minimum rating requirement applies
to these junk bonds. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
12
<PAGE> 117
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[AG 2 Domestic Bond Fund Class I]
ANNUAL RETURN CLASS A = (3.09)%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 (3.09)%
Worst Quarter: 1st 1999 (0.24)%
</TABLE>
13
<PAGE> 118
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: (1.49)%
Lehman Brothers Aggregate Bond
Index (1.12)%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.50%
-----
Total annual fund operating expenses 2.10%
=====
Fee waiver and/or expense reimbursement (1.19)%
-----
Net Expenses 0.91%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$93 $290 $505 $1,124
</TABLE>
14
<PAGE> 119
- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth through investments in a combination of the Series Company Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
15
<PAGE> 120
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
16
<PAGE> 121
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 Growth Lifestyle Fund Class I]
ANNUAL RETURN CLASS A = 28.85%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 20.40%
Worst Quarter: 3rd 1999 (2.26)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Growth Lifestyle Blended
Benchmark 18.54%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>
17
<PAGE> 122
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.09%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investment in a diversified portfolio of high yielding, high risk
fixed-income securities. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in below-investment grade
U.S. and foreign junk bonds. These high yielding, high risk fixed-income
securities are rated below Baa3 by Moody's and BBB- by S&P. Up to 15% can be
rated below Caa3 by Moody's or CCC- by S&P. The Fund may also invest up to 35%
of total assets in below-investment grade foreign fixed-income securities.
To balance this risk, the Fund may invest up to 35% in investment grade
securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In
addition, the Fund may invest up to 15% in zero coupon securities (securities
not paying current cash interest), and up to 20% of total assets in equity
securities. Equity securities includes common or preferred stocks, warrants, and
convertible securities. The Sub-Adviser is not required to dispose of a bond
that is downgraded to below-investment grade. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
18
<PAGE> 123
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
19
<PAGE> 124
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 HIGH YIELD BOND CLASS I]
ANNUAL RETURN CLASS A = 4.21%
<TABLE>
<S> <C> <C>
Best Quarter: 1st 1999 3.84%
Worst Quarter: 3rd 1999 (1.48)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney High Yield
Market Index, a widely recognized, unmanaged index covering a significant
portion of the below-investment grade U.S. corporate bond market. The average
total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 2.44%
Salomon Smith Barney High Yield
Market Index 4.24%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption
proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.68%
Other expenses 1.37%
-----
Total annual fund operating expenses 2.05%
=====
Fee waiver and/or expense reimbursement (0.92)%
-----
Net Expenses 1.13%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
20
<PAGE> 125
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$115 $359 $623 $1,379
</TABLE>
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Jacobs Asset Management
INVESTMENT OBJECTIVE
Seeks to provide long-term capital appreciation by investing in equity
securities of non-U.S. companies, the majority of which are expected to be in
developed markets. The Fund may invest across the capitalization spectrum,
although it intends to emphasize smaller capitalization stocks. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts ("GDRs"). ADRs are certificates issued
by a U.S. depositary bank, representing foreign shares held by the bank, to
facilitate trading in foreign securities. GDRs and EDRs are very similar to
ADRs. Generally, ADRs are designed for use in U.S. securities markets and EDRs
are designed for use in European securities markets. GDRs are designed for use
when the issuer is raising capital in more than one market simultaneously, such
as the issuer's local market and the U.S. ADRs, EDRs and GDRs each carry the
same currency, political and economic risks as the underlying foreign shares.
The Fund may invest up to 40% of total assets in the equity securities of
issuers located in emerging market countries. An "emerging market country" is
any country which, in the opinion of the Sub-Adviser, is generally considered to
be an emerging or developing country by the international financial community,
including the International Bank for Reconstruction and Development (known as
"The World Bank") and the International Finance Corporation. The Fund will focus
its emerging market investments on those countries in which the Sub-Adviser
believes the economies are developing and the markets are becoming more
sophisticated.
We will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. Our goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities, including those of smaller capitalization companies ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
21
<PAGE> 126
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 INTERNATIONAL GROWTH FUND CLASS I]
ANNUAL RETURN CLASS A = 55.75%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 44.56%
Worst Quarter: 1st 1999 (0.78)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 15.16%
Salomon Smith Barney Primary Market Index 25.58%
</TABLE>
22
<PAGE> 127
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.90%
Other expenses 1.85%
-----
Total annual fund operating expenses 2.75%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 1.28%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$130 $406 $703 $1,550
</TABLE>
- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks to provide growth of capital and future income through investments
primarily in securities of non-U.S. issuers and securities whose principal
markets are outside of the United States. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign securities.
Since the Fund normally intends to be fully invested, foreign equity securities
will usually represent closer to 80-85% of the Fund's total assets. While the
assets of the Fund can be invested with geographical flexibility, the emphasis
will be on securities of companies located in Europe, Canada, Australia, and the
Far East, giving due consideration to economic, social, and political
developments, currency risks and the liquidity of various national markets.
Up to 90% of the amount invested in foreign securities may be invested in put
and call options on foreign currencies and forward currency contracts. A put
option on foreign currency is a security that gives the Fund the right to sell a
particular foreign currency within a stated period of time. A call option on
foreign currency gives the Fund the right to buy a particular foreign currency
within a stated period of time. A forward currency contract is an agreement to
buy or sell foreign currency at an agreed-upon price and date.
23
<PAGE> 128
The Fund may invest in the equity securities of issuers located in emerging
market countries. An "emerging market country" is any country which, in the
opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (known as "The World
Bank") and the International Finance Corporation. The Fund will focus its
emerging market investments on those countries in which the Sub-Adviser believes
the economies are developing and the markets are becoming more sophisticated.
This Fund may invest up to 10% of total assets in the securities of foreign
small capitalization companies ("Foreign Small Caps"). Foreign Small Caps are
companies that have total assets (capitalization) of approximately $150 million
to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in put
and call options, futures, swaps, structured securities and other derivative
instruments. These instruments may be leveraged so that small changes may
produce disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
24
<PAGE> 129
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 INTERNATIONAL VALUE FUND CLASS I]
ANNUAL RETURN CLASS A = 12.13%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 27.28%
Worst Quarter: 3rd 1999 7.78%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 44.25%
Salomon Smith Barney Primary
Market Index 25.58%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 1.00%
Other expenses 1.68%
-----
Total annual fund operating expenses 2.68%
=====
Fee waiver and/or expense reimbursement (1.51)%
-----
Net Expenses 1.17%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
25
<PAGE> 130
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$119 $372 $645 $1,425
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management
INVESTMENT OBJECTIVE
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary objective. This investment objective can
be changed by the Board of Trustees, without the approval of the Fund
shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in the equity securities of
large cap U.S. issuers. Large cap U.S. issuers include the largest 1,000
companies by market capitalization traded in the United States.
The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment Research Department, other
industry sources and objective quantitative analysis. Next, the Fund's
investment portfolio is constructed by balancing expected returns against
portfolio risk, trading fees and investment objectives. The Fund is intended to
be constructed with minimum deviations from the sector, risk statistics and
macroeconomic sensitivity of the Fund's benchmark, the Russell 1000(R) Growth
Index. A proprietary multi-factor model is used in seeking to ensure risks taken
are both intended and are warranted due to expected return. Lastly, the Fund is
traded regularly and rebalanced in seeking to ensure all positions are in line
with current market outlooks and benchmark weights.
The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. GDRs are very
similar to ADRs. Generally, ADRs are designed for use in the United States
securities markets, while GDRs are designed for use when the issuer is raising
capital in more than one market simultaneously, such as the issuer's local
market and the U.S. ADRs and GDRs each carry the same currency, political and
economic risks as the underlying foreign shares. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instruments.
These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
26
<PAGE> 131
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 LARGE CAP GROWTH FUND CLASS I]
ANNUAL RETURN CLASS A = 36.74%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 23.94%
Worst Quarter: 3rd 1999 (2.57)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Growth Index. The
Russell 1000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 1000(R) Growth Index measures the performance
of the 1,000 largest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 36.14%
Russell 1000(R) Growth Index 34.25%
</TABLE>
27
<PAGE> 132
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.55%
Other expenses 1.63%
-----
Total annual fund operating expenses 2.18%
=====
Fee waiver and/or expense reimbursement (1.20)%
-----
Net Expenses 0.98%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$100 $312 $543 $1,206
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers
INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index through investment in equity securities. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
The Russell 1000(R) Value Index is a sub-index of the Russell 1000(R) Index,
which measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values. As of June 30, 1999, the latest Russell index
reconstitution date, the average market capitalization in the Russell 1000(R)
Index was $12.1 billion.
INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data. The
constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.
28
<PAGE> 133
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Market Risk also refers to the risk that the value of the securities purchased
by the Fund may decline as a result of economic, political or market conditions
or an issuer's financial circumstances. Because the Fund maintains sector
weights at a similar level to that of the Index, your investment may experience
similar changes in value and share similar risks. In order to avoid unintended
exposures to economic factors, including the direction of the economy, interest
rates, energy prices and inflation, we maintain the proportion of equity
securities from different economic sectors in this Fund's portfolio at a level
similar to that of the Index.
Quantitative Method Risk: The different factors that go into the quantitative
analysis can be changed periodically. The weight of each factor may also change;
thus, the analytical model may have different historical or future performance
compared to the Fund.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 LARGE CAP VALUE FUND]
ANNUAL RETURN CLASS A = 5.40%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 12.63%
Worst Quarter: 3rd 1999 (9.71)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Value Index. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 15.09%
Russell 1000(R) Value Index 16.53%
</TABLE>
29
<PAGE> 134
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.50%
Other expenses 1.79%
-----
Total annual fund operating expenses 2.29%
=====
Fee waiver and/or expense reimbursement (1.36)%
-----
Net Expenses 0.93%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$95 $297 $516 $1,147
</TABLE>
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
INVESTMENT OBJECTIVE
Seeks capital appreciation principally through investments in medium
capitalization equity securities, such as common and preferred stocks and
securities convertible into common stocks. Current income is a secondary
objective. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization of $1 to $10 billion. We will
seek to achieve capital appreciation through an opportunistic investment
strategy with a growth bias. This Fund will purchase equity securities of those
companies that appear to be undervalued relative to their growth potential in
the securities markets, because the companies are presently out of favor, not
well known or possess value that is not currently recognized by the investment
community. The Sub-Adviser uses a "bottom up" approach to select specific
investments, employing analysis that contains elements of traditional dividend
discount and earnings yield models, establishes predicted relative valuation for
equity and fixed-income markets, and determines the attractiveness of individual
securities through evaluation of growth and risk characteristics of the
underlying company relative to the overall equity market. Although the Fund's
portfolio securities generally will be acquired for the long term, they may be
sold under some of the following circumstances when the Sub-Adviser believes
that: a) the anticipated price
30
<PAGE> 135
appreciation has been achieved or is no longer probable; b) alternative
investments offer superior total return prospects; or c) fundamentals change
adversely.
Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 MID CAP GROWTH FUND CLASS I]
ANNUAL RETURN CLASS A = 3.39%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 16.84%
Worst Quarter: 3rd 1999 (11.90)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Growth Index. The
Russell Midcap(TM) Growth Index focuses on Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values. The average total
return table shows returns with the maximum front-end sales charge deducted. No
sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 3.24%
Russell Midcap(TM) Growth Index 37.66%
</TABLE>
31
<PAGE> 136
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.65%
Other expenses 1.18%
-----
Total annual fund operating expenses 1.83%
=====
Fee waiver and/or expense reimbursement (0.91)%
-----
Net Expenses 0.92%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>
- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.
INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund invests at least 65% of total assets in equity securities of medium
capitalization established companies, using a value-oriented investment approach
intended to increase capital with reasonable risk. Medium capitalization
companies include companies with the characteristics of companies included in
the Russell Midcap(TM) Index. As of June 30, 1999, the largest company included
in the Russell Midcap(TM) Index had an approximate market capitalization of
$11.2 billion, while the average market capitalization was approximately $3.9
billion.
We choose securities we believe are undervalued based on strong fundamentals,
including a low price-to-earnings ratio, consistent cash flow, and the company's
track record through all parts of the market cycle. When selecting securities
for this Fund, we also consider other factors, including ownership by a
company's management of the company's stock and the dominance of a company in
its particular field. Up to 35% of the Fund's total assets may be invested in
other equity securities, including common and preferred stocks, convertible
securities, and related equities. See "More About Portfolio Investments."
32
<PAGE> 137
The Fund may participate in the Initial Public Offering ("IPO") market, and a
portion of the Funds' returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will
experience significant improvement in performance by investing in IPOs.
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, % for the fiscal year ended October 31, 1999. The
rate of portfolio turnover is calculated by dividing the lesser of the amount of
purchases or sales of portfolio securities during the fiscal year by the average
of the value of the portfolio securities. A high rate of portfolio turnover
generally involves correspondingly greater brokerage commission expenses, thus
increasing the Fund's operating expenses. The Fund's active trading strategy may
cause the Fund to have a relatively high amount of short-term capital gains,
which are taxable to you at your ordinary income tax rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 MID CAP VALUE FUND CLASS I]
ANNUAL RETURN CLASS A = 23.80%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 16.64%
Worst Quarter: 3rd 1999 (11.25)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Value Index. The
Russell Midcap(TM) Value Index measures the performance of the 800 smallest
companies in the Russell 1000(R) Index, focusing on those with lower
price-to-book ratios and lower forecasted growth values. The Russell 1000(R)
Index is a sub-index of the Russell 3000(R)Index. The Russell 3000(R) Index
follows the 3,000 largest U.S. companies, based on total market capitalization.
The average total return table shows returns with the maximum front-end sales
charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 20.18%
Russell Midcap(TM) Value Index 5.70%
</TABLE>
33
<PAGE> 138
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.76%
-----
Total annual fund operating expenses 2.51%
=====
Fee waiver and/or expense reimbursement (1.34)%
-----
Net Expenses 1.17%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Year 5 Year 10 Year
$119 $372 $645 $1,425
</TABLE>
- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth and current income through investments in a combination of the
Series Company Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Growth Lifestyle Fund. This investment objective
can be changed by the Board of Trustees, without the approval of the Fund
shareholders.
34
<PAGE> 139
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least
65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
INVESTMENT RISKS
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
35
<PAGE> 140
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
36
<PAGE> 141
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 MODERATE GROWTH LIFESTYLE CLASS II GRAPH]
ANNUAL RETURN CLASS A = 18.69%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.22%
Worst Quarter: 3rd 1999 (3.28)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 15.35%
Moderate Growth Lifestyle
Blended Benchmark 15.02%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a None
percentage of offering price)
Maximum deferred sales charge (load) (as a percentage of None
purchase or redemption proceeds, whichever is lower)
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 1.03%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
37
<PAGE> 142
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Stability
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. In accordance with
Rule 2a-7 of the 1940 Act, such securities must mature in 13 months or less and
the Fund must have a dollar-weighted average portfolio maturity of 90 days or
less. These practices are designed to reduce risk and minimize any fluctuation
in the share price.
The investments this Fund may buy include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements
- - Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- - Asset-backed securities
- - Loan participations
- - Adjustable rate securities
- - Variable Rate Demand Notes
- - Illiquid and restricted securities (limited to 10% of the Fund's net assets at
all times)
- - Rule 144A securities (liquid)
INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Money Market Fund
varies daily depending on short-term interest rates.
Because of the following principal risks, the value of your investment may
fluctuate:
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
38
<PAGE> 143
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 MONEY MARKET FUND CLASS I GRAPH]
ANNUAL RETURN CLASS A = 4.70%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 1.27%
Worst Quarter: 1st 1999 1.04%
</TABLE>
The table shows the Fund's seven-day yield as of a recent date. Please call
Customer Service at 1-877-999-2434 for the most current yield information. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 4.63%
New York City 30-day Primary
CD Rate 4.38%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.60%
-----
Total annual fund operating expenses 1.85%
=====
Fee waiver and/or expense reimbursement (1.17)%
-----
Net Expenses 0.68%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>
39
<PAGE> 144
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $1.25 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) Growth Index. Within each
industry, the Fund invests in equity securities that the Sub-Adviser's research
and valuation process indicate are undervalued. The greater a company's
estimated worth compared to the current market price of its equity securities,
the more undervalued the company.
The Fund may invest up to 35% of total assets in other equity securities of U.S.
and foreign large and medium capitalization issuers, including those equities
listed above, and the securities of investment companies. Large and medium
capitalization issuers are those companies with total assets of approximately $1
billion or more. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
40
<PAGE> 145
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 SMALL CAP GROWTH FUND CLASS I GRAPH]
ANNUAL RETURN CLASS A = 62.47%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 42.91%
Worst Quarter: 1st 1999 (0.77)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Growth Index. The
Russell 2000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 2000(R) Growth Index measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 41.90%
Russell 2000(R) Growth Index 29.28%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.85%
Other expenses 1.57%
-----
Total annual fund operating expenses 2.42%
=====
Fee waiver and/or expense reimbursement (1.14)%
-----
Net Expenses 1.28%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
41
<PAGE> 146
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$130 $406 $703 $1,550
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)
INVESTMENT OBJECTIVE
Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGIES
This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $1.25 billion and companies included in
the Russell 2000(R) Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.
Actively Managed Portion (50%): In analyzing and selecting investments for the
actively managed portion of the Fund's investment portfolio, we look for market
themes and changes that signal opportunity. We seek companies with lower
price-to-earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. At any given time, this portion of the Fund's
investment portfolio will be invested in a diversified group of small
capitalization equity securities in several industries. The Fund will invest
primarily in U.S. companies with seasoned management or a track record as part
of a larger company.
Passively Managed Portion (50%): This portion of the Fund is comprised of a
sampling of stocks in the Index that, as a group, should reflect its
performance. Since it may not be possible for this Fund to buy every stock
included in the Index or in the same proportions, the Fund will select stocks to
purchase by utilizing a statistical sampling technique known as "optimization."
This process selects stocks for the Fund so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate
those of the Index. The stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of the Index as a whole.
The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U.S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the U.S. Government; the right of the issuer to borrow from
the U.S. Treasury; the credit of the issuing government agency; or the authority
of the U.S. Government to purchase obligations of the agency. See "More About
Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
42
<PAGE> 147
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 SMALL CAP VALUE FUND GRAPH]
ANNUAL RETURN CLASS A = (4.72)%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 11.78%
Worst Quarter: 1st 1999 (12.69)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Value Index. The
Russell 2000(R) Value Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index
43
<PAGE> 148
follows the 3,000 largest U.S. companies, based on total market capitalization.
The Russell 2000(R) Value Index measures the performance of the 2,000 smallest
companies in the Russell 3000(R) Index, focusing on those with lower
price-to-book ratios and lower forecasted growth values. The average total
return table shows returns with the maximum front-end sales charge deducted. No
sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: (6.16)%
Russell 2000(R) Value Index 0.72%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.93%
-----
Total annual fund operating expenses 2.68%
=====
Fee waiver and/or expense reimbursement (1.57)%
-----
Net Expenses 1.11%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$113 $353 $612 $1,356
</TABLE>
44
<PAGE> 149
- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in equity
securities, in companies which meet the social criteria established for the
Fund. This investment objective can be changed by the Board of Trustees, without
the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund will invest at least 80% of total assets in the equity securities of
companies meeting the Fund's social criteria. To find out which companies meet
the Fund's social criteria, we rely on industry classifications, research
services such as the Investor Responsibility Research Center ("IRRC").
The Fund does not invest in companies that are significantly engaged in:
- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.
At least once a year, the IRRC surveys state laws to see if there are any new or
revised state laws that govern or affect the investments of public funds. If the
survey shows that at least 20 states have adopted laws that restrict public
funds from being invested in a clearly definable category of investments, this
category is automatically added to our social criteria list.
Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs carry the
same currency, political and economic risks as the underlying foreign shares.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:
Foreign Securities Risk:
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:
Political risk - the chance of a change in government and the assets of the
company being taken away.
Currency risk - a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment
valued in U.S. dollars will decline even if the value of the foreign stock
or bond is unchanged.
Limited information - foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are
used to getting. To minimize taxes they may not report some income or they
may report higher expenses.
Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk - the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
45
<PAGE> 150
Settlement and Clearance Risk - the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Social Criteria Risk: If a company stops meeting the Fund's social criteria
after the Fund invested in it, the Fund will sell these investments even if this
means the Fund loses money. Also, if the Fund changes its social criteria and
the companies the Fund has already invested in no longer qualify, the Fund will
sell these investments, even if this means the Fund loses money. Social criteria
screening will limit the availability of investment opportunities for the Fund
more than for funds having no such criteria.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 SOCIALLY RESPONSIBLE FUND CLASS I GRAPH]
ANNUAL RETURN CLASS A = 18.55%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.23%
Worst Quarter: 3rd 1999 (6.99)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The Index
approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 22.73%
S&P 500 Index 25.67%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
</TABLE>
46
<PAGE> 151
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.64%
-----
Total annual fund operating expenses 1.89%
=====
Fee waiver and/or expense reimbursement (1.21)%
-----
Net Expenses 0.68%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>
- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of income producing
securities. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including
- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)
Up to 25% of the Fund's total assets may be invested in foreign emerging market
debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may also
invest up to 20% of total assets in equity securities, such as common and
preferred stocks, convertible securities, and warrants.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
47
<PAGE> 152
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
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<PAGE> 153
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[AG 2 STRATEGIC BOND FUND CLASS I GRAPH]
ANNUAL RETURN CLASS A = (4.67)%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 3.32%
Worst Quarter: 2nd 1999 (0.81)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 2.50%
Lehman Brothers Aggregate Bond Index 0.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.90%
-----
Total annual fund operating expenses 2.50%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 1.03%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
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<PAGE> 154
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1,264
</TABLE>
- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
Each Fund's principal investment strategies and risks are summarized above. More
information about types of portfolio investments is shown below. Funds may
invest in other investments and may use investment techniques not described in
this prospectus. All Money Market Fund investments must comply with Rule 2a-7 of
the 1940 Act, which allows the purchase of only high quality money market
instruments. The Lifestyle Funds invest in other Funds described in this
Prospectus and thus are not specifically mentioned below. Please refer to the
SAI for more information about investments.
ASSET-BACKED SECURITIES
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders. Examples of assets supporting asset-backed
securities include credit card receivables, retail installment loans, home
equity loans, auto loans, and manufactured housing loans. All of the Funds
except International Growth Fund, International Value Fund, Large Cap Growth,
and Mid Cap Growth may invest in asset-backed securities.
DEPOSITARY RECEIPTS
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. ADRs in which a Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs. All of the Funds except for
the Money Market Fund and the Strategic Bond Fund may purchase ADRs.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund and Socially Responsible Fund may invest in
EDRs and GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest
in EDRs.
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund, though equities may not be
a primary strategy for each Fund.
Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also
gives each owner a share in a company's profits through dividend payments
or the capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get
a fixed dividend before the common stock shareholders receive any
dividends on their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the
holder may exchange for a certain amount of common stock.
Stocks are not the only type of equity security. Other equity securities include
but are not limited to convertible securities, depository receipts, warrants,
rights and partially paid shares, investment company securities, real estate
securities, convertible bonds and foreign equity securities, such as ADRs, GDRs
and EDRs.
50
<PAGE> 155
FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short-, medium- and long-term
obligations, including notes and bonds. Fixed-income securities may have fixed,
variable, or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed-income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
Bonds are one type of fixed-income security and are sold by governments on the
local, state, and federal levels, and by companies. There are many different
kinds of bonds. For example, each bond issue has specific terms. U.S. Government
bonds are guaranteed to pay interest and principal by the federal government.
Revenue bonds are usually only paid from the revenue of the issuer. An example
of that would be an airport revenue bond. Debentures are a very common type of
corporate bond (a bond sold by a company). Payment of interest and return of
principal is subject to the company's ability to pay. Convertible bonds are
corporate bonds that can be exchanged for stock.
The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value, and Strategic Bond Fund may also invest in below-investment grade bonds.
Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short-term (generally less than 12 months), intermediate (one to
10 years), and long-term (10 years or more). Commercial paper is a specific type
of corporate or short-term note. In fact, it's very short-term, being paid in
less than 270 days, though most commercial paper matures in 50 days or less.
Bonds are not the only type of fixed-income security. Other fixed-income
securities include, for example, U.S. and foreign corporate fixed-income
securities, including convertible securities (bonds, debentures, notes and other
similar instruments) and corporate commercial paper; mortgage-related and other
asset-backed securities; inflation-indexed bonds issued by both governments and
corporations; structured notes, including hybrid or "indexed" securities,
preferred or preference stock, catastrophe bonds, and loan participations; bank
certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; fixed-income securities
issued by states or local governments and their agencies, authorities and other
instrumentalities; obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and obligations of international agencies or
supranational entities. Fixed-income securities may be acquired with warrants
attached.
FOREIGN CURRENCY
Funds buy foreign currencies when they believe the value of the currency will
increase. If it does increase, they sell the currency for a profit. If it
decreases they will experience a loss. Generally, the International Growth Fund
and the International Value Fund may also buy and sell foreign currencies to
settle transactions for foreign securities bought or sold in the Fund. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund and the Small Cap Value Fund may invest in foreign
currency.
FOREIGN SECURITIES
Securities of foreign issuers may be denominated in foreign currencies, except
with respect to the Money Market Fund and the Core Bond Fund which may only
invest in U.S. dollar-denominated securities of foreign issuers. The Large Cap
Growth Fund may only invest in the equity securities of foreign issuers that are
traded in the United States. Generally, all of the Funds may invest in foreign
securities except for Mid Cap Growth Fund.
Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed-income securities
issued by foreign governments, corporations and supranational organizations, and
ADRs, EDRs and GDRs. See "Depositary Receipts".
FUTURES AND OPTIONS
Futures and options are considered derivative securities, since the value of the
future or option is derived in part from the value and characteristics of
another security. A "future" is a contract which involves the sale of a security
for future delivery. An "option" gives the buyer the opportunity to buy or sell
a security at a set price on or before a date specified in the contract. A call
option buyer thinks the stock price may go up in the future, while a put option
buyer thinks the stock price may go down. All of the Funds except for
International Growth Fund, Mid Cap Growth Fund and Money Market Fund may invest
in derivatives.
51
<PAGE> 156
The Funds use stock and bond futures to invest cash and cash equivalents to:
- - Write (sell) exchange traded covered put and call options on securities and
stock indices.
- - Purchase exchange traded put and call options on securities and stock indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- - Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.
ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. Non-money market funds may invest up to
15% in illiquid securities, while money market funds are limited to 10%. This
restriction applies at all times to all assets.
A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold in the public market. Securities eligible for sale
under Rule 144A and commercial paper offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, are not deemed by VALIC or the Fund's
Sub-Adviser to be illiquid solely by reason of being restricted. Instead, VALIC
or the Sub-Adviser will determine whether such securities are liquid based on
trading markets and pursuant to guidelines adopted by the Series Company's Board
of Trustees. If VALIC or the Sub-Adviser concludes that a security is not
liquid, that investment will be included within the Fund's limitation on
illiquid securities.
INVESTMENT COMPANIES
All of the Funds may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by an investment company in which it invests.
INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund and Small Cap Growth Fund may
invest in investment funds.
LOAN PARTICIPATIONS
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All of the Funds except the Mid Cap Value Fund may invest in loan
participations.
MONEY MARKET SECURITIES
A money market security is high quality when it is rated in one of the two
highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-Adviser. All
the Funds may invest in money market securities, though it is not a primary
strategy for all Funds.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of times of high quality money
market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Money Market Fund and the
Socially Responsible Fund may invest in mortgage-related securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgage loans secured by residential or commercial real property. Payments of
interest and principal on these securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans which underlie the securities. Mortgage-related securities are
subject to interest rate risk and prepayment risk.
52
<PAGE> 157
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized mortgage obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity, coupon, and prepayment preference. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds.
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related or asset-backed securities.
REAL ESTATE SECURITIES
Real estate securities are securities issued by companies that invest in real
estate or interests therein. All of the Funds except for the Domestic Bond Fund
and the High Yield Bond Fund may invest in real estate securities and real
estate investment trusts ("REITs"). REITs are generally publicly traded on the
national stock exchanges and in the over-the-counter market and have varying
degrees of liquidity.
REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short-term loan (usually for one day to one week). The risk in a
repurchase agreement is the failure of the seller to be able to buy the security
back. If the value of the security declines, the Fund may have to sell at a
loss. A repurchase agreement of more than 7 days duration is illiquid. A Fund
may enter into repurchase agreements only with well-established securities
dealers or banks that are members of the Federal Reserve System. All the Funds
in this Prospectus may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A reverse repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. Under a
reverse repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
If a Fund's positions in reverse repurchase agreements or similar transactions
are not covered by liquid assets in a segregated account, such transactions
would be subject to the Funds' limitations on borrowings. The Funds will not
borrow money, except as provided in each Fund's investment restrictions. Reverse
repurchase agreements may be entered into by all Funds except the Mid Cap Growth
Fund.
The Core Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and the Strategic Bond Fund
may enter into dollar rolls. In a dollar roll transaction, a Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date.
STRUCTURED SECURITIES
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment. The Balanced
Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund, and the
Strategic Bond Fund may enter into structured securities.
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based
53
<PAGE> 158
on the return of a different specified index or asset. The Large Cap Growth
Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value Fund, and the Strategic Bond Fund may enter into swap agreements.
U.S. GOVERNMENT SECURITIES
All the Funds may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The U.S. Government does not guarantee the net
asset value of the Funds' shares. Some U.S. Government securities, such as
Treasury bills, notes and bonds, and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, the Tennessee Valley Authority and the Small
Business Authority are supported only by the credit of the instrumentality. U.S.
Government securities include securities that have no coupons, or have been
stripped of their unmatured interest coupons, individual interest coupons from
such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. Custodial receipts issued in
connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are, therefore, not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(STRIPs and CUBEs) are direct obligations of the U.S. Government.
VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula. The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, and the
Strategic Bond Fund may invest in the variable amount demand master notes.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may also may invest in participation
VRDNs, which provide a Fund with an undivided interest in underlying VRDNs held
by major investment banking institutions. All the Funds may invest in VRDNs.
WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities. All of the Funds except for the Mid Cap Growth Fund and
the Money Market Fund may invest in warrants and rights.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will soon be on the market. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit. All of the Funds except the Mid
Cap Value Fund and the Money Market Fund may invest in when-issued securities.
- --------------------------------------------------------------------------------
WELCOME TO AMERICAN GENERAL CORPORATION
- --------------------------------------------------------------------------------
American General Corporation, with assets of $111 billion and shareholders'
equity of $15 billion as of December 31, 1999, is the parent company of one of
the nation's largest diversified financial services organizations. American
General's operating divisions deliver a wide range of retirement services, life
insurance, and consumer finance products and services to diverse markets through
focused distribution channels. American General, headquartered in Houston, was
incorporated as a general business corporation in Texas in 1980 and is the
successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
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<PAGE> 159
American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC and American General Investment Management, L.P. ("AGIM"), is
2929 Allen Parkway, Houston, Texas 77019.
INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment adviser for all the Funds. VALIC had
approximately $61 billion in assets under management, as of December 31, 1999.
VALIC and AGIM, a Sub-Adviser, are both members of the American General
Corporation group of companies. Each entity is a registered investment adviser
with the SEC. Several of VALIC's principal officers, directors and portfolio
managers hold similar positions with AGIM.
As Investment Adviser, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisers who make investment
decisions for most of the Funds.
In addition to the Funds shown in this prospectus, VALIC serves as investment
adviser to the following Funds which are not described in this Prospectus:
American General Mid Cap Index Fund, American General Small Cap Index Fund,
American General Stock Index Fund, American General Municipal Bond Fund,
American General Municipal Money Market Fund and the American General Science &
Technology Fund. The American General Municipal Bond Fund and American General
Municipal Money Market Fund are sub-advised by AGIM, and the American General
Science & Technology Fund is sub-advised by T. Rowe Price Associates, Inc. These
Funds are presented in separate prospectuses, also dated March 1, 2000.
VALIC makes investment decisions for and is directly responsible for the
day-to-day management of the Lifestyle Funds, the Socially Responsible Fund, and
the Money Market Fund. The investment advisory agreement between VALIC and the
Series Company provides for the Series Company to pay all expenses not
specifically assumed by VALIC. Examples of the expenses paid by the Series
Company include transfer agency fees, custodial fees, the fees of outside legal
and auditing firms, the costs of reports to shareholders and expenses of
servicing shareholder accounts. These expenses are allocated to each Fund in a
manner approved by the Board of Trustees.
Teresa Moro has been the Money Market Fund's portfolio manager and Vice
President and Investment Officer of the Series Company since its inception.
Since 1991, Ms. Moro has served as Vice President and Investment Officer of
American General Series Portfolio Company, a registered investment company
managed by VALIC and as Portfolio Manager of the American General Series
Portfolio Company Money Market Fund.
Magali E. Azema-Barac is responsible for the equity group. She heads the team
making investment decisions for the Socially Responsible Fund and the passively
managed portion of the Small Cap Value Fund. Ms. Azema-Barac joined American
General in September, 1999. From 1995 to 1999, she worked on the equity desk of
USWest Investment Management Company in Englewood, Colorado, where she incepted
and managed an enhanced equity portfolio.
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<PAGE> 160
HOW VALIC IS PAID FOR ITS SERVICES
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments. From time to time VALIC, the Sub-Advisers and/or the
Distributor may voluntarily undertake to reduce a Fund's expenses by reducing
the fees payable to them or bearing certain expenses.
<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- -------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
Money Market Fund 0.25%
Small Cap Growth Fund 0.85%
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>
INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are financial service
companies that specialize in certain types of investing. However, VALIC still
retains ultimate responsibility for managing the Funds. The Sub-Adviser's role
is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.
According to the agreements we have with the Sub-Advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-Advisers the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-Advisers
may buy and sell securities for each Fund with broker-dealers and
56
<PAGE> 161
other financial intermediaries that they select. The Sub-Advisers may place
orders to buy and sell securities of these Funds with a broker-dealer affiliated
with the Sub-Adviser as allowed by law. This could include any affiliated
futures commission merchants.
The 1940 Act permits Sub-Advisers, under certain conditions, to place an order
to buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker cannot be greater than the
usual and customary brokers commission if the sale was completed on a securities
exchange. The Series Company has adopted procedures, as required by the 1940
Act, which provide that any commissions received by a Sub-Adviser's affiliated
broker may be considered reasonable and fair if compared to the commission
received by other brokers for the same type of securities transaction.
The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the SEC. The Series
Company and the Sub-Advisers have entered into written contracts, as required by
the 1940 Act, to allow the Sub-Adviser's affiliate to effect these types of
transactions for commissions.
VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
In selecting Sub-Advisers, the Trustees of the Series Company carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-Adviser; (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-Advisers' personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid by VALIC to each Sub-Adviser. The Sub-Advisory
fees are not paid by the Funds.
The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisers or replace
existing sub-advisers without first obtaining shareholder approval for the
change. The Board of Trustees, including a majority of the "independent"
Trustees, must approve each new sub-advisory agreement. This allows VALIC to act
more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90 days of the hiring of a new
sub-adviser. VALIC is responsible for selecting, monitoring, evaluating and
allocating assets to the Sub-advisers and oversees the Sub-advisers' compliance
with the relevant Fund's investment objective, policies and restrictions.
The Sub-Advisers are:
AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998
AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund, and the Strategic Bond Fund. AGIM was formed in
1998 as a successor to the investment management division of American General
Corporation, and is an indirect wholly-owned subsidiary of American General
Corporation. AGIM also provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors.
Investment decisions for the High Yield Bond Fund and the Strategic Bond Fund
are made by teams. Each team meets regularly to review portfolio holdings and
discuss purchase and sale activity.
Robert N. Kase, CFA, has been the Core Bond Fund's Portfolio Manager since
November 1998. He has been Investment Officer of VALIC since September 1998, and
Senior Portfolio Manager of AGIM since September 1998. Previously, Mr. Kase was
Senior Portfolio Manager with CL Capital Management, Inc. from September 1992
until July 1998.
Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined the Sub-adviser in
April 1998. Previously, Mr. Massie was Director of High Yield Research at
American General Corporation from August 1985 to April 1998.
BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983
Brown Capital is the Sub-Adviser for the Mid Cap Growth Fund. Brown Capital
served as investment adviser to approximately $4.6 billion in assets as of
December 31, 1999. Investment decisions for the Mid Cap Growth Fund are made by
a team of portfolio managers/analysts organized for that purpose. The team meets
regularly to review portfolio holdings and discuss purchase and sale activity.
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<PAGE> 162
CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931
Capital Guardian is the Sub-Adviser for the International Value Fund, the
Balanced Fund and the Domestic Bond Fund. Capital Guardian provides investment
management services to a limited number of large institutional clients such as
employee benefit funds, foundations and endowment funds. As of September 30,
1999, Capital Guardian had more than $275 billion in assets under management.
The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.
The portfolio managers for the fixed-income portion of the Fund include: (i) Jim
Mulally, Senior Vice President of the Sub-Adviser, who has been an investment
professional for 22 years and has been with the Sub-Adviser or an affiliate for
19 years; and (ii) Jim Baker, Vice President of the Sub-Adviser, who has been an
investment professional for 18 years and has been with the Sub-Adviser or an
affiliate for 11 years.
The portfolio managers for the U.S. large cap equity portion of the Fund
include: (i) David Fisher, Vice Chairman of the Sub-Adviser, who has been an
investment professional for 33 years and has been with the Sub-Adviser or an
affiliate for 29 years; (ii) Gene Stein, Executive Vice President of the
Sub-Adviser, who has been an investment professional for 27 years and has been
with the Sub-Adviser or an affiliate for 26 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 18 years and has been with the Sub-Adviser or an affiliate for
12 years; (iv) Ted Samuels, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 20 years and has been with the Sub-Adviser
or an affiliate for 18 years; and (v) Donnalisa Barnum, Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 13 years.
The portfolio managers for the U.S. small cap equity portion of the Fund
include: (i) Bob Kirby, Chairman Emeritus of the Sub-Adviser, who has been an
investment professional for 46 years and has been with the Sub-Adviser or an
affiliate for 33 years; (ii) Michael Ericksen, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 11 years; and (iii) James Kang, Vice
President of Capital Guardian Research Company, an affiliate of the Sub-Adviser,
who has been an investment professional for 11 years and has been with the Sub-
Adviser or an affiliate for 10 years.
The International Value Fund's portfolio managers include: (i) Robert Ronus,
President of the Sub-Adviser, who has been an investment professional for 30
years and has been with the Sub-Adviser or an affiliate for 25 years; (ii) David
Fisher, Vice Chairman of the Sub-Adviser, who has been an investment
professional for 33 years and has been with the Sub-Adviser or an affiliate for
29 years; (iii) Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., an affiliate of the Sub-Adviser, who has been an investment
professional for 27 years and has been with the Sub-Adviser or an affiliate for
26 years; (iv) Nancy Kyle, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 25 years and has been with the Sub-Adviser
or an affiliate for 8 years; (v) Nilly Sikorsky, Director of The Capital Group
of Companies, Inc., the ultimate parent of the Sub-Adviser, who has been an
investment professional for 36 years and has been with the Sub-Adviser or an
affiliate for 36 years; (vi) Lionel Sauvage, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 12 years and has been
with the Sub-Adviser or an affiliate for 12 years; (vii) Richard Havas, Sr.,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 17 years and has been with the Sub-Adviser or an affiliate for
13 years; and (viii) Rudolf Staehelin, Sr., Senior Vice President of Capital
International Research, Inc., an affiliate the Sub-Adviser, who has been an
investment professional for 21 years and has been with the Sub-Adviser or an
affiliate for 17 years.
James S. Baker and James R. Mulally serve as the Domestic Bond Fund's portfolio
managers. Mr. Baker, Vice President and fixed-income portfolio manager of an
affiliate of the Sub-Adviser, has focused on the application of quantitative
valuations to investment grade bonds and portfolios for the Sub-Adviser since
1987. Mr. Mulally, Senior Vice President, Director and Chairman of the
Sub-Adviser's Fixed-income Subcommittee, joined the Sub-Adviser in 1980.
FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)
FMA is the Sub-Adviser for the actively managed portion of the assets of the
Small Cap Value Fund. FMA is a wholly-owned subsidiary of United Asset
Management Corporation ("UAM"), and provides investment management services to
corporations, foundations, endowments, pension and profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of December 31, 1999,
UAM and its affiliates had over $203 billion in assets under management.
Investment decisions are made by a team that consists of portfolio managers and
analysts who specialize their research by sectors. Kathryn Vorisek is the lead
portfolio manager. The team meets regularly to review portfolio holdings and to
discuss purchase and sale activity.
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<PAGE> 163
GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869
GSAM is the Sub-Adviser for the Large Cap Growth Fund. As of September 1, 1999,
the Investment Management Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). The newly created entity
includes GSAM. GSAM provides a wide range of fully discretionary investment
advisory services, quantitatively driven and actively managed to U.S. and
international equity portfolios, U.S. and global fixed-income portfolios,
commodity and currency products and money market accounts. As of December 31,
1999, GSAM, along with other units of IMD, had assets under management of nearly
$500 billion.
The Large Cap Growth Fund is managed by the following individuals: Robert C.
Jones; Kent A. Clark; Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing
Director, joined the Sub-Adviser in 1989. Mr. Clark, Managing Director, joined
the Sub-Adviser's quantitative equity management team as a portfolio manager in
1992. Mr. Pinter, Vice President, joined the Sub-Adviser as a research analyst
in 1990, and became a portfolio manager in 1992. Ms. Brown, Vice President,
joined the Sub-Adviser in 1998. From 1984 to 1998, Ms. Brown was the director of
Quantitative Equity Research and served on the Investment Policy Committee at
Prudential Securities.
J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838
J.P. Morgan is the Sub-Adviser for the Small Cap Growth Fund. Known for its
commitment to proprietary research and its disciplined investment strategies,
J.P. Morgan provides asset management services to corporations, financial
institutions, governments and individuals. As of December 31, 1999, J.P. Morgan
and its affiliates employed over analysts and portfolio managers around
the world and had more than $340 billion in assets under management.
Candice Eggerss, Saira Malik and Carolyn Jones are the members of the
Sub-Adviser's team who will be primarily responsible for the day-to-day
management of the Small Cap Growth Fund. Ms. Eggerss, who has been with the
Sub-Adviser since 1996, is a Vice President and specializes in portfolio
investments in small capitalization technology companies. Prior to this, Ms.
Eggerss was employed at Weiss, Peck and Greer from April 1993 to April 1996. Ms.
Malik joined the Sub-Adviser in 1995 as a small company equity analyst and
portfolio manager after completing her graduate studies at the University of
Wisconsin. Ms. Jones has been with the Sub-Adviser since July 1998. Prior to
this, Ms. Jones served as a portfolio manager in J.P. Morgan's private banking
group and as a product specialist at Merrill Lynch Asset Management.
JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)
Jacobs Asset Management is the Sub-Adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation ("UAM") is a limited partner of, and owns a controlling
interest in, Jacobs Asset Management. Jacobs Asset Management provides
investment management and advisory services to corporations, unions, pensions
and profit-sharing plans, trusts and estates and other institutions and
investors. As of December 31, 1999, UAM and its affiliates had over $203 billion
in assets under management.
Investment decisions for the International Growth Fund are made by a team that
consists of portfolio managers and analysts who specialize their research by
region. Dan Jacobs, President, is the lead portfolio manager and has final
approval on purchase and sales. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.
NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939
NB Management is the Sub-Adviser for the Mid Cap Value Fund. NB Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of December 31, 1999, NB Management and its affiliates managed
approximately $54 billion in assets under management.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of the Sub-Adviser
and Mr. Gendelman is a managing director of Neuberger Berman, LLC. Messrs.
Gendelman and Mullick have been associated with the Sub-Adviser since 1994 and
1998, respectively. From 1993 to 1998, Mr. Mullick was a portfolio manager for
another investment adviser.
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<PAGE> 164
STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792
State Street Global Advisors is the Sub-Adviser for the Large Cap Value Fund.
State Street Global Advisors is an operating division of State Street Bank, a
wholly-owned subsidiary of State Street Corporation, which had more than $667
billion under management as of December 31, 1999.
The Large Cap Value Fund is managed by a team of investment professionals. In
addition to the ongoing activity of portfolio management, the team is
responsible for research focused on enhancing the Sub-Adviser's quantitative
process.
ADMINISTRATIVE SERVICES
The Series Company has entered into an Administrative Service Agreement
("Service Agreement") with VALIC Retirement Services Company ("Retirement
Services") and the Distributor for the provision of recordkeeping and
shareholder services to retirement and employee benefit plans. Under the terms
of the Service Agreement, the Series Company pays a fee to either Retirement
Services or the Distributor. The annual fee, paid monthly, is 0.25% of the
aggregate net asset value of each Fund, other than the Lifestyle Funds. Under
the Service Agreement, Retirement Services and the Distributor provide
recordkeeping services, including the establishment and maintenance of plan and
participant accounts and records; participant services, including the provision
of customer service representatives to respond to participant inquiries and
process telephone transactions; and plan services, including the production of
plan documentation and summary plan descriptions.
AMERICAN GENERAL DISTRIBUTORS, INC.
American General Distributors, Inc. is the Distributor of the Funds. The
Distributor sells Institutional Class I Shares of the Funds to employer
retirement plans. The Distributor transmits the employer orders to buy, sell or
transfer shares to the Series Company's designated agent daily. The Distributor
is a subsidiary of American General Corporation and acts as distributor of the
Funds' shares under an agreement with the Series Company. The Distributor is not
required to sell a minimum number of shares to employer retirement plans.
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT MINIMUMS
The employer retirement plan may establish a plan account with an initial
purchase of $5 million.
HOW TO BUY SHARES
Institutional Class I shares of each Fund are available to you through your
employer plan. Institutional Class I Shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $5 million
with the Series Company. A plan's account balance is equal at any time to the
aggregate of all amounts contributed by the plan to the Series Company, less the
cost of all redemptions by such plan from the Series Company. The Distributor
may waive the minimum account balance requirement if it reasonably anticipates
that the size of the plan and/or the anticipated amount of contributions will
present economies of scale.
As a participant in an employer retirement plan, you do not purchase
Institutional Class I Shares of the Funds directly. Rather, Institutional Class
I Shares of a Fund are purchased for you when you elect to allocate your
retirement contributions to a Fund that is available as an investment option in
your retirement or savings plan. You may be permitted to elect different
investment options, alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in accordance with
your plan's specific provisions. See your plan administrator or employee
benefits office for more details.
Investments by individual participants in employer retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
instructions for all orders for the purchase, redemption and exchange of Fund
shares. The availability of an investment by a plan participant in the Funds,
and the procedures for investing, depend upon the provisions of the plan and
whether the plan sponsor or administrator has contracted with the Series Company
or designated agent for special processing services.
For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.
HOW SHARES ARE VALUED
The price of each Class of shares for a Fund is based on net asset value
("NAV"). NAV is computed by adding the value of a Fund's holdings plus other
assets, subtracting liabilities, and then dividing the result by the number of
shares outstanding. The NAV of each Class will be different, depending on the
number of Class shares outstanding.
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Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. Some Funds hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when you will not be able to buy or sell your shares.
The Money Market Fund and the Municipal Money Market Fund and any securities
maturing within 60 days are valued according to the "amortized cost" method,
which is intended to stabilize the NAV at $1 per share.
The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4 p.m. Eastern Time).
Each Fund is open for business each day the NYSE is open.
TRANSFER OR EXCHANGE OF BALANCES
An employer retirement plan may allow you to exchange all or part of your
existing plan balance from one investment option to another. Check with your
plan administrator for details on the rules governing exchanges in your plan.
Exchanges will be accepted by the Series Company only as permitted by your plan.
Your plan administrator can explain how frequently exchanges are allowed. The
Series Company reserves the right to refuse any exchange purchase request.
TRANSACTION PROCESSING
Purchases, exchanges or redemptions of the Funds' shares are processed as soon
as they have been received in good order. Good order means that your request
includes complete information on your purchase, exchange or redemption and that
the Distributor has received the appropriate payment. The Series Company and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Series Company also reserves the right to suspend the sale of the Funds'
shares in response to conditions in the securities markets or for other reasons.
When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed. Please note that there are some federal holidays, however, such
as Columbus Day and Veterans' Day, when the NYSE is open and the Funds are open
but purchases and redemptions cannot be made due to the closure of the banking
system.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividends and
any distributions are automatically reinvested in the same Fund.
<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Dividends declared daily and paid
monthly:
Core Bond Strategic Bond
Domestic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth
Dividends paid semi-annually:
International Growth
International Value
</TABLE>
TAXPAYER IDENTIFICATION NUMBER
You are required to give us your correct Social Security or Taxpayer
Identification Number ("TIN") when you make contributions to the employer's
plan. We reserve the right to reject any new account or any purchase order for
failure to supply a certified TIN.
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The line graphs on the following pages reflect how an initial $10,000 investment
made on each Fund's inception date, November 2, 1998, would have changed in
value by the end of the first fiscal year, October 31, 1999.
Each line graph also shows how each Fund's benchmark index performed during that
same period. An investor cannot invest directly in one of the benchmark indices.
Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.
AMERICAN GENERAL BALANCED FUND
[GRAPH]
62
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AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
[GRAPH]
AMERICAN GENERAL CORE BOND FUND
[GRAPH]
63
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AMERICAN GENERAL DOMESTIC BOND FUND
[GRAPH]
AMERICAN GENERAL GROWTH LIFESTYLE FUND
[GRAPH]
64
<PAGE> 169
AMERICAN GENERAL HIGH YIELD BOND FUND
[GRAPH]
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
[GRAPH]
65
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AMERICAN GENERAL INTERNATIONAL VALUE FUND
[GRAPH]
AMERICAN GENERAL LARGE CAP GROWTH FUND
[GRAPH]
66
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AMERICAN GENERAL LARGE CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL MID CAP GROWTH FUND
[GRAPH]
67
<PAGE> 172
AMERICAN GENERAL MID CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
[GRAPH]
68
<PAGE> 173
AMERICAN GENERAL MONEY MARKET FUND
[GRAPH]
AMERICAN GENERAL SMALL CAP GROWTH FUND
[GRAPH]
69
<PAGE> 174
AMERICAN GENERAL SMALL CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
[GRAPH]
70
<PAGE> 175
AMERICAN GENERAL STRATEGIC BOND FUND
[GRAPH]
The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:
<TABLE>
<CAPTION>
CLASS I
-------
<S> <C>
Balanced Fund 15.92%
Conservative Growth Lifestyle Fund 12.24%
Core Bond Fund (0.38)%
Domestic Bond Fund (1.12)%
Growth Lifestyle Fund 19.71%
High Yield Bond Fund 2.44%
International Growth Fund 15.16%
International Value Fund 44.25%
Large Cap Growth Fund 36.14%
Large Cap Value Fund 15.09%
Mid Cap Growth Fund 3.24%
Mid Cap Value Fund 20.18%
Moderate Growth Lifestyle Fund 15.35%
Money Market Fund 4.63%
Small Cap Growth Fund 41.90%
Small Cap Value Fund (6.16)%
Socially Responsible Fund 22.73%
Strategic Bond Fund 2.50%
</TABLE>
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<PAGE> 176
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single Fund share. The total return numbers in the
tables represent the rate that an investor would have earned or lost on an
investment in a Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by Ernst & Young, L.P., whose reports, along
with the Fund's financial statements, are included in the Annual Report, which
is available upon request and which is incorporated into this document by this
reference.
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS I SHARES
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-------------------------------------------------------------------
INTERNATIONAL LARGE CAP MID CAP SMALL CAP INTERNATIONAL
GROWTH GROWTH GROWTH GROWTH VALUE
FUND FUND FUND FUND FUND
------------- --------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.12 -- (0.01) (0.04) 0.05
Net realized and unrealized gain (loss) on securities 1.39 3.61 0.33 4.23 4.37
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.51 3.61 0.32 4.19 4.42
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income -- -- -- -- --
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions -- -- -- -- --
------ ------ ------ ------ ------
Net asset value at end of period $11.51 $13.61 $10.32 $14.19 $14.42
====== ====== ====== ====== ======
TOTAL RETURN 15.16% 36.14% 3.24% 41.90% 44.25%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.28% 0.98% 0.92% 1.28% 1.17%
Ratio of expenses to average net assets before
expense reductions 2.75% 2.18% 1.83% 2.42% 2.68%
Ratio of net investment income (loss) to average net
assets 1.18% -- (0.14)% (0.58)% 0.48%
Portfolio turnover rate 91% 65% 25% 128% 32%
Number of shares outstanding at end of period (000's) 129 215 680 256 148
Net assets at end of period (000's) $1,487 $2,923 $7,010 $3,626 $2,132
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
----------------------------------------------------
SMALL
LARGE CAP MID CAP CAP SOCIALLY
VALUE VALUE VALUE RESPONSIBLE
FUND FUND FUND FUND
--------- ------- ----- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.11 0.07 0.12 0.11
Net realized and unrealized gain (loss) on securities 1.40 1.94 (0.73) 2.16
------ ------ ------ ------
Total income (loss) from investment operations 1.51 2.01 (0.61) 2.27
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.11) (0.06) (0.12) (0.11)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.11) (0.06) (0.12) (0.11)
Net asset value at end of period $11.40 $11.95 $ 9.27 $12.16
====== ====== ====== ======
TOTAL RETURN 15.09% 20.18% (6.16)% 22.73%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.93% 1.17% 1.11% 0.68%
Ratio of expenses to average net assets before
expense reductions 2.29% 2.51% 2.68% 1.89%
Ratio of net investment income (loss) to average net
assets 1.05% 0.64% 1.26% 0.97%
Portfolio turnover rate 66% 177% 91% 24%
Number of shares outstanding at end of period (000's) 155 126 133 173
Net assets at end of period (000's) $1,761 $1,507 $1,234 $2,098
</TABLE>
72
<PAGE> 177
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS I SHARES CONTINUED
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------
BALANCED HIGH YIELD STRATEGIC DOMESTIC CORE
FUND BOND FUND BOND FUND BOND FUND BOND FUND
-------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.22 0.83 0.69 0.51 0.51
Net realized and unrealized gain (loss) on securities 1.37 (0.57) (0.45) (0.62) (0.55)
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.59 0.26 0.24 (0.11) (0.04)
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.22) (0.83) (0.69) (0.51) (0.51)
Distributions from net realized gain on securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.22) (0.83) (0.69) (0.51) (0.51)
------ ------ ------ ------ ------
Net asset value at end of period $11.37 $ 9.43 $ 9.55 $ 9.38 $ 9.45
====== ====== ====== ====== ======
TOTAL RETURN 15.92% 2.44% 2.50% (1.12)% (0.38)%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.95% 1.13% 1.03% 0.91% 0.93%
Ratio of expenses to average net assets before expense
reductions 2.57% 2.05% 2.50% 2.10% 1.77%
Ratio of net investment income (loss) to average net assets 2.09% 5.57% 7.09% 5.43% 4.03%
Portfolio turnover rate 62% 72% 183% 98% 469%
Number of shares outstanding at end of period (000's) 156 1 134 374 5
Net assets at the end of period (000's) $1,777 $ 14 $1,281 $3,509 $ 49
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------
MODERATE CONSERVATIVE
GROWTH GROWTH GROWTH
MONEY MARKET LIFESTYLE LIFESTYLE LIFESTYLE
FUND FUND FUND FUND
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.07 0.15 0.21
Net realized and unrealized gain (loss) on securities -- 1.90 1.38 1.02
------ ------ ------ ------
Total income (loss) from investment operations 0.05 1.97 1.53 1.23
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.05) (0.06) (0.14) (0.20)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.05) (0.06) (0.14) (0.20)
------ ------ ------ ------
Net asset value at end of period $ 1.00 $11.91 $11.39 $11.03
====== ====== ====== ======
TOTAL RETURN 4.63% 19.71% 15.35% 12.24%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.68% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before expense
reductions 1.85% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net assets 4.64% 0.62% 1.42% 2.01%
Portfolio turnover rate N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 2,910 130 135 137
Net assets at the end of period (000's) $2,910 $1,547 $1,537 $1,508
</TABLE>
73
<PAGE> 178
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.
Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.
You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:
TELEPHONE: 1-877-999-2434
American General Web-Site Address: http://www.agfundgroup.com
You can review the Funds' reports and SAI at the public Reference Room of the
SEC.
You can get text only copies:
- - For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.
- - Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.
Investment Company Act File No. 811-08875 (AGSPC 2)
VA 10856-I VER.3/00
74
<PAGE> 179
American General Series Portfolio Company 2
Institutional Class II Shares
March 1, 2000
The American General Series Portfolio Company 2 (the "Series Company") is an
open-end mutual fund made up of separate Funds (the "Funds"). In this
prospectus, "we", "us", and "our" refers to the American General Fund Group.
Institutional Class II Shares of these Funds are available to you only through
an employer retirement plan. Different employer plans choose different
combinations of funds, so all of the funds discussed in this prospectus may not
be available in your plan. Please check your employer-provided plan documents
for available investments.
ACTIVELY MANAGED EQUITY FUNDS:
THESE FUNDS INVEST MOSTLY IN STOCKS AND ARE DESIGNED TO INCREASE THE VALUE OF
YOUR INVESTMENT OVER THE LONG TERM.
American General International Growth Fund ("International Growth Fund")
American General International Value Fund ("International Value Fund")
American General Large Cap Growth Fund ("Large Cap Growth Fund")
American General Large Cap Value Fund ("Large Cap Value Fund")
American General Mid Cap Growth Fund ("Mid Cap Growth Fund")
American General Mid Cap Value Fund ("Mid Cap Value Fund")
American General Small Cap Growth Fund ("Small Cap Growth Fund")
American General Small Cap Value Fund ("Small Cap Value Fund")
American General Socially Responsible Fund ("Socially Responsible Fund")
BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
American General Balanced Fund ("Balanced Fund")
INCOME FUNDS:
THESE FUNDS ARE DESIGNED TO PROVIDE CURRENT INCOME WHILE CONSERVING CAPITAL.
American General Core Bond Fund ("Core Bond Fund")
American General Domestic Bond Fund ("Domestic Bond Fund")
American General High Yield Bond Fund ("High Yield Bond Fund")
American General Strategic Bond Fund ("Strategic Bond Fund")
LIFESTYLE FUNDS:
THESE FUNDS ALLOCATE ASSETS TO OTHER AMERICAN GENERAL FUNDS IN ORDER TO PROVIDE
A DIVERSIFIED, LESS RISKY INVESTMENT.
American General Conservative Growth Lifestyle Fund ("Conservative Growth
Lifestyle Fund")
American General Growth Lifestyle Fund ("Growth Lifestyle Fund")
American General Moderate Growth Lifestyle Fund ("Moderate Growth Lifestyle
Fund")
MONEY MARKET FUNDS:
THIS FUND PROVIDES LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The SEC maintains an internet website at http://www.sec.gov that contains the
Statement of Additional Information ("SAI"), material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
<PAGE> 180
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 5
Core Bond Fund 8
Domestic Bond Fund 11
Growth Lifestyle Fund 14
High Yield Bond Fund 17
International Growth Fund 20
International Value Fund 22
Large Cap Growth Fund 25
Large Cap Value Fund 27
Mid Cap Growth Fund 29
Mid Cap Value Fund 31
Moderate Growth Lifestyle Fund 33
Money Market Fund 37
Small Cap Growth Fund 39
Small Cap Value Fund 41
Socially Responsible Fund 43
Strategic Bond Fund 46
MORE ABOUT PORTFOLIO INVESTMENTS 49
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 53
ACCOUNT INFORMATION 59
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 60
FINANCIAL HIGHLIGHTS 71
</TABLE>
2
<PAGE> 181
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE
- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Balanced
INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks balanced accomplishment of (i) conservation of principal and (ii)
long-term growth of capital and income through investment in fixed-income and
equity securities. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in a combination of fixed-income and equity securities in order
to maintain the value of your principal investment and provide you with capital
growth and income over the long term. We select securities for the Fund's
portfolio by identifying fixed-income (bonds and preferred stock) and equity
(stock) securities that represent fundamental values at reasonable prices. We
implement this philosophy using a system of portfolio managers, under which a
different group of portfolio managers makes investment decisions for the
fixed-income and equity portions of the Fund.
Fixed-income Portion: Up to 75% of the Fund's total assets may be invested in
fixed-income securities rated A or better by Moody's Investors Service
("Moody's") or Standard & Poor ("S&P") or of comparable investment quality. The
Sub-Adviser is not required to sell the security, however, if the rating is
downgraded. At all times, at least 25% of the Fund's total assets are invested
in fixed-income senior securities. The Fund may hold up to 20% of its total
assets in high-yielding, high risk fixed-income securities ("junk bonds").
Equity Portion: Up to 75% of the Fund's total assets may be invested in equity
securities listed on national securities exchanges or in the national
over-the-counter market, NASDAQ. Equity securities include American Depositary
Receipts ("ADRs"), which are certificates issued by a U.S. depositary bank,
representing foreign shares held by the bank. ADRs carry the same currency,
political and economic risks as the underlying foreign shares. Up to 10% of the
Fund's total assets may be invested in the securities of U.S. small
capitalization companies ("Small Caps"). Small Caps are companies that have
total assets (capitalization) of approximately $150 million to $1.25 billion.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities involves significantly greater credit risk, market risk
and interest rate risk than higher rated fixed-income securities, achievement of
the Fund's investment objective is dependent
3
<PAGE> 182
upon the Sub-Adviser's investment analysis. Accordingly, the Fund's investments
may be worth less than what the Fund paid for them.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN = 12.45%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 6.79%
Worst Quarter: 3rd 1999 (5.12)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a broad measure of market performance
and to a blend of two indices ("Balanced Blend"). The Balanced Blend is composed
of 40% Lehman Brothers Government and Corporate Index and 60% S&P 500 Index.
Each is a widely recognized, unmanaged index. The average total return table
shows returns with the maximum front-end sales charge deducted. No sales charge
has been applied to the indices used for comparison in the table. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return 16.22%
40% Lehman Brothers Government and
Corporate Index/60% S&P 500 14.64%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
Management fees 0.80
Other expenses 1.54
-----
Total annual fund operating expenses 2.34
=====
Fee waiver and/or expense reimbursement (1.64)%
-----
Net Expenses 0.70
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
4
<PAGE> 183
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$72 $224 $390 $874
</TABLE>
- --------------------------------------------------------------------------------
CONSERVATIVE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Growth Lifestyle Fund or the
Moderate Growth Lifestyle Fund. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 5%-15%
(These Funds invest at least 65% in non-U.S.
companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of small
capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
(These Funds invest in the equities of medium
capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large
capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
(These Funds invest in fixed-income securities, at
least 65% of which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
5
<PAGE> 184
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the Investment Company
Act of 1940 (the "1940 Act") because it invests in a limited number of the
Underlying Funds. However, the Underlying Funds themselves are diversified
companies.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
6
<PAGE> 185
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
[GRAPH]
ANNUAL RETURN CLASS A = 13.65%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 10.91%
Worst Quarter: 3rd 1999 (2.95)%
</TABLE>
[insert bar chart (Class A only) for calendar year 1999, best and worst quarter
information and average annual return table (both Class A and B) for fiscal year
1999]
<TABLE>
<S> <C> <C>
Average Annual Total Return 12.27%
Conservative Growth Lifestyle
Blended Benchmark 12.32%
</TABLE>
7
<PAGE> 186
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
----
Total annual fund operating expenses 0.10%
====
</TABLE>
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.75%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
CORE BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed-income securities. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in medium to high quality
fixed-income securities rated investment grade or higher, or in securities
issued or guaranteed by the U.S. Government, mortgage-backed or asset-backed
securities. U.S. Government securities are securities issued or guaranteed by
the U.S. Government which are supported by the full faith and credit of the U.S.
Government; the right of the issuer to borrow from the U.S. Treasury; the credit
of the issuing government agency; or the authority of the U.S. Government to
purchase obligations of the agency. A portion of the 65% may also be invested in
U.S. dollar-denominated fixed-income securities issued by foreign issuers,
although the Fund currently intends to limit these investments to no more than
40% of its total assets. The Sub-Adviser is not required to dispose of a
security if its rating is
8
<PAGE> 187
downgraded. Up to 10% of the Fund's total assets may be invested in lower
quality fixed-income securities ("junk bonds"), those rated below Baa3 by
Moody's and BBB by S&P.
Up to 35% of the Fund's total assets may be invested in interest-bearing
short-term investments, such as commercial paper, bankers' acceptances, bank
certificates of deposit, and other cash equivalents and cash. Equity securities,
including common or preferred stocks, convertible securities, and warrants, may
comprise up to 20% of the Fund's total assets. See "More About Portfolio
Investments."
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, 469% for the fiscal year ended October 31, 1999.
The rate of portfolio turnover is calculated by dividing the lesser of the
amount of purchases or sales of portfolio securities during the fiscal year by
the average of the value of the portfolio securities. A high rate of portfolio
turnover generally involves correspondingly greater brokerage commission
expenses, thus increasing the Fund's operating expenses. The Fund's active
trading strategy may cause the Fund to have a relatively high amount of
short-term capital gains, which are taxable to you at your ordinary income tax
rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to
9
<PAGE> 188
as junk bonds) involves significantly greater credit risk, market risk and
interest rate risk than higher rated fixed-income securities achievement of the
Fund's investment objective is dependent upon the Sub-Adviser's investment
analysis. Accordingly, the Fund's investments may become worth less than what
the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = (0.86)%
<TABLE>
<S> <C> <C>
Best Quarter: 3rd 1999 0.43%
Worst Quarter: 2nd 1999 (1.27)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return: (0.25)%
Lehman Brothers Aggregate Bond Index: 0.53%
</TABLE>
10
<PAGE> 189
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
------------------------------
<S> <C>
Management fees 0.48%
Other expenses 0.57%
-------
Total annual fund operating expenses 1.05%
=======
Fee waiver and/or expense reimbursement (0.37)%
-------
Net Expenses 0.68%
=======
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>
- --------------------------------------------------------------------------------
DOMESTIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments primarily in investment grade fixed-income securities and
other income producing securities. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in investment grade U.S.
corporate fixed-income securities, rated at least A by Moody's or S&P, in
securities issued or guaranteed by the U.S. Government, Yankee bonds, or in
mortgage-backed or asset-backed securities. U.S. Government securities are
securities issued or guaranteed by the U.S. Government which are supported by
the full faith and credit of the U.S. Government; the right of the issuer to
borrow from the U.S. Treasury; the credit of the issuing government agency; or
the authority of the U.S. Government to purchase obligations of the agency. The
Sub-Adviser is not required to dispose of a security if its rating is
downgraded.
Up to 35% of total assets may be invested in non-U.S. investment grade
intermediate and long-term corporate fixed-income securities rated at least A by
Moody's or S&P, including Eurodollar fixed-income securities, securities issued
or guaranteed by the Canadian Government, its provinces or their
instrumentalities, or interest bearing short-term investments, such as
commercial paper, bankers' acceptances, bank certificates of deposit and other
cash equivalents and cash. Currently, Eurodollar fixed-income securities will be
limited to no more than 20% of the Fund's total assets.
11
<PAGE> 190
To increase the Fund's earning potential, we may use up to 25% of the Fund's
assets to make some higher risk investments in mortgage-related securities or
bonds rated less than A by Moody's or S&P. No minimum rating requirement applies
to these junk bonds. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
12
<PAGE> 191
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund. This information helps to provide some indication of the
risks of investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = (2.90)%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 (0.18)%
Worst Quarter: 1st 1999 (1.44)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return (0.92)%
Lehman Brothers Aggregate Bond
Index 0.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a None
percentage of offering price)
Maximum deferred sales charge (load) (as a percentage of None
purchase or redemption proceeds, whichever is lower)
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.60%
Other expenses 1.63%
------
Total annual fund operating expenses 2.23%
======
Fee waiver and/or expense reimbursement (1.57)%
------
Net Expenses 0.66%
======
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
13
<PAGE> 192
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$67 $211 $368 $826
</TABLE>
- --------------------------------------------------------------------------------
GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth through investments in a combination of the Series Company Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C>
International Equity Securities 25%-35%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
(These Funds invest in the equities of small capitalization
companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization
companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
(These Funds invest in the equities of large capitalization
companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
(These Funds invest in fixed-income securities, at least 65% of
which are investment grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be
14
<PAGE> 193
appropriate for the Fund's investment objective. We may change the asset
allocation ranges and the particular Underlying Funds in which the Fund may
invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
15
<PAGE> 194
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 28.86%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 20.40%
Worst Quarter: 3rd 1999 (2.26)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return 19.72%
Growth Lifestyle Blended Benchmark 18.54%
</TABLE>
16
<PAGE> 195
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
=====
</TABLE>
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.84%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investment in a diversified portfolio of high yielding, high risk
fixed-income securities. This investment objective can be changed by the Board
of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in below-investment grade
U.S. and foreign junk bonds. These high yielding, high risk fixed-income
securities are rated below Baa3 by Moody's and BBB- by S&P. Up to 15% can be
rated below Caa3 by Moody's or CCC- by S&P. The Fund may also invest up to 35%
of total assets in below-investment grade foreign fixed-income securities.
To balance this risk, the Fund may invest up to 35% in investment grade
securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In
addition, the Fund may invest up to 15% in zero coupon securities (securities
not paying current cash interest), and up to 20% of total assets in equity
securities. Equity securities includes common or preferred stocks, warrants,
17
<PAGE> 196
and convertible securities. The Sub-Adviser is not required to dispose of a bond
that is downgraded to below-investment grade. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
18
<PAGE> 197
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 4.58%
<TABLE>
<S> <C> <C>
Best Quarter: 1st 1999 3.93%
Worst Quarter: 3rd 1999 (1.42)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney High Yield
Market Index, a widely recognized, unmanaged index covering a significant
portion of the below-investment grade U.S. corporate bond market. The average
total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return 2.74%
Salomon Smith Barney High Yield
Market Index 4.24%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.70%
Other expenses 0.65%
-----
Total annual fund operating expenses 1.35%
=====
Fee waiver and/or expense reimbursement (0.47)%
-----
Net Expenses 0.88%
=====
</TABLE>
19
<PAGE> 198
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$90 $281 $488 $1,089
</TABLE>
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Jacobs Asset Management
INVESTMENT OBJECTIVE
Seeks to provide long-term capital appreciation by investing in equity
securities of non-U.S. companies, the majority of which are expected to be in
developed markets. The Fund may invest across the capitalization spectrum,
although it intends to emphasize smaller capitalization stocks. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts ("GDRs"). ADRs are certificates issued
by a U.S. depositary bank, representing foreign shares held by the bank, to
facilitate trading in foreign securities. GDRs and EDRs are very similar to
ADRs. Generally, ADRs are designed for use in U.S. securities markets and EDRs
are designed for use in European securities markets. GDRs are designed for use
when the issuer is raising capital in more than one market simultaneously, such
as the issuer's local market and the U.S. ADRs, EDRs and GDRs each carry the
same currency, political and economic risks as the underlying foreign shares.
The Fund may invest up to 40% of total assets in the equity securities of
issuers located in emerging market countries. An "emerging market country" is
any country which, in the opinion of the Sub-Adviser, is generally considered to
be an emerging or developing country by the international financial community,
including the International Bank for Reconstruction and Development (known as
"The World Bank") and the International Finance Corporation. The Fund will focus
its emerging market investments on those countries in which the Sub-Adviser
believes the economies are developing and the markets are becoming more
sophisticated.
We will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. Our goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities, including those of smaller capitalization companies ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
20
<PAGE> 199
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 56.16%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 44.54%
Worst Quarter: 1st 1999 (0.69)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the
21
<PAGE> 200
index used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return: 15.41%
Salomon Smith Barney Primary
Market Index 25.58%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
SHAREHOLDER FEES
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.90%
Other expenses 1.60%
-----
Total annual fund operating expenses 2.50%
=====
Fee waiver and/or expense reimbursement 1.47%
-----
Net Expenses 1.03%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1.264
</TABLE>
- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
INVESTMENT OBJECTIVE
Seeks to provide growth of capital and future income through investments
primarily in securities of non-U.S. issuers and securities whose principal
markets are outside of the United States. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign securities.
Since the Fund normally intends to be fully invested, foreign equity securities
will usually represent closer to 80-85% of the Fund's total assets. While the
assets of the Fund can be invested with geographical flexibility, the emphasis
will be on securities of companies located in Europe, Canada, Australia, and the
Far East, giving due consideration to economic, social, and political
developments, currency risks and the liquidity of various national markets.
Up to 90% of the amount invested in foreign securities may be invested in put
and call options on foreign currencies and forward currency contracts. A put
option on foreign currency is a security that gives the Fund the right to sell a
particular foreign currency
22
<PAGE> 201
within a stated period of time. A call option on foreign currency gives the Fund
the right to buy a particular foreign currency within a stated period of time. A
forward currency contract is an agreement to buy or sell foreign currency at an
agreed-upon price and date.
The Fund may invest in the equity securities of issuers located in emerging
market countries. An "emerging market country" is any country which, in the
opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (known as "The World
Bank") and the International Finance Corporation. The Fund will focus its
emerging market investments on those countries in which the Sub-Adviser believes
the economies are developing and the markets are becoming more sophisticated.
This Fund may invest up to 10% of total assets in the securities of foreign
small capitalization companies ("Foreign Small Caps"). Foreign Small Caps are
companies that have total assets (capitalization) of approximately $150 million
to $1.25 billion. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in put
and call options, futures, swaps, structured securities and other derivative
instruments. These instruments may be leveraged so that small changes may
produce disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
23
<PAGE> 202
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 66.55%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 27.34%
Worst Quarter: 3rd 1999 7.84%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Salomon Smith Barney Primary Market
Index. The Salomon Smith Barney Primary Market Index is a sub-index of the
Salomon Smith Barney Broad Market Index, which measures the performance of
equities from 23 countries and 18 regions throughout the world. Each company
with equity capital of at least $100 million is tracked by the Salomon Smith
Barney Index. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 44.61%
Salomon Smith Barney Primary
Market Index 25.58%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 1.00%
Other expenses 1.48%
-----
Total annual fund operating expenses 2.48%
======
Fee waiver and/or expense reimbursement (1.56)%
-----
Net Expenses 0.92%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
24
<PAGE> 203
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management
INVESTMENT OBJECTIVE
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary objective. This investment objective can
be changed by the Board of Trustees, without the approval of the Fund
shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in the equity securities of
large cap U.S. issuers. Large cap U.S. issuers include the largest 1,000
companies by market capitalization traded in the United States.
The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment Research Department, other
industry sources and objective quantitative analysis. Next, the Fund's
investment portfolio is constructed by balancing expected returns against
portfolio risk, trading fees and investment objectives. The Fund is intended to
be constructed with minimum deviations from the sector, risk statistics and
macroeconomic sensitivity of the Fund's benchmark, the Russell 1000(R) Growth
Index. A proprietary multi-factor model is used in seeking to ensure risks taken
are both intended and are warranted due to expected return. Lastly, the Fund is
traded regularly and rebalanced in seeking to ensure all positions are in line
with current market outlooks and benchmark weights.
The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. GDRs are very
similar to ADRs. Generally, ADRs are designed for use in the United States
securities markets, while GDRs are designed for use when the issuer is raising
capital in more than one market simultaneously, such as the issuer's local
market and the U.S. ADRs and GDRs each carry the same currency, political and
economic risks as the underlying foreign shares. See "More About Portfolio
Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instruments.
These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
25
<PAGE> 204
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 37.05%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 24.04%
Worst Quarter: 3rd 1999 (2.58)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Growth Index. The
Russell 1000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 1000(R) Growth Index measures the performance
of the 1,000 largest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 36.40%
Russell 1000(R) Growth Index 34.25%
</TABLE>
26
<PAGE> 205
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.55%
Other expenses 1.48%
-----
Total annual fund operating expenses 2.03%
=====
Fee waiver and/or expense reimbursement (1.30)%
-----
Net Expenses 0.73%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$75 $234 $407 $910
</TABLE>
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers
INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index through investment in equity securities. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
The Russell 1000(R) Value Index is a sub-index of the Russell 1000(R) Index,
which measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values. As of June 30, 1999, the latest Russell index
reconstitution date, the average market capitalization in the Russell 1000(R)
Index was $12.1 billion.
27
<PAGE> 206
INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data. The
constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Market Risk also refers to the risk that the value of the securities purchased
by the Fund may decline as a result of economic, political or market conditions
or an issuer's financial circumstances. Because the Fund maintains sector
weights at a similar level to that of the Index, your investment may experience
similar changes in value and share similar risks. In order to avoid unintended
exposures to economic factors, including the direction of the economy, interest
rates, energy prices and inflation, we maintain the proportion of equity
securities from different economic sectors in this Fund's portfolio at a level
similar to that of the Index.
Quantitative Method Risk: The different factors that go into the quantitative
analysis can be changed periodically. The weight of each factor may also change;
thus, the analytical model may have different historical or future performance
compared to the Fund.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 5.73%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 12.78%
Worst Quarter: 3rd 1999 (9.63)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 1000(R) Value Index. The
average total return table shows returns with the maximum front-end sales charge
deducted. No
28
<PAGE> 207
sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 15.35%
Russell 1000(R) Value Index 16.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.50%
Other expenses 1.57%
-----
Total annual fund operating expenses 2.07%
-----
-----
Fee waiver and/or expense reimbursement (1.39)%
-----
Net Expenses 0.68%
-----
-----
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$69 $218 $379 $850
</TABLE>
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
INVESTMENT OBJECTIVE
Seeks capital appreciation principally through investments in medium
capitalization equity securities, such as common and preferred stocks and
securities convertible into common stocks. Current income is a secondary
objective. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization of $1 to $10 billion. We will
seek to achieve capital appreciation through an opportunistic investment
strategy with a growth bias. This Fund will purchase equity securities of those
companies that appear to be undervalued relative to their growth potential in
the securities markets, because the companies
29
<PAGE> 208
are presently out of favor, not well known or possess value that is not
currently recognized by the investment community. The Sub-Adviser uses a "bottom
up" approach to select specific investments, employing analysis that contains
elements of traditional dividend discount and earnings yield models, establishes
predicted relative valuation for equity and fixed-income markets, and determines
the attractiveness of individual securities through evaluation of growth and
risk characteristics of the underlying company relative to the overall equity
market. Although the Fund's portfolio securities generally will be acquired for
the long term, they may be sold under some of the following circumstances when
the Sub-Adviser believes that: a) the anticipated price appreciation has been
achieved or is no longer probable; b) alternative investments offer superior
total return prospects; or c) fundamentals change adversely.
Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Management Style Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued relative to its growth potential in the
securities markets may prove incorrect.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 3.56%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 16.93%
Worst Quarter: 3rd 1999 (11.89)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Growth Index. The
Russell Midcap(TM) Growth Index focuses on Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values. The average total
return table shows returns with the maximum front-end sales charge deducted. No
sales charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return 3.39%
Russell Midcap(TM) Growth Index 37.66%
</TABLE>
30
<PAGE> 209
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.65%
Other expenses 1.60%
-----
Total annual fund operating expenses 2.25%
-----
-----
Fee waiver and/or expense reimbursement (1.58)%
-----
Net Expenses 0.67%
-----
-----
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$68 $215 $374 $838
</TABLE>
- --------------------------------------------------------------------------------
MID CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.
INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund invests at least 65% of total assets in equity securities of medium
capitalization established companies, using a value-oriented investment approach
intended to increase capital with reasonable risk. Medium capitalization
companies include companies with the characteristics of companies included in
the Russell Midcap(TM) Index. As of June 30, 1999, the largest company included
in the Russell Midcap(TM) Index had an approximate market capitalization of
$11.2 billion, while the average market capitalization was approximately $3.9
billion.
We choose securities we believe are undervalued based on strong fundamentals,
including a low price-to-earnings ratio, consistent cash flow, and the company's
track record through all parts of the market cycle. When selecting securities
for this Fund, we also consider other factors, including ownership by a
company's management of the company's stock and the dominance of a company in
its particular field. Up to 35% of the Fund's total assets may be invested in
other equity securities, including common and preferred stocks, convertible
securities, and related equities. See "More About Portfolio Investments."
31
<PAGE> 210
The Fund may participate in the Initial Public Offering ("IPO") market, and a
portion of the Funds' returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will
experience significant improvement in performance by investing in IPOs.
The Fund is actively traded. The frequency of Fund transactions is reflected in
its portfolio turnover rate, % for the fiscal year ended October 31, 1999. The
rate of portfolio turnover is calculated by dividing the lesser of the amount of
purchases or sales of portfolio securities during the fiscal year by the average
of the value of the portfolio securities. A high rate of portfolio turnover
generally involves correspondingly greater brokerage commission expenses, thus
increasing the Fund's operating expenses. The Fund's active trading strategy may
cause the Fund to have a relatively high amount of short-term capital gains,
which are taxable to you at your ordinary income tax rate.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 24.21%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 16.71%
Worst Quarter: 3rd 1999 (11.19)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell Midcap(TM) Value Index. The
Russell Midcap(TM) Value Index measures the performance of the 800 smallest
companies in the Russell 1000(R) Index, focusing on those with lower
price-to-book ratios and lower forecasted growth values. The Russell 1000(R)
Index is a sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index
follows the 3,000 largest U.S. companies, based on total market capitalization.
The average total return table shows returns with the maximum front-end sales
charge deducted. No sales charge has been applied to the index used for
comparison in the table. The Fund's past performance does not necessarily
indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return: 20.53%
Russell Midcap(TM) Value Index 5.70%
</TABLE>
32
<PAGE> 211
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDERS FEES
- -----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a None
percentage of offering price)
Maximum deferred sales charge (load) (as a percentage of None
purchase or redemption proceeds, whichever is lower)
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75%
Other expenses 1.52%
----
Total annual fund operating expenses 2.27%
====
Fee waiver and/or expense reimbursement (1.35)%
----
Net Expenses 0.92%
====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$94 $294 $510 $1,136
</TABLE>
- --------------------------------------------------------------------------------
MODERATE GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth and current income through investments in a combination of the
Series Company Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Growth Lifestyle Fund. This investment objective
can be changed by the Board of Trustees, without the approval of the Fund
shareholders.
33
<PAGE> 212
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges and Underlying Fund choices for this Fund, as
of the time of print.
<TABLE>
<S> <C> <C>
International Equity Securities 10%-20%
(These Funds invest at least 65% in non-U.S. companies.)
Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of small capitalization companies.)
Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
(These Funds invest in the equities of medium capitalization companies.)
Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
(These Funds invest in the equities of large capitalization companies.)
Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
(These Funds invest in fixed-income securities, at least 65% of which are investment
grade.)
Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based the target investment percentages for the Fund on the degree to
which we believe the Underlying Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
INVESTMENT RISKS
The allocation among the different Underlying Funds is designed to achieve the
Fund's investment objective and reduce risk. The allocation of assets within the
Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Funds and asset classes based on
VALIC's current outlook on financial markets and the world's economies. Because
the Fund's assets will be adjusted only periodically, there should not be any
sudden large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
Funds affect this Fund's net asset value. Also, the Fund's ability to meet its
investment objective depends upon the ability of the Underlying Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds.
The Fund is also subject to the risk that a Fund that is non-diversified under
the 1940 Act will invest more of its assets in fewer issuers and, therefore, is
more likely to be adversely affected by a downturn in any one issuer or
security.
34
<PAGE> 213
The securities that Underlying Funds invest in also involve various risks:
Credit Risk (applies to Core Bond): The risk that an issuer of a fixed-income
security owned by the Fund may be unable to make interest or principal payments.
Derivatives Risk (Domestic Bond, International Value, Large Cap Growth): The
risk that loss may result from a Fund's investments in put and call options,
futures, swaps, structured securities and other derivative instruments. These
instruments may be leveraged so that small changes may produce disproportionate
losses to a Fund.
Foreign Securities Risks (applies to each of the above Underlying Funds except
for Mid Cap Growth and Mid Cap Value):
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk (applies to Core Bond): Interest rate risk refers to the risk
that fluctuations in interest rates may affect the value of interest-paying
securities in a Fund. When interest rates rise, the value of fixed-income
securities will usually fall, and vice versa. Longer term securities are subject
to greater interest rate risk.
Manager Risk (applies to all Underlying Funds): There is a risk that the Fund's
management strategy may not achieve the desired results and the Fund's
performance may lag behind that of similar funds.
Management Style Risk (applies to Mid Cap Growth): The risk that the portfolio
manager's judgments that a particular security is undervalued relative to its
growth potential in the securities markets may prove incorrect.
Market Risk (applies to all Underlying Funds): Market risk refers to the
potential loss of capital resulting from changes in the prices of investments.
For example, market risk occurs when expectations of lower corporate profits in
general cause the broad market of stocks or bonds to fall in price. When this
happens, even though a company is experiencing growth in profits, the price of
its stock or bonds could fall.
Quantitative Method Risk (applies to Large Cap Value): The different factors
that go into the quantitative analysis can be changed periodically. The weight
of each factor may also change; thus, the analytical model may have different
historical or future performance compared to the Fund.
Small Capitalization Company Risk (applies to Core Bond, Domestic Bond,
International Growth, International Value, Small Cap Growth, and Small Cap
Value): The risk that smaller companies may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
markets, generally.
Value Investing Risk (applies to Domestic Bond, International Value, Small Cap
Value, Mid Cap Value and Large Cap Value): The risk that the portfolio manager's
judgments that a particular security is undervalued in relation to the company's
fundamental economic value may prove incorrect.
35
<PAGE> 214
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 18.71%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.33%
Worst Quarter: 3rd 1999 (3.36)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of a blended index, calculated by including
the pro rata portion of each of the Underlying Fund's respective indices, and
the S&P 500 Index, composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The S&P 500 Index approximates the general distribution of
industries in the U.S. economy, captures the price performance of a large
cross-section of the publicly traded stock market. The average total return
table shows returns with the maximum front-end sales charge deducted. No sales
charge has been applied to the index used for comparison in the table. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C>
Average Annual Total Return: 15.17%
Moderate Growth Lifestyle 15.02%
Blended Benchmark
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.10%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.10%
-----
-----
</TABLE>
Including indirect expenses of the Underlying Funds, after expense
reimbursements to the Underlying Funds, the numbers below show the total
combined operating expenses as a percentage of net Assets. This reflects total
average weighted combined operating expenses.
<TABLE>
<S> <C>
Total Combined Operating Expenses: 0.78%
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
36
<PAGE> 215
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$10 $32 $57 $129
</TABLE>
- --------------------------------------------------------------------------------
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Stability
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. In accordance with
Rule 2a-7 of the 1940 Act, such securities must mature in 13 months or less and
the Fund must have a dollar-weighted average portfolio maturity of 90 days or
less. These practices are designed to reduce risk and minimize any fluctuation
in the share price.
The investments this Fund may buy include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements
- - Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- - Asset-backed securities
- - Loan participations
- - Adjustable rate securities
- - Variable Rate Demand Notes
- - Illiquid and restricted securities (limited to 10% of the Fund's net assets at
all times)
- - Rule 144A securities (liquid)
INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Money Market Fund
varies daily depending on short-term interest rates.
Because of the following principal risks, the value of your investment may
fluctuate:
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
37
<PAGE> 216
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 4.88%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 1.34%
Worst Quarter: 1st 1999 1.09%
</TABLE>
The table shows the Fund's seven-day yield as of a recent date. Please call
Customer Service at 1-877-999-2434 for the most current yield information. The
Fund's past performance does not necessarily indicate how it will perform in the
future.
<TABLE>
<S> <C> <C>
Average Annual Total Return 4.79%
New York City 30-day Primary CD Rate 4.38%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 0.85%
----
Total annual fund operating expenses 1.10%
====
Fee waiver and/or expense reimbursement (0.67)%
----
Net Expenses 0.43%
====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$44 $138 $241 $545
</TABLE>
38
<PAGE> 217
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $1.25 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) Growth Index. Within each
industry, the Fund invests in equity securities that the Sub-Adviser's research
and valuation process indicate are undervalued. The greater a company's
estimated worth compared to the current market price of its equity securities,
the more undervalued the company.
The Fund may invest up to 35% of total assets in other equity securities of U.S.
and foreign large and medium capitalization issuers, including those equities
listed above, and the securities of investment companies. Large and medium
capitalization issuers are those companies with total assets of approximately $1
billion or more. See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
39
<PAGE> 218
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 63.35%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 43.01%
Worst Quarter: 1st 1999 (0.43)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Growth Index. The
Russell 2000(R) Growth Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 2000(R) Growth Index measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, focusing on those
with higher price-to-book ratios and higher forecasted growth values. The
average total return table shows returns with the maximum front-end sales charge
deducted. No sales charge has been applied to the index used for comparison in
the table. The Fund's past performance does not necessarily indicate how it will
perform in the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return: 42.30%
Russell 2000(R) Growth Index 29.28%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.85%
Other expenses 1.49%
----
Total annual fund operating expenses 2.34%
====
Fee waiver and/or expense reimbursement (1.31)%
----
Net Expenses 1.03%
====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
40
<PAGE> 219
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$105 $328 $570 $1,264
</TABLE>
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)
INVESTMENT OBJECTIVE
Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGIES
This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $1.25 billion and companies included in
the Russell 2000(R) Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.
Actively Managed Portion (50%): In analyzing and selecting investments for the
actively managed portion of the Fund's investment portfolio, we look for market
themes and changes that signal opportunity. We seek companies with lower
price-to-earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. At any given time, this portion of the Fund's
investment portfolio will be invested in a diversified group of small
capitalization equity securities in several industries. The Fund will invest
primarily in U.S. companies with seasoned management or a track record as part
of a larger company.
Passively Managed Portion (50%): This portion of the Fund is comprised of a
sampling of stocks in the Index that, as a group, should reflect its
performance. Since it may not be possible for this Fund to buy every stock
included in the Index or in the same proportions, the Fund will select stocks to
purchase by utilizing a statistical sampling technique known as "optimization."
This process selects stocks for the Fund so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate
those of the Index. The stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of the Index as a whole.
The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U. S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the U.S. Government; the right of the issuer to borrow from
the U.S. Treasury; the credit of the issuing government agency; or the authority
of the U.S. Government to purchase obligations of the agency. See "More About
Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
41
<PAGE> 220
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = (4.56)%
<TABLE>
<S> <C> <C>
Best Quarter: 2nd 1999 11.75%
Worst Quarter: 1st 1999 (12.61)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Russell 2000(R) Value Index. The
Russell 2000(R) Value Index is a sub-index of the Russell 3000(R) Index. The
Russell 3000(R) Index follows the 3,000 largest U.S. companies, based on total
market capitalization. The Russell 2000(R) Value Index measures the performance
of the 2,000 smallest companies in the Russell 3000(R) Index, focusing on those
with lower price-to-book ratios and lower forecasted growth values. The average
total return table shows returns with the maximum front-end sales charge
deducted.
42
<PAGE> 221
No sales charge has been applied to the index used for comparison in the table.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
<TABLE>
<S> <C> <C>
Average Annual Total Return (5.92)%
Russell 2000(R) Value Index 0.72%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.75
Other expenses 1.69
----
Total annual fund operating expenses 2.44
====
Fee waiver and/or expense reimbursement (1.58)%
----
Net Expenses 0.86
====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$88 $275 $478 $1,065
</TABLE>
- --------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in equity
securities, in companies which meet the social criteria established for the
Fund. This investment objective can be changed by the Board of Trustees, without
the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund will invest at least 80% of total assets in the equity securities of
companies meeting the Fund's social criteria. To find out which companies meet
the Fund's social criteria, we rely on industry classifications, research
services such as the Investor Responsibility Research Center ("IRRC").
The Fund does not invest in companies that are significantly engaged in:
- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
43
<PAGE> 222
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.
At least once a year, the IRRC surveys state laws to see if there are any new or
revised state laws that govern or affect the investments of public funds. If the
survey shows that at least 20 states have adopted laws that restrict public
funds from being invested in a clearly definable category of investments, this
category is automatically added to our social criteria list.
Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs carry the
same currency, political and economic risks as the underlying foreign shares.
See "More About Portfolio Investments."
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:
Foreign Securities Risk:
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities:
Political risk - the chance of a change in government and the assets of the
company being taken away.
Currency risk - a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment
valued in U.S. dollars will decline even if the value of the foreign stock
or bond is unchanged.
Limited information - foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are
used to getting. To minimize taxes they may not report some income or they
may report higher expenses.
Sovereign Risk - the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk - foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk - the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk - the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Social Criteria Risk: If a company stops meeting the Fund's social criteria
after the Fund invested in it, the Fund will sell these investments even if this
means the Fund loses money. Also, if the Fund changes its social criteria and
the companies the Fund has already invested in no longer qualify, the Fund will
sell these investments, even if this means the Fund loses money. Social criteria
screening will limit the availability of investment opportunities for the Fund
more than for funds having no such criteria.
44
<PAGE> 223
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 14.19%
Worst Quarter: 3rd 1999 (6.87)%
</TABLE>
[GRAPH]
ANNUAL RETURN CLASS A = 18.76%
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the S&P 500 Index, composed of 500
common stocks which are chosen by Standard & Poor's Corporation. The Index
approximates the general distribution of industries in the U.S. economy,
captures the price performance of a large cross-section of the publicly traded
stock market. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C> <C>
Annual Return
Average Annual Total Return 22.99%
S&P 500 Index 25.67%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Management fees 0.25%
Other expenses 1.52%
-------
Total annual fund operating expenses 1.77%
=======
Fee waiver and/or expense reimbursement (1.34)%
-------
Net Expenses 0.43%
=======
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
45
<PAGE> 224
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$44 $138 $241 $545
</TABLE>
- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of income producing
securities. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including
- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)
Up to 25% of the Fund's total assets may be invested in foreign emerging market
debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may also
invest up to 20% of total assets in equity securities, such as common and
preferred stocks, convertible securities, and warrants.
Temporary Defensive Investment Strategy: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
46
<PAGE> 225
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Interest Rate Risk: Interest rate risk refers to the risk that fluctuations in
interest rates may affect the value of interest-paying securities in a Fund.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential loss of capital resulting from
changes in the prices of investments. For example, market risk occurs when
expectations of lower corporate profits in general cause the broad market of
stocks or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A portion of the Fund's investments
may be in high yielding, high risk fixed-income securities that are rated below
investment grade. Fixed-income securities rated below BBB- by S&P or Baa3 by
Moody's are considered to be below investment grade. Fixed-income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed-income
securities rated as investment grade. These lower rated securities are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
fixed-income securities (commonly referred to as junk bonds) involves
significantly greater credit risk, market risk and interest rate risk than
higher rated fixed-income securities achievement of the Fund's investment
objective is dependent upon the Sub-Adviser's investment analysis. Accordingly,
the Fund's investments may become worth less than what the Fund paid for them.
The lower rated but higher yielding fixed-income securities purchased by the
Fund may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed-income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or the Sub-Adviser of a lower rated security
may also include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt maturity
schedules, regulatory concerns, and responsiveness to changes in business
conditions and interest rates. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
47
<PAGE> 226
PERFORMANCE INFORMATION
The bar chart below shows the Fund's annual total return and performance for the
1999 calendar year, for Class A Shares, assuming reinvestment of dividends and
distributions. The return for the Fund's Class B Shares will differ from the
Class A returns shown in the bar chart, due to the expenses of each Class. The
bar chart does not reflect any sales charge that you may be required to pay upon
purchase or redemption of the Fund's shares. Any sales charge will reduce your
return. This information helps to provide some indication of the risks of
investing in the Fund.
[GRAPH]
ANNUAL RETURN CLASS A = 4.93%
<TABLE>
<S> <C> <C>
Best Quarter: 4th 1999 3.39%
Worst Quarter: 2nd 1999 (0.75)%
</TABLE>
The table compares the average annual returns for calendar year 1999 and since
inception (November 2, 1998) to that of the Lehman Brothers Aggregate Bond
Index, a total return index measuring both the capital price changes and the
income underlying the universe of securities, weighted by market value
outstanding. The average total return table shows returns with the maximum
front-end sales charge deducted. No sales charge has been applied to the index
used for comparison in the table. The Fund's past performance does not
necessarily indicate how it will perform in the future.
<TABLE>
<S> <C>
Average Annual Total Return: 2.67%
Lehman Brothers Aggregate Bond Index 0.53%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. Shareholder fees are paid directly from your account, while
annual Fund operating expenses are deducted from Fund assets.
<TABLE>
<S> <C>
SHAREHOLDER FEES
- ------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
purchase or redemption proceeds, whichever is lower) None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
Management fees 0.60%
Other expenses 1.65%
-----
Total annual fund operating expenses 2.25%
=====
Fee waiver and/or expense reimbursement (1.47)%
-----
Net Expenses 0.78%
=====
</TABLE>
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the Fund for the time periods indicated;
- - You redeem all your shares at the end of those periods;
48
<PAGE> 227
- - Your investment has a 5% return each year; and
- - The Fund's operating expenses remain the same.
<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$80 $249 $434 $970
</TABLE>
- --------------------------------------------------------------------------------
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
Each Fund's principal investment strategies and risks are summarized above. More
information about types of portfolio investments is shown below. Funds may
invest in other investments and may use investment techniques not described in
this prospectus. All Money Market Fund investments must comply with Rule 2a-7 of
the 1940 Act, which allows the purchase of only high quality money market
instruments. The Lifestyle Funds invest in other Funds described in this
Prospectus and thus are not specifically mentioned below. Please refer to the
SAI for more information about investments.
ASSET-BACKED SECURITIES
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders. Examples of assets supporting asset-backed
securities include credit card receivables, retail installment loans, home
equity loans, auto loans, and manufactured housing loans. All of the Funds
except International Growth Fund, International Value Fund, Large Cap Growth,
and Mid Cap Growth may invest in asset-backed securities.
DEPOSITARY RECEIPTS
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. ADRs in which a Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs. All of the Funds except for
the Money Market Fund and the Strategic Bond Fund may purchase ADRs.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund and Socially Responsible Fund may invest in
EDRs and GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest
in EDRs.
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund, though equities may not be
a primary strategy for each Fund.
Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.
Stocks are not the only type of equity security. Other equity securities include
but are not limited to convertible securities, depository receipts, warrants,
rights and partially paid shares, investment company securities, real estate
securities, convertible bonds and foreign equity securities, such as ADRs, GDRs
and EDRs.
FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short-, medium- and long-term
obligations, including notes and bonds. Fixed-income securities may have fixed,
variable, or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed-income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
49
<PAGE> 228
Bonds are one type of fixed-income security and are sold by governments on the
local, state, and federal levels, and by companies. There are many different
kinds of bonds. For example, each bond issue has specific terms. U.S. Government
bonds are guaranteed to pay interest and principal by the federal government.
Revenue bonds are usually only paid from the revenue of the issuer. An example
of that would be an airport revenue bond. Debentures are a very common type of
corporate bond (a bond sold by a company). Payment of interest and return of
principal is subject to the company's ability to pay. Convertible bonds are
corporate bonds that can be exchanged for stock.
The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value, and Strategic Bond Fund may also invest in below-investment grade bonds.
Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short-term (generally less than 12 months), intermediate (one to
10 years), and long-term (10 years or more). Commercial paper is a specific type
of corporate or short-term note. In fact, it's very short-term, being paid in
less than 270 days, though most commercial paper matures in 50 days or less.
Bonds are not the only type of fixed-income security. Other fixed-income
securities include, for example, U.S. and foreign corporate fixed-income
securities, including convertible securities (bonds, debentures, notes and other
similar instruments) and corporate commercial paper; mortgage-related and other
asset-backed securities; inflation-indexed bonds issued by both governments and
corporations; structured notes, including hybrid or "indexed" securities,
preferred or preference stock, catastrophe bonds, and loan participations; bank
certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; fixed-income securities
issued by states or local governments and their agencies, authorities and other
instrumentalities; obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and obligations of international agencies or
supranational entities. Fixed-income securities may be acquired with warrants
attached.
FOREIGN CURRENCY
Funds buy foreign currencies when they believe the value of the currency will
increase. If it does increase, they sell the currency for a profit. If it
decreases they will experience a loss. Generally, the International Growth Fund
and the International Value Fund may also buy and sell foreign currencies to
settle transactions for foreign securities bought or sold in the Fund. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund and the Small Cap Value Fund may invest in foreign
currency.
FOREIGN SECURITIES
Securities of foreign issuers may be denominated in foreign currencies, except
with respect to the Money Market Fund and the Core Bond Fund which may only
invest in U.S. dollar-denominated securities of foreign issuers. The Large Cap
Growth Fund may only invest in the equity securities of foreign issuers that are
traded in the United States. Generally, all of the Funds may invest in foreign
securities except for Mid Cap Growth Fund.
Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed-income securities
issued by foreign governments, corporations and supranational organizations, and
ADRs, EDRs and GDRs. See "Depositary Receipts".
FUTURES AND OPTIONS
Futures and options are considered derivative securities, since the value of the
future or option is derived in part from the value and characteristics of
another security. A "future" is a contract which involves the sale of a security
for future delivery. An "option" gives the buyer the opportunity to buy or sell
a security at a set price on or before a date specified in the contract. A call
option buyer thinks the stock price may go up in the future, while a put option
buyer thinks the stock price may go down. All of the Funds except for
International Growth Fund, Mid Cap Growth Fund and Money Market Fund may invest
in derivatives.
The Funds use stock and bond futures to invest cash and cash equivalents to:
- - Write (sell) exchange traded covered put and call options on securities and
stock indices.
- - Purchase exchange traded put and call options on securities and stock indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- - Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.
50
<PAGE> 229
ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. Non-money market funds may invest up to
15% in illiquid securities, while money market funds are limited to 10%. This
restriction applies at all times to all assets.
A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold in the public market. Securities eligible for sale
under Rule 144A and commercial paper offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, are not deemed by VALIC or the Fund's
Sub-Adviser to be illiquid solely by reason of being restricted. Instead, VALIC
or the Sub-Adviser will determine whether such securities are liquid based on
trading markets and pursuant to guidelines adopted by the Series Company's Board
of Trustees. If VALIC or the Sub-Adviser concludes that a security is not
liquid, that investment will be included within the Fund's limitation on
illiquid securities.
INVESTMENT COMPANIES
All of the Funds may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by an investment company in which it invests.
INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund and Small Cap Growth Fund may
invest in investment funds.
LOAN PARTICIPATIONS
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All of the Funds except the Mid Cap Value Fund may invest in loan
participations.
MONEY MARKET SECURITIES
A money market security is high quality when it is rated in one of the two
highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-Adviser. All
the Funds may invest in money market securities, though it is not a primary
strategy for all Funds.
VALIC has agreed to waive or reimburse expenses as shown above. This contractual
arrangement will extend for an indefinite period of time.s of high quality money
market securities include:
- - Cash and cash equivalents
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and adjustable
rate securities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Money Market Fund and the
Socially Responsible Fund may invest in mortgage-related securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgage loans secured by residential or commercial real property. Payments of
interest and principal on these securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans which underlie the securities. Mortgage-related securities are
subject to interest rate risk and prepayment risk.
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
51
<PAGE> 230
Collateralized mortgage obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity, coupon, and prepayment preference. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds.
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related or asset-backed securities.
REAL ESTATE SECURITIES
Real estate securities are securities issued by companies that invest in real
estate or interests therein. All of the Funds except for the Domestic Bond Fund
and the High Yield Bond Fund may invest in real estate securities and real
estate investment trusts ("REITs"). REITs are generally publicly traded on the
national stock exchanges and in the over-the-counter market and have varying
degrees of liquidity.
REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short-term loan (usually for one day to one week). The risk in a
repurchase agreement is the failure of the seller to be able to buy the security
back. If the value of the security declines, the Fund may have to sell at a
loss. A repurchase agreement of more than 7 days duration is illiquid. A Fund
may enter into repurchase agreements only with well-established securities
dealers or banks that are members of the Federal Reserve System. All the Funds
in this Prospectus may invest in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A reverse repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. Under a
reverse repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
If a Fund's positions in reverse repurchase agreements or similar transactions
are not covered by liquid assets in a segregated account, such transactions
would be subject to the Funds' limitations on borrowings. The Funds will not
borrow money, except as provided in each Fund's investment restrictions. Reverse
repurchase agreements may be entered into by all Funds except the Mid Cap Growth
Fund.
The Core Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and the Strategic Bond Fund
may enter into dollar rolls. In a dollar roll transaction, a Fund sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date.
STRUCTURED SECURITIES
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment. The Balanced
Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund, and the
Strategic Bond Fund may enter into structured securities.
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset. The Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, and the Strategic Bond Fund may enter into swap
agreements.
U.S. GOVERNMENT SECURITIES
All the Funds may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. The U.S. Government does not guarantee the net
asset value of the Funds' shares. Some U.S. Government securities, such as
Treasury bills, notes and bonds, and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those
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of the Federal Home Loan Banks, are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, the Tennessee Valley
Authority and the Small Business Authority are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts issued
in connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are, therefore, not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(STRIPs and CUBEs) are direct obligations of the U.S. Government.
VARIABLE AMOUNT DEMAND MASTER NOTES
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula. The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, and the
Strategic Bond Fund may invest in the variable amount demand master notes.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may also may invest in participation
VRDNs, which provide a Fund with an undivided interest in underlying VRDNs held
by major investment banking institutions. All the Funds may invest in VRDNs.
WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities. All of the Funds except for the Mid Cap Growth Fund and
the Money Market Fund may invest in warrants and rights.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will soon be on the market. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit. All of the Funds except the Mid
Cap Value Fund and the Money Market Fund may invest in when-issued securities.
- --------------------------------------------------------------------------------
WELCOME TO AMERICAN GENERAL CORPORATION
- --------------------------------------------------------------------------------
American General Corporation, with assets of $111 billion and shareholders'
equity of $15 billion as of December 31, 1999, is the parent company of one of
the nation's largest diversified financial services organizations. American
General's operating divisions deliver a wide range of retirement services, life
insurance, and consumer finance products and services to diverse markets through
focused distribution channels. American General, headquartered in Houston, was
incorporated as a general business corporation in Texas in 1980 and is the
successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC and American General Investment Management, L.P. ("AGIM"), is
2929 Allen Parkway, Houston, Texas 77019.
INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment adviser for all the Funds. VALIC had
approximately $61 billion in assets under management, as of December 31, 1999.
VALIC and AGIM, a Sub-Adviser, are both members of the American General
Corporation group of companies. Each entity is a registered
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investment adviser with the SEC. Several of VALIC's principal officers,
directors and portfolio managers hold similar positions with AGIM.
As Investment Adviser, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisers who make investment
decisions for most of the Funds.
In addition to the Funds shown in this prospectus, VALIC serves as investment
adviser to the following Funds which are not described in this Prospectus:
American General Mid Cap Index Fund, American General Small Cap Index Fund,
American General Stock Index Fund, American General Municipal Bond Fund,
American General Municipal Money Market Fund and the American General Science &
Technology Fund. The American General Municipal Bond Fund and American General
Municipal Money Market Fund are sub-advised by AGIM, and the American General
Science & Technology Fund is sub-advised by T. Rowe Price Associates, Inc. These
Funds are presented in separate prospectuses, also dated March 1, 2000.
VALIC makes investment decisions for and is directly responsible for the
day-to-day management of the Lifestyle Funds, the Socially Responsible Fund, and
the Money Market Fund. The investment advisory agreement between VALIC and the
Series Company provides for the Series Company to pay all expenses not
specifically assumed by VALIC. Examples of the expenses paid by the Series
Company include transfer agency fees, custodial fees, the fees of outside legal
and auditing firms, the costs of reports to shareholders and expenses of
servicing shareholder accounts. These expenses are allocated to each Fund in a
manner approved by the Board of Trustees.
Teresa Moro has been the Money Market Fund's portfolio manager and Vice
President and Investment Officer of the Series Company since its inception.
Since 1991, Ms. Moro has served as Vice President and Investment Officer of
American General Series Portfolio Company, a registered investment company
managed by VALIC and as Portfolio Manager of the American General Series
Portfolio Company Money Market Fund.
Magali E. Azema-Barac is responsible for the equity group. She heads the team
making investment decisions for the Socially Responsible Fund and the passively
managed portion of the Small Cap Value Fund. Ms. Azema-Barac joined American
General in September, 1999. From 1995 to 1999, she worked on the equity desk of
USWest Investment Management Company in Englewood, Colorado, where she incepted
and managed an enhanced equity portfolio.
HOW VALIC IS PAID FOR ITS SERVICES
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments. From time to time VALIC, the Sub-Advisers and/or the
Distributor may voluntarily undertake to reduce a Fund's expenses by reducing
the fees payable to them or bearing certain expenses.
<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
Growth Lifestyle Fund 0.10%
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
</TABLE>
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<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Large Cap Growth Fund 0.55%
Large Cap Value Fund 0.50%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Moderate Growth Lifestyle Fund 0.10%
Money Market Fund 0.25%
Small Cap Growth Fund 0.85%
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>
INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are financial service
companies that specialize in certain types of investing. However, VALIC still
retains ultimate responsibility for managing the Funds. The Sub-Adviser's role
is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.
According to the agreements we have with the Sub-Advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-Advisers the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-Advisers
may buy and sell securities for each Fund with broker-dealers and other
financial intermediaries that they select. The Sub-Advisers may place orders to
buy and sell securities of these Funds with a broker-dealer affiliated with the
Sub-Adviser as allowed by law. This could include any affiliated futures
commission merchants.
The 1940 Act permits Sub-Advisers, under certain conditions, to place an order
to buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker cannot be greater than the
usual and customary brokers commission if the sale was completed on a securities
exchange. The Series Company has adopted procedures, as required by the 1940
Act, which provide that any commissions received by a Sub-Adviser's affiliated
broker may be considered reasonable and fair if compared to the commission
received by other brokers for the same type of securities transaction.
The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the SEC. The Series
Company and the Sub-Advisers have entered into written contracts, as required by
the 1940 Act, to allow the Sub-Adviser's affiliate to effect these types of
transactions for commissions.
VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
In selecting Sub-Advisers, the Trustees of the Series Company carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-Adviser; (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-Advisers' personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid by VALIC to each Sub-Adviser. The Sub-Advisory
fees are not paid by the Funds.
The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisers or replace
existing sub-advisers without first obtaining shareholder approval for the
change. The Board of Trustees, including a majority of the "independent"
Trustees, must approve each new sub-advisory agreement. This allows VALIC to act
more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90 days of the hiring of
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<PAGE> 234
a new sub-adviser. VALIC is responsible for selecting, monitoring, evaluating
and allocating assets to the Sub-advisers and oversees the Sub-advisers'
compliance with the relevant Fund's investment objective, policies and
restrictions.
The Sub-Advisers are:
AGIM
2929 Allen Parkway, Houston, Texas 77015
Founded: 1998
AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund, and the Strategic Bond Fund. AGIM was formed in
1998 as a successor to the investment management division of American General
Corporation, and is an indirect wholly-owned subsidiary of American General
Corporation. AGIM also provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors.
Investment decisions for the High Yield Bond Fund and the Strategic Bond Fund
are made by teams. Each team meets regularly to review portfolio holdings and
discuss purchase and sale activity.
Robert N. Kase, CFA, has been the Core Bond Fund's Portfolio Manager since
November 1998. He has been Investment Officer of VALIC since September 1998, and
Senior Portfolio Manager of AGIM since September 1998. Previously, Mr. Kase was
Senior Portfolio Manager with CL Capital Management, Inc. from September 1992
until July 1998.
Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc from 1983
to May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined the Sub-adviser in
April 1998. Previously, Mr. Massie was Director of High Yield Research at
American General Corporation from August 1985 to April 1998.
BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Founded: 1983
Brown Capital is the Sub-Adviser for the Mid Cap Growth Fund. Brown Capital
served as investment adviser to approximately $4.6 billion in assets as of
December 31, 1999. Investment decisions for the Mid Cap Growth Fund are made by
a team of portfolio managers/analysts organized for that purpose. The team meets
regularly to review portfolio holdings and discuss purchase and sale activity.
CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
Founded: 1931
Capital Guardian is the Sub-Adviser for the International Value Fund, the
Balanced Fund and the Domestic Bond Fund. Capital Guardian provides investment
management services to a limited number of large institutional clients such as
employee benefit funds, foundations and endowment funds. As of September 30,
1999, Capital Guardian had more than $275 billion in assets under management.
The Balanced Fund is managed using a system of multiple portfolio managers.
Under this system, the Fund is divided into segments, which are assigned to
individual managers.
The portfolio managers for the fixed-income portion of the Fund include: (i) Jim
Mulally, Senior Vice President of the Sub-Adviser, who has been an investment
professional for 22 years and has been with the Sub-Adviser or an affiliate for
19 years; and (ii) Jim Baker, Vice President of the Sub-Adviser, who has been an
investment professional for 18 years and has been with the Sub-Adviser or an
affiliate for 11 years.
The portfolio managers for the U.S. large cap equity portion of the Fund
include: (i) David Fisher, Vice Chairman of the Sub-Adviser, who has been an
investment professional for 33 years and has been with the Sub-Adviser or an
affiliate for 29 years; (ii) Gene Stein, Executive Vice President of the
Sub-Adviser, who has been an investment professional for 27 years and has been
with the Sub-Adviser or an affiliate for 26 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 18 years and has been with the Sub-Adviser or an affiliate for
12 years; (iv) Ted Samuels, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 20 years and has been with the Sub-Adviser
or an affiliate for 18 years; and (v) Donnalisa Barnum, Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 13 years.
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The portfolio managers for the U.S. small cap equity portion of the Fund
include: (i) Bob Kirby, Chairman Emeritus of the Sub-Adviser, who has been an
investment professional for 46 years and has been with the Sub-Adviser or an
affiliate for 33 years; (ii) Michael Ericksen, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 17 years and has been
with the Sub-Adviser or an affiliate for 11 years; and (iii) James Kang, Vice
President of Capital Guardian Research Company, an affiliate of the Sub-Adviser,
who has been an investment professional for 11 years and has been with the
Sub-Adviser or an affiliate for 10 years.
The International Value Fund's portfolio managers include: (i) Robert Ronus,
President of the Sub-Adviser, who has been an investment professional for 30
years and has been with the Sub-Adviser or an affiliate for 25 years; (ii) David
Fisher, Vice Chairman of the Sub-Adviser, who has been an investment
professional for 33 years and has been with the Sub-Adviser or an affiliate for
29 years; (iii) Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., an affiliate of the Sub-Adviser, who has been an investment
professional for 27 years and has been with the Sub-Adviser or an affiliate for
26 years; (iv) Nancy Kyle, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 25 years and has been with the Sub-Adviser
or an affiliate for 8 years; (v) Nilly Sikorsky, Director of The Capital Group
of Companies, Inc., the ultimate parent of the Sub-Adviser, who has been an
investment professional for 36 years and has been with the Sub-Adviser or an
affiliate for 36 years; (vi) Lionel Sauvage, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 12 years and has been
with the Sub-Adviser or an affiliate for 12 years; (vii) Richard Havas, Sr.,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 17 years and has been with the Sub-Adviser or an affiliate for
13 years; and (viii) Rudolf Staehelin, Sr., Senior Vice President of Capital
International Research, Inc., an affiliate the Sub-Adviser, who has been an
investment professional for 21 years and has been with the Sub-Adviser or an
affiliate for 17 years.
James S. Baker and James R. Mulally serve as the Domestic Bond Fund's portfolio
managers. Mr. Baker, Vice President and fixed-income portfolio manager of an
affiliate of the Sub-Adviser, has focused on the application of quantitative
valuations to investment grade bonds and portfolios for the Sub-Adviser since
1987. Mr. Mulally, Senior Vice President, Director and Chairman of the
Sub-Adviser's Fixed-income Subcommittee, joined the Sub-Adviser in 1980.
FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
Founded: 1980 (UAM)
FMA is the Sub-Adviser for the actively managed portion of the assets of the
Small Cap Value Fund. FMA is a wholly-owned subsidiary of United Asset
Management Corporation ("UAM"), and provides investment management services to
corporations, foundations, endowments, pension and profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of December 31, 1999,
UAM and its affiliates had over $203 billion in assets under management.
Investment decisions are made by a team that consists of portfolio managers and
analysts who specialize their research by sectors. Kathryn Vorisek is the lead
portfolio manager. The team meets regularly to review portfolio holdings and to
discuss purchase and sale activity.
GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
Founded: 1869
GSAM is the Sub-Adviser for the Large Cap Growth Fund. As of September 1, 1999,
the Investment Management Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). The newly created entity
includes GSAM. GSAM provides a wide range of fully discretionary investment
advisory services, quantitatively driven and actively managed to U.S. and
international equity portfolios, U.S. and global fixed-income portfolios,
commodity and currency products and money market accounts. As of December 31,
1999, GSAM, along with other units of IMD, had assets under management of nearly
$500 billion.
The Large Cap Growth Fund is managed by the following individuals: Robert C.
Jones; Kent A. Clark; Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing
Director, joined the Sub-Adviser in 1989. Mr. Clark, Managing Director, joined
the Sub-Adviser's quantitative equity management team as a portfolio manager in
1992. Mr. Pinter, Vice President, joined the Sub-Adviser as a research analyst
in 1990, and became a portfolio manager in 1992. Ms. Brown, Vice President,
joined the Sub-Adviser in 1998. From 1984 to 1998, Ms. Brown was the director of
Quantitative Equity Research and served on the Investment Policy Committee at
Prudential Securities.
J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
Founded: 1838
J.P. Morgan is the Sub-Adviser for the Small Cap Growth Fund. Known for its
commitment to proprietary research and its disciplined investment strategies,
J.P. Morgan provides asset management services to corporations, financial
institutions,
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governments and individuals. As of December 31, 1999, J.P. Morgan and its
affiliates employed over analysts and portfolio managers around the world
and had more than $340 billion in assets under management.
Candice Eggerss, Saira Malik and Carolyn Jones are the members of the
Sub-Adviser's team who will be primarily responsible for the day-to-day
management of the Small Cap Growth Fund. Ms. Eggerss, who has been with the
Sub-Adviser since 1996, is a Vice President and specializes in portfolio
investments in small capitalization technology companies. Prior to this, Ms.
Eggerss was employed at Weiss, Peck and Greer from April 1993 to April 1996. Ms.
Malik joined the Sub-Adviser in 1995 as a small company equity analyst and
portfolio manager after completing her graduate studies at the University of
Wisconsin. Ms. Jones has been with the Sub-Adviser since July 1998. Prior to
this, Ms. Jones served as a portfolio manager in J.P. Morgan's private banking
group and as a product specialist at Merrill Lynch Asset Management.
JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
Founded: 1980 (UAM)
Jacobs Asset Management is the Sub-Adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation ("UAM") is a limited partner of, and owns a controlling
interest in, Jacobs Asset Management. Jacobs Asset Management provides
investment management and advisory services to corporations, unions, pensions
and profit-sharing plans, trusts and estates and other institutions and
investors. As of December 31, 1999, UAM and its affiliates had over $203 billion
in assets under management.
Investment decisions for the International Growth Fund are made by a team that
consists of portfolio managers and analysts who specialize their research by
region. Dan Jacobs, President, is the lead portfolio manager and has final
approval on purchase and sales. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.
NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
Founded: 1939
NB Management is the Sub-Adviser for the Mid Cap Value Fund. NB Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of December 31, 1999, NB Management and its affiliates managed
approximately $54 billion in assets under management.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of the Sub-Adviser
and Mr. Gendelman is a managing director of Neuberger Berman, LLC. Messrs.
Gendelman and Mullick have been associated with the Sub-Adviser since 1994 and
1998, respectively. From 1993 to 1998, Mr. Mullick was a portfolio manager for
another investment adviser.
STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
Founded: 1792
State Street Global Advisors is the Sub-Adviser for the Large Cap Value Fund.
State Street Global Advisors is an operating division of State Street Bank, a
wholly-owned subsidiary of State Street Corporation, which had more than $667
billion under management as of December 31, 1999.
The Large Cap Value Fund is managed by a team of investment professionals. In
addition to the ongoing activity of portfolio management, the team is
responsible for research focused on enhancing the Sub-Adviser's quantitative
process.
ADMINISTRATIVE SERVICES
The Series Company has entered into an Administrative Service Agreement
("Service Agreement") with VALIC Retirement Services Company ("Retirement
Services") and the Distributor for the provision of recordkeeping and
shareholder services to retirement and employee benefit plans. Under the terms
of the Service Agreement, the Series Company pays a fee to either Retirement
Services or the Distributor. The annual fee, paid monthly, is 0.25% of the
aggregate net asset value of each Fund, other than the Lifestyle Funds. Under
the Service Agreement, Retirement Services and the Distributor provide
recordkeeping services, including the establishment and maintenance of plan and
participant accounts and records; participant services, including the provision
of customer service representatives to respond to participant inquiries and
process telephone transactions; and plan services, including the production of
plan documentation and summary plan descriptions.
AMERICAN GENERAL DISTRIBUTORS, INC.
American General Distributors, Inc. is the Distributor of the Funds. The
Distributor sells Institutional Class II Shares of the Funds to employer
retirement plans. The Distributor transmits the employer orders to buy, sell or
transfer shares to the Series Company's designated agent daily. The Distributor
is a subsidiary of American General Corporation and acts as distributor
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of the Funds' shares under an agreement with the Series Company. The Distributor
is not required to sell a minimum number of shares to employer retirement plans.
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT MINIMUMS
The employer retirement plan may establish a plan account with an initial
purchase of $5 million.
HOW TO BUY SHARES
Institutional Class II shares of each Fund are available to you through your
employer plan. Institutional Class II Shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $5 million
with the Series Company. A plan's account balance is equal at any time to the
aggregate of all amounts contributed by the plan to the Series Company, less the
cost of all redemptions by such plan from the Series Company. The Distributor
may waive the minimum account balance requirement if it reasonably anticipates
that the size of the plan and/or the anticipated amount of contributions will
present economies of scale.
As a participant in an employer retirement plan, you do not purchase
Institutional Class I Shares of the Funds directly. Rather, Institutional Class
II Shares of a Fund are purchased for you when you elect to allocate your
retirement contributions to a Fund that is available as an investment option in
your retirement or savings plan. You may be permitted to elect different
investment options, alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in accordance with
your plan's specific provisions. See your plan administrator or employee
benefits office for more details.
Investments by individual participants in employer retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
instructions for all orders for the purchase, redemption and exchange of Fund
shares. The availability of an investment by a plan participant in the Funds,
and the procedures for investing, depend upon the provisions of the plan and
whether the plan sponsor or administrator has contracted with the Series Company
or designated agent for special processing services.
For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.
HOW SHARES ARE VALUED
The price of each Class of shares for a Fund is based on net asset value
("NAV"). NAV is computed by adding the value of a Fund's holdings plus other
assets, subtracting liabilities, and then dividing the result by the number of
shares outstanding. The NAV of each Class will be different, depending on the
number of Class shares outstanding.
Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. Some Funds hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when you will not be able to buy or sell your shares.
The Money Market Fund and the Municipal Money Market Fund and any securities
maturing within 60 days are valued according to the "amortized cost" method,
which is intended to stabilize the NAV at $1 per share.
The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4 p.m. Eastern Time).
Each Fund is open for business each day the NYSE is open.
TRANSFER OR EXCHANGE OF BALANCES
An employer retirement plan may allow you to exchange all or part of your
existing plan balance from one investment option to another. Check with your
plan administrator for details on the rules governing exchanges in your plan.
Exchanges will be accepted by the Series Company only as permitted by your plan.
Your plan administrator can explain how frequently exchanges are allowed. The
Series Company reserves the right to refuse any exchange purchase request.
TRANSACTION PROCESSING
Purchases, exchanges or redemptions of the Funds' shares are processed as soon
as they have been received in good order. Good order means that your request
includes complete information on your purchase, exchange or redemption and that
the Distributor has received the appropriate payment. The Series Company and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Series Company also reserves the right to suspend the sale of the Funds'
shares in response to conditions in the securities markets or for other reasons.
When the NYSE is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC, redemptions may be suspended or payment
dates postponed.
59
<PAGE> 238
Please note that there are some federal holidays, however, such as Columbus Day
and Veterans' Day, when the NYSE is open and the Funds are open but purchases
and redemptions cannot be made due to the closure of the banking system.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses.
Distributions of net short-term capital gains (treated as dividends for tax
purposes) and net long-term capital gains, if any, are normally paid once a
year; however, the Funds do not anticipate making any such distributions unless
available capital loss carryovers have been used or have expired. Dividends and
any distributions are automatically reinvested in the same Fund.
<TABLE>
<S> <C>
Dividends declared and paid daily:
Money Market Fund
Dividends declared daily and paid monthly:
Core Bond
Domestic Bond Strategic Bond
High Yield Bond
Dividends paid quarterly:
Balanced Mid Cap Value
Conservative Growth Lifestyle Moderate Growth Lifestyle
Growth Lifestyle Small Cap Growth
Large Cap Growth Small Cap Value
Large Cap Value Socially Responsible
Mid Cap Growth
Dividends paid semi-annually:
International Growth
International Value
</TABLE>
TAXPAYER IDENTIFICATION NUMBER
You are required to give us your correct Social Security or Taxpayer
Identification Number ("TIN") when you make contributions to the employer's
plan. We reserve the right to reject any new account or any purchase order for
failure to supply a certified TIN.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The line graphs on the following pages reflect how an initial $10,000 investment
made on each Fund's inception date, November 2, 1998, would have changed in
value by the end of the first fiscal year, October 31, 1999.
Each line graph also shows how each Fund's benchmark index performed during the
same period. An investor cannot invest directly in one of the benchmark indices.
Each Fund's average annual total return as of October 31, 1999 is shown after
the line graphs.
60
<PAGE> 239
AMERICAN GENERAL BALANCED FUND
[GRAPH]
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
[GRAPH]
61
<PAGE> 240
AMERICAN GENERAL CORE BOND FUND
[GRAPH]
AMERICAN GENERAL DOMESTIC BOND FUND
[GRAPH]
62
<PAGE> 241
AMERICAN GENERAL GROWTH LIFESTYLE FUND
[GRAPH]
AMERICAN GENERAL HIGH YIELD BOND FUND
[GRAPH]
63
<PAGE> 242
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
[GRAPH]
AMERICAN GENERAL INTERNATIONAL VALUE FUND
[GRAPH]
64
<PAGE> 243
AMERICAN GENERAL LARGE CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL LARGE CAP VALUE FUND
[GRAPH]
65
<PAGE> 244
AMERICAN GENERAL MID CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL MID CAP VALUE FUND
[GRAPH]
66
<PAGE> 245
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
[GRAPH]
AMERICAN GENERAL MONEY MARKET FUND
[GRAPH]
67
<PAGE> 246
AMERICAN GENERAL SMALL CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL SMALL CAP VALUE FUND
[GRAPH]
68
<PAGE> 247
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
[GRAPH]
AMERICAN GENERAL STRATEGIC BOND FUND
[GRAPH]
69
<PAGE> 248
The Funds commenced operations on November 2, 1998. For the fiscal year ended
October 31, 1999, the average annual total returns were:
<TABLE>
<CAPTION>
CLASS II
--------
<S> <C>
Balanced Fund 16.22%
Conservative Growth Lifestyle Fund 12.27%
Core Bond Fund (0.25)%
Domestic Bond Fund (0.92)%
Growth Lifestyle Fund 19.72%
High Yield Bond Fund 2.74%
International Growth Fund 15.41%
International Value Fund 44.61%
Large Cap Growth Fund 36.40%
Large Cap Value Fund 15.35%
Mid Cap Growth Fund 3.39%
Mid Cap Value Fund 20.53%
Moderate Growth Lifestyle Fund 15.17%
Money Market Fund 4.79%
Small Cap Growth Fund 42.30%
Small Cap Value Fund (5.92)%
Socially Responsible Fund 22.99%
Strategic Bond Fund 2.67%
</TABLE>
70
<PAGE> 249
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single Fund share. The total return numbers in the
tables represent the rate that an investor would have earned or lost on an
investment in a Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by Ernst & Young, L.P., whose reports, along
with the Fund's financial statements, are included in the Annual Report, which
is available upon request and which is incorporated into this document by this
reference.
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS II SHARES
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
INTERNATIONAL
GROWTH LARGE CAP MID CAP SMALL CAP INTERNATIONAL
FUND GROWTH FUND GROWTH FUND GROWTH FUND VALUE FUND
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.15 0.04 0.01 (0.04) 0.10
Net realized and unrealized gain (loss) on
securities 1.39 3.60 0.33 4.27 4.36
------ ------ ------ ------ ------
Total income (loss) from investment operations 1.54 3.64 0.34 4.23 4.46
------ ------ ------ ------ ------
Distributions:
Distributions from net investment income (0.01) (0.04) (0.01) -- (0.01)
Distributions from net realized gain on
securities -- -- -- -- --
------ ------ ------ ------ ------
Total distributions (0.01) (0.04) (0.01) -- (0.01)
------ ------ ------ ------ ------
Net asset value at end of period $11.53 $13.60 $10.33 $14.23 $14.45
====== ====== ====== ====== ======
TOTAL RETURN 15.41% 36.40% 3.39% 42.30% 44.61%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 1.03% 0.73% 0.67% 1.03% 0.92%
Ratio of expenses to average net assets before
expense reductions 2.50% 2.03% 2.25% 2.34% 2.48%
Ratio of net investment income (loss) to average
net assets 1.44% 0.29% 0.07% (0.33)% 0.75%
Portfolio turnover rate 91% 65% 25% 128% 32%
Number of shares outstanding at end of period
(000's) 128 118 126 122 120
Net assets at end of period (000's) $1,474 $1,601 $1,300 $1,731 $1,739
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
--------------------------------------------------
SOCIALLY
LARGE CAP MID CAP SMALL CAP RESPONSIBLE
VALUE FUND VALUE FUND VALUE FUND FUND
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.14 0.11 0.14 0.14
Net realized and unrealized gain (loss) on securities 1.39 1.94 (0.73) 2.15
------ ------ ------ ------
Total income (loss) from investment operations 1.53 2.05 (0.59) 2.29
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.14) (0.10) (0.14) (0.14)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.14) (0.10) (0.14) (0.14)
------ ------ ------ ------
Net asset value at end of period $11.39 $11.95 $ 9.27 $12.15
====== ====== ====== ======
TOTAL RETURN 15.35% 20.53% (5.92)% 22.99%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.68% 0.92% 0.86% 0.43%
Ratio of expenses to average net assets before expense
reductions 2.07% 2.27% 2.44% 1.77%
Ratio of net investment income (loss) to average net
assets 1.32% 0.88% 1.53% 1.25%
Portfolio turnover rate 66% 177% 91% 24%
Number of shares outstanding at end of period (000's) 124 122 132 127
Net assets at end of period (000's) $1,416 $1,457 $1,228 $1,537
</TABLE>
71
<PAGE> 250
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
Per share data is for a share of beneficial interest outstanding throughout the
period. Total return includes reinvestment of distributions on the reinvestment
date.
CLASS II SHARES CONTINUED
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
---------------------------------------------------------
BALANCED HIGH YIELD STRATEGIC DOMESTIC CORE
FUND BOND FUND BOND FUND BOND FUND BOND FUND
-------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $10.00 $ 10.00 $10.00 $10.00 $ 10.00
------ ------- ------ ------ --------
Income (loss) from investment operations:
Net investment income (loss) 0.26 0.86 0.71 0.53 0.52
Net realized and unrealized gain (loss) on securities 1.36 (0.57) (0.45) (0.62) (0.55)
------ ------- ------ ------ --------
Total income (loss) from investment operations 1.62 0.29 0.26 (0.09) (0.03)
------ ------- ------ ------ --------
Distributions:
Distributions from net investment income (0.26) (0.86) (0.71) (0.53) (0.52)
Distributions from net realized gain on securities -- -- -- -- --
------ ------- ------ ------ --------
Total distributions (0.26) (0.86) (0.71) (0.53) (0.52)
------ ------- ------ ------ --------
Net asset value at end of period $11.36 $ 9.43 $ 9.55 $ 9.38 $ 9.45
====== ======= ====== ====== ========
TOTAL RETURN 16.22% 2.74% 2.67% (0.92)% (0.25)%
====== ======= ====== ====== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.70% 0.88% 0.78% 0.66% 0.68%
Ratio of expenses to average net assets before expense
reductions 2.34% 1.35% 2.25% 2.23% 1.05%
Ratio of net investment income (loss) to average net
assets 2.36% 8.84% 7.26% 5.51% 5.45%
Portfolio turnover rate 62% 72% 183% 98% 469%
Number of shares outstanding at end of period (000's) 128 6,630 134 153 34,645
Net assets at the end of period (000's) $1,452 $62,506 $1,283 $1,432 $327,384
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
----------------------------------------------------------
GROWTH MODERATE CONSERVATIVE
MONEY MARKET LIFESTYLE GROWTH GROWTH
FUND FUND LIFESTYLE FUND LIFESTYLE FUND
------------ --------- -------------- --------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 1.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.07 0.13 0.21
Net realized and unrealized gain (loss) on securities -- 1.90 1.38 1.02
------ ------ ------ ------
Total income (loss) from investment operations 0.05 1.97 1.51 1.23
------ ------ ------ ------
Distributions:
Distributions from net investment income (0.05) (0.06) (0.12) (0.20)
Distributions from net realized gain on securities -- -- -- --
------ ------ ------ ------
Total distributions (0.05) (0.06) (0.12) (0.20)
------ ------ ------ ------
Net asset value at end of period $ 1.00 $11.91 $11.39 $11.03
====== ====== ====== ======
TOTAL RETURN 4.79% 19.72% 15.17% 12.27%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.43% 0.10% 0.10% 0.10%
Ratio of expenses to average net assets before expense
reductions 1.10% 0.10% 0.10% 0.10%
Ratio of net investment income (loss) to average net
assets 4.68% 0.62% 1.25% 2.01%
Portfolio turnover rate N/A 9% 11% 10%
Number of shares outstanding at end of period (000's) 4,669 126 126 127
Net assets at the end of period (000's) $4,669 $1,496 $1,440 $1,404
</TABLE>
72
<PAGE> 251
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.
Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.
You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:
Telephone: 1-877-999-2434
American General Web-Site Address: http://www.agfundgroup.com
You can review the Funds' reports and SAI at the public Reference Room of the
SEC.
You can get text only copies:
- - For a fee, by electronic request at [email protected] or by writing to or
calling the Public Reference Room of the Commission, Washington, D.C.
20549-6009, Telephone: 1-202-942-8090.
- - Free from the EDGAR database on the Commission's Internet website at
http://www.sec.gov.
Investment Company Act File No. 811-08875 (AGSPC 2)
VA 10856-II VER. 3/00
73
<PAGE> 252
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
AMERICAN GENERAL BALANCED FUND
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
AMERICAN GENERAL CORE BOND FUND
AMERICAN GENERAL DOMESTIC BOND FUND
AMERICAN GENERAL GROWTH LIFESTYLE FUND
AMERICAN GENERAL HIGH YIELD BOND FUND
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
AMERICAN GENERAL INTERNATIONAL VALUE FUND
AMERICAN GENERAL LARGE CAP GROWTH FUND
AMERICAN GENERAL LARGE CAP VALUE FUND
AMERICAN GENERAL MID CAP GROWTH FUND
AMERICAN GENERAL MID CAP INDEX FUND
AMERICAN GENERAL MID CAP VALUE FUND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
AMERICAN GENERAL MONEY MARKET FUND
AMERICAN GENERAL MUNICIPAL BOND FUND
AMERICAN GENERAL MUNICIPAL MONEY MARKET FUND
AMERICAN GENERAL SCIENCE & TECHNOLOGY FUND
AMERICAN GENERAL SMALL CAP GROWTH FUND
AMERICAN GENERAL SMALL CAP INDEX FUND
AMERICAN GENERAL SMALL CAP VALUE FUND
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
AMERICAN GENERAL STOCK INDEX FUND
AMERICAN GENERAL STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
PART B
MARCH 1, 2000
This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectuses for American General Series
Portfolio Company 2 (the "Series Company"). It should be read in conjunction
with the Prospectuses. The Statement of Additional Information and the related
Prospectuses are dated March 1, 2000. Please call 1-877-999-2434 to request
copies of the Prospectuses.
<PAGE> 253
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History 2
Performance and Yield Information 2
Investment Restrictions 14
Investment Practices 29
Investment Adviser 57
Investment Sub-Advisers 59
Other Service Providers 62
Portfolio Transactions and Brokerage 63
Distribution and Service Plan 65
Determination of Net Asset Value 67
Purchasing and Selling Fund Shares 68
Taxation 69
Trustees and Officers 72
Control Persons and Principal Holders of Securities 75
Marketing Information 75
Endorsements and Published Rankings 76
Other Information 76
</TABLE>
GENERAL INFORMATION AND HISTORY
American General Series Portfolio Company 2 (the "Series Company") was
organized as a Delaware business trust on March 16, 1998 by The Variable Annuity
Life Insurance Company ("VALIC") and is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") as an open-end management investment
company. The Series Company consists of twenty-four separate investment
portfolios (hereinafter collectively referred to as the "Funds" or individually
as a "Fund"), each of which issues its own separate classes of shares of
beneficial interest.
The Series Company and VALIC have Codes of Ethics which establish for
their officers, directors or trustees and certain employees procedures and
restrictions as to those individuals' personal investment trading activities.
PERFORMANCE AND YIELD INFORMATION
This section explains how performance and yield information is calculated,
per federal law.
AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Returns for periods of 1, 5 and 10 years (or since
inception) are 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.
ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the first period.
Average Annual Total Return reflects the deduction of the sales charges
and expenses and assumes that all dividends and distributions are reinvested
when paid.
2
<PAGE> 254
The Funds commenced operations on November 2, 1998. For the fiscal year
ended October 31, 1999, the average annual total returns were:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Balanced Fund 9.07% 9.42%
Conservative Growth Lifestyle Fund 5.84% 7.21%
Core Bond Fund (5.24)% (5.99)%
Domestic Bond Fund (6.03)% (6.58)%
Growth Lifestyle Fund 12.80% 14.52%
High Yield Bond Fund (2.58)% (3.18)%
International Growth Fund 8.42% 9.00%
International Value Fund 35.93% 37.70%
Large Cap Growth Fund 28.18% 29.70%
Large Cap Value Fund 8.24% 8.93%
Mid Cap Growth Fund (2.92)% (2.90)%
Mid Cap Index Fund 12.15% 13.05%
Mid Cap Value Fund 13.32% 13.71%
Moderate Growth Lifestyle Fund 8.58% 10.26%
Money Market Fund 4.54% (1.07)%
Municipal Bond Fund (10.32)% (11.28)%
Municipal Money Market Fund 2.18% (3.58)%
Small Cap Growth Fund 33.65% 35.40%
Small Cap Index Fund 4.92% 5.53%
Small Cap Value Fund (11.68)% (11.72)%
Socially Responsible Fund 15.48% 16.50%
Stock Index Fund 17.21% 17.55%
Strategic Bond Fund (2.60)% (3.29)%
</TABLE>
<TABLE>
<CAPTION>
CLASS I CLASS II
------- --------
<S> <C> <C>
Balanced Fund 15.92% 16.22%
Conservative Growth Lifestyle Fund 12.24% 12.27%
Core Bond Fund (0.38)% (0.25)%
Domestic Bond Fund (1.12)% (0.92)%
Growth Lifestyle Fund 19.71% 19.72%
High Yield Bond Fund 2.44% 2.74%
International Growth Fund 15.16% 15.41%
International Value Fund 44.25% 44.61%
Large Cap Growth Fund 36.14% 36.40%
Large Cap Value Fund 15.09% 15.35%
Mid Cap Growth Fund 3.24% 3.39%
Mid Cap Index Fund N/A N/A
Mid Cap Value Fund 20.18% 20.53%
Moderate Growth Lifestyle Fund 15.35% 15.17%
Money Market Fund 4.63% 4.79%
Municipal Bond Fund N/A N/A
Municipal Money Market Fund N/A N/A
Small Cap Growth Fund 41.90% 42.30%
Small Cap Index Fund N/A N/A
Small Cap Value Fund (6.16)% (5.92)%
Socially Responsible Fund 22.73% 22.99%
Stock Index Fund N/A N/A
Strategic Bond Fund 2.50% 2.67%
</TABLE>
3
<PAGE> 255
SEVEN DAY YIELDS
The American General Money Market Fund and the American General Municipal
Money Market Fund may quote a Seven Day Current Yield and a Seven Day Effective
Yield. The Seven Day Current Yield is calculated by determining the total return
for the current seven day period ("based period return") and annualizing the
base period return by dividing by seven days, then multiplying the result by 365
days. The Seven Day Effective Yield annualizes the base period return while
compounding weekly the base period return according to the following formula:
Seven Day Effective Yield = [(Base Period Return + 1)(365/7)]-1
As of October 31, 1999, the seven day yields were:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
Money Market Fund Class A 4.80% 4.92%
Money Market Fund Class B 4.05% 4.13%
Money Market Fund Class I 4.93% 5.05%
Money Market Fund Class II 5.17% 5.30%
Municipal Money Market Fund Class A 2.39% 2.41%
Municipal Money Market Fund Class B 1.62% 1.64%
</TABLE>
30 DAY CURRENT YIELD
The American General Domestic Bond Fund, the American General High Yield
Bond Fund, the American General Strategic Bond Fund, the American General Core
Bond Fund and the American General Municipal Bond Fund may quote a 30 Day
Current Yield which is determined according to the following standardized
formula:
Yield = 2[(a-b/cd + 1)(6) -1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = 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.
As of October 31, 1999, the 30 day current yields were:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS I CLASS II
------- ------- ------- --------
<S> <C> <C> <C> <C>
Core Bond Fund 5.91% 5.42% 6.41% 6.57%
Domestic Bond Fund 5.55% 5.04% 5.90% 6.21%
High Yield Bond Fund 9.37% 9.10% 9.97% 10.22%
Municipal Bond Fund 4.22% 3.64% -- --
Strategic Bond Fund 7.57% 7.19% 8.09% 8.35%
</TABLE>
TAX EQUIVALENT YIELDS
The Municipal Bond Fund and the Municipal Money Market Fund (each referred
to as the "Fund") may also quote a tax equivalent yield and a tax equivalent
effective yield that show the before tax yield that would have to be earned from
a taxable investment to equal the Fund's yield. These yields are computed by
dividing the portion of the Fund's yield that is tax-exempt by one minus the
stated federal income tax rate and adding the product to the portion of the
Fund's yield that is not tax-exempt, if any.
As of December 31, 1999, the federal income tax rate upon which the Fund's
tax equivalent yield quotations are based was 39.6%.
4
<PAGE> 256
The tax equivalent yields as of December 31, 1999 were:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Municipal Bond Fund 6.72% 5.81%
Municipal Money Market Fund 6.26% 5.02%
</TABLE>
DISTRIBUTION RATE CALCULATION
The Funds may advertise a non-standardized distribution rate. The
distribution rate may be calculated as frequently as daily, based on the latest
normal dividend paid. The latest normal dividend is annualized by multiplying
the dividend by a factor based on the dividend frequency (12 for monthly or 4
for quarterly). The result is then divided by the higher of the current net
asset value or the maximum offering price. For example, a bond fund may pay a
monthly dividend of 0.04536. This is multiplied by 12 since it is a monthly
dividend. The result, 0.54432, is divided by the offering price of $9.89. That
equals a distribution rate of 5.50%.
The distribution rate measures the level of the ordinary income, including
short-term capital gains, that is actually paid out to investors. This is
different from fund yield, which is a measure of the income earned by a fund's
investments, but which may not be directly paid out to investors. Total return
measures the income earned, as does the yield, but also measures the effect of
any realized or unrealized appreciation or depreciation of the fund's
investments. The distribution rate will be calculated separately for each class
of shares. The calculation assumes that no CDSC is paid for Class B shares.
PORTFOLIO TOTAL RETURN
Portfolio Total Return quotations for periods of 1, 5 and 10 years or
since inception, are calculated by adding to the Average Total Annual Return
(described above) the expenses of the mutual fund, discretionary account or
composite. Expenses of the Fund are calculated at the end of each mutual fund,
discretionary account or composite fiscal year and are expressed as a percentage
of average net assets. Expenses as a percentage of average net assets are
prorated equally over the months in the fiscal year in which the ratio was
calculated when determining expenses for periods crossing over fiscal years.
The Series Company may compare Portfolio Total Return to the total return
of the mutual fund, discretionary account or composite benchmark index ("Index
Total Return"). The difference between Portfolio Total Return and Index Total
Return is referred to as "tracking difference." Tracking difference represents
the amount that the return on the investment portfolio (which results from VALIC
or the Sub-adviser's investment selection) deviates from its benchmark's Index
Total Return.
INDEX TOTAL RETURN
Index Total Return quotations for periods 1, 5 and 10 years, or since
inception, are calculated by determining the percentage change in value of the
benchmark index over the applicable period including reinvestment of dividends
and interest as applicable. Index Total Return is calculated according to the
formula described above for Average Annual Total Return, however it does not
include an expense component. If an expense component were included the return
would be lower.
5
<PAGE> 257
INVESTMENT RESTRICTIONS
The Funds have each adopted certain fundamental investment restrictions
which, unlike the investment objectives, policies, and investment program of
each Fund, may only be changed with the consent of a majority of the outstanding
voting securities of the particular Fund. The 1940 Act defines such a majority
as the lesser of (1) 67% or more of the voting securities present in person or
by proxy at a shareholders' meeting, if the holders of more than 50% of the
outstanding voting securities of a Fund are present or represented by proxy, or
(2) more than 50% of a Fund's outstanding voting securities. Also, certain of
the Funds have non-fundamental investment restrictions which may be changed by
the Series Company's Board of Trustees without shareholder approval.
The fundamental and, if applicable, non-fundamental, investment
restrictions of each Fund are listed below. The percentage limitations
referenced in some of the restrictions are to be determined at the time of
purchase. However, percentage limitations for illiquid securities and borrowings
apply at all times. Calculation of each Fund's total assets for compliance with
any of the investment restrictions will not include cash collateral held in
connection with securities lending activities.
AMERICAN GENERAL BALANCED FUND ("BALANCED FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Balanced Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the Securities and Exchange
Commission ("SEC") under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes of
this restriction, all outstanding debt securities of an issuer are considered as
one class, and all preferred stock of an issuer is considered as one class. This
restriction does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. As a matter of operating policy,
the Series Company will not consider repurchase agreements subject to the 5%
limitation if the collateral underlying the repurchase agreements are U.S.
Government securities.
(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into reverse repurchase
agreements, or employ similar investment techniques and pledge its assets in
connection therewith, except to the extent permitted by applicable law, and
provided that the Fund will not purchase additional securities if borrowings
exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
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(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
As a matter of non-fundamental policy, the Balanced Fund may not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. The Fund may use
short-term credits when necessary to clear transactions.
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND ("CONSERVATIVE GROWTH
LIFESTYLE FUND")
AMERICAN GENERAL GROWTH LIFESTYLE FUND ("GROWTH LIFESTYLE FUND"); AND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND ("MODERATE GROWTH LIFESTYLE
FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Conservative Growth Lifestyle Fund,
the Growth Lifestyle Fund and the Moderate Growth Lifestyle Fund may not:
(1) Issue senior securities.
(2) Borrow money, except to the extent permitted by applicable law, and provided
that the Fund may not purchase additional securities if borrowings exceed 5% of
total assets.
(3) Underwrite the securities of other issuers.
(4) Purchase real estate or real estate mortgage loans, although the underlying
mutual funds in which a Fund will invest may purchase marketable securities of
companies which deal in real estate, real estate mortgage loans or interests
therein.
(5) Purchase or sell commodities or commodity contracts.
(6) Make loans except by purchasing bonds, debentures or similar obligations
which are either publicly distributed or customarily purchased by institutional
investors.
(7) Invest more than 25% of its assets in any one industry, other than Funds
that are part of the Series Company.
As a matter of non-fundamental policy, the Growth Lifestyle Fund, the
Moderate Growth Lifestyle Fund and the Conservative Growth Lifestyle Fund may
not:
(1) Purchase any securities on margin, make short sales of securities or
purchase or sell puts and calls, or combinations thereof.
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(2) Invest directly in oil, gas, or other mineral exploration or development
programs; provided, however, that the underlying mutual funds in which the Fund
will invest may purchase the securities of companies engaged in such activities.
(3) Purchase or retain any security other than shares of the underlying Series
Company Funds if (i) one or more officers or trustees of the Series Company
individually own or would own, directly or beneficially, more than 1/2 of 1
percent of the securities of such issuer and (ii) in the aggregate such persons
own or would own more than 5% of such securities.
(4) Invest in companies for the purpose of exercising control of management.
AMERICAN GENERAL CORE BOND FUND ("CORE BOND FUND")
AMERICAN GENERAL DOMESTIC BOND FUND ("DOMESTIC BOND FUND")
AMERICAN GENERAL HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND");
AMERICAN GENERAL MUNICIPAL BOND FUND ("MUNICIPAL BOND FUND"); AND
AMERICAN GENERAL STRATEGIC BOND FUND ("STRATEGIC BOND FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Core Bond Fund, Domestic Bond Fund,
High Yield Bond Fund, Municipal Bond Fund, and Strategic Bond Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that a Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities or securities issued by state or municipal governments and
their political subdivisions. As a matter of operating policy, the Series
Company will not consider repurchase agreements subject to the 5% limitation if
the collateral underlying the repurchase agreements are U.S. Government
securities.
(2) (a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, unless immediately after each borrowing there is asset
coverage of 300%.
(3) Acquire real estate or real estate contracts, although a Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of a Fund's total
assets.
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(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities and with respect to the Municipal Bond Fund, obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or by any state, territory or any possession of the United States, the District
of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, or with respect to repurchase agreements collateralized
by any such obligations), provided, however, that this limitation excludes
shares of other open-end investment companies owned by a Fund but includes a
Fund's pro rata portion of the securities and other assets owned by any such
company.
As a matter of non-fundamental policy, the Core Bond Fund, Domestic Bond
Fund, High Yield Fund, Municipal Bond Fund, and Strategic Bond Fund may not:
(1) Invest more than 15% of a Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that a Fund may purchase securities
of other investment companies without regard to such limitation to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. A Fund may use
short-term credits when necessary to clear transactions.
For the purposes of the investment limitations applicable to the Municipal
Bond Fund, the identification of the issuer of a municipal obligation depends on
the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision
would be regarded as the sole issuer. Similarly, in the case of a private
activity bond, if the bond is backed only by the assets and revenues of the non-
governmental user, such non-governmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be considered a separate security and treated
as an issue of such government or entity.
AMERICAN GENERAL INTERNATIONAL GROWTH FUND ("INTERNATIONAL GROWTH FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the International Growth Fund may not:
(1) With respect to 75% of its total assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer (other
than obligations issued or guaranteed as to principal and interest by the U.S.
Government or any of its agencies or instrumentalities); except that the Fund
may purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
(2) With respect to 75% of its total assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
(3) Invest more than 25% of its total assets in companies within a single
industry, provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's
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pro rata portion of the securities and other assets owned by any such company.
There are no limitations on investments made in instruments issued or guaranteed
by the U.S. Government and its agencies.
(4) Make loans except by purchasing debt securities in accordance with its
investment objective and policies or entering into repurchase agreements, or by
lending its portfolio securities to banks, brokers, dealers and other financial
institutions so long as the loans are made in compliance with the 1940 Act, as
amended, or the rules and regulations or interpretations of the SEC.
(5) Borrow, except (i) from banks; (ii) to enter into reverse repurchase
agreements or to employ similar investment techniques, and pledge its assets in
connection therewith; and (iii) as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3% of the Fund's
total assets valued at the lower of market or cost. If borrowings exceed 5% of
the Fund's total assets, the Fund will not purchase additional securities.
(6) Invest in physical commodities or contracts on physical commodities.
(7) Purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase and sell securities
which are secured by interests in real estate.
(8) Underwrite the securities of other issuers.
(9) Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
As a matter of non-fundamental policy, the International Growth Fund may
not:
(1) Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history of
less than 3 years.
(2) Invest in futures and/or options on futures.
(3) Purchase on margin or sell short.
(4) Invest more than an aggregate of 15% of the Fund's net assets in illiquid or
restricted securities.
(5) Invest for the purpose of exercising control over management of any company;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(6) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL INTERNATIONAL VALUE FUND ("INTERNATIONAL VALUE FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the International Value Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter
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of operating policy, the Series Company will not consider repurchase agreements
subject to the 5% limitation if the collateral underlying the repurchase
agreements are U.S. Government securities.
(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into repurchase agreements, or
employ similar investment techniques, and pledge its assets in connection
therewith, except to the extent permitted by applicable law, and provided that
the Fund will not purchase additional securities if borrowings exceed 5% of
total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
As a matter of non-fundamental policy, the International Value Fund may
not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. The Fund may use
short-term credits when necessary to clear transactions.
AMERICAN GENERAL LARGE CAP GROWTH FUND ("LARGE CAP GROWTH FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Large Cap Growth Fund may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.
(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or
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instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
(3) Borrow money, except (a) the Fund may borrow from banks (as defined in the
1940 Act) or through reverse repurchase agreements in amounts up to 33 1/3% of
its total assets (including the amount borrowed), (b) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (c) the Fund may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of portfolio
securities, (d) the Fund may purchase securities on margin to the extent
permitted by applicable law and (e) the Fund may engage in transactions in
mortgage dollar rolls which are accounted for as financings.
(4) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b) repurchase
agreements with banks, brokers, dealers and other financial institutions, and
(c) loans of securities as permitted by applicable laws but not to exceed
33 1/3% of the Fund's total assets.
(5) Underwrite securities issued by others, except to the extent that the sale
of portfolio securities by the Fund may be deemed to be an underwriting.
(6) Purchase, hold or deal in real estate, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, securities
of real estate investment trusts and mortgage-related securities and may hold
and sell real estate acquired by a Fund as a result of the ownership of
securities.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(8) Issue senior securities to the extent such issuance would violate applicable
law.
As a matter of non-fundamental policy, the Large Cap Growth Fund may not:
(1) Invest in companies for the purpose of exercising control or management;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(2) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(3) Purchase additional securities if the Fund's borrowings (excluding covered
mortgage dollar rolls) exceed 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
(5) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL LARGE CAP VALUE FUND ("LARGE CAP VALUE FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Large Cap Value Fund may not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the U.S. Government,
its agencies and instrumentalities), provided, however, that this
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limitation excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and other assets
owned by any such company.
(2) Borrow money, except to enter into reverse repurchase agreements and employ
similar investment techniques and pledge its assets in connection therewith, and
as a temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33 1/3% of the current value of the Fund's total
assets taken at market value, less liabilities other than borrowings. If at any
time the Fund's borrowings exceed this limitation due to a decline in net
assets, such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. The Fund will not purchase investments
once borrowed funds (including reverse repurchase agreements) exceed 5% of its
total assets.
(3) With respect to 75% of its total assets, invest in securities of any one
issuer (other than securities issued by the U.S. Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Make loans to any person or firm; provided, however, that the making of a
loan shall not include (i) the acquisition for investment of bonds, debentures,
notes or other evidences of indebtedness of any corporation or government which
are publicly distributed or of a type customarily purchased by institutional
investors, or (ii) the entry into repurchase agreements or reverse repurchase
agreements. The Fund may lend its portfolio securities to broker-dealers or
other institutional investors if the aggregate value of all securities loaned
does not exceed 33 1/3% of the value of the Fund's total assets.
(5) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(6) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(7) Engage in the business of underwriting securities issued by others, except
that the Fund will not be deemed to be an underwriter or to be underwriting on
account of the purchase of securities subject to legal or contractual
restriction on disposition.
(8) Issue senior securities, except as permitted by its investment objective,
policies and restrictions, and except as permitted by the 1940 Act.
As a matter of non-fundamental policy, the Large Cap Value Fund may not:
(1) Purchase from or sell portfolio securities to its officers or trustees or
other interested persons (as defined in the 1940 Act) of the Fund, including
their investment advisers and affiliates, except as permitted by the 1940 Act
and exemptive rules or orders thereunder.
(2) Invest more than 15% of the Fund's net assets in illiquid securities or
restricted securities.
(3) Make investments for the purpose of gaining control of an issuer's
management.
(4) Pledge, mortgage or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding 33 1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above under fundamental policies.
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(5) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(6) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of transactions.
The Fund may make initial margin deposits and variation margin payments in
connection with transactions in futures contracts and related options.
(7) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL MID CAP GROWTH FUND ("MID CAP GROWTH FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Mid Cap Growth Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities or
of any class of securities of any one issuer (except that securities of the U.S.
Government, its agencies and instrumentalities are not subject to these
limitations); except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(2) Invest 25% or more of the value of its total assets in any one industry or
group of industries (except that securities of the U.S. Government, its agencies
and instrumentalities are not subject to these limitations); provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company.
(3) Invest in interests in real estate, real estate mortgage loans, real estate
limited partnerships, oil, gas or other mineral exploration or development
programs or leases, except that the Fund may invest in the readily marketable
securities of companies which own or deal in such things.
(4) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter under the federal securities laws, in connection
with the disposition of portfolio securities.
(5) Make loans of money, except that the Fund may invest in repurchase
agreements.
(6) Issue senior securities as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(8) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(9) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except to the
extent permitted by applicable law, and provided that the Fund will not purchase
additional securities if borrowings exceed 5% of total assets.
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As a matter of non-fundamental policy, the Mid Cap Growth Fund may not:
(1) Invest in the securities of any issuer if any of the officers, directors or
trustees of the Series Company, VALIC or the Sub-adviser own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer or together own more
than 5% of the outstanding securities of such issuer.
(2) Invest for the purpose of exercising control or management of another
issuer; except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions).
(4) Make short sales of securities or maintain a short position, except short
sales "against the box"; (A short sale is made by selling a security the Fund
does not own. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no additional cost
securities identical to those sold short.)
(5) Participate on a joint or joint and several basis in any trading account in
securities.
(6) Invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of bonds,
guarantors), if more than 5% of its total assets would be invested in such
securities.
(7) Invest more than 10% of the value of its net assets in illiquid securities.
(8) Purchase foreign securities, except the Fund may invest up to 10% of total
assets in foreign securities sold as American Depositary Receipts.
(9) Invest in restricted securities.
(10) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL MID CAP INDEX FUND ("MID CAP INDEX FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Mid Cap Index Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer. However, the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter of operating policy, the Series Company will not
consider repurchase agreements subject to the 5% limitation if the collateral
underlying the repurchase agreements are U.S. Government securities.
(2)(a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow, except from banks and as a temporary
measure for extraordinary or emergency purposes and then, in no event, in excess
of 33 1/3% of the Fund's total assets valued at the lower of market or cost. If
borrowings exceed 5% of the Fund's total assets, the Fund will not purchase
additional securities.
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(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities (except in connection with investments in
options and futures contracts) or invest in oil, gas or mineral exploration
programs.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(8) Enter into a financial futures contract (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter, the total
of the initial margin deposits required with respect to all open futures
positions, at the time such positions were established, plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.
(9) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry. This limitation excludes shares
of other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
As a matter of non-fundamental policy, the Mid Cap Index Fund may not:
(1) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(2) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(3) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. Each Fund may use
short-term credits when necessary to clear transactions.
(4) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
AMERICAN GENERAL MID CAP VALUE FUND ("MID CAP VALUE FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Mid Cap Value Fund may not:
(1) Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes and not for leveraging or investment and (ii)
enter into reverse repurchase agreements and employ similar investment
techniques, and pledge its assets in connection therewith, for any purpose;
provided that (i) and (ii) in combination do not exceed 33 1/3% of the value of
its total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 33 1/3% of the value of the Fund's total
assets, the Fund will reduce its borrowings within three days (excluding Sundays
and holidays) to the extent necessary to comply with the 33 1/3% limitation.
(2) Purchase physical commodities or contracts thereon, unless acquired as a
result of the ownership of securities or instruments, but this restriction shall
not prohibit the Fund from purchasing futures contracts or options (including
options on futures contracts, but excluding options or futures contracts on
physical commodities) or from investing in securities of any kind. For purposes
of the limitations on commodities, the Fund does not consider foreign currencies
or forward contracts to be physical commodities.
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(3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (i)
more than 5% of the value of the Fund's total assets would be invested in the
securities of that issuer or (ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Purchase any security if, as a result, 25% or more of its total assets
(taken at current value) would be invested in the securities of issuers having
their principal business activities in the same industry, provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company. This limitation does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
(5) Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets (taken at current value) would be lent to other parties,
except, in accordance with its investment objective, policies, and limitations,
(i) through the purchase of a portion of an issue of debt securities or (ii) by
engaging in repurchase agreements.
(6) Purchase real estate unless acquired as a result of the ownership of
securities or instruments, but this restriction shall not prohibit the Fund from
purchasing securities issued by entities or investment vehicles that own or deal
in real estate or interests therein or instruments secured by real estate or
interests therein.
(7) Issue senior securities, except as permitted under the 1940 Act.
(8) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities, may be deemed to be an underwriter within
the meaning of the 1933 Act.
As a matter of non-fundamental policy, the Mid Cap Value Fund may not:
(1) Purchase securities if outstanding borrowings, including any reverse
repurchase agreements, exceed 5% of its total assets.
(2) Purchase securities on margin from brokers or other lenders, except that the
Fund may obtain such short-term credits as are necessary for the clearance of
securities transactions. Margin payments in connection with transactions in
futures contracts and options on futures contracts shall not constitute the
purchase of securities on margin and shall not be deemed to violate the
foregoing limitation.
(3) Invest more than 10% of the value of its total assets in securities of
foreign issuers, provided that the limitation shall not apply to foreign
securities denominated in U.S. dollars, including American Depositary Receipts
("ADRs").
(4) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(5) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Money Market Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent
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permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
For purposes of this restriction, all outstanding debt securities of an issuer
are considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, except to the extent permitted by applicable law, and
provided that the Fund will not purchase additional securities if borrowings
exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(7) Purchase or sell commodity contracts.
(8) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry, except investments in obligations
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities,
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.
As a matter of non-fundamental policy, the Money Market Fund may not:
(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Purchase any security which matures, after giving effect to any demand
features, more than 13 months from the date of purchase.
(5) Invest in warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof.
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AMERICAN GENERAL MUNICIPAL MONEY MARKET FUND
("MUNICIPAL MONEY MARKET FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Municipal Money Market Fund may
not:
(1) Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities, or securities which are backed by the full faith
and credit of the U.S. or securities issued by state or municipal governments
and their political subdivisions) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer or more than 10% of
the outstanding voting securities of any class of any issuer would be held by
the Fund.
The Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
(2) Borrow money, except from a bank for temporary or emergency purposes and not
for investment purposes, and then in an amount not exceeding 10% of the value of
the Fund's total assets at the time of borrowing. (No new investments will be
made by the Fund while any outstanding borrowings exceed 5% of its total
assets.) Secured temporary borrowings may take the form of reverse repurchase
agreements, pursuant to which the Fund would sell portfolio securities for cash
and simultaneously agree to repurchase them at a specified date for the same
amount of cash plus an interest component.
(3) Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations in accordance with the Fund's investment objectives,
policies, and restrictions, either directly from the issuer, or from an
underwriter for an issuer, may be deemed to be underwriting.
(4) Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal fixed income securities secured by real estate or
interests therein.
(5) Purchase or sell commodities or commodity contracts or invest in oil, gas or
other mineral exploration or development programs.
(6) Make loans, except (i) by the purchase of a portion of an issue of debt
securities in accordance with its investment objectives, policies, and
restrictions, (ii) by engaging in repurchase transactions, and (iii) by making
loans of portfolio securities not in excess of 10% of the value of the Fund's
total assets.
(7) Write, purchase or sell puts, calls, or combinations thereof, except that it
may obtain rights to resell municipal bonds and notes.
(8) Purchase securities (other than municipal bonds, notes and other fixed
income securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 25% of total Fund assets would be
invested in any one industry.
As a matter of non-fundamental policy, the Municipal Money Market Fund may
not:
(1) Pledge, mortgage, or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities having
a market value at the time of pledge not exceeding 10% of the value of the
Fund's total assets.
(2) Invest more than 10% of the Fund's net assets in illiquid or restricted
securities.
(3) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of transactions.
(4) Purchase or retain the securities of any issuer other than the securities of
the Fund, if, to the Fund's knowledge, those Trustees and officers of the Series
Company, or of the investment manager, who individually own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer together own
beneficially more than 5% of such outstanding securities.
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(5) Invest for the purpose of exercising control or management of another
company.
(6) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(7) Purchase an industrial revenue bond if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue bonds where
the payment of principal and interest are the responsibility of companies with
less than three years of operating history.
For the purposes of the investment limitations applicable to the Municipal
Money Market Fund, the identification of the issuer of a municipal obligation
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee would be considered a separate security
and treated as an issue of such government or entity.
AMERICAN GENERAL SCIENCE & TECHNOLOGY FUND ("SCIENCE & TECHNOLOGY FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Science & Technology Fund may not:
1. Make any investment inconsistent with its classification as a diversified
investment company under the 1940 Act.
2. Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities),
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company.
3. Issue senior securities or borrow money, except from banks or other persons
for non-leveraging, temporary or emergency purposes, and then only in an
amount up to 33 1/3% of the value of its total assets or as permitted by law
and except by engaging in reverse repurchase agreements, where allowed. In
order to secure any permitted borrowings and reverse repurchase agreements
under this section, the Fund may pledge, mortgage or hypothecate its assets.
4. Make loans, although the Fund may lend portfolio securities, purchase of
money market instruments and repurchase agreements or bonds, debentures or
other debt securities, or as permitted by law. The purchase of all or a
portion of an issue of publicly distributed or privately placed debt
obligations and purchase debt in accordance with the Fund's investment
objective, policies and restrictions, shall not constitute the making of a
loan.
5. Underwrite the securities of other issuers, except as allowed by law or to
the extent that the purchase of obligations in accordance with its investment
objective and policies, either directly from the issuer, or from an
underwriter for an issuer, may be deemed an underwriting.
6. Invest directly in commodities or real estate, unless acquired as a result of
ownership of securities or other instruments, or as permitted by law.
However, the Fund may invest in securities which are secured by real estate
or real estate mortgages and securities of issuers which invest or deal in
commodities, commodity futures, real estate or real estate mortgages.
The Board of Trustees has adopted the following non-fundamental investment
restrictions, which may be changed at any time without a shareholder vote. The
Fund may not:
1. Effect short sales of securities or purchase securities on margin, except in
connection with investments in options and futures contracts. Each Fund may
use short-term credits when necessary to clear transactions.
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2. Purchase illiquid securities if more than 15% of the value of its net assets
would be invested in such securities, or as permitted by the 1940 Act.
3. Enter into reverse repurchase agreements if the aggregate proceeds from
outstanding reverse repurchase agreements, when added to other outstanding
borrowings permitted by the 1940 Act, would exceed 33 1/3% of its total
assets. The Fund does not intend to make any purchases of securities if
borrowing exceeds 5% of its total assets.
4. Invest in securities issued by other investment companies except as part of a
merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
5. Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
AMERICAN GENERAL SMALL CAP GROWTH FUND ("SMALL CAP GROWTH FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Small Cap Growth Fund may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities);
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.
(3) Issue senior securities, except as permitted under the 1940 Act or any rule,
order or interpretation thereunder.
(4) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except to the
extent permitted by applicable law, and provided that the Fund will not purchase
additional securities if borrowings exceed 5% of total assets.
(5) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities may be deemed an underwriter within the
meaning of the 1933 Act.
(6) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in (a) securities directly or indirectly
secured by real estate, or (b) securities issued by issuers that invest in real
estate.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(8) Make loans to other persons, except in accordance with the Fund's investment
objectives and policies and to the extent permitted by applicable law.
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As a matter of non-fundamental policy, the Small Cap Growth Fund may not:
(1) Purchase securities on margin, make short sales of securities, or maintain a
short position, except in the course of the Fund's hedging activities, provided
that this restriction shall not be deemed to be applicable to the purchase or
sale of when-issued securities or delayed delivery securities.
(2) Invest more than 15% of the Fund's net assets in illiquid securities.
(3) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL SMALL CAP INDEX FUND ("SMALL CAP INDEX FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Small Cap Index Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the Fund's total assets, it
may borrow money as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would be borrowed
only from banks and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets, the Fund will not purchase additional securities.
(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the 1933
Act in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 30% of the
Fund's total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the Series
Company may hold and sell, for the Fund's portfolio, real estate acquired as a
result of the Fund's ownership of securities). This limitation excludes shares
of other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
(5) Concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of a
Fund's investment objective(s), up to 25% of its total assets may be invested in
any one industry, provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
(6) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
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As a matter of non-fundamental policy, the Small Cap Index Fund may not:
(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Fund's total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this restriction.
(2) Purchase any security or evidence of interest therein on margin, except that
such short-term credit as may be necessary for the clearance of purchases and
sales of securities may be obtained and except that deposits of initial deposit
and variation margin may be made in connection with the purchase, ownership,
holding or sale of futures.
(3) Sell securities it does not own such that the dollar amount of such short
sales at any one time exceeds 25% of the net equity of the Fund, and the value
of securities of any one issuer in which the Fund is short exceeds the lesser of
2.0% of the value of the Fund's net assets or 2.0% of the securities of any
class of any U.S. issuer and, provided that short sales may be made only in
those securities which are fully listed on a national securities exchange or a
foreign exchange (This provision does not include the sale of securities of the
Fund contemporaneously owns or has the right to obtain securities equivalent in
kind and amount to those sold, i.e., short sales against the box.) (The Fund has
no current intention to engage in short selling).
(4) Invest for the purpose of exercising control or management; except that the
Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
(5) Invest more than 10% of the Fund's total assets (taken at the greater of
cost or market value) in securities that are restricted as to resale under the
1933 Act (other than Rule 144A securities deemed liquid by the Fund's Board of
Trustees).
(6) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable not
including (a) Rule 144A securities that have been determined to be liquid by the
Board of Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and the Board of
Trustees have determined the commercial paper to be liquid; or (iii) is rated in
one of the two highest categories by one nationally recognized statistical
rating agency and the Board of Trustees have determined that the commercial
paper is equivalent quality and is liquid.
(7) Invest more than 5% of the Fund's total assets in securities issued by
issuers which (including predecessors) have been in operation less than three
years.
(8) With respect to 75% of the Fund's total assets, purchase securities of any
issuer if such purchase at the time thereof would cause the Fund to hold more
than 10% of any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction. The Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(9) Invest more than 5% of its total assets in the securities (excluding U.S.
government securities) of any one issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(10) Invest in securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Series Company, or
is an officer or partner of the VALIC or of the Subadviser, if after
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the purchase of the securities of such issuer for the Fund one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.
(11) Invest in warrants (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market) would exceed 5% of the value
of the Fund's net assets or if, as a result, more than 2% of the Fund's net
assets would be invested in warrants not listed on a recognized United States or
foreign stock exchange, to the extent permitted by applicable state securities
laws.
(12) Write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the Investment
Practices of the Fund and the option is issued by the Options Clearing
Corporation, except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges; (b) the aggregate value
of the obligations underlying the puts determined as of the date the options are
sold shall not exceed 5% of the Fund's net assets; (c) the securities subject to
the exercise of the call written by the Fund must be owned by the Fund at the
time the call is sold and must continue to be owned by the Fund until the call
has been exercised, has lapsed, or the Fund has purchased a closing call, and
such purchase has been confirmed, thereby extinguishing the Fund's obligation to
deliver securities pursuant to the call it has sold; and (d) at the time a put
is written, the Fund establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the Fund
has purchased a closing put, which is a put of the same series as the one
previously written).
(13) Buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities association or are
listed on a national securities or commodities exchange, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all, such options
which are held at any time do not exceed 20% of the Fund's total net assets; and
(c) the aggregate margin deposits required on all such or options thereon held
at any time do not exceed 5% of the Fund's total assets.
(14) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL SMALL CAP VALUE FUND ("SMALL CAP VALUE FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Small Cap Value Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the total Fund's assets, it
may borrow money as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would be borrowed
only from banks and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets, the Fund will not purchase additional securities.
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(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the 1933
Act in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 33 1/3% of the
Fund's total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), in the
ordinary course of business (except that the Series Company may hold and sell,
for the Fund's portfolio, real estate acquired as a result of the Fund's
ownership of securities and the securities of companies that deal in real
estate).
(5) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such company.
(6) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
As a matter of non-fundamental policy, the Small Cap Value Fund may not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND ("SOCIALLY RESPONSIBLE FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Socially Responsible Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any other class of securities, of any one issuer; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. For purposes of this restriction, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stock of an issuer is considered as one class. This restriction does not apply
to obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter of operating policy, the Series Company will not
consider repurchase agreements subject to the 5% limitation if the collateral
underlying the repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in options
and futures contracts; or (b) borrow money, enter into reverse repurchase
agreements, or employ similar investment techniques, and
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pledge its assets in connection therewith, except to the extent permitted by
applicable law, and provided that the Fund will not purchase additional
securities if borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by companies
investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal securities
laws.
(5) Lend money, except by purchasing debt obligations in which a Fund may invest
consistent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(8) Enter into financial futures contracts (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter, the total
of the initial margin deposits required with respect to all open futures
positions at the time such positions were established plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.
(9) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry (excluding the U.S. Government or
any of its agencies or instrumentalities), provided, however, that this
limitation excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and other assets
owned by any such company.
As a matter of non-fundamental policy, the Socially Responsible Fund may
not:
(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except in
connection with investment in options and futures contracts. The Fund may use
short-term credits when necessary to clear transactions.
AMERICAN GENERAL STOCK INDEX FUND ("STOCK INDEX FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Stock Index Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the Fund's total assets, it
may borrow money as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would be borrowed
only from banks and only either to accommodate requests for the withdrawal of
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beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute. If borrowings exceed 5% of the
Fund's total assets the Fund will not purchase additional securities.
(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the
Securities Act of 1933 ("1933 Act") in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 30% of the
Fund's total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the Fund)
may hold and sell, for the Fund's portfolio, real estate acquired as a result of
the Fund's ownership of securities).
(5) Concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Fund's investment objective, up to 25% of its total assets may be invested
in any one industry. This limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.
(6) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
As a matter of non-fundamental policy, the Stock Index Fund may not:
(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of the Fund
total assets (taken at market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction.
(2) Purchase any security or evidence of interest therein on margin, except that
such short-term credit as may be necessary for the clearance of purchases and
sales of securities may be obtained and except that deposits of initial deposit
and variation margin may be made in connection with the purchase, ownership,
holding or sale of futures.
(3) Sell any security which it does not own unless by virtue of its ownership of
other securities it has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions.
(4) Invest for the purpose of exercising control or management.
(5) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable not
including (a) Rule 144A securities that have been determined to be liquid by the
Board of Trustees, and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to interest or
principal: and (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and the Series
Company's Board of Trustees have determined the commercial paper to be liquid:
or (iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and the Board of Trustees has determined
that the commercial paper is equivalent quality and is liquid.
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<PAGE> 279
(6) Invest more than 10% of the Fund's total assets (taken at the greater of
cost or market value) in securities that are restricted as to resale under the
1933 Act (other than Rule 144A securities deemed liquid by the Board of
Trustees.)
(7) Invest more than 5% of the Fund's total assets in securities issued by
issuers which (including predecessors) have been in operation less than three
years.
(8) With respect to 75% of the Fund's total assets, purchase securities of any
issuer if such purchase at the time thereof would cause the Fund to hold more
than 10% of any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction. The Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(9) With respect to 75% of its assets, invest more than 5% of its total assets
in the securities (excluding U.S. government securities) of any one issuer;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(10) Purchase or retain in the Fund's portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Series Company, or is an officer or partner of VALIC
or the Sub-adviser, if after the purchase of the securities of such issuer for
the Fund one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value.
(11) Invest more than 5% of the Fund's net assets in warrants (valued at the
lower of cost or market) (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase), but not more than 2% of
the Fund's net assets may be invested in warrants not listed on the New York
Stock Exchange Inc. (the "NYSE") or the American Stock Exchange.
(12) Make short sales of securities or maintain a short position, unless at all
times when a short position is open, it owns an equal amount of such securities
or securities convertible into or exchangeable without payment of any further
consideration, for securities of the same issue and equal in amount to, the
securities sold short and unless not more than 10% of the Fund's net assets
(taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time. The Fund
has no current intention to engage in short selling.
(13) Write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the investment
policies of the Fund and the option is issued by the Options Clearing
Corporation, except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges: (b) the aggregate value
of the obligations underlying the puts determined as of the date the options are
sold shall not exceed 50% of the Fund's net assets; (c) the securities subject
to the exercise of the call written by the Fund must be owned by the Fund at the
time the call is sold and must continue to be owned by the Fund until the call
has been exercised, has lapsed, or the Fund has purchased a closing call, and
such purchase has been confirmed, thereby extinguishing the Fund's obligation to
deliver securities pursuant to the call it has sold: and (d) at the time a put
is written, the Fund establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the Fund
has purchased a closing put, which is a put of the same series as the one
previously written).
(14) Buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or
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futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Fund's total net assets; and (c)
the aggregate margin deposits required on all such futures or options thereon
held at any time do not exceed 5% of the Fund's total assets.
(15) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent permitted
(i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
INVESTMENT PRACTICES
This discussion of investment practices supplements that in the
Prospectus. All principal strategies are described in the Prospectus. The
Lifestyle Funds may not be specifically discussed below, since each Lifestyle
Fund actually invests in other American General Funds mentioned in the
Prospectus.
REPURCHASE AGREEMENTS
Each Fund may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations) subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Board of Trustees. The underlying security must be a U.S.
Government security or a security rated in the highest rating category by the
requisite Nationally Recognized Statistical Rating Organization ("NRSRO")
(except for the International Growth Fund, the International Value Fund, the
Strategic Bond Fund, the Municipal Bond Fund, and the High Yield Bond Fund which
may utilize foreign money market securities) and the seller must be a well
established securities dealer or bank that is a member of the Federal Reserve
System. For the Money Market Fund and the Municipal Money Market Fund, the
underlying security must be a U.S. Government security or a security rated in
the highest rating category by the requisite NRSROs and must be determined to
present minimal credit risk. Repurchase agreements are generally for short
periods, often less than a week. Repurchase agreements typically obligate a
seller, at the time it sells securities to a Fund, to repurchase the securities
at a specific future time and price. The price for which the Fund resells the
securities is calculated to exceed the price the Fund initially paid for the
same securities, thereby determining the yield during the Fund's holding period.
This result is a fixed market rate of interest, agreed upon by that Fund and the
seller, which is accrued as ordinary income. Most repurchase agreements mature
within seven days although some may have a longer duration. The underlying
securities constitute collateral for these repurchase agreements, which are
considered loans under the 1940 Act.
The Funds do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Funds (i) retain the securities
subject to the repurchase agreement as collateral securing the seller's
obligation to repurchase the securities, (ii) monitor on a daily basis the
market value of the securities subject to the repurchase agreement, and (iii)
require the seller to deposit with the Series Company's custodian collateral
equal to any amount by which the market value of the securities subject to the
repurchase agreement falls below the resale amount provided under the repurchase
agreement. In the event that a seller defaults on its obligation to repurchase
the securities, the Funds must hold the securities until they mature or may sell
them on the open market, either of which may result in a loss to a Fund if, and
to the extent that, the values of the securities decline. Additionally, the
Funds may incur disposition expenses when selling the securities. Bankruptcy
proceedings by the seller may also limit or delay realization and liquidation of
the collateral by a Fund and may result in a loss to that Fund. The Board of
Trustees of the Series Company will evaluate the creditworthiness of all banks
and broker-dealers with which the Series Company proposes to enter into
repurchase agreements. Repurchase agreement's that do not mature in seven days
are considered illiquid.
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LENDING PORTFOLIO SECURITIES
For purposes of realizing additional income, each Fund, except the
Lifestyle Funds, may make secured loans of its portfolio securities. Securities
loans are made to broker-dealers and other financial institutions approved by
State Street Bank and Trust Company (the "Custodian"), custodian to the Funds
and pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the loaned securities marked to market
on a daily basis. VALIC will monitor the activities of the Custodian as
authorized by the Board of Trustees. The collateral received will consist of
cash, U.S. government securities, letters of credit or such other collateral as
permitted by interpretations or rules of the SEC. While the securities are on
loan, the Funds will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower.
Any loan of portfolio securities by any Fund will be callable at any time
by the lending Fund upon notice of five business days. When voting or consent
rights which accompany loaned securities pass to the borrower, the lending Fund
will call the loan, in whole or in part as appropriate, to permit the exercise
of such rights if the matters involved would have a material effect on that
Fund's investment in the securities being loaned. If the borrower fails to
maintain the requisite amount of collateral, the loan will automatically
terminate, and the lending Fund will be permitted to use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there are
risks of delay in receiving additional collateral or in the recovery of the
securities or, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only when the Custodian, as monitored by VALIC,
considers the borrowing broker-dealers or financial institutions to be
creditworthy and of good standing and the interest earned from such loans to
justify the attendant risks. On termination of the loan, the borrower will be
required to return the securities to the lending Fund. Any gain or loss in the
market price during the loan would inure to the lending Fund. The lending Fund
may pay reasonable finders', administrative, and custodial fees in connection
with a loan of its securities.
BORROWING
Each Fund may borrow money, subject to the Fund's investment restrictions.
This borrowing may be unsecured. Provisions of the 1940 Act require a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund's total assets made
for temporary administrative purposes. Any borrowings for temporary
administrative purposes in excess of 5% of the Fund's total assets must maintain
continuous asset coverage. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. As noted below, a Fund also may
enter into certain transactions, including reverse repurchase agreements,
mortgage dollar rolls, and sale-buybacks, that can be viewed as constituting a
form of borrowing or financing transaction by the Fund. To the extent a Fund
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the segregation of assets determined in accordance with
procedures adopted by the Trustees, equal in value to the amount of the Fund's
commitment to repurchase, such an agreement will not be considered a "senior
security" by the Fund and therefore will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the Funds. Borrowing
will tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
DOLLAR ROLLS
In a "dollar roll" transaction, a Fund sells a mortgage-related security,
such as a security issued by the Government National Mortgage Association
("GNMA"), to a dealer and simultaneously agrees to repurchase a similar security
(but not the same security) in the future at a pre-determined price. A "dollar
roll" can be
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viewed, like a reverse repurchase agreement, as a collateralized borrowing in
which a Fund pledges a mortgage-related security to a dealer to obtain cash.
Unlike in the case of reverse repurchase agreements, the dealer with which a
Fund enters into a dollar roll transaction is not obligated to return the same
securities as those originally sold by the Fund, but only securities which are
"substantially identical." To be considered "substantially identical," the
securities returned to a Fund generally must: (1) be collateralized by the same
types of underlying mortgages; (2) be issued by the same agency and be part of
the same program; (3) have a similar original stated maturity; (4) have
identical net coupon rates; (5) have similar market yields (and therefore
price); and (6) satisfy "good delivery" requirements, meaning that the aggregate
principal amounts of the securities delivered and received back must be within
1.0% of the initial amount delivered.
A Fund's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that positions
in dollar roll agreements are not covered by segregated liquid assets at least
equal to the amount of any forward purchase commitment, such transactions would
be subject to the Funds' limitations on borrowings. Dollar roll transactions for
terms exceeding three months may be deemed "illiquid" and subject to a Fund's
overall limitations on investments in illiquid securities.
CONVERTIBLE SECURITIES
All of the Funds except for the Money Market Fund and the Municipal Funds
may invest in convertible securities of foreign or domestic issues. A
convertible security is a security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time into a certain
quantity of the common stock of the same or a different issuer. Convertible
securities are senior to common stocks in a corporation's capital structure but
are usually subordinated to similar nonconvertible securities. Convertible
securities provide, through their conversion feature, an opportunity to
participate in capital appreciation resulting from a market price advance in a
convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines.
A Fund may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objectives.
To the extent that convertible securities are intended by a Fund to be
equity securities, the following equity quality criteria typically are
considered: industry prospects (growth rate, competitive pressures, supply/
demand characteristics), market valuations (including price-to-book ratios,
price-earnings ratios and return on equity), company profile (suppliers,
competitors, end-users and customers), discretionary cash flow and quality of
management. To the extent that convertible securities are intended by a Fund to
be fixed income securities, the quality criteria typically applied by the Fund
to investments in fixed income securities (i.e., Moody's and S&P ratings) are
applied.
FOREIGN SECURITIES
A foreign security includes corporate debt securities of foreign issuers
(including preferred or preference stock), certain foreign bank obligations (see
"Bank Obligations") and U.S. dollar or foreign currency-denominated obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities.
Included within the definition of foreign securities are the following
depositary receipts: American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) and Global Depositary Receipts (GDRs). Depositary receipts that
are denominated in U.S. dollars are not considered foreign securities in
determining compliance with the Mid Cap Value Fund's investment restrictions.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Generally, ADRs are in
registered form. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market
quotations
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are readily available, and (ii) issuers whose securities are represented by ADRs
are generally subject to auditing, accounting and financial reporting standards
similar to those applied to domestic issuers. EDRs and GDRs are receipts
evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are
designed for use in the non-U.S. securities markets. EDRs and GDRs are not
necessarily quoted in the same currency as the underlying security. In addition,
the Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund,
International Growth Fund, International Value Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund
Socially Responsible Fund, Stock Index Fund, and the Strategic Bond Fund may
invest in other types of depositary securities such as international depositary
receipts, global depositary shares, European depositary shares and international
depositary shares.
A Fund may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S.
dollar-denominated money market securities of foreign issuers. Such money market
securities may be registered domestically and traded on domestic exchanges or in
the over-the-counter market (e.g., Yankee securities) or may be (1) registered
abroad and traded exclusively in foreign markets or (2) registered domestically
and issued in foreign markets (e.g., Eurodollar securities).
Investing in foreign securities may involve advantages and disadvantages
not present in domestic investments. There may be less publicly available
information about securities not registered domestically, or their issuers, than
is available about domestic issuers or their domestically registered securities.
Stock markets outside the U.S. may not be as developed as domestic markets, and
there may also be less government supervision of foreign exchanges and brokers.
Foreign securities may be less liquid or more volatile than U.S. securities.
Trade settlements may be slower and could possibly be subject to failure. In
addition, brokerage commissions and custodial costs with respect to foreign
securities may be higher than those for domestic investments. Accounting,
auditing, financial reporting and disclosure standards for foreign issuers may
be different than those applicable to domestic issuers. Non-U.S.
dollar-denominated foreign securities may be affected favorably or unfavorably
by changes in currency exchange rates and exchange control regulations
(including currency blockage) and a Fund may incur costs in connection with
conversions between various currencies. Foreign securities may also involve
risks due to changes in the political or economic conditions of such foreign
countries, the possibility of expropriation of assets or nationalization, and
possible difficulty in obtaining and enforcing judgments against foreign
entities.
SOVEREIGN DEBT OBLIGATIONS
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Funds) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
A Fund will consider an issuer to be economically tied to a country with
an emerging securities market if (1) the issuer is organized under the laws of,
or maintains its principal place of business in, the country, (2) its securities
are principally traded in the country's securities markets, or (3) the issuer
derived at least half of its
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revenues or profits from goods produced or sold, investments made, or services
performed in the country, or has at least half of its assets in that country.
PERFORMANCE INDEXED PAPER
Performance indexed paper ("PIPs(SM)") is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is established
at maturity as a function of spot exchange rates between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
BANK OBLIGATIONS
Each Fund, other than the Lifestyle Funds, may invest in bank obligations.
Bank obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 10% of its net assets (15% in the case of the Stock Index
Fund, the Mid Cap Index Fund, the Small Cap Index Fund, the International Growth
Fund, the Large Cap Growth Fund, the Small Cap Growth Fund, the Large Cap Value
Fund, the Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Municipal Bond Fund, the
Strategic Bond Fund and the Core Bond Fund) would be invested in such deposits,
repurchase agreements maturing in more than seven days and other illiquid
assets.
The Funds limit investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Funds limit investments in foreign bank obligations to United States
dollar- or foreign currency-denominated obligations of foreign banks (including
United States branches of foreign banks) which at the time of investment (i)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (iv) in the opinion of
VALIC or a Sub-adviser, are of an investment quality comparable to obligations
of United States banks in which the Funds may invest. The Core Bond Fund may
invest in the same types of bank obligations as the other Funds, but they must
be U.S. dollar-denominated. Subject to a Fund's limitation on concentration in
the securities of issuers in a particular industry, there is no limitation on
the amount of a Fund's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations
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of United States banks, that a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations, that foreign deposits may
be seized or nationalized, that foreign governmental restrictions such as
exchange controls may be adopted which might adversely affect the payment of
principal and interest on those obligations and that the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to United States banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
INTERNATIONAL BONDS
The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Fund,
International Value Fund, Large Cap Growth Fund, Mid Cap Index Fund, Mid Cap
Value Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund,
Socially Responsible Fund, Stock Index Fund, and the Strategic Bond Fund may
invest in international bonds, which include U.S. dollar-denominated bonds
issued by foreign corporations for which the primary trading market is in the
United States ("Yankee Bonds"), or for which the primary trading market is
abroad ("Euro Bonds"). International bonds may involve special risks and
considerations not typically associated with investing in U.S. companies,
including differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility. A
Fund's investment in international bonds also may be affected either unfavorably
or favorably by fluctuations in the relative rates of exchange between
currencies of different nations, by exchange control regulations and by
indigenous economic and political developments.
EMERGING MARKETS
All of the Funds except for Large Cap Growth Fund, Large Cap Value Fund,
Mid Cap Growth Fund, Money Market Fund, Municipal Bond Fund, and the Municipal
Money Market Fund may invest in companies located in emerging market countries.
The investments may be subject to additional risks. Specifically, volatile
social, political and economic conditions may expose investments in emerging or
developing markets to economic structures that are generally less diverse and
mature. Emerging market countries may have less stable political systems than
those of more developed countries. As a result, it is possible that favorable
economic developments in certain emerging market countries may be suddenly
slowed or reversed by unanticipated political or social events in such
countries. Moreover, the economies of individual emerging market countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth in gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additionally, investments in emerging countries may also be adversely impacted
due to the implementation of certain capital control measures which could limit
the a Fund's ability to access U.S. dollars, repatriate earned interest and/or
principal, and sell selected securities.
Investing in emerging market securities, whether in the U.S. or another
country, can result in a lack of liquidity and in greater price volatility.
Until recently, there has been an absence of a capital market structure or
market-oriented economy in certain emerging market countries. If a Fund's
securities will generally be denominated in foreign currencies, the value of
such securities to the Fund will be affected by changes in currency exchange
rates and in exchange control regulations. A change in the value of a foreign
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of a Fund's securities. In addition, some emerging market
countries may have fixed or managed currencies which are not free-floating
against the U.S. dollar. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Many emerging markets countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and
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rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
A further risk is that the existence of national policies may restrict a
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.
BRADY BONDS
The Domestic Bond Fund, the Balanced Fund, the High Yield Bond Fund, the
Municipal Bond Fund, the Strategic Bond Fund and the Core Bond Fund may invest
in Brady Bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructurings under a debt restructuring plan agreed to by
the debtor nation and its creditors. Brady Plan debt restructurings have been
implemented in a number of countries.
Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily the U.S. dollar) and are actively traded in the
over-the-counter secondary market. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discounts bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the Brady Bonds, but are not backed by the
U.S. Government. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Funds may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Funds to suffer
a loss of interest or principal on any of its holdings.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Foreign currency transactions used by certain of the Funds may be either:
(i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign
exchange market, or (ii) conducted through the use of forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date. In general,
forward foreign currency exchange contracts are not guaranteed by a third party
and, accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.
A Fund will enter into forward foreign currency exchange contracts only
under two circumstances. First, a Fund may enter into a forward foreign currency
exchange contract to purchase an amount of foreign currency to protect itself
against a possible loss that might occur between trade and settlement dates for
a particular security, resulting from a decline in the U.S. dollar against the
foreign currency in which such security is denominated. This practice may limit
the potential gains that might result from a positive change in such currency
relationships. Second, when VALIC or a Sub-adviser believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
the U.S. dollar, a Fund may enter into a forward foreign currency exchange
contract to purchase or sell an amount of foreign currency approximating the
value of some or all of that Fund's portfolio securities denominated in such
foreign currency. The forecasting of short-term currency market movements is
extremely difficult and it is uncertain whether such short-term hedging
strategies will be successful.
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STANDARD AND POOR'S DEPOSITARY RECEIPTS
The Large Cap Growth Fund may, consistent with its objectives, purchase
Standard & Poor's Depositary Receipts ("SPDR's"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Large Cap Growth
Fund as the price movement of the instrument does not perfectly correlate with
the price action of the underlying index.
WHEN-ISSUED SECURITIES
Securities may be purchased on a when-issued, delayed delivery or forward
commitment basis. When such transactions are negotiated, the price of such
securities is fixed at the time of commitment, but delivery and payment for the
securities may take place a month or more after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and no
interest accrues to the purchaser during this period. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. VALIC does not believe that a Fund's net asset
value or income will be adversely affected by the purchase of securities on a
when-issued basis.
FIXED INCOME SECURITIES
Fixed income securities are considered high quality if they are rated at
least A by Moody's or its equivalent by any other NRSRO or, if unrated, are
determined to be of equivalent investment quality. High quality fixed income
securities are considered to have a very strong capacity to pay principal and
interest. Fixed income securities are considered investment grade if they are
rated, for example, at least Baa by Moody's or BBB by S&P or their equivalents
by any other NRSRO or, if not rated, are determined to be of equivalent
investment quality. Investment grade fixed income securities are regarded as
having an adequate capacity to pay principal and interest. Lower rated
securities, for example, Ba by Moody's or its equivalent by any other NRSRO are
regarded on balance as high risk and predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
The maturity of fixed income securities may be considered long (ten plus
years), intermediate (one to ten years), or short-term (thirteen months or
less). In general, the principal values of longer-term securities fluctuate more
widely in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
fixed income securities, while an increase in interest rates generally reduces
their value.
LOWER RATED FIXED INCOME SECURITIES
Issuers of lower rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of lower rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
Lower rated securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
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A Fund may have difficulty disposing of certain lower rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet a Fund's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness of
the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower rated securities are likely to adversely affect a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings as a method
for evaluating lower rated fixed income securities. For example, credit ratings
evaluate the safety of principal and interest payments, not the market risks
involved in lower rated fixed income securities. Since credit rating agencies
may fail to change the credit ratings in a timely manner to reflect subsequent
events, the Sub-adviser will monitor the issuers of lower rated fixed income
securities in a Fund to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
debt securities' liquidity within the parameters of the Fund's investment
policies.
ZERO COUPON FIXED INCOME SECURITIES
The Large Cap Value Fund, the Mid Cap Value Fund, the Balanced Fund, the
High Yield Bond Fund, the Strategic Bond Fund, the Municipal Bond Fund, the Core
Bond Fund and the Domestic Bond Fund may invest in zero coupon fixed income
securities, which are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or that specify a future date
when the securities begin to pay current interest.
Zero coupon fixed income securities are issued and traded at a discount
from their face amount or par value. This discount varies depending on
prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.
The discount on zero coupon fixed income securities ("original issue
discount") must be taken into income ratably by a Fund prior to the receipt of
any actual payments. Because the Fund must distribute substantially all of its
net income to its shareholders each year for income and excise tax purposes, the
Fund may have to dispose of portfolio securities under disadvantageous
circumstances to generate cash, or may be required to borrow, to satisfy its
corresponding Fund's distribution requirements.
The market prices of zero coupon fixed income securities generally are
more volatile than the prices of securities that pay interest periodically. Zero
coupon fixed income securities are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having a similar
maturity and credit quality.
Custodial receipts issued in connection with zero coupon fixed income
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury,
although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.
INFLATION-INDEXED BONDS
The Core Bond Fund, the Balanced Fund, the Municipal Bond Fund, the
Domestic Bond Fund, the High Yield Bond Fund and the Strategic Bond Fund may
invest in inflation-indexed bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. Interest payments are made to bondholders semi-annually and are
made up of two components: a fixed "real coupon" or spread, and a variable
coupon linked to an inflation index. Accordingly, payments will increase or
decrease each period as a result of changes in the inflation index. In the
period of deflation payments may decrease to zero, but in any event will not be
less than zero. Inflation-indexed bonds generally are issued at an interest rate
lower than typical bonds, but are expected to retain their principal value over
time. The interest rate on these bonds is fixed at issuance, but over the life
of the bond this interest may be paid on an increasing principal value, which
has been adjusted for inflation.
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Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five, ten or thirty years, although it is anticipated that
securities with other maturities will be issued in the future. The securities
will pay interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
were 1%, the mid-year par value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year reached 3%, the end-of-year par value of the
bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assurance that the
U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxation" for information about the possible tax
consequences of investing in inflation-indexed bonds.
HYBRID INSTRUMENTS
A hybrid instrument can combine the characteristics of equity and fixed
income securities, futures, and options. For example, a hybrid instrument may
combine the characteristics of preferred stock and fixed income securities in
the form of quarterly income preferred stock or trust-originated preferred
stock. In other hybrid securities, the principal amount or interest rate may be
tied (positively or negatively) to the price of some commodity, currency or
securities index or another interest rate (each a "benchmark"). The interest
rate or the
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principal amount payable at maturity of a hybrid security may be increased or
decreased, depending on changes in the value of the benchmark.
Hybrid instruments can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark and, as
a result, may be leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and political
events, such as commodity shortages and currency devaluations, which cannot be
readily foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes a Fund to the credit risk of the issuer of the
hybrids. These risks may cause significant fluctuations in the net asset value
of the Fund. Accordingly, no Fund will invest more than 5% of its assets in
hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Funds' investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
CATASTROPHE BONDS
The High Yield Bond Fund, the Balanced Fund, the Municipal Bond Fund, the
Strategic Bond Fund, the Domestic Bond Fund and the Core Bond Fund may invest in
"catastrophe bonds." Catastrophe bonds are fixed income securities, for which
the return of principal and payment of interest is contingent on the non-
occurrence of a specific "trigger" catastrophic event, such as a hurricane or an
earthquake. They may be issued by government agencies, insurance companies,
reinsurers, special purpose corporations or other on-shore or off-shore
entities. If a trigger event causes losses exceeding a specific amount in the
geographic region and time period specified in a bond, a Fund investing in the
bond may lose a portion or all of its principal invested in the bond. If no
trigger event occurs, the Fund will recover its principal plus interest. For
some catastrophe bonds, the trigger event or losses may be based on companywide
losses, index-portfolio losses, industry indices, or readings of scientific
instruments rather than specified actual losses. Often the catastrophe bonds
provide for extensions of maturity that are mandatory, or optional at the
discretion of the issuer, in order to process and audit loss claims in those
cases where a trigger event has, or possibly has, occurred. In addition to the
specified trigger events, catastrophe bonds may also expose the Fund to certain
unanticipated risks including but not limited to issuer (credit) default,
adverse regulatory or jurisdictional interpretations, and adverse tax
consequences.
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Fund may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and a Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.
REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")
Real estate securities are equity securities consisting of (i) common
stocks, (ii) rights or warrants to purchase common stocks, (iii) securities
convertible into common stocks and (iv) preferred stocks issued by real estate
companies. A real estate company is one that derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial, or residential real estate or that has at least 50% of
its assets invested in real estate.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real
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estate mortgages and derive income from the collection of interest payments.
Like regulated investment companies such as the Funds, REITs are not taxed on
income distributed to shareholders provided they comply with certain
requirements under the Internal Revenue Code (the "Code"). A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject
to interest rate risks.
WARRANTS
Bonds with warrants attached to purchase equity securities have many
characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value. Warrants do not
entitle a holder to dividends or voting rights with respect to the underlying
securities and do not represent any rights in the assets of the issuing company.
In addition, the value of warrants does not, necessarily, in all cases change to
the same extent as the value of the underlying securities to which they relate.
Warrants cease to have value if they are not exercised prior to the expiration
date. These factors can make warrants more speculative than other types of
investments.
SWAP AGREEMENTS
These transactions are entered into in an attempt to obtain a particular
return when it is considered desirable to do so, possibly at a lower cost to the
Fund than if the Fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged or "swapped" between the parties are
generally calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Forms of swap agreements include interest rate
caps, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified rate, or "floor"; and interest rate collars, under which a party sells
a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding minimum or maximum levels.
Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by VALIC or a Sub-adviser in
accordance with procedures established by the Board of Trustees, to avoid any
potential leveraging of a Fund's portfolio. Obligations under swap agreements so
covered will not be construed to be "senior securities" for purposes of the
Fund's investment restriction concerning senior securities. A Fund will not
enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the
Fund's assets.
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Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on VALIC or a Sub-adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Funds will
enter into swap agreements only with counterparties that meet certain standards
of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
STRUCTURED NOTES
Structured notes are derivative fixed income securities, the interest rate
or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, VALIC or a Sub-Adviser will analyze these securities in its
overall assessment of the effective duration of the Fund's portfolio in an
effort to monitor the Fund's interest rate risk.
EURODOLLAR OBLIGATIONS
All of the Funds except for the International Growth Fund, Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Municipal Bond Fund and
the Municipal Money Market Fund may invest in Eurodollar obligations, including
Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation
is a security denominated in U.S. dollars and originated principally in Europe,
giving rise to the term Eurodollar.
Such securities are not registered with the SEC and generally may only be
sold to U.S. investors after the initial offering and cooling-off periods. The
market for Eurodollar securities is dominated by foreign-based investors and the
primary trading market for these securities is London.
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Eurodollar obligations, including Eurodollar bonds and Eurodollar
certificates of deposit, are principally obligations of foreign branches of U.S.
banks. These instruments represent the loan of funds actually on deposit in the
U.S. The Series Company believes that the U.S. bank would be liable in the event
that its foreign branch failed to pay on its U.S. dollar denominated
obligations. Nevertheless, the assets supporting the liability could be
expropriated or otherwise restricted if located outside the U.S. Exchange
controls, taxes, or political and economic developments also could affect
liquidity or repayment. Due to possibly conflicting laws or regulations, the
foreign branch of the U.S. bank could maintain and prevail that the liability is
solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar
denominated obligations of foreign branches of Federal Deposit Insurance
Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of
FDIC insurance if they are payable only at an office of such a bank located
outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Moreover, there may be less publicly available information about foreign
issuers whose securities are not registered with the SEC and such foreign
issuers may not be subject to the accounting, auditing, and financial reporting
standards applicable to issuers registered domestically. In addition, foreign
issuers, stock exchanges, and brokers generally are subject to less government
regulation. There are, however, no risks of currency fluctuation since the
obligations are U.S. dollar denominated.
The Core Bond Fund, High Yield Bond Fund, Mid Cap Index Fund, Small Cap
Growth Fund, Small Cap Index Fund, Small Cap Value Fund, Socially Responsible
Fund, Stock Index Fund and the Strategic Bond Fund may purchase and sell
Eurodollar futures contracts, which enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in a foreign prime lending interest rate to which many interest swaps
and fixed income securities are linked.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in fixed income securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. These securities may be structured in classes with rights to receive
varying proportions of principal and interest.
Mortgage Pass-Through Securities
Interests in pools of mortgage-related securities differ from other forms
of fixed income securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities are
GNMA, Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage ("FHLMC"). GNMA is a wholly owned United States Government corporation
within the Department of Housing and Urban Development.
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GNMA is authorized to guarantee, with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of mortgages insured
by the Federal Housing Administration (the "FHA"), or guaranteed by the
Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned by the twelve
Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC
issues Participation Certificates ("PCs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Series Company's investment quality standards. There can be
no assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Funds may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, VALIC or a Sub-adviser determines that the securities meet the Series
Company's quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. No Fund will purchase mortgage-related securities or any
other assets which in VALIC's or the Sub-adviser's opinion are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Growth Fund, the Small Cap Growth Fund,
the Large Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Strategic Bond Fund and
the Core Bond Fund.)
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of
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adverse economic, political or business developments that may affect such region
and, ultimately, the ability of residential homeowners to make payments of
principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs)
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal is
paid, in most cases, monthly. CMOs may be collateralized by whole mortgage
loans, but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured in multiple classes, each bearing a different stated
maturity, coupon, and prepayment preference. Actual maturity and average life
will depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
pool of mortgages according to how quickly the loans are repaid. Monthly payment
of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
As an example of a CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
Commercial Mortgage-Backed Securities
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage-or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES
Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including mortgage
dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS").
Other mortgage-related securities may be equity or fixed income securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals
CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
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The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities ("SMBS")
SMBS are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
ASSET-BACKED SECURITIES
Asset-backed securities (unrelated to first mortgage loans) represent
fractional interests in pools of retail installment loans, both secured (such as
certificates for automobile receivables) and unsecured, and leases, or revolving
credit receivables both secured and unsecured (such as credit card receivable
securities). These assets are generally held by a trust and payments of
principal and interest, or interest only are passed through monthly or quarterly
to certificate holders and may be guaranteed up to certain amounts by letters of
credit issued by a financial institution affiliated or unaffiliated with the
trustee or originator of the trust.
Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary
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much with interest rates and the short-term nature of the underlying loans,
leases, or receivables tends to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying loans, leases or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. If consistent with its investment objective(s) and policies, a
Fund may invest in other asset-backed securities that may be developed in the
future.
MUNICIPAL BONDS
Municipal bonds are debt obligations that are typically issued by a
municipality to obtain funding for public purposes, such as the construction of
public facilities (e.g., airports, highways, bridges and schools). Private
activity bonds issued by or on behalf of public authorities to finance various
privately operated facilities also are considered municipal bonds. Municipal
bonds at the time of issuance may have varying maturities. The Municipal Money
Market Fund will not purchase a security which, after giving effect to any
demand features, has a remaining maturity of greater than 13 months, or
maintains a dollar-weighted average portfolio maturity in excess of 90 days.
The Municipal Bond Fund and the Municipal Money Market Fund may invest in
investment grade municipal bonds. Investment grade municipal bonds are
instruments that are rated at the time of purchase within the four highest
ratings assigned by Moody's, S&P, Fitch, or determined by a Sub-adviser to be of
comparable quality. The four highest ratings currently assigned by Moody's to
municipal bonds are "Aaa", "Aa", "A" and "Baa"; the four highest ratings
assigned by S&P and Fitch to municipal bonds are "AAA", "AA", "A" and "BBB".
Although municipal obligations rated in the fourth highest rating category by
Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest. A more complete description of the
ratings assigned by Moody's, S&P and Fitch is included in the Appendix to the
Class A and Class B Prospectus.
MUNICIPAL NOTES
Municipal notes are notes issued by local, regional and state governments
to meet their short-term funding requirements. Municipal notes generally have
maturities at the time of issuance of three years or less.
Funds may invest in municipal notes rated at the time of purchase "MIG1",
"MIG2" (or "VMIG-1" or "VMIG-2", in the case of variable rate demand notes),
"P-2" or better by Moody's, "SP-2", "A-2" or better by S&P or "F-2" or better by
Fitch, or if not rated, determined by a Sub-adviser to be of comparable quality.
Municipal notes that may be purchased by the Funds include, but are not
limited to:
Tax Anticipation Notes. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty in a
municipal issuer's capacity to raise taxes as a result of such factors as a
decline in its tax base or a rise in delinquencies could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.
Bond Anticipation Notes. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to meet its obligations on its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
Revenue Anticipation Notes. Revenue anticipation notes ("RANs") are sold
as interim financing in anticipation of receipt of other revenues. A decline in
the receipt of certain revenues, such an anticipated revenues from another level
of government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs.
TANs, BANs and RANs are usually general obligations of the issuer.
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MUNICIPAL OBLIGATIONS
Municipal obligations are debt obligations issued by or on behalf of
states, cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the Municipal Bond
Fund and the Municipal Money Market Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of a facility being financed. Revenue securities may include private
activity bonds. Such bonds may be issued by or on behalf of public authorities
to finance various privately operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of private
activity bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Funds will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Funds may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax.
The Funds' portfolio may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality that
created the issuer.
In addition, the Funds may invest in municipal lease obligations ("MLOs").
MLOs are not fully backed by the municipality's credit and their interest may
become taxable if the lease is assigned. If the governmental user does not
appropriate sufficient funds for the following year's lease payments, the lease
will terminate, with the possibility of default on the MLO and loss to the Fund.
The Sub-adviser may invest more than 5% of each Fund's net assets in MLOs and
the Trustees of the Series Company have established procedures the Sub-adviser
will use to examine certain factors in evaluating the liquidity of such
obligations. These factors include (i) the frequency of trades and quotes for
the MLO; (ii) the number of dealers willing to purchase or sell such MLO and the
number of other potential purchasers; (iii) the willingness of dealers to
undertake to make a market in the MLO; (iv) the nature of the MLO and the nature
of the marketplace trades (e.g., the time needed to dispose of the security and
the method of soliciting offers); (v) the nature of the offering of such MLO
(e.g., the size of the issue and the number of anticipated holders); (vi) the
ability of the MLO to maintain its marketability throughout the time the
instrument is held in the Fund; and (vii) other factors, if any, which the
Sub-adviser deems relevant to determining the existence of a trading market for
such MLO. The Funds also may invest in resource recovery bonds, which may be
general obligations of the issuing municipality or supported by corporate or
bank guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
The Funds currently intend to invest substantially all of their assets in
obligations the interest on which is exempt from regular federal income taxes.
However, in order to maintain liquidity, each of these Funds may invest up to
20% of its assets in taxable obligations, including taxable high-quality
short-term money market instruments. These Funds also may invest in the
following taxable high-quality short-term money market instruments: obligations
of the U.S. Government or its agencies or instrumentalities; commercial paper of
issuers rated, at the time of purchase, "A-2" or better by S&P, "P-2" or better
by Moody's, or "F-2" or better by Fitch or which if unrated, in the opinion of
the Sub-adviser, are of comparable quality; certificates of deposit, bankers'
acceptances or time deposits of U.S. banks with total assets of at least $1
billion (including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks), and repurchase agreements with respect to such
obligations.
If at some future date, in the opinion of the Sub-adviser, adverse
conditions prevail in the market for obligations the interest on which is exempt
from regular federal income taxes, the Funds may invest its assets without limit
in taxable high-quality short-term money market instruments. Dividends paid by
the Funds that are attributable to interest derived from taxable money market
instruments will be taxable to investors.
From time to time, the Funds may invest more than 25% of its assets in
obligations whose interest payments are from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same
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geographic location. As a result, the Funds may be more susceptible to a single
economic, political or regulatory development than would a portfolio of
securities with a greater variety of issuers. These developments include
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither the
Series Company nor the Sub-adviser will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.
MUNICIPAL COMMERCIAL PAPER
The Municipal Bond Fund and the Municipal Money Market Fund may also
purchase municipal commercial paper. Municipal commercial paper that may be
purchased by the Funds consists of short term obligations of a municipality.
Such paper is likely to be issued to meet seasonal working capital needs of a
municipality or as interim construction financing. Municipal commercial paper,
in many cases, is backed by a letter of credit lending agreement, repurchase
agreement or other credit facility agreement offered by banks or other
institutions.
The Funds may invest in commercial paper that is rated at the time of
purchase "P-2" or better by Moody's, "A-2" or better by S&P, or "F-2" or better
by Fitch, or, if not rated, determined by a Sub-adviser to be of comparable
quality.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand to receive
payment of the principal balance plus accrued interest either at any time or at
specified intervals not exceeding one year and in either case upon no more than
seven days notice. The interest rates are adjustable at intervals ranging from
daily ("floating rate") to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.
The Municipal Bond Fund, the Municipal Money Market Fund and the Money
Market Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days. A
Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
PRE-REFUNDED BONDS
From time to time, a municipality may refund a bond that it has already
issued prior to the original bond's call date by issuing a second bond, the
proceeds of which are used to purchase securities. The securities are placed in
an escrow account pursuant to an agreement between the municipality and an
independent escrow agent. The principal and interest payments on the securities
are then used to pay off the original bondholders. For the purposes of
diversification, pre-refunded bonds will be treated as governmental issues.
LOAN PARTICIPATIONS
Loan Participations are debt obligations of corporations and are usually
purchased from major money center banks, selected regional banks, and major
foreign banks with branches in the U.S. which are regulated by the Federal
Reserve System or appropriate state regulatory authorities. VALIC and the
Sub-advisers believe that the credit standards imposed by such banks are
comparable to the standards such banks use in connection
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with loans originated by them and in which they intend to maintain a full
interest. The financial institutions offering loan participations do not
guarantee principal or interest on the loan participations which they offer.
VALIC and the Sub-advisers will not purchase such securities for the Funds
unless they believe that the collateral underlying the corporate loans is
adequate and the corporation will be able, in a timely fashion, to pay scheduled
interest and principal amounts.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities (i.e., variable rate and floating rate
instruments) are securities that have interest rates that are adjusted
periodically, according to a set formula. The maturity of some adjustable rate
securities may be shortened under certain special conditions described more
fully below.
Variable rate instruments are obligations (usually certificates of
deposit) that provide for the adjustment of their interest rates on
predetermined dates or whenever a specific interest rate changes. A variable
rate instrument whose principal amount is scheduled to be paid in 13 months or
less is considered to have a maturity equal to the period remaining until the
next readjustment of the interest rate. Many variable rate instruments are
subject to demand features which entitle the purchaser to resell such securities
to the issuer or another designated party, either (1) at any time upon notice of
usually 30 days or less, or (2) at specified intervals, not exceeding 13 months,
and upon 30 days notice. A variable rate instrument subject to a demand feature
is considered to have a maturity equal to the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.
Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The maturity of a floating rate
instrument is considered to be the period remaining until the principal amount
can be recovered through demand.
All of the Funds except for International Growth Fund, International Value
Fund, Large Cap Growth Fund, Large Cap Value Fund, Money Market Fund, Municipal
Bond Fund, and the Municipal Money Market Fund may invest in inverse floaters,
which are derivative fixed income or municipal securities. Inverse floaters may
be issued by agencies or instrumentalities of the U.S. government or by private
issuers including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Inverse floaters generally have greater volatility than other types of mortgage
securities in which a Fund may invest. Although inverse floaters are purchased
and sold by institutional investors through several investment banking firms
acting as brokers or dealers, the market for such securities has not yet been
fully developed. Accordingly, inverse floaters are generally illiquid.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate securities.
ILLIQUID SECURITIES
The Money Market Fund and Municipal Money Market Fund will not invest more
than 10% (15% in the case of the Stock Index Fund, the Mid Cap Index Fund, the
Small Cap Index Fund, the International Growth Fund, the Small Cap Growth Fund,
the Large Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Strategic Bond Fund, the
Municipal Bond Fund and the Core Bond Fund), of the value of their net assets in
securities or other investments that are illiquid or not readily marketable
(including repurchase agreements with maturities exceeding seven days).
Securities received as a result of a corporate reorganization or similar
transaction affecting readily-marketable securities already held in the
portfolio of a Fund will not be considered securities or other investments that
are not readily marketable. However, the Funds will attempt, in an orderly
fashion, to dispose of any securities received under these
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circumstances, to the extent that such securities are considered not readily
marketable, and together with other illiquid securities, exceed 10% (or 15%) of
the value of a Fund's net assets.
RULE 144A SECURITIES
Privately placed securities are eligible for purchase and sale pursuant to
Rule 144A under the 1933 Act. This Rule permits certain qualified institutional
buyers, such as the Funds, to trade in privately placed securities even though
such securities are not registered under the 1933 Act. The Series Company, under
the supervision of the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Funds'
restriction on investing more than 10% (15% in the case of the Stock Index Fund,
the Mid Cap Index Fund, the Small Cap Index Fund, the International Growth Fund,
the Small Cap Growth Fund, the Large Cap Growth Fund, the Large Cap Value Fund,
the Mid Cap Value Fund, the Small Cap Value Fund, the High Yield Bond Fund, the
Balanced Fund, the International Value Fund, the Domestic Bond Fund, the
Strategic Bond Fund and the Core Bond Fund) of its net assets in illiquid
securities. Excluded from the Funds' investment limitations, however, are any
Rule 144A securities that have been determined to be liquid by the Board of
Trustees, VALIC or the Sub-adviser pursuant to Board approved guidelines.
Determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination the Series Company will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition the Series Company could consider (i)
frequency of trades and quotes, (ii) number of dealers and potential purchasers,
(iii) dealer undertakings to make a market, and (iv) nature of the security and
market place trades (for example, the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by the Series Company and, if, as a
result of changed conditions, it is determined that a Rule 144A security is no
longer liquid, the Funds' holding of illiquid securities will be reviewed to
determine what, if any, action is required to assume that the Funds do not
invest more than 10% (or 15%) of their net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of the Funds' investments in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. Each Fund other than the
Lifestyle Funds, may invest in Rule 144A securities that have been determined to
be liquid by Board approved guidelines.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund, other than the Large Cap Growth Fund, the Mid Cap Growth Fund,
the International Growth Fund, the Lifestyle Funds, the Municipal Money Market
Fund and the Money Market Fund, may write covered call and put options on
securities and securities indices. A call option is a contract that gives to the
holder the right to buy a specified amount of the underlying security or
currency at a fixed or determinable price (called the exercise or "strike"
price) upon exercise of the option. A put option is a contract that gives the
holder the right to sell a specified amount of the underlying security or
currency at a fixed or determinable price upon exercise of the option.
To "cover" a call option written, a Fund may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Fund may, for example, establish a segregated asset account with its custodian
containing cash or liquid assets that, when added to amounts deposited with its
broker or futures commission merchant ("FCM") as margin, equals the market value
of the instruments underlying the put option written.
All the Funds except for International Growth Fund, Mid Cap Growth Fund,
Money Market Fund, and the Municipal Money Market Fund may write options on
securities and securities indices. If a Fund writes an option which expires
unexercised or is closed out by the Fund at a profit, it will retain the premium
received for the option, which will increase its gross income. If the price of
the underlying security or currency moves adversely to the Fund's position, the
option may be exercised and the Fund, as the writer of the option, will be
required to sell or purchase the underlying security or currency at a
disadvantageous price, which may only be partially offset by the amount of
premium received.
Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of
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individual stocks. When a Fund writes an option on a securities index, and the
underlying index moves adversely to the Fund's position, the option may be
exercised. Upon such exercise, the Fund, as the writer of the option, will be
required to pay in cash an amount equal to the difference between the exercise
settlement value of the underlying index and the exercise price of the option,
multiplied by a specified index "multiplier."
Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option the option is considered to be "in the money." In such a case, the Fund
will cover such options written by segregating with its custodian or pledging to
its commodity broker as collateral cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.
Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index and NYSE Beta Index. The Funds may also use options
on such other indices as may now or in the future be available.
All the Funds except for International Growth Fund, Mid Cap Growth Fund,
Money Market Fund, and the Municipal Money Market Fund may also purchase put or
call options on securities and securities indices in order to (i) hedge against
anticipated changes in interest rates or stock prices that may adversely affect
the prices of securities that the Fund intends to purchase at a later date, (ii)
hedge its investments against an anticipated decline in value, or (iii) attempt
to reduce the risk of missing a market or industry segment advance. These Funds
also may purchase put options on foreign currencies that correlate with the
Fund's portfolio securities in order to minimize or hedge against anticipated
declines in the exchange rate of the currencies in which the Fund's securities
are denominated and may purchase call options on foreign currencies that
correlate with its portfolio securities to take advantage of anticipated
increases in exchange rates. In the event that the anticipated changes in
interest rates, stock prices, or exchange rates occur, the Fund may be able to
offset the resulting adverse effect on the Fund, in whole or in part, through
the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Fund. To close option positions purchased by the Funds, the Funds may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.
Options used by the Funds may be traded on the national securities
exchanges or in the over-the-counter market. Only the Large Cap Value Fund, the
Small Cap Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Municipal Bond Fund and the Core Bond Fund may use over-the-counter options.
Options traded in the over-the-counter market may not be as actively traded as
those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be more difficult to enter into closing
transactions with respect to options traded over-the-counter. In this regard,
the Funds may enter into contracts with the primary dealers with whom they write
over-the-counter options. The contracts will provide that each Fund has the
absolute right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value of such option, as determined in
good faith through negotiations between the parties, but which in no event will
exceed a price determined pursuant to a formula contained in the contract.
Although the specific details of the formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by each Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Although the specific details of
the formula may vary with different primary dealers, each contract will provide
a formula to determine the maximum price at which each Fund can repurchase the
option at any time. The Funds have established standards of creditworthiness for
these primary dealers.
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WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS
All of the Funds, except International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund, Municipal Money Market Fund and Money Market Fund, may
write exchange-traded covered call and put options on or relating to specific
securities in order to earn additional income or, in the case of a call written,
to minimize or hedge against anticipated declines in the value of the Fund's
securities. The Mid Cap Value Fund may write exchange-traded covered call
options, but not put options in this connection. To "cover" an option means, for
example, to identify and make available for sale the specific portfolio security
or foreign currency to which the option relates. Through the writing of a
covered call option a Fund receives premium income but obligates itself to sell
to the purchaser of such an option the particular security or foreign currency
underlying the option at a specified price at any time prior to the expiration
of the option period, regardless of the market value of the security or the
exchange rate for the foreign currency during this period. Through the writing
of a covered put option a Fund receives premium income but obligates itself to
purchase a particular security or foreign currency underlying the option at a
specified price at any time prior to the expiration of the option period,
regardless of market value or exchange rate during the option period.
All of the Funds, except International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund, Municipal Money Market Fund and Money Market Fund, may
also write exchange-traded covered call and put options on stock indices and may
purchase call and put options on stock indices that correlate with the Fund's
portfolio securities. These Funds may engage in such transactions for the same
purposes as they may engage in such transactions with respect to individual
portfolio securities or foreign currencies, that is, to generate additional
income or as a hedging technique to minimize anticipated declines in the value
of the Fund's portfolio securities or the exchange rate of the securities in
which the Fund invested. In economic effect, a stock index call or put option is
similar to an option on a particular security, except that the value of the
option depends on the weighted value of the group of securities comprising the
index, rather than a particular security, and settlements are made in cash
rather than by delivery of a particular security.
Each Fund, other than International Growth Fund, Large Cap Growth Fund,
Mid Cap Growth Fund, Money Market Fund, and the Municipal Bond Fund, may also
purchase exchange-traded call and put options with respect to securities and
stock indices that correlate with that Fund's particular portfolio securities.
In this connection, the Mid Cap Value Fund may purchase exchange traded call
options only.
A Fund may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its portfolio securities or
currencies. As the holder of a put option with respect to individual securities
or currencies, the Fund has the right to sell the securities or currencies
underlying the options and to receive a cash payment at the exercise price at
any time during the option period. As the holder of a put option on an index, a
Fund has the right to receive, upon exercise of the option, a cash payment equal
to a multiple of any excess of the strike price specified by the option over the
value of the index.
A Fund may purchase call options on individual securities, currencies or
stock indices in order to take advantage of anticipated increases in the price
of those securities or currencies by purchasing the right to acquire the
securities or currencies underlying the option or, with respect to options on
indices, to receive income equal to the value of such index over the strike
price. As the holder of a call option with respect to individual securities or
currencies, a Fund obtains the right to purchase the underlying securities or
currencies at the exercise price at any time during the option period. As the
holder of a call option on a stock index, a Fund obtains the right to receive,
upon exercise of the option, a cash payment equal to the multiple of any excess
of the value of the index on the exercise date over the strike price specified
in the option.
Unlisted options may be used by the Large Cap Value Fund, the Small Cap
Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund, the Municipal
Bond Fund and the Core Bond Fund. Such options are not traded on an exchange and
may not be as actively traded as listed securities, making the valuation of
these securities more difficult. In addition, an unlisted option entails a risk
not found in connection with listed options -- that the party on the other side
of the option transaction will default. This may make it impossible to close out
an unlisted option position in some cases, and profits may be lost thereby. Such
unlisted, over-the-counter options, unless otherwise indicated, will be
considered illiquid securities. The Funds will engage in such transactions only
with firms of sufficient credit to minimize these risks. In instances in which a
Fund has entered into agreements with primary dealers with respect to the
unlisted, over-the-counter options it has written, and such agreements would
enable the Fund to have an absolute right to repurchase, at a pre-established
formula
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price, the over-the-counter options written by it, the Fund will treat as
illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
Although these investment practices will be used to generate additional
income and to attempt to reduce the effect of any adverse price movement in the
securities or currencies subject to the option, they do involve certain risks
that are different in some respects from investment risks associated with
similar funds which do not engage in such activities. These risks include the
following: writing covered call options -- the inability to effect closing
transactions at favorable prices and the inability to participate in the
appreciation of the underlying securities or currencies above the exercise
price; writing covered put options -- the inability to effect closing
transactions at favorable prices and the obligation to purchase the specified
securities or currencies or to make a cash settlement on the stock index at
prices which may not reflect current market values or exchange rates; and
purchasing put and call options -- possible loss of the entire premium paid. In
addition, the effectiveness of hedging through the purchase or sale (writing) of
stock index options will depend upon the extent to which price movements in the
portion of a Fund's portfolio being hedged correlate with price movements in the
selected stock index. Perfect correlation may not be possible because the
securities held or to be acquired by a Fund may not exactly match the
composition of the stock index on which options are purchased or written. If the
forecasts of VALIC or the Sub-Advisers regarding movements in securities prices,
currencies or interest rates are incorrect, a Fund's investment results may have
been better without the hedge.
FINANCIAL FUTURES CONTRACTS
Each Fund, except the Mid Cap Growth Fund, the International Growth Fund,
the Mid Cap Value Fund, the Lifestyle Funds, the Municipal Money Market Fund and
the Money Market Fund, in accordance with its investment objective(s),
investment program, policies, and restrictions may purchase and sell exchange-
traded financial futures contracts as a hedge to protect against anticipated
changes in prevailing interest rates, overall stock prices or currency rates, or
to efficiently and in a less costly manner implement either increases or
decreases in exposure to the equity or bond markets. The Funds may also write
covered call options and purchase put and call options on financial futures
contracts for the same purposes or to earn additional income and the Small Cap
Growth Fund, the Large Cap Value Fund and the Large Cap Growth Fund may also
write covered put options on stock index futures contracts. The Large Cap Value
Fund may utilize currency futures contracts and both listed and unlisted
financial futures contracts and options thereon.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts, and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. A stock index futures contract is similar in
economic effect, except that rather than being based on specific securities, it
is based on a specified index of stocks and not the stocks themselves. A
currency futures contract is a contract to buy or sell a specific foreign
currency at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the
purchaser on a specified future date a specified quantity of one of several
listed financial instruments, against payment of a settlement price specified in
the contract. A public market currently exists for futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
will be developed and traded in the future.
The Municipal Bond Fund may enter into municipal bond index futures
contracts. A municipal bond index futures contract is an agreement to take or
make delivery of an amount of cash equal to the difference between the value of
the index at the beginning and at the end of the contract period. The Municipal
Bond Fund may enter into short municipal bond index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of securities in its respective portfolio that might otherwise
result. When the Fund is not fully invested in securities and anticipates a
significant market advance, it may enter into long municipal bond index futures
contracts in order to gain rapid market exposure that may wholly or partially
offset increases in the costs of securities that it intends to purchase. In a
substantial majority of
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these transactions, the Fund will purchase such securities upon termination of
the futures position but, under unusual market conditions, a futures position
may be terminated without the corresponding purchase of securities.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the S&P MidCap 400, the
Nikkei 225, the New York Stock Exchange Composite Index, the Value Line Stock
Index, and the Major Market Index. It is expected that financial instruments
related to broad-based indices, in addition to those for which futures contracts
are currently traded, will in the future be the subject of publicly-traded
futures contracts, and the Funds may use any of these, which are appropriate, in
its hedging strategies.
A financial futures contract is an agreement to buy or sell a security (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery of a specified security)
for a set price in the future. Exchange-traded futures contracts are designated
by boards of trade which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC").
Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but instead are liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities whenever it appears
economically advantageous to the Fund to do so. A clearing organization
associated with the relevant exchange assumes responsibility for closing out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to all
positions that remain open at the termination of the contract.
Unlisted financial futures contracts, which may be purchased or sold only
by the Large Cap Value Fund, the High Yield Bond Fund, the Strategic Bond Fund,
the Municipal Bond Fund and the Core Bond Fund, like unlisted options, are not
traded on an exchange and, generally, are not as actively traded as listed
futures contracts or listed securities. Such financial futures contracts
generally do not have the following elements: standardized contract terms,
margin requirements relating to price movements, clearing organizations that
guarantee counter-party performance, open and competitive trading in centralized
markets, and public price dissemination. These elements in listed instruments
serve to facilitate their trading and accurate valuation. As a result, the
accurate valuation of unlisted financial futures contracts may be difficult. In
addition, it may be difficult or even impossible, in some cases, to close out an
unlisted financial futures contract, which may, in turn, result in significant
losses to the Fund. Such unlisted financial futures contracts will be considered
by the Fund to be illiquid securities and together with other illiquid
securities will be limited to no more than 10% (or 15%) of the value of such
Fund's total assets. In making such determination, the value of unlisted
financial futures contracts will be based upon the "face amount" of such
contracts.
When financial futures contracts are entered into by a Fund, either as the
purchaser or the seller of such contracts, the Fund is required to deposit with
the Custodian in a segregated account in the name of the FCM an initial margin
of cash or U.S. Treasury bills equaling as much as 5% to 10% or more of the
contract settlement price. The nature of initial margin requirements in futures
transactions differs from traditional margin payments made in securities
transactions in that initial margins for financial futures contracts do not
involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a financial futures contract represents
a good faith deposit securing the customer's contractual obligations under the
financial futures contract. The initial margin deposit is returned, assuming
these obligations have been met, when the financial futures contract is
terminated. In addition, subsequent payments to and from the FCM, called
"variation margin," are made on a daily basis as the price of the underlying
security, stock index, or currency fluctuates, reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Funds will normally close all futures positions by entering
into an offsetting transaction which operates to cancel the position held, and
which usually results in a
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profit or loss. A Fund may not adhere to its internal operating policy in
circumstances where the Fund is required to invest a large cash infusion.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
For bona fide hedging purposes, each Fund, except the Mid Cap Growth Fund,
the International Growth Fund, the Mid Cap Value Fund, the Lifestyle Funds, the
Municipal Money Market Fund and the Money Market Fund, may also purchase call
and put options on financial futures contracts and write call options on
financial futures contracts of the type which the particular Fund is authorized
to enter into. Options on financial future contracts used by the Funds are
traded on exchanges that are licensed and regulated by the CFTC. A call option
on a financial futures contract gives the purchaser the right in return for the
premium paid, to purchase a financial futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
put option gives the purchaser the right, in return for the premium paid, to
sell a financial futures contract (assume a "short" position), for a specified
exercise price, at any time before the option expires.
Unlike entering into financial futures contracts, purchasing options on
financial futures contracts allows a Fund to decline to exercise the option,
thereby avoiding any loss beyond foregoing the purchase price (or "premium")
paid for the options. Therefore, the purchase of options on financial futures
contracts may be a preferable hedging strategy when a Fund desires maximum
flexibility. Whether, in order to achieve a particular objective, a Fund enters
into a financial futures contract, on the one hand, or an option contract, on
the other, will depend on all the circumstances, including the relative costs,
liquidity, availability and capital requirements of such financial futures and
options contracts. Also, the Funds will consider the relative risks involved,
which may be quite different. These factors, among others, will be considered in
light of market conditions and the particular objective to be achieved.
CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS
The use of options and financial futures contracts may entail some risks.
First, although such instruments when used by the Funds are intended to
correlate with the Funds' portfolio securities or currencies, in many cases the
options or financial futures contracts used may be based on securities,
currencies, or stock indices the components of which are not identical to the
portfolio securities owned or intended to be acquired by the Funds. Second, due
to supply and demand imbalances and other market factors, the price movements of
financial futures contracts, options thereon, currency options, and stock index
options may not necessarily correspond exactly to the price movements of the
securities, currencies, or stock indices on which such instruments are based.
Accordingly, there is a risk that a Fund's transactions in those instruments
will not in fact offset the impact on the Fund of adverse market developments in
the manner or to the extent contemplated or that such transactions will result
in losses to the Fund which are not offset by gains with respect to
corresponding portfolio securities owned or to be purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contracts which is smaller than the amount of portfolio securities to which such
contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in a Fund's portfolio securities is particularly
relevant to financial futures contracts and options written on stock indices and
currencies. A Fund, in entering into a futures purchase contract, potentially
could lose any or all of the contract's settlement price. In entering into a
futures sale contract, a Fund could potentially lose a sum equal to the excess
of the contract's value (marked to market daily) over the contract's settlement
price. In writing options on stock indices or currencies a Fund could
potentially lose a sum equal to the excess of the value of the index or currency
(marked to market daily) over the exercise price. In addition, because financial
futures contracts require delivery at a future date of either a specified
security or currency, or an amount of cash equal to a multiple of the difference
between the value of a specified stock index on that date and the settlement
price, an algebraic relationship exists between any price movement in the
underlying security or
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currency or index and the potential cost of settlement to a Fund. A small
increase or decrease in the value of the underlying security or currency or
stock index can, therefore, result in a much greater increase or decrease in the
cost to the Fund.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Fund's portfolio securities "covering"
a stock index call option written by it may decline during the time between
exercise of the option by the option holder and notice to the Fund of such
exercise (usually one day or more) thereby requiring the Fund to use additional
assets to settle the transaction. This risk is not present in the case of
covered call options on individual securities, which are settled by delivery of
the actual securities.
There are also special risks in using currency options including the
following: (i) settlement of such options must occur in the country issuing the
currency in conformity with foreign regulations for such delivery, including the
possible imposition of additional costs and taxes, (ii) no systematic reporting
of "last sale" information for foreign currencies, and (iii) the need to use
"odd lot" transactions for underlying currencies at prices less favorable than
those for "round lot" transactions.
Although the Funds intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when a Fund seeks to "close out" (i.e.
terminate) a particular financial futures contract or option position. This is
particularly relevant for over-the-counter options and financial futures
contracts, as previously noted. Trading in such instruments could be
interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Fund may be able, by adjusting
investment strategy in the cash or other contract markets, to offset to some
extent any adverse effects of being unable to liquidate a hedge position.
Nevertheless, in some cases, a Fund may experience losses as a result of such
inability. Therefore it may have to liquidate other more advantageous
investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to
a Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. The Funds will use only FCMs or brokers in whose
reliability and financial soundness they have full confidence and have adopted
certain other procedures and limitations to reduce the risk of loss with respect
to any assets which brokers hold or to which they may have access. Nevertheless,
in the event of a broker's insolvency or bankruptcy, it is possible that a Fund
could experience a delay or incur costs in recovering such assets or might
recover less than the full amount due. Also the value of such assets could
decline by the time a Fund could effect such recovery.
The success of a Fund in using hedging techniques depends, among other
things, on VALIC's, or the Sub-adviser's ability to predict the direction and
volatility of price movements in both the futures and options markets as well as
the securities markets and on VALIC's or the Sub-adviser's ability to select the
proper type, time, and duration of hedges. There can be no assurance that these
techniques will produce their intended results. In any event, VALIC, or the
Sub-adviser will use financial futures contracts, options thereon, currency
options and stock index options only when it believes the overall effect is to
reduce, rather than increase, the risks to which a Fund is exposed. Hedging
transactions also, of course, may be more, rather than less, favorable to a Fund
than originally anticipated.
LIMITATIONS
No Fund will enter into any financial futures contract or purchase any
option thereon if, immediately thereafter, the total amount of its assets
required to be on deposit as initial margin to secure its obligations under
financial futures contracts, plus the amount of premiums paid by it for
outstanding options to purchase futures contracts, exceeds 5% of the market
value of its total assets; provided however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. This is a fundamental policy of the Socially
Responsible Fund. Collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of the investment restrictions concerning
borrowing money, mortgaging, or hypothecating assets of any Fund.
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Each Fund has an operating policy which provides that it will not enter
into financial futures contracts or write put or call options with respect to
financial futures contracts unless such transactions are either "covered" or
subject to segregation requirements considered appropriate by the SEC staff.
Further, each Fund has an operating policy which provides that it will not enter
into custodial arrangements with respect to initial or variation margin deposits
or marked-to-market amounts unless the custody of such initial and variation
margin deposits and marked-to-market amounts are in compliance with current SEC
staff interpretive positions or no-action letters or rules adopted by the SEC.
SHORT SALES AND SHORT SALES AGAINST THE BOX
The Balanced Fund, each Bond Fund, International Value Fund, and Socially
Responsible Fund may enter in short sales in connection with options and futures
contracts only. Mid Cap Value Fund, Small Cap Index Fund, and Strategic Index
Fund may engage in short sale transactions in securities listed on one or more
national securities exchanges or on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ"). Short selling involves the
sale of borrowed securities. At the time a short sale is effected, a Fund incurs
an obligation to replace the security borrowed at whatever its price may be at
the time that the Fund purchases it for delivery to the lender. When a short
sale transaction is closed out by delivery of the securities, any gain or loss
on the transaction is taxable as a short term capital gain or loss. Until the
security is replaced, the Fund is required to pay to the lender amounts equal to
any dividends or interest which accrue during the period of the loan. All short
sales will be fully collateralized. The Large Cap Growth Fund and Mid Cap Growth
Fund may only engage in short sales against the box, which involves selling a
security the Fund holds in its portfolio for delivery at a specified date in the
future. A Fund will not engage in short sales or short sales against the box if
immediately following such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of the
Fund's net assets (taken at market value).
MONEY MARKET SECURITIES OF FOREIGN ISSUERS
Foreign money market instruments utilized by certain of the Funds will be
limited to: (i) obligations of, or guaranteed by, a foreign government, its
agencies or instrumentalities; (ii) certificates of deposit, bankers'
acceptances, short-term notes, negotiable time deposits and other obligations of
the ten largest banks in each foreign country, measured in terms of net assets;
and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day
commercial paper) of foreign companies. For temporary purposes or in light of
adverse foreign political or economic conditions, the Funds may invest in
short-term high quality foreign money market securities without limitation.
INVESTMENT ADVISER
VALIC is a stock life insurance company organized on May 1, 1969 under the
Texas Insurance Code as a successor to The Variable Annuity Life Insurance
Company of America, a District of Columbia insurance company organized in 1955.
VALIC is an indirect wholly-owned subsidiary of American General Corporation,
Houston, Texas. Members of the American General Corporation group of companies
operate in each of the 50 states, the District of Columbia, and Canada and
collectively engage in substantially all forms of financial services. American
General Corporation was incorporated as a Texas business corporation on February
26, 1980 as the successor to American General Life Insurance Company (organized
in 1926) as the result of a corporate reorganization completed on July 1, 1980.
VALIC serves as the investment adviser to each of the Funds pursuant to an
Investment Advisory Agreement with each Fund that was approved by the Board of
Trustees on August 26, 1998. Under the
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Investment Advisory Agreement, each Fund pays VALIC an annual fee, payable
monthly, based on its average daily net asset value.
For the fiscal period ending October 31, 1999, the Funds paid the
following advisory fees to VALIC:
<TABLE>
<CAPTION>
ADVISORY
FUND NAME FEES
- --------- ---------
<S> <C>
Stock Index Fund 29,869
Mid Cap Index Fund 17,492
Small Cap Index Fund 16,062
International Growth Fund 52,251
Large Cap Growth Fund 49,471
Mid Cap Growth Fund 54,371
Small Cap Growth Fund 62,829
International Value Fund 66,958
Large Cap Value Fund 35,427
Mid Cap Value Fund 51,545
Small Cap Value Fund 40,252
Socially Responsible Fund 15,928
Balanced Fund 59,766
High Yield Bond Fund 426,557
Strategic Bond Fund 31,224
Domestic Bond Fund 45,924
Core Bond Fund 1,551,018
Municipal Bond Fund 30,118
Money Market Fund 32,936
Municipal Money Market Fund 27,357
Growth Lifestyle Fund 6,889
Moderate Growth Lifestyle Fund 7,247
Conservative Growth Lifestyle Fund 7,049
</TABLE>
Pursuant to the Investment Advisory Agreement, the Series Company retains
VALIC to manage the investment of the assets of each Fund, maintain a trading
desk, and place orders for the purchase and sale of portfolio securities. As
investment adviser, VALIC obtains and evaluates as appropriate economic,
statistical, and financial information in order to formulate and implement
investment programs in furtherance of each Fund's investment objective(s) and
investment program. Pursuant to the Investment Advisory Agreements, VALIC
provides other services including furnishing the services of the President and
such other executives and clerical personnel as the Series Company requires to
conduct its day-to-day operations, to prepare the various reports and statements
required by law, and to conduct any other recurring or nonrecurring activity
which the Series Company may need to continue operations. The Investment
Advisory Agreement provides that the Series Company pay all expenses not
specifically assumed by VALIC under the Agreement. Examples of the expenses paid
by the Series Company include transfer agency fees, custodial fees, the fees of
outside legal and auditing firms, the costs of reports to shareholders and
expenses of servicing shareholder accounts (e.g., daily calculation of the net
asset value). The Series Company allocates advisory fees, SEC filing fees,
interest expenses and state filing fees, if any, to the Fund that incurs such
charges and allocates all other expenses among the Funds based on the net assets
of each Fund in relation to the net assets of the Series Company.
The Investment Advisory Agreement requires that VALIC's advisory fee be
reduced by any commissions, tender and exchange offer solicitation fees and
other fees, or similar payments (less any direct expenses incurred) received by
VALIC or its affiliates in connection with the purchase and sale of portfolio
investments of the Funds. In this regard, the Investment Advisory Agreement
requires VALIC to use its best efforts to recapture tender and exchange
solicitation offer fees for each Fund's benefits, and to advise the Series
Company's Board of Trustees of any other fees, or similar payments that it (or
any of its affiliates) may receive in connection with each Fund's portfolio
transactions or of other arrangements that may benefit any of the Funds or the
Series Company.
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The Investment Advisory Agreement may be continued with respect to any
Fund if specifically approved, after the initial two year term, at least
annually by (a)(i) the Series Company's Board of Trustees or (ii) a majority of
that Fund's outstanding voting securities (as defined by the 1940 Act), and (b)
the affirmative vote of a majority of the trustees who are not parties to the
agreement or "interested persons" of any such party (as defined by the 1940 Act)
by votes cast in person at a meeting called for this purpose. The Investment
Advisory Agreement also provides that it shall terminate automatically if
assigned. The Investment Advisory Agreement may be terminated as to any Fund at
any time by the Series Company's Board of Trustees, by vote of a majority of the
Fund's outstanding voting securities, or by VALIC, on not more than 60 days'
written notice, nor less than 30 days' written notice, or upon such shorter
notice as may be mutually agreed upon, without the payment of any penalty.
Additionally the Investment Advisory Agreement provides that VALIC shall not be
liable to the Series Company, or any shareholder in the Series Company, for any
act or omission in rendering services under the Agreement, or for any losses
sustained in the purchase, holding, or sale of any portfolio security, so long
as there has been no willful misfeasance, bad faith, negligence, or reckless
disregard of obligations or duties on the part of VALIC.
Pursuant to an Accounting Services Agreement ("Agreement"), VALIC provides
accounting services to the Series Company. The Agreement provides that the
Series Company will pay to VALIC an annual fee payable monthly based on average
daily net assets for providing the accounting services.
INVESTMENT SUB-ADVISERS
Pursuant to Investment Sub-advisory Agreements with each Sub-adviser,
VALIC has engaged American General Investment Management, L.P. ("AGIM") to
provide sub-advisory services to High Yield Bond Fund, Strategic Bond Fund, Core
Bond Fund, Municipal Bond Fund, Municipal Money Market Fund, Stock Index Fund,
Mid Cap Index Fund, Small Cap Index Fund and for a portion of the Small Cap
Value Fund. Capital Guardian Trust Company ("Capital Guardian") provides
sub-advisory services for the International Value Fund, the Domestic Bond Fund
and the Balanced Fund, Jacobs Asset Management provides sub-advisory services
for the International Growth Fund, State Street Bank and Trust Company/State
Street Global Advisors ("State Street Global Advisors") provides sub-advisory
services for the Large Cap Value Fund, Goldman Sachs Asset Management ("GSAM")
provides sub-advisory services for the Large Cap Growth Fund and Neuberger
Berman Management Inc. ("N B Management") provides sub-advisory services for the
Mid Cap Value Fund pursuant to separate Sub-advisory Agreements. Brown Capital
Management, Inc. ("Brown Capital Management") provides sub-advisory services for
the Mid Cap Growth Fund, Fiduciary Management Associates, Inc. ("FMA") provides
sub-advisory services for a portion of the Small Cap Value Fund, J.P. Morgan
Investment Management, Inc. ("JP Morgan") provides sub-advisory services for the
Small Cap Growth Fund and T. Rowe Price Associates, Inc. ("T. Rowe") provides
sub-advisory services for the Science & Technology Fund pursuant to separate
sub-advisory Agreements, as well. AGIM, Capital Guardian, Jacobs Asset
Management, State Street Global Advisors, GSAM, N&B Management, Brown Capital
Management, FMA, JP Morgan and T. Rowe (collectively, the "Sub-advisers") will
be subject to the control, supervision and direction of VALIC, which will retain
responsibility for the overall management of the Funds to which these companies
provide sub-advisory services (collectively, the "Sub-advised Funds").
In selecting Sub-advisers, the Series Company's Trustees carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-adviser, (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-adviser's personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid to each Sub-adviser.
The Series Company was issued an exemptive order by the SEC on September
9, 1998 for an exemption (the "Exemption") from certain provisions of the 1940
Act which would otherwise require VALIC to obtain formal shareholder approval
prior to engaging and entering into sub-advisory agreements with Sub-advisers.
The relief is based on the conditions set forth in the Exemption that, among
other things; (1) VALIC will select, monitor, evaluate and allocate assets to
the Sub-advisers and oversee Sub-advisers compliance with the relevant Fund's
investment objective, policies and restrictions; (2) before a Fund may rely on
the Exemption, the Exemption must be approved by the shareholders of the Funds
operating under the Exemption; (3) the Series Company will provide to
shareholders certain information about a new Sub-adviser; (4) the Series Company
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will disclose in its Prospectus the existence, substance and effect of the
Exemption; and (5) the Trustees, including a majority of the "non-interested"
Trustees, must approve each sub-advisory agreement in the manner required under
the 1940 Act. Any changes to the Investment Advisory Agreement between the
Series Company and VALIC would still require shareholder approval. As required
by the Exemption, the initial shareholder of each Fund on October 7, 1998,
consented to permit VALIC to terminate, replace or add Sub-advisers and to enter
into sub-advisory agreements with Sub-advisers upon approval of the Board of
Trustees but without formal shareholder approval.
Pursuant to the Investment Sub-advisory Agreements and subject to VALIC's
control, supervision and direction, the Sub-advisers will manage the investment
and reinvestment of the assets, other than cash, of the Sub-advised Funds,
including the evaluation of pertinent economic, statistical, financial and other
data, and the determination of industries and companies to be represented in the
Sub-advised Funds. Further, the Sub-advisers will maintain a trading desk and
place orders for the purchase and sale of portfolio investments for the
Sub-advised Funds, accounts with brokers and dealers selected by the
Sub-advisers, or arrange for any other entity to provide a trading desk and to
place orders with brokers and dealers selected by the Sub-advisers and VALIC.
The Investment Sub-advisory Agreements provide that the Sub-advisers will
bear the expense of discharging their responsibilities.
VALIC shall pay to AGIM, for the services rendered and expenses paid by
AGIM, a monthly fee computed at the annual rate of 0.25% of the first $200
million, 0.20% of the next $300 million and 0.15% of average daily net asset
values on the excess over $500 million for each of the Core Bond Fund, the
Municipal Bond Fund and the Municipal Money Market Fund. With respect to the
Strategic Bond Fund, VALIC pays AGIM, a monthly fee computed at the annual rate
of 0.35% of the first $200 million, 0.25% of the next $300 million and 0.20% of
average daily net assets over $500 million. For the High Yield Bond Fund, VALIC
pays AGIM, a monthly fee computed at the annual rate of 0.45% of the first $200
million, 0.35% of the next $300 million and 0.30% of average daily net assets
over $500 million.
VALIC shall pay to Brown Capital Management, for the services rendered to
the Mid Cap Growth Fund and expenses paid by Brown Capital Management, a monthly
fee computed at the annual rate of 0.40% of the first $25 million, 0.30% of the
next $25 million and 0.20% of average daily net asset values on the excess over
$50 million.
VALIC shall pay to Capital Guardian, for the services rendered and
expenses paid by Capital Guardian, a quarterly fee computed at the annual rate
of 0.75% of the first $25 million, 0.60% of the next $25 million, 0.425% of the
next $200 million and 0.375% of average daily net assets values on the excess
over $250 million of the International Value Fund, 0.35% of the first $50
million, 0.20% of the next $50 million, 0.18% of the next $200 million and 0.15%
of average daily net asset values on the excess over $300 million of the
Domestic Bond Fund and 0.55% of the first $25 million, 0.40% of the next $25
million and 0.20% of average daily net asset values on the excess over $50
million of the Balanced Fund. Capital Guardian aggregates fees with respect to
the International Value Fund, the Domestic Bond Fund and the Balanced Fund and
applies a 5% discount to all fees if total fees are between $1.25 million and $4
million, a 7.5% discount to all fees if total fees are between $4 million and $8
million, a 10% discount to all fees if total fees are between $8 million and $12
million and a 12.5% discount to all fees if total fees exceed $12 million.
VALIC shall pay to FMA, for the services rendered to the portion of the
Small Cap Value Fund that it manages and expenses paid by FMA, a monthly fee
computed at the annual rate of 0.50% of the first $50 million and 0.40% of
average daily net asset values on the excess over $50 million.
VALIC shall pay to GSAM, for the services rendered to the Large Cap Growth
Fund and expenses paid by GSAM, a monthly fee computed at the annual rate of
0.30% of average daily net asset values of the Large Cap Growth Fund.
VALIC shall pay to JP Morgan, for the services rendered to the Small Cap
Growth Fund and expenses paid by JP Morgan, a monthly fee computed at the annual
rate of 0.60% of average daily net asset values of the Small Cap Growth Fund.
VALIC shall pay to Jacobs Asset Management, for the services rendered to
the International Growth Fund and expenses paid by Jacobs Asset Management, a
monthly fee computed at the annual rate of 0.65% of the first $100 million and
0.55% of average daily net asset values on the excess over $100 million.
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VALIC shall pay to N&B Management, for the services rendered to the Mid
Cap Value Fund and expenses paid by N&B Management, a monthly fee computed at
the annual rate of 0.50% of the first $100 million, 0.475% of the next $150
million, 0.45% of the next $250 million, 0.425% of the next $250 million and
0.40% of average daily net asset values on the excess over $750 million.
VALIC shall pay to State Street Global Advisors, for the services rendered
to the Large Cap Value Fund and expenses paid by State Street, a monthly fee
computed at the annual rate of 0.25% of average daily net asset values of the
Large Cap Value Fund, but in no event less than $50,000 per year.
VALIC shall pay to T. Rowe Price, for the services rendered to the Science
& Technology Fund and expenses paid by T. Rowe Price, a monthly fee based on
average daily net asset values of the Science & Technology Fund. The fee shall
be computed at the annual rate of 0.60% on the first $500 million, and 0.55% on
the assets over $500 million.
The Investment Sub-advisory Agreements may be continued with respect to
any of the Funds if approved, after the initial two year term, at least annually
by the vote of the Series Company's Board of Trustees who are not parties to the
Investment Sub-advisory Agreements or interested persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval
and by a vote of a majority of the Series Company's Board of Trustees or a
majority of the relevant Fund's outstanding voting securities.
Subject to the Exemption, the Investment Sub-advisory Agreements may be
terminated at any time by VALIC, the relevant Sub-adviser, the Series Company's
Board of Trustees, or by vote of a majority of the outstanding voting securities
of the relevant Sub-advised Fund, on not more than 60 days' nor less than 30
days' written notice to the other entities, or upon such shorter notice as may
be mutually agreed upon. Such termination shall be without the payment of any
penalty.
The Investment Sub-advisory Agreements provide that the Sub-advisers shall
not be liable to VALIC, the Series Company or to any shareholder of the Series
Company for any act or omission in rendering services under the Investment
Sub-advisory Agreements or for any losses sustained in the purchase, holding or
sale of any portfolio security, so long as there has been no willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties on the part of the Sub-advisers.
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OTHER SERVICE PROVIDERS
National Financial Data Services, Inc., 330 West 9th Street, Kansas City,
Missouri 64105, is the "Transfer Agent") for the Funds. The Transfer Agent
receives a fee from each Fund for services provided. For the fiscal period
ending October 31, 1999, the Funds paid transfer agent fees of:
<TABLE>
<CAPTION>
TRANSFER
FUND NAME AGENCY FEES
- --------- -----------
<S> <C>
Stock Index Fund 28,946
Mid Cap Index Fund 17,009
Small Cap Index Fund 15,744
International Growth Fund 15,736
Large Cap Growth Fund 23,366
Mid Cap Growth Fund 22.972
Small Cap Growth Fund 19,233
International Value Fund 17,843
Large Cap Value Fund 19,156
Mid Cap Value Fund 18,640
Small Cap Value Fund 14,755
Socially Responsible Fund 17,278
Balanced Fund 19,973
High Yield Bond Fund 161,837
Strategic Bond Fund 14,255
Domestic Bond Fund 20,582
Core Bond Fund 850,770
Municipal Bond Fund 16,399
Money Market Fund 34,592
Municipal Money Market Fund 14,865
Growth Lifestyle Fund -0-
Moderate Growth Lifestyle Fund -0-
Conservative Growth Lifestyle Fund -0-
</TABLE>
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The Series Company has entered into an Accounting Services Agreement with
VALIC which appointed VALIC as accounting services agent. Under the Agreement,
VALIC provides accounting services and administrative services to each Fund. For
the fiscal year ended October 31, 1999, the Funds paid VALIC the following fees
for these services:
<TABLE>
<CAPTION>
ACCOUNTING ADMINISTRATIVE
FUND NAME SERVICES SERVICE FEE
- --------- ---------- --------------
<S> <C> <C>
Stock Index Fund 3,323 -0-
Mid Cap Index Fund 1,878 -0-
Small Cap Index Fund 1,725 -0-
International Growth Fund 1,746 3,275
Large Cap Growth Fund 2,703 4,169
Mid Cap Growth Fund 2,513 8,118
Small Cap Growth Fund 2,222 4,305
International Value Fund 2,013 3,702
Large Cap Value Fund 2,130 3,481
Mid Cap Value Fund 2,066 3,579
Small Cap Value Fund 1,614 3,025
Socially Responsible Fund 1,915 4,044
Balanced Fund 2,245 3,594
High Yield Bond Fund 18,307 213
Strategic Bond Fund 1,565 3,141
Domestic Bond Fund 2,300 4,857
Core Bond Fund 97,007 214
Municipal Bond Fund 1,811 -0-
Money Market Fund 3,958 4,271
Municipal Money Market Fund 1,645 -0-
Growth Lifestyle Fund -0- -0-
Moderate Growth Lifestyle Fund -0- -0-
Conservative Growth Lifestyle Fund -0- -0-
</TABLE>
The Series Company has entered into an Administrative Services Agreement
with VALIC Retirement Services Company ("VRSCO") and VALIC Investment Services
Company ("VISCO") for the provision of recordkeeping and shareholder services to
retirement and employee benefit plans purchasing Class I shares. Under the terms
of the Service Agreement, the Series pays either VRSCO or VISCO a fee on Class I
Shares equal to 0.25% of average net assets of each Fund's Class I shares,
except for the Lifestyle Funds. For the fiscal year ended October 31, 1999, the
Funds paid $53,988 to VRSCO and VISCO for these services.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As investment adviser to the Series Company, VALIC has responsibility for
placing (and deciding when to place) orders for the purchase and sale of
investments for the portfolio of each Fund, selecting brokers or dealers to
handle these transactions, and negotiating commissions on these transactions.
VALIC utilizes the assistance of Sub-advisers in selecting brokers or dealers to
handle transactions for the Sub-advised Funds. The Sub-advisers may employ
affiliated brokers for portfolio transactions under circumstances described in
the Prospectus under the heading "Welcome to American General Corporation."
Virtually all of the over-the-counter transactions by the actively managed
portion of the Small Cap Value Fund, High Yield Bond Fund, Strategic Bond Fund,
Domestic Bond Fund, Municipal Bond Fund and Mid Cap Growth Fund are principal
transactions with issuers and dealers at net prices which entail no brokerage
commissions. The International Value Fund, Mid Cap Value Fund and Socially
Responsible Fund each purchase and sell most of their portfolio securities on a
national securities exchange on an agency basis. The International Growth Fund,
Balanced Fund, Mid Cap Growth Fund, Small Cap Value Fund, and Large Cap Value
Fund engage in over-the-counter transactions with principals and transactions
with national securities
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exchanges on an agency basis. The Series Company normally enters into principal
transactions directly with the issuer or the market-maker.
When the Series Company purchases or sells securities or financial futures
contracts on an exchange, it pays a commission to any FCM or broker executing
the transaction. When the Series Company purchases securities from the issuer,
an underwriter usually receives a commission or "concession" paid by the issuer.
When the Series Company purchases securities from a market-maker, it pays no
commission, but the price includes a "spread" or "mark-up" (between the bid and
asked price) earned by the market-making dealer on the transaction.
In purchasing and selling each Fund's portfolio securities, it is the
policy of VALIC and the Sub-advisers (collectively, the "Advisers") to seek the
best execution at the most favorable price through responsible broker-dealers
and, in the case of agency transactions, at competitive commission rates. When
selecting brokers or dealers, and in negotiating prices and commissions, the
Advisers consider such factors as: the broker or dealer's reliability; the
quality of the broker or dealer's execution services on a continuing basis; the
rate of the commission; the size and difficulty of the order and the timeliness
of execution; the reliability, integrity, financial condition, general
execution, and operational capabilities of that firm and competing
broker-dealers. In over-the-counter transactions, the Advisers place orders
directly with the principal market-maker unless they believe the Series Company
can obtain a better price (or receive better execution of orders) from a broker
on an agency basis. In transactions executed on securities or commodities
exchanges, the Advisers seek the best overall price and execution at the most
favorable commission rate (except when higher brokerage commissions are paid to
obtain brokerage and research services, as explained below). When the Advisers
believe that more than one firm meets these criteria the Advisers may prefer
brokers who provide the Advisers or the Series Company with brokerage and
research services, described below.
The Advisers may cause a Fund to pay a broker-dealer a commission (for
executing a securities transaction) that is greater than the commission another
broker-dealer would have received for executing the same transaction, if the
Advisers determine in good faith that the greater commission paid to the first
broker-dealer is reasonable in relation to the value of brokerage and research
services provided to the Advisers viewed in terms of either that particular
transaction or the overall responsibilities of the Advisers.
The Advisers receive a wide range of research services from
broker-dealers, including: information on securities markets, the economy and
individual companies; statistical information; accounting and tax law
interpretations; technical market action; pricing and appraisal services; and
credit analyses. Research services are received by the Advisers primarily in the
form of written reports, telephone contacts, personal meetings with securities
analysts, corporate and industry spokespersons, and access to various
computer-generated data.
The Advisers have no agreements or understandings with broker-dealers by
which specific amounts of transactions or commissions are directed to specific
broker-dealers.
The Advisers evaluate whether such research services provide lawful and
appropriate assistance to them in the performance of their investment
decision-making responsibilities, for the Series Company. The Advisers will not
cause the Series Company to pay higher commissions without first determining, in
good faith, that the cost is reasonable considering the brokerage and research
services provided, with respect to either the particular transaction or the
Advisers' overall responsibilities with respect to accounts for which they
exercise investment discretion. The Advisers receive research services at no
cost and cannot assign any specific monetary value to them; nevertheless, the
Advisers believe these supplemental investment research services are essential
to the Advisers' ability to provide high quality portfolio management to the
Funds. Research services furnished by broker-dealers through whom a Fund effects
securities transactions may be used by the Advisers in servicing all of the
Funds, and the Advisers may not use all such services in managing the Funds.
The amount of brokerage commissions paid, the quality of execution, the
nature and quality of research services provided, and the amount of commissions
paid to firms providing research services are reviewed
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quarterly by the Series Company's Board of Trustees. For the fiscal year ended
October 31, 1999, the Funds paid aggregate brokerage commissions as follows:
<TABLE>
<CAPTION>
BROKERAGE
FUND NAME COMMISSIONS
- --------- -----------
<S> <C>
Balanced Fund 9,772
Conservative Growth Lifestyle Fund -0-
Core Bond Fund -0-
Domestic Bond Fund -0-
Growth Lifestyle Fund -0-
High Yield Bond Fund -0-
International Growth Fund 51,865
International Value Fund 27,694
Large Cap Growth Fund 13,376
Large Cap Value Fund 11,942
Mid Cap Growth Fund 14,845
Mid Cap Index Fund 4,880
Mid Cap Value Fund 41,428
Moderate Growth Lifestyle Fund -0-
Money Market Fund -0-
Municipal Bond Fund -0-
Municipal Money Market Fund -0-
Small Cap Growth Fund 10,252
Small Cap Index Fund 5,721
Small Cap Value Fund 17,835
Socially Responsible Fund 4,603
Stock Index Fund 5,986
Strategic Bond Fund -0-
</TABLE>
Following are those Funds for which brokerage commissions were paid to
brokers selected on the basis of the quality of the execution together with
research services provided to VALIC or a Sub-Adviser along with the approximate
commissions paid and the related transaction totals: Mid Cap Growth Fund,
$1,135, $24,923, Small Cap Value Fund, $4,179, $8,532,812.
Occasions may arise when one or more of the Funds or other accounts that
may be considered affiliated persons of the Funds under the 1940 Act desire to
purchase or sell the same portfolio security at approximately the same time. On
those occasions when such simultaneous purchase and sale transactions are made
such transaction will be allocated in an equitable manner according to written
procedures approved by the Series Company's Board of Trustees. Specifically,
such written procedures provide that in allocating purchase and sale
transactions made on a combined basis the parties will seek to achieve the same
net unit price of securities for each Fund or other account and to allocate as
nearly as practicable, such transactions on a pro-rata basis substantially in
proportion to the amounts ordered to be purchased and sold by each Fund or other
account. In some cases, this procedure could have an adverse effect on the price
or quantity of securities available to the Funds. However, the Funds may,
alternatively, benefit from lower broker's commissions and/or correspondingly
lower costs for brokerage and research services by engaging in such combined
transactions. In the Advisers' opinion, the results of this procedure will, on
the whole, be in the best interest of each Fund.
For the fiscal year ended October 31, 1999, the Series Company did not pay
brokerage commissions to any of the Funds' affiliated brokers.
DISTRIBUTION AND SERVICE PLAN
American General Distributors, Inc. (the "Distributor") acts as the
principal underwriter of the Series Company's shares. Effective May 1, 1999,
American General Distributors, Inc. replaced VALIC Investment Services Company
("VISCO") as the Distributor. The Distributor has the exclusive right to
distribute shares of the Series Company. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Series Company is required
to take and pay for only such shares of the Series Company as
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may be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor's address is the same as that of VALIC. For
the fiscal year ended October 31, 1999, the Funds paid net commissions to the
Distributor as follows:
$4,746 for the six months ended April 30, 1999 to VISCO and $19,414 for
the period May 1, 1999 to October 31, 1999 to American General Distributors,
Inc.
The Series Company, with respect to each Fund (except for the Lifestyle
Funds), has adopted a Distribution and Service Plan for Class A shares and Class
B shares (the "Plan"). The Plan provides that the Fund may spend a portion of
the Fund's average daily net assets attributable to each class of shares in
connection with the provision of ongoing distribution and shareholders services.
The Plan shall continue in force, after the initial two year period, from year
to year, provided that such continuance is approved at least annually (a)(i) by
the Board of Trustees of the Series Company, or (ii) by vote of a majority of
the Series Company's outstanding voting securities (as defined in the 1940 Act)
and (b) by the affirmative vote of a majority of the Series Company's Trustees
who are not interested persons of the Series Company, as defined in the 1940
Act, by votes cast in person at a meeting called for such purpose. The Plan may
be terminated at any time, without penalty, by a vote of the Board of Trustees
of the Series Company or by a vote of a majority of the outstanding voting
securities of the Series Company, or by the Distributor, on sixty days' written
notice to the other party. The Plan also automatically terminates in the event
of an assignment.
Under the Plan, the Distributor must submit quarterly reports to the Board
of Trustees of the Series Company, setting forth separately by Fund and class of
shares all amounts paid under the Plan and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. Pursuant to the Plan, the
Distributor pays promotional and advertising expenses and the cost of printing
prospectuses used to offer and sell shares of the Series Company (after
typesetting and printing the copies required for regulatory filings by the
Series Company). Promotional and advertising expenses include any expense
related to distribution of shares of the Funds or attributable to any activity
primarily intended to result in the sale of shares, including, for example, the
preparation, printing, and distribution of advertising and sales literature
(including reports to shareholders used as sales literature). The Series Company
pays all expenses related to the registration of Fund shares under federal and
state laws, including registration and filing fees, the cost of preparing the
prospectus for such purpose, and related expenses of outside legal and auditing
firms. During the fiscal year ended October 31, 1999, the Funds paid the
following fees for distribution and servicing:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
-----------------
FUND NAME CLASS A CLASS B
- --------- ------- -------
<S> <C> <C>
Stock Index Fund 9,224 65,092
Mid Cap Index Fund 7,078 32,282
Small Cap Index Fund 6,790 28,565
International Growth Fund 3,401 16,888
Large Cap Growth Fund 4,860 34,739
Mid Cap Growth Fund 3,680 21,310
Small Cap Growth Fund 4,060 22,970
International Value Fund 3,709 18,850
Large Cap Value Fund 4,037 24,584
Mid Cap Value Fund 3,825 22,257
Small Cap Value Fund 3,172 15,450
Socially Responsible Fund 3,693 18,075
Balanced Fund 3,924 29,389
High Yield Bond Fund 231 3,087
Strategic Bond Fund 3,142 14,194
Domestic Bond Fund 3,783 26,519
Core Bond Fund 297 1,749
Municipal Bond Fund 6,741 33,044
Money Market Fund 7,535 34,961
Municipal Money Market Fund 6,983 26,326
</TABLE>
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DETERMINATION OF NET ASSET VALUE
Equity investments (including common stocks, preferred stocks, convertible
securities, and warrants) and call options written on all portfolio investments
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
and call options written on portfolio securities are valued at the last sale
price on the NASDAQ (National Association of Securities Dealers Automated
Quotations) National Market System. In the absence of any National Market System
sales on that day, equity securities are valued at the last reported bid price
and call options written on all portfolio securities for which other
over-the-counter market quotations are readily available are valued at the last
reported asked price.
U.S. Treasury securities and other obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, are valued at representative
quoted prices. Such quotations generally are obtained from government securities
pricing services; however, in circumstances where it is deemed appropriate to do
so, quotations may be obtained from dealers in government securities.
The Board of Trustees also has authorized the Funds to value certain fixed
income securities by reference to valuations obtained from pricing services
which take into account appropriate factors such as institution-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data in determining valuations
of such securities, without extensive reliance upon quoted prices, since such
valuations are believed by the Board of Trustees to more accurately reflect the
fair value of such securities.
Publicly-traded corporate bonds are valued at prices obtained from pricing
services, such as Merrill Lynch or Interactive Data Services, or other
representative services.
Short-term fixed income securities for which market quotations are readily
available are valued at the last reported bid price, except for those with a
remaining maturity of 60 days or less which are valued by the amortized cost
method (unless, due to special circumstances, the use of such a method with
respect to any security would result in a valuation which does not approximate
fair market value).
Convertible bonds are valued at prices obtained from one or more of the
major dealers in such bonds. Where there is a discrepancy between dealers or
when no quotes are readily available, values may be adjusted based on a
combination of yields and premium spreads to the underlying common stock.
Portfolio securities that are primarily traded on foreign securities
exchanges are generally valued at the last sale price on the exchange where such
security is primarily traded. All foreign securities traded on the
over-the-counter market are valued at the last sale quote, if market quotations
are available, or the last closing bid price, if there is no active trading in a
particular security for a given day. Where market quotations are not readily
available for such foreign over-the-counter securities, then such securities
will be valued in good faith by a method that the Series Company's Board of
Trustees, or its delegates, believes accurately reflects fair value. Quotations
of foreign securities in foreign currencies are converted, at current exchange
rates, to their U.S. dollar equivalents in order to determine their current
value. In addition, because of the need to value foreign securities (other than
ADRs) as of the close of trading on various exchanges and over-the-counter
markets throughout the world, the calculation of the net asset value of Funds
investing in such foreign securities may not take place contemporaneously with
the valuation of such foreign securities in those Funds' portfolios.
Options purchased by the Funds (including options on financial futures
contracts, stock indices, foreign currencies, and securities) listed on national
securities exchanges are valued on the exchange where such security is primarily
traded.
Over-the-counter options purchased or sold by the Funds are valued based
upon prices provided by market-makers in such securities or dealers in such
currencies.
Exchange-traded financial futures contracts (including interest rate
futures contracts, stock index futures contracts, and currency futures
contracts) are valued at the settlement price for such contracts established
each day by the board of trade or exchange on which such contracts are traded.
Unlisted financial futures contracts are valued based upon prices provided by
market-makers in such financial futures contracts.
All of the assets of the Municipal Money Market Fund and the Money Market
Fund are valued on the basis of amortized cost. Under the amortized cost method
of valuation, securities are valued at a price on a given date, and thereafter a
constant accretion of any discount or amortization of any premium to maturity is
assumed, regardless of the impact of fluctuating interest rates on the market
value of the security. While this
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method provides certainty in valuation it may result in periods in which value
as determined by amortized cost is higher or lower than the price a Fund would
receive if it sold the security. During such periods, the yield to investors may
differ somewhat from that obtained by a similar fund or portfolio which uses
available market quotations to value all of its portfolio securities. The Series
Company's Board of Trustees has established procedures reasonably designed,
taking into account current market conditions and Municipal Money Market Fund's
and Money Market Fund's investment objective, to stabilize the net asset value
per share for purposes of sales and redemptions at $1.00. These procedures
include review by the Board, at such intervals as it deems appropriate, to
determine the extent, if any, to which the net asset value per share calculated
by using available market quotations deviates from $1.00 per share. In the event
such deviation should exceed one half of one percent, the Board will promptly
consider initiating corrective action. If the Board believes that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include: selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; or utilizing a net asset value per share
determined from available market quotations. Even if these steps were taken, the
Municipal Money Market Fund's and Money Market Fund's net asset value might
still decline.
PURCHASING AND SELLING FUND SHARES
PURCHASE OF SHARES
Please see the Prospectus for a complete discussion of how to buy shares.
Shares of the Funds are sold in a continuous offering and may be purchased on
any business day through the Transfer Agent or your registered representative.
SELLING FUND SHARES
(APPLICABLE TO ALL CLASSES OF SHARES)
Please see the Prospectus for a complete discussion of how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
(APPLICABLE TO CLASS A SHARES)
For investments of $1,000,000 or more of Class A Shares of a Fund
("Qualified Purchaser"), the initial sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of 1.00% is imposed on
redemptions made within the first year of the purchase and 0.50% within the
second year. If a CDSC -- Class A is imposed upon redemption, the amount of the
CDSC -- Class A will be equal to the lesser of 1.00% or 0.50%, respectively, of
the net asset value of the shares at the time of purchase or 1.00% or 0.50%,
respectively, of the net asset value of the shares at the time of redemption.
The CDSC -- Class A will be imposed only if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one or two year period prior to the redemption. No CDSC
- -- Class A will be imposed on exchanges between Funds. For purposes of the CDSC
- -- Class A, when shares of one Fund are exchanged for shares of another Fund,
the purchase date for the shares of the Fund exchanged into will be assumed to
be the date on which shares were purchased in the Fund from which the exchange
was made. If the exchanged shares themselves are acquired through an exchange,
the purchase date is assumed to carry over from the date of the original
election to purchase shares subject to a CDSC -- Class A rather than pay an
initial sales charge. In determining whether a CDSC -- Class A is payable, it is
assumed that shares held the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an account of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of a Fund described in the Prospectus.
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EXCHANGE PRIVILEGE
By use of the exchange privilege, as discussed in the Prospectus, the
investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself to
be the investor or the agent of the investor and believed by the Transfer Agent
to be genuine. The Series Company, the Distributor and the Transfer Agent employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither the Series Company, the Distributor nor the Transfer Agent will be
liable for following telephone instructions which it reasonably believes to be
genuine. The Series Company, the Distributor and the Transfer Agent may be
liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Series Company. This summary does
not address special tax rules applicable to certain classes of investors, such
as tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Statement of Additional Information, which are subject to change.
GENERAL
Each Fund is a separate taxable entity. Each Fund has elected to be
treated and intends to qualify for each taxable year as a regulated investment
company under Subchapter M of the Code.
If a Fund does not qualify as a regulated investment company, it will be
taxable on all of its investment company taxable income and net capital gain at
corporate rates, and its distributions to shareholders will be taxable as
ordinary dividends to the extent of its current and accumulated earnings and
profits.
FOREIGN TAX ON INCOME
If a Fund invests in foreign securities, the earnings may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. If, as may occur for some Funds,
more than 50% of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the Fund
would be required to (i) include in ordinary gross income (in addition to
taxable dividends actually received) their pro rata shares of foreign income
taxes paid by the Fund that are treated as income taxes under U.S. tax
regulations (which excludes, for example, stamp taxes, securities transaction
taxes, and similar taxes) even though not actually received by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them.
If a Fund makes this election, its respective shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of foreign taxes paid by a Fund,
although such shareholders will be required to include their shares of such
taxes in gross income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by a Fund, the amount of
the credit that may be claimed in any year may not exceed the same proportion of
the U.S. tax against which such credit is taken which the shareholder's taxable
income from foreign sources (but not in excess of the shareholder's entire
taxable income) bears to his entire taxable income.
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For this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by a Fund will generally not be treated as income from
foreign sources. This foreign tax credit limitation may also be applied
separately to certain specific categories of foreign-source income and the
related foreign taxes. As a result of these rules, which have different effects
depending upon each shareholder's particular tax situation, certain shareholders
of a Fund which has made this election may not be able to claim a credit for the
full amount of their proportionate share of the foreign taxes paid by such Fund
even if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that a Fund files the election described above, its shareholders
will be notified of the amount of (i) each Shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.
TAX EXEMPT INFORMATION
The Municipal Bond Fund and the Municipal Money Market Fund intend to
qualify to pay "exempt-interest dividends," as that term is defined in the Code.
Because the Municipal Bond Fund and the Municipal Money Market Fund will
primarily invest in municipal obligations, dividends from these Funds will
generally be exempt from regular federal income tax. Further, gain from a sale
or redemption of shares of the Municipal Bond Fund and the Municipal Money
Market Fund will be taxable to shareholders as capital gain even though the
increase in value of such shares is attributable to tax-exempt income. Thus, it
will normally be advantageous for the Municipal Bond Fund and the Municipal
Money Market Fund to declare exempt-interest dividends frequently.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued for private entities (but
not to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax preference in determining the amount of
a taxpayer's alternative minimum taxable income. To the extent that the
Portfolio receives income from municipal obligations treated as a tax preference
item for purposes of the alternative minimum tax, a portion of the dividends
paid by it, although otherwise exempt from federal income tax, will be taxable
to shareholders to the extent that their tax liability will be determined under
the alternative minimum tax. The Funds will supply shareholders with an annual
report indicating the percentage of portfolio income attributable to municipal
obligations subject to the alternative minimum tax. Additionally, taxpayers must
disclose to the Internal Revenue Service on their tax returns the entire amount
of tax-exempt interest (including exempt-interest dividends on shares of the
Portfolio) received or accrued during the year.
In addition, for corporations, the alternative minimum taxable income may
be increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings," referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Portfolio, is included in calculating ACE. Taxpayers that may be subject to
the alternative minimum tax should consult their tax advisers before investing
in these Funds.
Shares of these Funds would not be a suitable investment for tax-exempt
institutions and may not be a suitable investment for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts,
because such plans and accounts are generally tax-exempt and, therefore, would
not gain any additional benefit from the receipt of exempt-interest dividends
from the Portfolio. Moreover, subsequent distributions of such dividends to the
beneficiaries will be taxable.
In addition, the receipt of exempt-interest dividends from each of the
Funds affects the federal tax liability of certain foreign corporations, S
corporations and insurance companies. The Code may also require shareholders
that receive exempt-interest dividends to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments.
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TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will be
taxable as ordinary income. Capital gain dividends (i.e., dividends from net
capital gain) if designated as such in a written notice to shareholders, will be
taxed to shareholders as long-term capital gain regardless of how long shares
have been held by shareholders, but are not eligible for the dividends-received
deduction for corporations. Distributions, if any, that are in excess of a
Fund's current and accumulated earnings and profits will first reduce a
shareholder's tax basis in his shares and, after such basis is reduced to zero,
will generally constitute capital gains to a shareholder who holds his shares as
capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Distributions from such plans, or from
annuity contracts which may invest in these shares, are generally tax reported
to the participant as ordinary income taxable at the participant's marginal tax
rate for the year of the distribution to the participant, rather than as capital
gains or losses for the year of the sale or other disposition.
TAXPAYER IDENTIFICATION NUMBER CERTIFICATION REQUIRED
Each Fund may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including capital gain dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to be the Fund is incorrect, or if (when required to do so) the payee
fails to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholders' U.S. federal income tax liability.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
NON-U.S. SHAREHOLDERS
The discussion above relates solely to U.S. federal income tax law as it
applies to "U.S. persons" subject to tax under such law. Shareholders who, as to
the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case, the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. federal income or withholding tax unless
the distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax
on deemed income resulting from
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any election by a Fund to treat qualified foreign taxes it pays as passed
through to shareholders (as described above), but they may not be able to claim
a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholders
trade or business in the U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. for 183
days or more during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
reportable dividends and the redemption proceeds. Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and
non-U.S. tax consequences of ownership of shares of and receipt of distributions
from the Funds.
STATE AND LOCAL
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
TRUSTEES AND OFFICERS
The trustees, in addition to their functions set forth under "Investment
Adviser," review such actions and decide on general policy. The officers conduct
and supervise the daily business operations of the Series Company. All officers
are affiliates of VALIC and are located at 2929 Allen Parkway, Houston, Texas
77019, unless otherwise noted.
The Series Company has an Audit Committee. The Series Company's Audit
Committee consists of Messrs. Lancaster, Hackerman, Love, Maupin and Paulsen.
The Audit Committee recommends to the Board the selection of independent
auditors for the Series Company and reviews with such independent auditors the
scope and results of the annual audit, reviews the performance of the accounts,
and considers any comments of the independent auditors regarding the Series
Company's financial statements or books of account. The Series Company does not
have a standing nominating or compensation committee.
The trustees and officers of the Series Company and members of their
families, as a group, beneficially owned less than 1% of the shares of
beneficial interest of each Fund outstanding.
<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Executive Vice President and Executive Vice President and Chief Financial Officer, VALIC
Trustee and AGAIC (1999-Present), Executive Vice President and Chief
Kent E. Barrett* Financial Officer, American General Life & Accident
2929 Allen Parkway Insurance Company ("AGLA") (1998-1999), Senior Vice
Houston, Texas 77019 President -- Finance and Treasurer, AGLA (1997-1998), Senior
Date of Birth: 09/20/56 Vice President, Controller and Treasurer, AGLA (1994-1997).
Trustee Retired Administrator; Formerly President, United Way of the
Dr. Judith L. Craven Texas Gulf Coast (1992-1998); Director, Houston Branch,
3212 Ewing St. Federal Reserve Bank of Dallas (1992-Present), Compaq
Houston, Texas 77004 Computer Corporation (1998-Present), Luby's Inc.
Date of Birth: 10/06/45 (1998-Present), A.H. Belo Corporation (journalism, TV and
radio) (1993-Present), and Sysco Corporation (marketing and
distribution of food) (1996-Present); Formerly, Board
Member, Sisters of Charity of the Incarnate Word
(1996-1999).
</TABLE>
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<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Trustee Professor and Head, Department of Neuroscience and Visscher
Dr. Timothy J. Ebner Chair of Physiology (1998-Present), Director, Graduate
17994 N.W. Union Blvd. Program in Neuroscience, University of Minnesota
Elk River, Minnesota 55330 (1991-1999). Formerly, Consultant to EMPI, Inc. (1994-1995)
Date of Birth: 07/15/49 and Medtronic Inc. (1997-1998) (manufacturers of medical
products).
Trustee Municipal Court Judge, Dallas, Texas (1995-Present);
Judge Gustavo E. Gonzales, Jr. Director, Downtown Dallas YMCA Board (1996-Present);
8320 Coolgreen Dr. Director, Dallas Easter Seals Society (1997-Present).
Dallas, Texas 75228 Formerly, private attorney (litigation) (1980-1995).
Date of Birth: 07/27/40
Trustee Chairman -- Scientific Advisory Board for The Robert A.
Dr. Norman Hackerman Welch Foundation (1983-Present); Director, Electrosource,
2001 Pecos Street Inc. (develops, manufactures and markets energy storage
Austin, Texas 78703 products); President Emeritus, Rice University, Houston,
Date of Birth: 03/02/12 Texas.
Chairman of the Board and President of American General Fund Group (1999-Present);
President Formerly, Executive Vice President, American General
Alice T. Kane* Investment Management, L.P. (1998-1999); Formerly, Executive
125 Maiden Lane Vice President, (1994-1998) and General Counsel (1986-1995)
New York, New York 10038 New York Life Insurance Company; Chair, MainStay Mutual
Date of Birth: 01/16/48 Funds (1994-1998). President of other investment companies
advised by VALIC.
Trustee Pastor Emeritus and Director of Planned Giving, First
Dr. John Wm. Lancaster Presbyterian Church, Houston Texas (1996-Present); Formerly,
4624 Braeburn Pastor, First Presbyterian Church, Houston, Texas.
Bellaire, Texas 77401
Date of Birth: 12/15/23
Trustee Retired. Formerly, Director, Mid-American (waste products)
Ben H. Love (1993- 1997); Formerly, Chief Executive, Boy Scouts of
4407 Eaton Circle America. (1985-1993).
Colleyville, Texas 76034
Date of Birth: 09/26/30
Trustee President, Meharry Medical College, Nashville, Tennessee
Dr. John E. Maupin, Jr. (1994- Present); Nashville Advisory Board Member, First
Meharry Medical College American National Bank (1996-Present); Director, Monarch
1005 D.B. Todd Blvd. Dental Corporation (1997- Present), LifePoint Hospitals,
Nashville, Tennessee 37208 Inc. (1998-Present).
Date of Birth: 10/28/46
Trustee Dean and Professor Emeritus, University of Arizona, Tucson,
Dr. F. Robert Paulsen Arizona. Formerly, Dean and Professor, University of
2801 N. Indian Ruins Connecticut, Storrs, Connecticut and Carnegie Fellow,
Tucson, Arizona 85715 University of Michigan, Ann Arbor, Michigan.
Date of Birth: 07/05/22
Vice President Associate General Counsel and Assistant Secretary, American
Pauletta P. Cohn General Life Companies (1998-Present), Senior Attorney,
Date of Birth: 06/06/48 American General (1993-1998).
</TABLE>
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<TABLE>
<CAPTION>
NAME AND POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- ------------------------------------------------------------
<S> <C>
Vice President and Assistant Associate General Counsel, VALIC (1997-Present). Formerly,
Secretary Of Counsel, Winstead Sechrest and Minick P.C. (1997); Vice
Nori L. Gabert President and Associate General Counsel of Van Kampen
Date of Birth: 08/15/53 American Capital, Inc. (1981- 1996).
Assistant Vice President Cynthia A. Senior Compliance Analyst, VALIC (1995-Present).
Gibbons
Date of Birth: 12/06/67
Assistant Treasurer Vice President, Fund Accounting, AGIM (1999-Present).
Gregory R. Kingston Formerly, Assistant Treasurer First Investor Management
Date of Birth: 01/18/66 Company (1994-1999).
Vice President and Investment Trader -- VALIC (1991-Present).
Officer
Teresa S. Moro
Date of Birth: 08/14/60
Controller Associate Director of Fund Accounting, AGIM (1996-Present).
Kathryn A. Pearce Formerly, Supervisor, Mutual Fund Accounting, Van Kampen
Date of Birth: 02/05/47 American Capital, Inc. (1977-1996).
Assistant Treasurer Director -- Variable Product Accounting and Financial
Jaime M. Sepulveda Reporting, AGIM (1998-Present). Formerly, Accounting
Date of Birth: 01/09/52 Manager, Metro Networks, Inc. (1997-1998); Controller and
Investment Officer, Port of Houston Authority (1994-1997).
Treasurer Vice President -- Variable Product Accounting, AGIM
Gregory R. Seward (1998-Present); Assistant Controller, AGAIC (1998-Present)
Date of Birth: 06/27/56 and VALIC (1991-1998).
Vice President and Investment Portfolio Manager, VALIC (1987-Present).
Officer
William Trimbur, Jr.
Date of Birth: 06/15/51
Senior Investment Officer Executive Vice President, Trading and Portfolio Management,
Peter V. Tuters AGIM (1998-Present); Vice President and Investment Officer
Date of Birth: 04/18/52 (1998-Present), Vice President and Chief Investment Officer
(1993-1998), VALIC and AGAICX (1998-Present). Formerly,
Director, VALIC, Senior Vice President and Chief Investment
Officer, American General Corporation (1993-1998).
Assistant Controller Associate Director, Mutual Fund Accounting, AGIM
Heriberto Valdez (1999-Present); Manager, Mutual Fund Accounting (1998-1999);
Date of Birth: 04/25/57 Manager, Variable Product Accounting (1997-1998); Staff
Accountant, Variable Products Division, VALIC (1989-1997).
Formerly, self-employed consultant (1998).
</TABLE>
* Interested trustees of the Series Company as defined in the 1940 Act.
The trustees of the Series Company who are not affiliated with VALIC are
each paid annual trustees' fees and are reimbursed for certain out-of-pocket
expenses by the Series Company. Trustees who are not interested persons of the
Series Company receive an annual retainer of $6,200. In addition, such trustees
are paid per board meeting, committee meeting and telephone meeting, a fee of
$1,000, $250 and $250, respectively, plus expenses, if any. Each of the trustees
is a director or trustee of American General Series Portfolio Company ("AGSPC"),
AGSPC 3, and USLife Income Fund, Inc., investment companies for which VALIC
serves as investment adviser.
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The following table sets forth information regarding the estimated
compensation and benefits earned by the disinterested Trustees for the fiscal
year ending October 31, 1999.
COMPENSATION TABLE
FISCAL YEAR ENDING OCTOBER 31, 1999
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM FUND COMPLEX
SERIES COMPANY PAID TO DIRECTORS
----------------- ------------------
<S> <C> <C>
Dr. Judith L. Craven 6,585 33,500
Dr. Timothy J. Ebner 6,548 33,000
Hon. Gustavo E. Gonzales, Jr. 6,585 33,750
Dr. Norman Hackerman 6,585 34,250
Dr. John W. Lancaster 6,548 34,000
Mr. Ben L. Love 6,622 34,250
Dr. John E. Maupin, Jr. 6,500 33,000
Dr. F. Robert Paulsen 6,548 34,000
Dr. R. Miller Upton 6,126 33,579
</TABLE>
* Dollar amounts are cash basis
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
[Control Persons and 5% Holders -- Table to come]
MARKETING INFORMATION
The Funds and/or affiliates may prepare advertising or sales literature
that provides information concerning various financial or market indices, the
economy, investment climate, investment strategies, political and social
conditions, or other relevant information. The Funds may discuss factors and
allocation strategies, designed to help the shareholders to determine whether
Funds are compatible with their investment goals. The Funds may list portfolio
holdings, or give examples of portfolio holdings.
VALIC, and its affiliates (collectively, referred to as the "Company"),
have targeted organizations in specific market sectors as the central focus of
their marketing efforts for the Series Company Funds. The Company has utilized
as its general marketing theme the concept that the Company is "America's
Retirement Plan Specialists." The Series Company Funds may be referred to as the
American General Fund Group or the AG Funds.
The Company may refer to its package of retirement plan services.
Collectively, this package of services may be referred to as easy Retirement
Plan. Easy Retirement Planning includes: (1) personal, face-to-face service from
highly trained Company Retirement Planning Specialists; (2) informative
retirement-investment education programs, seminars and materials; (3)
specialized computer-aided services for retirement planning and developing asset
allocation strategies; (4) a wide selection of innovative, market-responsive
investment options; (5) advanced and efficient administration of retirement
accounts; and (6) a financially strong and stable Company with which to do
business.
The Company may refer to the diversifying process of asset allocation
based on the Modern Portfolio Theory developed by Nobel Prize-winning economist
Harry Markowitz. The basic assumptions of Modern Portfolio Theory are that the
selection of individual investments has little impact on portfolio performance,
market timing strategies seldom work, markets are efficient and selecting the
suitable mix of asset classes is more important when creating a long-term
investment portfolio. Modern Portfolio Theory allows an investor to determine an
"efficient" or "optimized" portfolio that has historically provided a higher
return with the same risk or the same return with lower risk.
When presenting the asset allocation process, the Company may outline the
process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. The Company may quote various industry experts on which types of
investments are best suited
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<PAGE> 327
to each risk category. The Company may also provide a historical overview of the
performance of a variety of investment market indexes and different asset
categories, such as stocks, bonds, cash equivalents, etc. The Company may
discuss investment volatility (standard deviation) including the range of
returns for different asset categories and classes over different time horizons,
and the correlation between the returns of different asset categories and
classes. The Company may discuss the basis of portfolio optimization and may
describe various investment strategies and methods of implementation.
The Company, in its marketing efforts to each of the market segments, may
design sales literature and material specifically for that market segment, e.g.,
the healthcare segment. This sales literature and material may also be specific
to a certain group. For example, sales literature and material may be designed
for a specific hospital.
The Company may refer to certain milestones which are intended to
emphasize the Company's growth and development in assets, groups and various
market segments. Additionally the Company may refer to marketing strategies it
utilizes to promote the Company's business objectives. Further, the Company may
refer from time to time in advertisements or sales materials to certain
value-added services it provides to its investors.
The Company may refer in its advertisements to Schwab Personal Choice
Retirement Accounts ("PCRA"). The PCRA is a self-directed brokerage account that
may be used by investors to directly invest in publicly available mutual funds.
PCRA is marketed through the VALIC Investment Services Company.
ENDORSEMENTS AND PUBLISHED RATINGS
From time to time, in advertisements or in reports to shareholders, the
Company or the Series Company may refer to its endorsements. Endorsements are
often in the form of a list of organizations, individuals or other parties which
recommend the Company or the Series Company. The endorser's name will be used
only with the endorser's consent.
The Company or the Series Company may refer to publishers of statistical
data, such as Lipper Analytical Services Incorporated ("Lipper"), Morningstar,
Inc. ("Morningstar") and CDA/Wiesenberger Investment Companies
(CDA/Wiesenberger). Additionally, the Company may compare the performance of the
Series Company Funds to categories published by Lipper and Morningstar.
Finally, the Company will utilize as a comparative measure for the
performance of the Series Company Funds the Consumer Price Index ("CPI"). The
CPI is a measure of change in consumer prices, as determined in a monthly survey
of the U.S. Bureau of Labor Statistics. Housing costs, transportation, food,
electricity, changes in taxes and labor costs are among the CPI components. The
CPI provides a tool for determining the impact of inflation on an individual's
purchasing power.
OTHER INFORMATION
SHAREHOLDER REPORTS
Annual Reports containing audited financial statements of the Series
Company and Semiannual Reports containing unaudited financial statements, as
well as proxy materials, are sent to investors.
VOTING AND OTHER RIGHTS
The Series Company was organized under the laws of the state of Delaware
as a business trust, and presently is authorized to sell 24 series. Each of
these series is authorized to issue an unlimited number of shares of beneficial
interest, par value $0.01 per share, divided into classes. The expenses of each
class differ; therefore, dividend payments and net asset value will differ as
well.
CUSTODY OF ASSETS
Pursuant to a Custodian Contract with the Series Company, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, holds
the cash and portfolio securities of the Series Company as custodian.
76
<PAGE> 328
The Custodian is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, receiving and collecting income from investments, making all
payments covering expenses of the Series Company, and performing other
administrative duties, all as directed by persons authorized by the Series
Company. The Custodian does not exercise any supervisory function in such
matters as the purchase and sale of portfolio securities, payment of dividends,
or payment of expenses of the Funds or the Series Company. Portfolio securities
of the Funds purchased domestically are maintained in the custody of the
Custodian and may be entered into the book entry systems of securities
depositories approved by the Board of Trustees. Pursuant to the Custodian
Contract, portfolio securities purchased outside the United States will be
maintained in the custody of various foreign branches of the Custodian and such
other custodians, including foreign banks and foreign securities depositories,
as are approved by the Board of Trustees, in accordance with regulations under
the 1940 Act.
The Custodian holds securities of the Funds on which call options have
been written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the FCMs through which
such transactions are effected. The Funds may also be required to post margin
deposits with respect to covered call and put options written on stock indices
and for this purpose certain assets of those Funds may be held by the custodian
pursuant to similar arrangements with the brokers involved.
This arrangement regarding margin deposits essentially consists of the
Custodian creating a separate segregated account into which it transfers (upon
the Series Company's instructions) assets from a Fund's general (regular)
custodial account. The custody agreement for such arrangement provides that FCMs
or brokers will have access to the funds in the segregated accounts when and if
the FCMs or brokers represent that the Series Company has defaulted on its
obligation to the FCMs or brokers and that the FCMs or brokers have met all the
conditions precedent to their right to receive such funds under the agreement
between the Series Company and the FCMs or brokers. The Series Company has an
agreement with each FCM or broker which provides (1) that the assets of any Fund
held by the FCM or broker will be in the possession of State Street Bank until
released or sold or otherwise disposed of in accordance with or under the terms
of such agreement, (2) that such assets would not otherwise be pledged or
encumbered by the FCM or broker, (3) that when requested by the Series Company
the FCM or broker will cause State Street Bank to release to its general
custodial account any assets to which a Fund is entitled under the terms of such
agreement, and (4) that the assets in the segregated account shall otherwise be
used only to satisfy the Series Company's obligations to the FCM or broker under
the terms of such agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. Thereupon, such assets will be deposited in its general or
segregated account with the Custodian, as appropriate.
INDEX FUNDS
The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in
any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Fund nor any associated literature or
publications and Frank Russell Company makes no representation or warranty,
express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice,
to alter, amend, terminate or in any way change its Index(es). Frank Russell
Company has no obligation to take the needs of any particular fund or its
participants or any product or person into consideration in determining,
comprising or calculating the Index(es).
Frank Russell Company's publication of the Index(es) in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index(es)
is (are) based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY
77
<PAGE> 329
SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX(ES). FRANK RUSSELL
COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY
WARRANTY, OF ANY KIND, INCLUDING WITHOUT MEANS OR LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE
INDEX(ES) OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN.
The Stock Index Fund and the Mid Cap Index Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's Corporation ("S&P"). S&P makes
no representation or warranty, express or implied, to the Series Company or its
participants regarding the advisability of investing in securities generally or
in the Stock Index Fund or the Mid Cap Index Fund particularly or the ability of
the S&P 500 Index or the S&P Mid Cap 400 Index to track general stock market
performance. S&P has no obligation to take the need of the Series Company or its
investors into consideration in determining, composing or calculating the S&P
500 Index or S&P Mid Cap 400 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Stock Index
Fund or the Mid Cap Index Fund or the timing of the issuance or sale of such
Funds or in the determination or calculation of the equation by which such Funds
are to be converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of the Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE
NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE SERIES COMPANY
FROM THE USE OF THE S&P 500 INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR S&P MID CAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
BOND RATINGS
MOODY'S BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
78
<PAGE> 330
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
STANDARD & POOR'S RATINGS
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized. Plus (+) or minus (-): The ratings
from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
79
<PAGE> 331
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
a. 1. (a) 1. Agreement and Declaration of Trust (1)
2. Amendment to Agreement and Declaration of Trust (2)
(b) Certificate of Designation For:
(1) American General Core Bond Fund (2)
(2) American General High Yield Bond Fund (2)
(3) American General Strategic Bond Fund (2)
(4) American General Municipal Bond Fund (2)
(5) American General Municipal Money Market Fund (2)
(6) American General Science & Technology Fund
(c) Amended and Restated Certificate of Designation For:
(1) American General International Growth Fund (2)
(2) American General Large Cap Growth (2)
(3) American General Mid Cap Growth Fund (2)
(4) American General Small Cap Growth Fund (2)
(5) American General International Value Fund (2)
(6) American General Large Cap Value Fund (2)
(7) American General Mid Cap Value Fund (2)
(8) American General Small Cap Value Fund (2)
(9) American General Socially Responsible Fund (2)
(10) American General Balanced Fund (2)
(11) American General Domestic Bond Fund (2)
(12) American General Money Market Fund (2)
(13) American General Growth Lifestyle Fund (2)
(14) American General Moderate Growth Lifestyle Fund (2)
(15) American General Conservative Growth Lifestyle Fund (2)
(16) American General Stock Index Fund (2)
(17) American General Mid Cap Index Fund (2)
(18) American General Small Cap Index Fund (2)
(19) American General Municipal Bond Fund
(20) American General Municipal Money Market Fund
(d) Certificate of Termination For:
(1) American General Stock Index Fund (2)
(2) American General Mid Cap Index Fund (2)
(3) American General Small Cap Index Fund (2)
(4) American General Municipal Bond Fund
(5) American General Municipal Money Market Fund
b. 2. Amended and Restated Bylaws
c 3. Not Applicable
4. Not Applicable
d. 5. (a) Investment Advisory Agreement between the Registrant and The
Variable Annuity Life Insurance Company ("VALIC")
(b) Investment Sub-Advisory Agreements between VALIC and each Sub-Adviser
on behalf of the following Funds:
(1) American General International Growth Fund
(2) American General Large Cap Growth
(3) American General Mid Cap Growth Fund
<PAGE> 332
d. (4) American General Small Cap Growth Fund
(5) American General International Value Fund,
American General Balanced Fund and American General
Domestic Bond Fund
(6) American General Large Cap Value Fund
(7) American General Mid Cap Value Fund
(8) American General Small Cap Value Fund
(9) American General High Yield Bond Fund, American
General Strategic Bond Fund, American General Core Bond Fund,
American General Muncipal Bond Fund and American General
Municipal Money Market Fund (3)
(10) American General Stock Index Fund, American General Mid
Cap Index Fund, American General Small Cap Index Fund and American
General Small Cap Value Fund
(11) American General Science & Technology Fund
e. 6. Distribution Agreement between the Registrant and American General
Distributors, Inc.
f. 7. Not Applicable
g. 8. (a) Custodian Agreement between Registrant and State Street
Bank and Trust Company
(b) Form of Securities Lending Authorization Agreement between
Registrant and State Street Bank and Trust Company (2)
h. 9. (a) Transfer Agency and Services Agreement between Registrant and VALIC
(b) Form of Data Access Services Agreement between Registrant and State
Street Bank and Trust Company (2)
(c) Accounting Services Agreement between Registrant and VALIC
(d) Administrative Services Agreement among Registrant, VRSCO and American
General Distributors, Inc.
(e) State Filing Services Agreement and Form of Amendment to Schedule A
i. 10. Opinion of Counsel
j. 11. Consent of Ernst & Young LLP
k. 12. Not Applicable
l. 13. Subscription Agreements (2)
14. Not Applicable
m. 15. Rule 12b-1 Distribution and Service Plan
16. Not Applicable
17. Not Applicable
n. 18. Multi-Class Plan
19. Not Applicable
o. 20. Code of Ethics
p. 21. (a) Powers of Attorney for Messrs. Hackerman,
Lancaster, Paulsen and Love (1)
<PAGE> 333
(b) Powers of Attorney for Messrs. Ebner, Gonzales and
Maupin and Ms. Craven (2)
(c) Powers of Attorney for Mr. Barrett and Ms. Kane
- ----------
1 Incorporated herein by reference to Initial Registration Statement to the
Registrant's Form N-1A Registration Statement filed with the Securities and
Exchange Commission on July 13, 1998 (File No. 333-58979/811-08875, Accession
No. 0000950129-98-002983).
2 Incorporated herein by reference to Pre-Effective Amendment Number 1 to the
Registrant's Form N-1A Registration Statement filed with the Securities and
Exchange Commission on October 15, 1998 (File No. 333-58979, 811-08875,
Accession No. 0000950129-98-004291).
3 Incorporated herein by reference to the Registrant's Form N-SAR filed with
the Securities and Exchange Commission on July 14, 1999 (File No.
333-58979/811-08875, Accession Nos. 0001058413-99-000017 and
0001058413-99-000019).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the Registrant. All of
the outstanding shares of beneficial interest of Institutional Class I and
Institutional Class II of the Registrant is owned by VALIC, a Texas life
insurance corporation, and VALIC Separate Account A, a separate account of VALIC
which is registered as a unit investment trust under the Investment Company Act
of 1940 (File No. 811-3240/33-75292).
ITEM 25. INDEMNIFICATION
Incorporated herein by reference to Pre-Effective Amendment Number 1 to the
Registrant's Form N-1A Registration Statement filed with the Securities and
Exchange Commission on October 15, 1998 (File No. 333-58979/811-08875),
Accession No. 0000950129-98-004291).
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
See "About the Series Company Management" in Part A and "Investment Adviser" and
"Investment Sub-Advisers" in the Statement of Additional Information regarding
the businesses of VALIC and the Sub-advisers.
Set out below is a list of each director and officer of VALIC indicating each
other business, profession, vocation, or employment of a substantial nature in
which each such person has been, at any time during the past two fiscal years,
engaged for his or her own account or in the capacity of director, officer,
partner, or trustee. Unless otherwise specified, the principal business address
of VALIC is 2929 Allen Parkway, Houston, Texas 77019. See also the information
set out under the caption "Trustees and Officers" in Part B of this Registration
Statement, which is incorporated herein by reference to the extent applicable.
Companies, other than VALIC, identified in the list below are American General
Distributors, Inc. ("AG Distributors"), American General
<PAGE> 334
Annuity Insurance Company ("AGAIC") and American General Corporation ("AG
Corporation").
<TABLE>
<CAPTION>
NAME COMPANY TITLE
---- ------- -----
<S> <C> <C>
John A. Graf VALIC, AGAIC Chairman, Director,
President and Chief
Executive Officer
Bruce R. Abrams VALIC, AGAIC Director and Executive
Vice President - AGAIC
Kent E. Barrett VALIC, AGAIC Director, Executive Vice
President and
Chief Financial Officer
Rebecca G. Campbell VALIC, AGAIC Director and Senior Vice
President - Human Resources
Robert P. Condon VALIC, AGAIC Director and Executive
Vice President -
Institutional
Marketing
Robert M. Devlin VALIC, AGAIC Director
AG Corporation Director, Chairman and Chief
Executive Officer
Carl J. Santillo VALIC, AGAIC Director and Executive
Vice President - Operations
Mary Cavanaugh VALIC, AGAIC Executive Vice
President - General Counsel
and Secretary
Kathleen Adamson VALIC, AGAIC Senior Vice President -
Customer Service
Michael J. Akers VALIC, AGAIC Senior Vice President
and Chief Actuary
Dick Baily VALIC, AGAIC Senior Vice President -
Planning and Expense
Management
Michael A. Betts VALIC, AGAIC Senior Vice President -
Systems
Stephen G. Kellison VALIC, AGAIC Senior Vice President -
Product Management
Richard J. Lindsay VALIC, AGAIC Senior Vice President -
Marketing
Rosemary Beauvais VALIC, AGAIC Vice President -
Corporate Technology
Services
James D. Bonsall VALIC, AGAIC Vice President -
Financial Reporting
Gregory S. Broer VALIC, AGAIC Vice President -
Actuarial
Richard A. Combs VALIC, AGAIC Vice President -
Actuarial
Neil J. Davidson VALIC, AGAIC Vice President -
Actuarial
David H. denBoer VALIC, AGAIC Vice President -
Compliance
Stephen R. Duff VALIC, AGAIC Vice President -
New Account
Acquisitions
</TABLE>
<PAGE> 335
<TABLE>
<S> <C> <C>
Daniel Fritz VALIC, AGAIC Vice President -
Actuarial
Michael D. Gifford VALIC, AGAIC Vice President -
Case Development
Joseph P. Girgenti VALIC, AGAIC Vice President - Sales
Support
Sharla A. Jackson VALIC, AGAIC Vice President -
Customer Service -
Amarillo
Calvin King VALIC, AGAIC Vice President -
North Houston Customer
Care Center
Traci P. Langford VALIC, AGAIC Vice President -
Account Management
Thomas G. Norwood VALIC, AGAIC Vice President -
Broker/Dealer
Rembert R. Owen, Jr. VALIC, AGAIC Vice President and
Assistant Secretary
Stephen J. Poston VALIC, AGAIC Vice President -
Training and National
Accounts
Larry Robinson VALIC, AGAIC Vice President -
Product Development
Steven D. Rubinstein VALIC, AGAIC Vice President -
Financial Planning
and Reporting
Richard W. Scott VALIC, AGAIC Vice President and
Chief Investment
Officer
AG Corporation Executive Vice
President and Chief
Investment Officer
Gary N. See VALIC, AGAIC Vice President - Group
Actuarial
Gregory R. Seward VALIC, AGAIC Vice President -
Variable Product
Accounting
Nancy K. Shumbera VALIC Vice President -
Applications
Development
AGAIC Administrative Officer
Brenda Simmons VALIC, AGAIC Vice President -
Premium Processing
Norman A. Skinrood, Jr. VALIC, AGAIC Vice President -
Investment Products
Group
David Snyder VALIC, AGAIC Vice President -
Electronic Commerce
Paula F. Snyder VALIC, AGAIC Vice President - AGRS
Marketing Communications
Robert E. Steele VALIC, AGAIC Vice President -
Specialty Products
</TABLE>
<PAGE> 336
<TABLE>
<S> <C> <C>
Kenneth R. Story VALIC, AGAIC Vice President -
Information
Technology
Brian R. Toldan VALIC, AGAIC Vice President and
General Auditor
Michael A. Tompkins VALIC, AGAIC Vice President - PR
Acquisitions
Peter V. Tuters VALIC, AGAIC Vice President and
Investment Officer
AG Corporation Senior Vice President -
Investments
William A. Wilson VALIC, AGAIC Vice President -
Government Affairs
Jane E. Bates VALIC Chief Compliance
Officer
Roger E. Hahn VALIC, AGAIC Investment Officer
C. Scott Inglis VALIC, AGAIC Investment Officer
Craig R. Mitchell VALIC, AGAIC Investment Officer
Julia S. Tucker VALIC, AGAIC Investment Officer
AG Corporation Senior Vice President -
Investments
W. Lary Mask VALIC, AGAIC Real Estate Investment
Officer and Assistant
Secretary
D. Lynne Walters VALIC, AGAIC, Tax Officer
AG Distributors
AG Corporation Vice President - Taxes
W. Joan Farmer VALIC, AGAIC Assistant Secretary
Otto B. Gerlach, III VALIC, AGAIC Assistant Secretary
Cheryl G. Hemley VALIC, AGAIC Assistant Secretary
Christine W. McGinnis VALIC, AGAIC Assistant Secretary
Susan Miller VALIC, AGAIC Assistant Secretary
Connie E. Pritchett VALIC, AGAIC Assistant Secretary
Daniel R. Cricks VALIC, AGAIC Assistant Tax Officer
Eric Alexander VALIC, AGAIC Assistant Treasurer
Terry Festervand VALIC, AGAIC Assistant Treasurer
Paul Hoepfl VALIC, AGAIC Assistant Treasurer
Kristy L. McWilliams VALIC, AGAIC Assistant Treasurer
William H. Murray VALIC, AGAIC Assistant Treasurer
Tara S. Rock VALIC, AGAIC Assistant Treasurer
Carolyn Roller VALIC, AGAIC Assistant Treasurer
Marylyn S. Zlotnick VALIC, AGAIC Assistant Controller
Leslie K. Bates VALIC, AGAIC Administrative Officer
Mary C. Birmingham VALIC, AGAIC Administrative Officer
Donald L. Davis VALIC, AGAIC Administrative Officer
Robert A. Demchak VALIC, AGAIC Administrative Officer
Ruby K. Donelson VALIC, AGAIC Administrative Officer
Ted D. Hennis VALIC, AGAIC Administrative Officer
William L. Hinkle VALIC, AGAIC Administrative Officer
Joan M. Keller VALIC, AGAIC Administrative Officer
William R. Keller, Jr. VALIC, AGAIC Administrative Officer
Fred M. Lowery VALIC, AGAIC Administrative Officer
James F. McCulloch VALIC, AGAIC Administrative Officer
Michael E. Mead VALIC, AGAIC Administrative Officer
Kathryn T. Smith VALIC, AGAIC Administrative Officer
John M. Stanton VALIC, AGAIC Administrative Officer
James P. Steele VALIC, AGAIC Administrative Officer
</TABLE>
<PAGE> 337
ITEM 27. PRINCIPAL UNDERWRITERS
(a) American General Distributors, Inc. (the "Distributor") acts as exclusive
distributor and principal underwriter of the Registrant and as principal
underwriter for VALIC Separate Account A, American General Series Portfolio
Company and American General Series Portfolio Company 3.
(b) The following information is furnished with respect to each officer and
director of the Distributor.
<TABLE>
<CAPTION>
POSITIONS
NAME AND POSITIONS AND AND OFFICES
PRINCIPAL OFFICES WITH WITH THE
BUSINESS ADDRESS DISTRIBUTOR REGISTRANT
- ---------------- ----------- ----------
(*)
<S> <C> <C>
Robert P. Condon Chairman, Director, --
Chief Executive Officer
and President
(*)
Mary Cavanaugh Director --
(*)
Thomas G. Norwood Director, Chief Financial --
Officer and Treasurer
(*)
Jane E. Bates Vice President and Chief --
Compliance Officer
(*)
V. Keith Roberts Vice President- Operations --
(*)
D. Lynne Walters Tax Officer --
(*)
Cheryl G. Hemley Assistant Secretary --
(*)
Daniel R. Cricks Assistant Tax Officer --
(*)
James D. Bonsall Assistant Treasurer --
(*)
Steven D. Rubinstein Assistant Treasurer --
(*)
Marylyn S. Zlotnick Assistant Treasurer --
</TABLE>
- ----------
<PAGE> 338
(*) 2929 Allen Parkway, Houston, Texas 77019
(c) Not Applicable
ITEM 28. LOCATION OF BOOKS AND RECORDS
The books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules promulgated thereunder will be
in the physical possession of either:
THE DEPOSITOR:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
THE PRINCIPAL UNDERWRITER:
American General Distributors, Inc.
2929 Allen Parkway
Houston, Texas 77019
THE CUSTODIAN:
The State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTMENT SUB-ADVISERS:
American General Investment Management, L.P.
2929 Allen Parkway
Houston, Texas 77019
Brown Capital Management
1201 N. Calvert St.
Baltimore, Maryland 21201
Capital Guardian Trust Company
11100 Santa Monica Boulevard
Los Angeles, California 90025
Fiduciary Management Associates, Inc.
211 Congress Street
Boston, Massachusetts 02110
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Jacobs Asset Management, Inc.
211 Congress Street
Boston, Massachusetts 02110
<PAGE> 339
JP Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Neuberger Berman Management Inc.
605 Third Avenue
New York, New York 10158
State Street Bank and Trust Company
2 International Place
Boston, Massachusetts 02110
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
ITEM 29. MANAGEMENT SERVICES
There is no management-related service contract not discussed in Parts A or
B of this Form N-1A
ITEM 30. UNDERTAKINGS
Not Applicable
<PAGE> 340
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, American General Series Portfolio Company
2, certifies that it meets all of the requirement for effectiveness of this
registration statement under Rule 485(b) under the Securities Act and has duly
caused this registration statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Houston, and State of Texas, on the
1st day of March, 2000.
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
By: /s/ ALICE T. KANE
--------------------------
Alice T. Kane
Chairman of the Board of Trustees
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ ALICE T. KANE Chairman of March 1, 2000
- ------------------------ the Board of
Alice T. Kane. Trustees
/s/ GREGORY R. SEWARD Treasurer March 1, 2000
- ------------------------
Gregory R. Seward
* Trustee March 1, 2000
- ------------------------
Kent E. Barrett
* Trustee March 1, 2000
- ------------------------
Judith Craven
* Trustee March 1, 2000
- ------------------------
Timothy J. Ebner
* Trustee March 1, 2000
- ------------------------
Gustavo E. Gonzales, Jr.
* Trustee March 1, 2000
- ------------------------
Norman Hackerman
* Trustee March 1, 2000
- ------------------------
John Wm. Lancaster
* Trustee March 1, 2000
- ------------------------
Ben H. Love
* Trustee March 1, 2000
- ------------------------
John E. Maupin, Jr.
* Trustee March 1, 2000
- ------------------------
F. Robert Paulsen
By: /s/ David M. Leahy March 1, 2000
- ------------------------
David M. Leahy
Attorney-in-Fact
</TABLE>
<PAGE> 341
EXHIBIT INDEX
a. 1. (b) Certificate of Designation For:
(6) American General Science & Technology Fund
(c) (19) American General Municipal Bond Fund
(20) American General Municipal Money Market Fund
(d) (4) American General Municipal Bond Fund
(5) American General Municipal Money Market Fund
b. 2. Amended and Restated Bylaws
d. 5. (a) Investment Advisory Agreement between the Registrant and The
Variable Annuity Life Insurance Company ("VALIC")
(b) Investment Sub-Advisory Agreements between VALIC and each
Sub-Adviser on behalf of the following Funds:
(1) American General International Growth Fund
(2) American General Large Cap Growth Fund
(3) American General Mid Cap Growth Fund
(4) American General Small Cap Growth Fund
(5) American General International Value Fund,
American General Balanced Fund and American General
Domestic Bond Fund
(6) American General Large Cap Value Fund
(7) American General Mid Cap Value Fund
(8) American General Small Cap Value Fund
(10) American General Stock Index Fund, American General Mid
Cap Index Fund, American General Small Cap Index Fund and
American General Small Cap Value Fund
(11) American General Science & Technology Fund
e. 6. Distribution Agreement between the Registrant and American General
Distributors, Inc.
g. 8. (a) Custodian Agreement between Registrant and State Street
Bank and Trust Company
h. 9. (a) Transfer Agency and Services Agreement between Registrant and VALIC
(c) Accounting Services Agreement between Registrant and VALIC
(d) Administrative Services Agreement among Registrant, VRSCO and
American General Distributors, Inc.
(e) State Filing Services Agreement and Form of Amendment to Schedule A
i. 10. Opinion of Counsel
j. 11. Consent of Ernst & Young LLP
m. 15. Rule 12b-1 Distribution and Service Plan
n. 18. Multi-Class Plan
o. 20. Code of Ethics
p. 21. (c) Powers of Attorney for Mr. Barrett and Ms. Kane
<PAGE> 1
EXHIBIT a.1(b)(6)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Certificate of Designation
of
American General Science and Technology Fund
The undersigned, being the Vice President and Assistant Secretary of
American General Series Portfolio Company 2, a Delaware business trust
(the "Trust"), pursuant to the authority conferred upon the Trustees of
the Trust by Section 6.1 of the Trust's Agreement and Declaration of
Trust ("Declaration"), and by the affirmative vote of a Majority of the
Trustees does hereby establish and designate as a Series of the Trust
the American General Science and Technology Fund (the "Fund") with the
following rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into
Shares having a nominal or par value of $0.01 per Share, of which an
unlimited number may be issued, which Shares shall represent interests
only in the Fund. The Trustees shall have the authority from time to
time to authorize separate Series of Shares for the Trust as they deem
necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided
into three classes --Class A, Class B and Institutional Class I. The
Trustees shall have the authority from time to time to authorize
additional Classes of Shares of the Fund.
3. Sales Charges. Each Class A, Class B and Institutional Class I Share
shall be subject to such sales charges, if any, as may be established
from time to time by the Trustees in accordance with the Investment
Company Act of 1940 (the "1940 Act") and applicable rules and
regulations of the National Association of Securities Dealers, Inc.,
all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the
Shareholder thereof, into Class A Share of the Fund at such times and
pursuant to such terms, conditions and restrictions as may be
established by the Trustees and as set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses
under an administrative or service agreement, plan or other
arrangement, however designated) shall be borne by the Class and shall
be appropriately reflected (in a manner determined by the Trustees) in
the net asset value, dividends, distribution and liquidation rights of
the Shares of that Class.
<PAGE> 2
6. Special Meetings. A special meeting of Shareholders of a Class of
the Fund may be called with respect to the Rule 12b-1 distribution plan
applicable to such Class or with respect to any other proper purpose
affecting only holders of shares of such Class at any time by a
Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of
any Series of the Trust or with respect to any Class of Shares set
forth in the Declaration shall apply to Shares of the Fund unless
otherwise specified in this Certificate of Designation, in which case
this Certificate of Designation shall be govern.
8. Amendments etc. Subject to the provisions and limitations of Section
9.5 of the Declaration and applicable law, this Certificate of
Designation may be amended by an instrument signed in writing by a
Majority of the Trustees (or by an Officer of the Trust pursuant to the
vote of a Majority of the Trustees) or when authorized to do so by the
vote in accordance with the Declaration of the holders of a majority of
all the Shares of the Fund outstanding and entitled to vote or, if such
amendment affects the Shares of one or more but not all of the Classes
of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms
in the Declaration.
January 18, 2000
/s/ NORI L. GABERT
------------------
Nori L. Gabert,
Assistant Secretary
<PAGE> 1
EXHIBIT a.1(c)(19)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Amended and Restated Certificate of Designation
of
American General Municipal Bond Fund
The undersigned, being the Vice President and Assistant Secretary of American
General Series Portfolio Company 2, a Delaware business trust (the "Trust"),
pursuant to the authority conferred upon the Trustees of the Trust by Section
6.1 of the Trust's Agreement and Declaration of Trust ("Declaration"), and by
the affirmative vote of a Majority of the Trustees does hereby establish and
designate as a Series of the Trust the American General Municipal Bond Fund
(the "Fund") with the following rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be divided into two
classes -- Class A and Class B. The Trustees shall have the authority from time
to time to authorize additional Classes of Shares of the Fund.
3. Sales Charges. Each Class A and Class B Share shall be subject to such
sales charges, if any, as may be established from time to time by the Trustees
in accordance with the Investment Company Act of 1940 (the "1940 Act") and
applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Share of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by the Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the
Fund may be called with respect to the Rule 12b-1 distribution plan applicable
to such Class or with respect to any other proper purpose affecting only
holders of shares of such Class at any time by a Majority of the Trustees.
<PAGE> 2
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall be govern.
8. Amendments etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an Officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
October 28, 1998
/s/ NORI L. GABERT
- -------------------------
Nori L. Gabert,
Vice President and
Assistant Secretary
<PAGE> 1
EXHIBIT a.1(c)(20)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Amended and Restated Certificate of Designation
of
American General Municipal Money Market Fund
The undersigned, being the Vice President and Assistant Secretary of American
General Series Portfolio Company 2, a Delaware business trust (the "Trust"),
pursuant to the authority conferred upon the Trustees of the Trust by Section
6.1 of the Trust's Agreement and Declaration of Trust ("Declaration"), and by
the affirmative vote of a Majority of the Trustees does hereby establish and
designate as a Series of the Trust the American General Municipal Money Market
Fund (the "Fund") with the following rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be divided into two
classes --Class A and Class B. The Trustees shall have the authority from time
to time to authorize additional Classes of Shares of the Fund.
3. Sales Charges. Each Class A and Class B Share shall be subject to such
sales charges, if any, as may be established from time to time by the Trustees
in accordance with the Investment Company Act of 1940 (the "1940 Act") and
applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Share of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by the Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the
Fund may be called with respect to the Rule 12b-1 distribution plan applicable
to such Class or with respect to any other proper purpose affecting only
holders of shares of such Class at any time by a Majority of the Trustees.
<PAGE> 2
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall be govern.
8. Amendments etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an Officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
October 28, 1998
/s/ NORI L. GABERT
- ------------------------
Nori L. Gabert,
Vice President and
Assistant Secretary
<PAGE> 1
EXHIBIT a.1(d)(4)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Certificate of Termination
of Institutional Class I and Institutional Class II of
American General Municipal Bond Fund
The undersigned, being the Vice President and Assistant Secretary of American
General Series Portfolio Company 2, a Delaware business trust (the "Trust"),
pursuant to the authority conferred upon the Trustees of the Trust by Section
6.1 of the Trust's Agreement and Declaration of Trust ("Declaration"), and by
the affirmative vote of a Majority of the Trustees, and upon the finding that no
such Shares of these Classes are outstanding, does hereby terminate the
Institutional Class I and Institutional Class II Classes of Shares of the
American General Municipal Bond Fund.
October 28, 1998
/s/ NORI L. GABERT
------------------
Nori L. Gabert,
Vice President and
Assistant Secretary
<PAGE> 1
EXHIBIT a.1(d)(5)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Certificate of Termination
of Institutional Class I and Institutional Class II of
American General Municipal Money Market Fund
The undersigned, being the Vice President and Assistant Secretary of American
General Series Portfolio Company 2, a Delaware business trust (the "Trust"),
pursuant to the authority conferred upon the Trustees of the Trust by Section
6.1 of the Trust's Agreement and Declaration of Trust ("Declaration"), and by
the affirmative vote of a Majority of the Trustees, and upon the finding that
no such Shares of these Classes are outstanding, does hereby terminate the
Institutional Class I and Institutional Class II Classes of Shares of the
American General Municipal Money Market Fund.
October 28, 1998
/s/ NORI L. GABERT
---------------------------
Nori L. Gabert,
Vice President and
Assistant Secretary
<PAGE> 1
EXHIBIT b.2
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
BYLAWS
AMENDED AND RESTATED
JANUARY 18, 2000
<PAGE> 2
American General Series Portfolio Company 2
Bylaws
Amended and Restated
January 18, 2000
Index
<TABLE>
<S> <C>
ARTICLE 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Presiding Officer; Secretary . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Authority of Chairman of Meeting to Interpret Declaration and Bylaws . . . 2
Section 1.4. Voting; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5. Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6 Records at Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7 Shareholders' Action in Writing . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 2 TRUSTEES AND TRUSTEES' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Number of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.2. Regular Meetings of Trustees . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.3. Special Meetings of Trustees . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.4. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.5. Quorum; Presiding Trustee . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.6. Participation by Telephone . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.7. Location of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.8. Actions by Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.9. Rulings of Presiding Trustee . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.10. Trustees' Action in Writing . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.11. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 3 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1. Officers of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2. Time and Terms of Election . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.3. Resignation and Removal . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.4. Fidelity Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.5. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.6. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.7. Treasurer and Assistant Treasurers . . . . . . . . . . . . . . . . . . . . 6
Section 3.8. Controller and Assistant Controllers . . . . . . . . . . . . . . . . . . . 6
Section 3.9. Secretary and Assistant Secretaries . . . . . . . . . . . . . . . . . . . 7
Section 3.10. Substitutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.11. Execution of Deeds, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.12. Power to Vote Securities . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 4 COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.1. Power of Trustees to Designate Committees . . . . . . . . . . . . . . . . 8
Section 4.2. Rules for Conduct of Committee Affairs . . . . . . . . . . . . . . . . . 8
Section 4.3. Trustees May Alter, Abolish, etc., Committees . . . . . . . . . . . . . . 8
Section 4.4. Minutes; Review by Trustees . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 6 SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1. Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.2. Uncertificated Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.3. Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.4. Lost, Stolen, etc., Certificates . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 7 TRANSFERS OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7.1. Transfer Agents, Registrars, etc. . . . . . . . . . . . . . . . . . . . . 10
Section 7.2. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7.3. Registered Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 8 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8.1. Bylaws Subject to Amendment . . . . . . . . . . . . . . . . . . . . . . 10
Section 8.2. Notice of Proposal to Amend Bylaws Required . . . . . . . . . . . . . . . 11
</TABLE>
iii
<PAGE> 5
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
BYLAWS
AMENDED AND RESTATED
JANUARY 18, 2000
These are the Bylaws of American General Series Portfolio Company 2, a
trust with transferable shares established under the laws of The State of
Delaware (the "Trust"), pursuant to an Agreement and Declaration of Trust of
the Trust (the "Declaration") made the 16th day of March, 1998, and a
Certificate of Trust filed in the office of the Secretary of State pursuant to
Section 3810 of The Delaware Business Trust Act, Title 12, Chapter 38 of the
Delaware Code. These Bylaws have been adopted by the Trustees pursuant to the
authority granted by Section 4.14 of the Declaration.
All words and terms capitalized in these Bylaws, unless otherwise
defined herein, shall have the same meanings as they have in the
Declaration.
ARTICLE 1
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
SECTION 1.1. Meetings. A meeting of the Shareholders of the Trust
shall be held whenever called by the Chairman, the President or a majority of
the Trustees and whenever election of a Trustee or Trustees by Shareholders is
required by the provisions of the 1940 Act. Meetings of Shareholders shall
also be called by the Trustees when requested in writing by Shareholders
holding at least ten percent (10%) of the Shares then outstanding for the
purpose of voting upon removal of any Trustee, or if the Trustees shall fail to
call or give notice of any such meeting of Shareholders for a period of thirty
(30) days after such application, then Shareholders holding at least ten
percent (10%) of the Shares then outstanding may call and give notice of such
meeting. Notice of Shareholders' meetings shall be given as provided in the
Declaration.
SECTION 1.2. Presiding Officer; Secretary. The President shall
preside at each Shareholders' meeting as Chairman of the meeting, or in the
absence of the President, the Trustees present at the meeting shall elect one
of their number as chairman of the meeting. Unless otherwise provided for by
the Trustees, the Secretary or Assistant Secretary of the Trust shall be the
secretary of all meetings of Shareholders and shall record the minutes thereof.
1
<PAGE> 6
SECTION 1.3. Authority of Chairman of Meeting to Interpret
Declaration and Bylaws. At any Shareholders' meeting the Chairman of the
meeting shall be empowered to determine the construction or interpretation of
the Declaration or these Bylaws, or any part thereof or hereof, and their
ruling shall be final.
SECTION 1.4. Voting; Quorum. At each meeting of Shareholders, except
as otherwise provided by the Declaration, every holder of record of Shares
entitled to vote shall be entitled to a number of votes equal to the number of
Shares standing in his or her name on the Share register of the Trust on the
record date of the meeting. Shareholders may vote by proxy and the form of any
such proxy may be prescribed from time to time by the Trustees. A quorum shall
exist if the holders of a majority of the outstanding Shares of the Trust
entitled to vote are present in person or by proxy, but any lesser number shall
be sufficient for adjournments. At all meetings of the Shareholders, votes
shall be taken by ballot for all matters which may be binding upon the Trustees
pursuant to Section 7.1 of the Declaration. On other matters, votes of
Shareholders need not be taken by ballot unless otherwise provided for by the
Declaration or by vote of the Trustees, or as required by the 1940 Act, but the
chairman of the meeting may in his or her discretion authorize any matter to be
voted upon by ballot.
SECTION 1.5. Inspectors. At any meeting of Shareholders, the
Chairman of the meeting may appoint one or more Inspectors of Election or
Balloting to supervise the voting at such meeting or any adjournment thereof.
If Inspectors are not so appointed, the chairman of the meeting may, and on the
request of any Shareholder present or represented and entitled to vote shall,
appoint one or more Inspectors for such purpose. Each Inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of Inspector of Election or Balloting, as the
case may be, at such meeting with strict impartiality and according to the best
of his or her ability. If appointed, Inspectors shall take charge of the polls
and, when the vote is completed, shall make a certificate of the result of the
vote taken and of such other facts as may be required by law.
SECTION 1.6. Records at Shareholder Meetings. At each meeting of the
Shareholders there shall be open for inspection the minutes of the last
previous Meeting of Shareholders of the Trust and a list of the Shareholders of
the Trust, certified to be true and correct by the Secretary or other proper
agent of the Trust, as of the record date of the meeting or the date of closing
of transfer books, as the case may be. Such list of Shareholders shall contain
the name of each Shareholder. Shareholders shall have such other rights and
procedures of inspection of the books and records of the Trust as are granted
to shareholders of a Delaware corporation.
2
<PAGE> 7
SECTION 1.7. Shareholders' Action in Writing. Nothing in this
Article 1 shall limit the power of the Shareholders to take any action by means
of written instruments without a meeting, as permitted by Section 7.6 of the
Declaration.
ARTICLE 2
TRUSTEES AND TRUSTEES' MEETINGS
SECTION 2.1. Number of Trustees. There shall be initially one (1)
Trustee, and thereafter be such number, authorized by the Declaration, as from
time to time, shall be fixed by a vote adopted by a Majority of the Trustees.
SECTION 2.2. Regular Meetings of Trustees. Regular meetings of the
Trustees may be held without call or notice at such places and at such times as
the Trustees may from time to time determine; provided, that notice of such
determination, and of the time and place of the first regular meeting
thereafter, shall be given to each absent Trustee in accordance with Section
2.4 hereof.
SECTION 2.3. Special Meetings of Trustees. Special meetings of the
Trustees may be held at any time and at any place when called by the President
or the Treasurer or by three (3) or more Trustees, or if there shall be less
than three (3) Trustees, by any Trustee; provided, that notice of the time and
place thereof is given to each Trustee in accordance with Section 2.4 hereof by
the Secretary or an Assistant Secretary or by the officer or the Trustees
calling the meeting.
SECTION 2.4. Notice of Meetings. Notice of any regular or special
meeting of the Trustees shall be sufficient if given in writing to each
Trustee, and if sent by mail at least five (5) days, by a nationally recognized
overnight delivery service at least two (2) days or by facsimile at least
twenty-four (24) hours, before the meeting, addressed to his or her usual or
last known business or residence address, or if delivered to him or her in
person at least twenty-four (24) hours before the meeting. Notice of a special
meeting need not be given to any Trustee who was present at an earlier meeting,
not more than thirty-one (31) days prior to the subsequent meeting, at which
the subsequent meeting was called. Unless statute, these bylaws or a
resolution of the Trustees might otherwise dictate, notice need not state the
business to be transacted at or the purpose of any meeting of the Board of
Trustees. Notice of a meeting may be waived by any Trustee by written waiver
of notice, executed by him or her before or after the meeting, and such waiver
shall be filed with the records of the meeting. Attendance by a Trustee at a
meeting shall constitute a waiver of notice, except where a Trustee attends a
meeting for the purpose of
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protesting prior thereto or at its commencement the lack of notice. No notice
need be given of action proposed to be taken by unanimous written consent.
SECTION 2.5. Quorum: Presiding Trustee. At any meeting of the
Trustees, a Majority of the Trustees shall constitute a quorum. Any meeting may
be adjourned from time to time by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice. Unless the Trustees shall otherwise elect,
generally or in a particular case, the Chairman shall be the presiding Trustee
at each meeting of the Trustees or in the absence of the Chairman, the
President shall preside over the meeting. In the absence of both the Chairman
and the President, the Trustees present at the meeting shall elect one of their
number as presiding Trustee of the meeting.
SECTION 2.6. Participation by Telephone. One or more of the Trustees
may participate in a meeting thereof or of any Committee of the Trustees by
means of a conference telephone or similar communications equipment allowing
all persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
SECTION 2.7. Location of Meetings. Trustees' meetings may be held at
any place, within or without the State of Delaware.
SECTION 2.8. Actions by Trustees. Unless statute, the charter or
Bylaws requires a greater proportion, action of a majority of the Trustees
present at a meeting at which a quorum is present is action of the Board of
Trustees. The results of all voting shall be recorded by the Secretary in the
minute book.
SECTION 2.9. Rulings of Presiding Trustee. All other rules of
conduct adopted and used at any Trustees' meeting shall be determined by the
presiding Trustee of such meeting, whose ruling on all procedural matters
shall be final.
SECTION 2.10. Trustees' Action in Writing. Nothing in this Article 2
shall limit the power of the Trustees to take action by means of a written
instrument without a meeting, as provided in Section 4.2 of the Declaration.
SECTION 2.11. Resignations. Any Trustee may resign at any time by
written instrument signed by him or her and delivered to the Chairman, the
President or the Secretary or to a meeting of the Trustees. Such resignation
shall be effective upon receipt unless specified to be effective at some other
time.
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ARTICLE 3
OFFICERS
SECTION 3.1. Officers of the Trust. The officers of the Trust shall
consist of a President, a Treasurer and a Secretary, and may include a
Controller and one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries, and such other officers as the Trustees may designate. Any person
may hold more than one office.
SECTION 3.2. Time and Terms of Election. The President, the
Treasurer and the Secretary shall be elected by the Trustees at their first
meeting and thereafter at the annual meeting of the Trustees, as provided in
Section 4.1(c) of the Declaration. Such officers shall hold office until the
next annual meeting of the Trustees and until their successors shall have been
duly elected and qualified, and may be removed at any meeting by the
affirmative vote of a Majority of the Trustees. All other officers of the
Trust may be elected or appointed at any meeting of the Trustees. Such
officers shall hold office for any term, or indefinitely, as determined by the
Trustees, and shall be subject to removal, with or without cause, at any time
by the Trustees.
SECTION 3.3. Resignation and Removal. Any officer may resign at any
time by giving written notice to the Trustees. Such resignation shall take
effect at the time specified therein, and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it
effective. If the office of any officer or agent becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, the Trustees may choose a successor, who shall hold office for the
unexpired term in respect of which such vacancy occurred. Except to the extent
expressly provided in a written agreement with the Trust, no officer resigning
or removed shall have any right to any compensation for any period following
such resignation or removal, or any right to damage on account of such removal.
SECTION 3.4. Fidelity Bond. The Trustees may, in their discretion,
direct any officer appointed by them to furnish at the expense of the Trust a
fidelity bond approved by the Trustees, in such amount as the Trustees may
prescribe.
SECTION 3.5. President. The President shall be the chief executive
officer of the Trust and, subject to the supervision of the Trustees, shall
have general charge and supervision of the business, property and affairs of
the Trust and such other powers and duties as the Trustees may prescribe.
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SECTION 3.6. Vice Presidents. In the absence or disability of the
President, the Vice President or, if there shall be more than one, the Vice
Presidents in the order of their seniority or as otherwise designated by the
Trustees, shall exercise all of the powers and duties of the President. The
Vice Presidents shall have the power to execute bonds, notes, mortgages and
other contracts, agreements and instruments in the name of the Trust, and shall
do and perform such other duties as the Trustees or the President shall direct.
SECTION 3.7. Treasurer and Assistant Treasurers. The Treasurer shall
be the chief financial officer of the Trust, and shall have the custody of the
Trust's funds and Securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys, and other valuable effects in the name and to the credit of the Trust,
in such depositories as may be designated by the Trustees, taking proper
vouchers for such disbursements, shall have such other duties and powers as may
be prescribed from time to time by the Trustees, and shall render to the
Trustees, whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Trust. If no Controller is
elected, the Treasurer shall also have the duties and powers of the Controller,
as provided in these Bylaws. Any Assistant Treasurer shall have such duties and
powers as shall be prescribed from time to time by the Trustees or the
Treasurer, and shall be responsible to and shall report to the Treasurer. In the
absence or disability of the Treasurer, the Controller shall have the powers and
duties of the Treasurer. If no Controller is elected, the Assistant Treasurer
or, if there shall be more than one, the Assistant Treasurers in the order of
their seniority or as otherwise designated by the Trustees or the Chairman,
shall have the powers and duties of the Treasurer.
SECTION 3.8. Controller and Assistant Controllers. If a Controller
is elected, the Controller shall be the chief accounting officer of the Trust
and shall be in charge of its books of account and accounting records and of its
accounting procedures, and shall have such duties and powers as are commonly
incident to the office of a controller, and such other duties and powers as may
be prescribed from time to time by the Trustees. The Controller shall be
responsible to and shall report to the Trustees, but in the ordinary conduct of
the Trust's business, shall be under the supervision of the Treasurer. Any
Assistant Controller shall have such duties and powers as shall be prescribed
from time to time by the Trustees or the Controller, and shall be responsible to
and shall report to the Controller. In the absence or disability of the
Controller, the Assistant Controller or, if there shall be more than one, the
Assistant Controllers in the order of their seniority or as otherwise designated
by the Trustees, shall have the powers and duties of the Controller.
SECTION 3.9. Secretary and Assistant Secretaries. The Secretary
shall, if and to the extent requested by the Trustees, attend all meetings of
the Trustees, any Committee of the
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Trustees and/or the Shareholders and record all votes and the minutes of
proceedings in a book to be kept for that purpose, shall give or cause to be
given notice of all meetings of the Trustees, any Committee of the Trustees, and
of the Shareholders and shall perform such other duties as may be prescribed by
the Trustees. The Secretary, or in his or her absence any Assistant Secretary,
shall affix the Trust's seal to any instrument requiring it, and when so
affixed, it shall be attested by the signature of the Secretary or an Assistant
Secretary. The Secretary shall be the custodian of the Share records and all
other books, records and papers of the Trust (other than financial) and shall
see that all books, reports, statements, certificates and other documents and
records required by law are properly kept and filed. In the absence or
disability of the Secretary, the Assistant Secretary or, if there shall be more
than one, the Assistant Secretaries in the order of their seniority or as
otherwise designated by the Trustees, shall have the powers and duties of the
Secretary.
SECTION 3.10. Substitutions. In case of the absence or disability of
any officer of the Trust, or for any other reason that the Trustees may deem
sufficient, the Trustees may delegate, for the time being, the powers or
duties, or any of them, of such officer to any other officer, or to any
Trustee.
SECTION 3.11. Execution of Deeds, etc. Except as the Trustees may
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Trust shall be signed or endorsed
on behalf of the Trust by its properly authorized officers or agents as
provided in the Declaration.
SECTION 3.12. Power to Vote Securities. Unless otherwise ordered by
the Trustees, the Treasurer shall have full power and authority on behalf of
the Trust to give proxies for, and/or to attend and to act and to vote at, any
meeting of stockholders of any corporation in which the Trust may hold stock,
and at any such meeting the Treasurer or his or her proxy shall possess and may
exercise any and all rights and powers incident to the ownership of such stock
which, as the owner thereof, the Trust might have possessed and exercised if
present. The Trustees, by resolution from time to time, or, in the absence
thereof, the Treasurer, may confer like powers upon any other person or persons
as attorneys and proxies of the Trust.
ARTICLE 4
COMMITTEES
SECTION 4.1. Power of Trustees to Designate Committees. The
Trustees, by vote of a Majority of the Trustees, may elect from their number an
Executive Committee and any other
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Committees and may delegate thereto some or all of their powers except those
which by law, by the Declaration or by these Bylaws may not be delegated;
provided, that an Executive Committee shall not be empowered to elect the
President, the Treasurer or the Secretary, to amend the Bylaws, to exercise the
powers of the Trustees under this Section 4.1 or under Section 4.3 hereof, or to
perform any act for which the action of a Majority of the Trustees is required
by law, by the Declaration or by these Bylaws. The members of any such
Committee shall serve at the pleasure of the Trustees.
SECTION 4.2. Rules for Conduct of Committee Affairs. Except as
otherwise provided by the Trustees, each Committee elected or appointed pursuant
to this Article 4 may adopt such standing rules and regulations for the conduct
of its affairs as it may deem desirable, subject to review and approval of such
rules and regulations by the Trustees at the next succeeding meeting of the
Trustees, but in the absence of any such action or any contrary provisions by
the Trustees, the business of each Committee shall be conducted, so far as
practicable, in the same manner as provided herein and in the Declaration for
the Trustees.
SECTION 4.3. Trustees May Alter, Abolish, etc., Committees. Trustees
may at any time alter or abolish any Committee, change membership of any
Committee, or revoke, rescind, waive or modify action of any Committee or the
authority of any Committee with respect to any matter or class of matters;
provided, that no such action shall impair the rights of any third parties.
SECTION 4.4. Minutes: Review by Trustees. Any Committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees.
ARTICLE 5
SEAL
The seal of the Trust, if any, may be affixed to any instrument, and
the seal and its attestation may be lithographed, engraved or otherwise printed
on any document with the same force and effect as if had been imprinted and
affixed manually in the same manner and with the same force and effect as if
done by a Delaware corporation. Unless otherwise required by the Trustees,
the seal shall not be necessary to be placed on, and its absence shall not
impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
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ARTICLE 6
SHARES
SECTION 6.1. Issuance of Shares. The Trustees may issue an unlimited
number of Classes of Shares of any or all Series either in certificated or
uncertificated form. They may issue certificates to the holders of a Class of
Shares of a Series which was originally issued in uncertificated form, and if
they have issued Shares of any Series in certificated form, they may at any
time discontinue the issuance of Share certificates for such Series and may, by
written notice to such Shareholders of such Series require the surrender of
their Share certificates to the Trust for cancellation, which surrender and
cancellation shall not affect the ownership of Shares for such Series.
SECTION 6.2. Uncertificated Shares. For any Class of Shares for
which the Trustees issue Shares without certificates, the Trust or the Transfer
Agent may either issue receipts therefor or may keep accounts upon the books of
the Trust for the record holders of such Shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of such Shares as if they
had received certificates therefor and shall be held to have expressly assented
and agreed to the terms hereof and of the Declaration.
SECTION 6.3. Share Certificates. For any Class of Shares for which
the Trustees shall issue Share certificates, each Shareholder of such Class
shall be entitled to a certificate stating the number of Shares owned by him or
her in such form as shall be prescribed from time to time by the Trustees. Such
certificate shall be signed by the President or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Trust. Such signatures may be facsimiles if the certificate is
countersigned by a Transfer Agent, or by a Registrar, other than a Trustee,
officer or employee of the Trust. In case any officer who has signed or whose
facsimile signature has been placed on such certificate shall cease to be such
officer before such certificate is issued, it may be issued by the Trust with
the same effect as if he were such officer at the time of its issue.
SECTION 6.4. Lost, Stolen, etc., Certificates. If any certificate
for certificated Shares shall be lost, stolen, destroyed or mutilated, the
Trustees may authorize the issuance of a new certificate of the same tenor and
for the same number of Shares in lieu thereof. The Trustees shall require the
surrender of any mutilated certificate in respect of which a new certificate is
issued, and may, in their discretion, before the issuance of a new certificate,
require the owner of a lost, stolen or destroyed certificate, or the owner's
legal representative, to make an affidavit or affirmation setting forth such
facts as to the loss, theft or destruction as they deem
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necessary, and to give the Trust a bond in such reasonable sum as the Trustees
direct, in order to indemnify the Trust.
ARTICLE 7
TRANSFER OF SHARES
SECTION 7.1. Transfer Agents, Registrars, etc. As approved in
Section 5.2(e) of the Declaration, the Trustees shall have the authority to
employ and compensate such transfer agents and registrars with respect to the
Shares of the Trust as the Trustees shall deem necessary or desirable. In
addition, the Trustees shall have the power to employ and compensate such
dividend dispersing agents, warrant agents and agents for reinvestment of
dividends as they shall deem necessary or desirable. Any of such agents shall
have such power and authority as is delegated to any of them by the Trustees.
SECTION 7.2 Transfer of Shares. The Shares of the Trust shall be
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper documentation as provided in Section
6.1(m) of the Declaration. The Trust, or its transfer agents, shall be
authorized to refuse any transfer unless and until presentation of such
evidence as may be reasonably required to show that the requested transfer is
proper.
SECTION 7.3 Registered Shareholders. The Trust may deem and treat
the holder of record of any Shares the absolute owner thereof for all purposes
and shall not be required to take any notice of any right or claim of right of
any other person.
ARTICLE 8
AMENDMENTS
SECTION 8.1. Bylaws Subject to Amendment. These Bylaws may be
altered, amended or repealed, in whole or in part, at any time by vote of the
holders of a majority of the Shares issued, outstanding and entitled to vote.
The Trustees, by vote of a Majority of the Trustees (unless a greater vote is
required by Section 2.8 hereof), may alter, amend or repeal these Bylaws, in
whole or in part, including Bylaws adopted by the Shareholders, except with
respect to any provision hereof which by law, the Declaration or these Bylaws
requires action by the Shareholders. Bylaws adopted by the Trustees may be
altered, amended or repealed by the Shareholders.
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SECTION 8.2. Notice of Proposal to Amend Bylaws Required. No proposal
to amend or repeal these Bylaws or to adopt new Bylaws shall be acted upon at a
meeting unless either (i) such proposal is stated in the notice or in the
waiver of notice, as the case may be, of the meeting of the Trustees or
Shareholders at which such action is taken, or (ii) all of the Trustees or
Shareholders, as the case may be, are present at such meeting and all agree to
consider such proposal without protesting the lack of notice.
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EXHIBIT d.5(a)
INVESTMENT ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as the "ADVISER," and
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2, hereinafter referred to as the
"FUND."
The ADVISER and the FUND recognize the following:
(a) The ADVISER is a life insurance company organized under
Chapter 3 of the Texas Insurance Code and an investment adviser
registered under the Investment Advisers Act of 1940.
(b) The FUND is an investment company organized under the laws
of Delaware as a business trust, as a series type of investment company
issuing separate classes (or series) of shares of beneficial interest
and is registered as an open-end, management investment company under
the Investment Company Act of 1940 (the "1940 Act"). The 1940 Act
prohibits any person from acting as an investment adviser of a
registered investment company except pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General Stock Index Fund, American General Mid
Cap Index Fund, American General Small Cap Index Fund, American General
Small Cap Value Fund, American General Mid Cap Growth Fund, American
General International Value Fund, American General Domestic Bond Fund,
American General Balanced Fund, American General Large Cap Growth Fund,
American General Small Cap Growth Fund, American General Mid Cap Value
Fund, American General Large Cap Value Fund, American General
International Growth Fund, American General Money Market Fund, American
General Socially Responsible Fund, American General Growth Lifestyle
Fund, American General Moderate Growth Lifestyle Fund, American General
Conservative Growth Lifestyle Fund, American General Municipal Market
Fund, American General Municipal Bond Fund, American General Core Bond
Fund, American General Strategic Bond Fund, and American General High
Yield Bond Fund. In accordance with the FUND's Agreement and
Declaration of Trust (the "Declaration") and Bylaws, new Funds may be
added to the FUND upon approval of the FUND's Board of Trustees without
approval of the FUND's shareholders. This Agreement will apply only to
the Fund(s) and any other Fund as may be added or deleted by amendment
to the attached Schedule A ("Covered Funds").
The ADVISER and the FUND AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY ADVISER
The ADVISER, subject to the control, direction, and supervision of the
FUND's Board of Trustees and in conformity with the 1940 Act, applicable laws
and regulations thereunder, all other applicable federal and state laws and
regulations, the FUND's Declaration, Bylaws, registration statements, prospectus
and stated investment objectives, policies and restrictions shall:
(a) manage the investment and reinvestment of the assets of
the Covered Funds including, for example, the evaluation of pertinent
economic, statistical, financial, and other data, the determination of
the industries and companies to be represented in each Covered Fund's
portfolio, and the formulation and implementation of investment
programs.
(b) maintain a trading desk and place all orders for the
purchase and sale of portfolio investments for each Covered Fund's
account with brokers or dealers selected by the ADVISER, or arrange for
any other entity to provide a trading desk and to place orders with
brokers and dealers selected by the ADVISER, subject to the ADVISER's
control, direction, and supervision.
<PAGE> 2
(c) conduct and manage the day to day operations of each
Covered Fund including, for example, the preparation of registration
statements, prospectuses, reports, proxy solicitation materials and
amendments thereto, and the furnishing of legal services (except those
services provided by outside counsel to the FUND selected by the Board
of Trustees).
(d) furnish to the Covered Funds office space, facilities,
equipment and personnel adequate to provide the services described
above and pay the compensation to the FUND's trustees and officers who
are interested persons of the ADVISER.
In performing the services described in paragraph (b) above, the
ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to prior authorization by the
FUND's Board of Trustees of appropriate policies and procedures, the ADVISER may
cause the Covered Funds to pay to a broker a commission, for effecting a
portfolio transaction, in excess of the commission another broker would have
charged for effecting the same transaction, if the first broker provided
brokerage and\or research services, including statistical data, to the ADVISER.
The ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The ADVISER shall maintain records adequately demonstrating compliance
with its obligations under this Agreement and report periodically to the FUND's
Board of Trustees regarding the performance of services under this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
ADVISER shall bear the expense of discharging its responsibilities hereunder and
the FUND shall pay, or arrange for others to pay, all its expenses other than
those which part 2 of this Agreement expressly states are payable to the
ADVISER. Expenses payable by the FUND include, but are not limited to, (i)
interest and taxes; (ii) brokerage commissions and other expenses of purchasing
and selling portfolio investments; (iii) compensation of its trustees and
officers other than those persons who are interested persons of the ADVISER;
(iv) fees of outside counsel to and of independent auditors of the FUND selected
by the Board of Trustees; (v) fees for accounting services; (vi) custodial,
registration, and transfer agency fees; (vii) expenses related to the repurchase
or redemption of its shares including expenses related to a program of periodic
repurchases or redemptions; (viii) expenses related to the issuance of its
shares against payment therefor by, or on behalf of, the subscribers thereto;
(ix) fees and related expenses of registering and qualifying the FUND and its
shares for distribution under state and federal securities laws; (x) expenses of
printing and mailing to existing shareholders of registration statements,
prospectuses, reports, notices and proxy solicitation materials of the FUND;
(xi) all other expenses incidental to holding meetings of the FUND's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the FUND's membership in
trade associations approved by the Board of Trustees; and (xv) such
non-recurring expenses as may arise, including those associated with actions,
suits, or proceedings to which the FUND is a party and the legal obligation
which the FUND may have to indemnify its officers, trustees and employees with
respect thereto. The FUND shall allocate the foregoing expenses among the
Covered Funds and, to the extent that any of the foregoing expenses are
allocated between the Covered Funds and any other Funds or entities, such
allocations shall be made pursuant to methods approved by the Board of Trustees.
2. COMPENSATION OF ADVISER
The FUND shall pay to the ADVISER, as compensation for the services
rendered, facilities furnished and expenses paid by the ADVISER, a monthly fee
based on each Covered Fund's average monthly net asset value computed for each
Covered Fund as provided for in the fee schedule attached hereto as Schedule A.
Schedule A may be amended from time to time, provided that amendments are made
in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any existing or new
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
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The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. The FUND shall pay this fee for each calendar month as soon as
practicable after the end of that month.
The ADVISER shall promptly reduce its monthly fee by the amount of any
commissions, tender and exchange offer solicitation fees, other fees, or similar
payments received by the ADVISER, or any affiliated person of the ADVISER, in
connection with any Covered Fund's portfolio transactions, less the amount of
any direct expenses incurred by the ADVISER, or any affiliated person of the
ADVISER, in obtaining such commissions, fees, or payments.
If the ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
3. SCOPE OF ADVISER'S DUTIES
The ADVISER, and any person controlling, controlled by or under common
control with the ADVISER, shall remain free to provide similar investment
advisory services to other persons or engage in any other business or activity
which does not impair the services which the ADVISER renders to the Covered
Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
trustees, officers and employees of the FUND may be a shareholder, director,
officer or employee of, or be otherwise interested in, the ADVISER, and in any
person controlling, controlled by or under common control with the ADVISER; and
the ADVISER, and any person controlling, controlled by or under common control
with the ADVISER, may have an interest in the FUND.
The ADVISER shall not be liable to the FUND, or to any shareholder in
the FUND, for any act or omission in rendering services under this Agreement, or
for any losses sustained in the purchase, holding, or sale of any portfolio
security, so long as there has been no willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties on the part of the
ADVISER.
The ADVISER may from time to time employ or associate with itself any
person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided that any such person who
serves or acts as an investment adviser separate from the ADVISER will do so
pursuant to a sub-advisory agreement as provided in the following paragraph. The
compensation of any such persons will be paid by the ADVISER, and no obligation
will be incurred by, or on behalf of, the FUND with respect to them.
Notwithstanding any other provision of this Agreement, the FUND hereby
authorizes the ADVISER to employ an investment sub-adviser for any one or more
of the Covered Funds for the purpose of providing investment management services
with respect to such Covered Funds, provided that (a) the compensation to be
paid to such investment sub-adviser shall be the sole responsibility of the
ADVISER, (b) the duties and responsibilities of the investment sub-adviser shall
be as set forth in a sub-advisory agreement including the ADVISER and the
investment sub-adviser as parties, (c) such sub-advisory agreement shall be
adopted and approved in conformity with applicable laws and regulations, and (d)
such sub-advisory agreement may be terminated at any time, on not more than 60
days' written notice, by the ADVISER on notice to the sub-adviser and the FUND,
by the sub-adviser on notice to the ADVISER and the FUND, and by the FUND's
Board of Trustees or by a majority vote of the Covered Fund's outstanding voting
securities on notice to the sub-adviser and the ADVISER.
4. DURATION OF AGREEMENT
This Agreement shall become effective as to the Covered Funds set forth
on Schedule A on the date hereof and as to any other Funds on the date of the
Amendment to Schedule A adding such Fund in accordance with this
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<PAGE> 4
Agreement. Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from the effective date. Thereafter this
Agreement shall continue in effect, but with respect to any Covered Fund,
subject to the termination provisions and all other terms and conditions hereof,
only so long as such continuance is approved at least annually by the vote of a
majority of the FUND's trustees who are not parties to this Agreement or
interested persons of any such parties, cast in person at a meeting called for
the purpose of voting on such approval, and by a vote of a majority of the
FUND's Board of Trustees or a majority of that Fund's outstanding voting
securities.
This Agreement shall automatically terminate in the event of its
assignment. The Agreement may be terminated as to any Covered Fund at any time
by the FUND's Board of Trustees, by vote of a majority of that Fund's
outstanding voting securities, or by the ADVISER, on not more than 60 days' nor
less than 30 days' written notice, or upon such shorter notice as may be
mutually agreed upon. Such termination shall be without the payment of any
penalty.
5. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with applicable
federal securities laws and regulations, including definitions therein and such
exemptions as may be granted to the ADVISER or the FUND by the Securities and
Exchange Commission or such interpretive positions as may be taken by the
Commission or its staff. To the extent that the applicable law of the State of
Texas, or any of the provisions herein, conflict with applicable provisions of
the federal securities laws, the latter shall control.
6. MISCELLANEOUS PROVISIONS
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted to either the ADVISER or the FUND by the Securities and Exchange
Commission (the "Commission"), or such interpretive positions as may be taken by
the Commission or its staff, under the 1940 Act, and the term "brokerage and
research services" shall have the meaning given in the Securities Exchange Act
of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the FUND's
Trustees and by the sole shareholder. This Agreement is executed on behalf of
the FUND or the Trustees of the FUND as Trustees and not individually and that
the obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the FUND individually, but are binding only upon the
assets and property of the FUND. A Certificate of Trust in respect of the FUND
is on file with the Secretary of the State of Delaware.
All questions concerning the validity, meaning and effect of this
Agreement shall be determined in accordance with the laws (without giving effect
to the conflict-of-law principles thereof) of the State of Delaware applicable
to contracts made and to be performed in that state.
4
<PAGE> 5
The parties hereto have each caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 2
By: /s/ CRAIG RODBY
-------------------------------
Name: Craig Rodby
Title: Vice Chairman
ATTEST:
/s/ CYNTHIA TOLES
- -------------------------------
Secretary
THE VARIABLE ANNUITY LIFE
INSURANCE COMPANY
By: /s/ THOMAS WEST, JR.
-------------------------------
Name: Thomas West, Jr.
Title:
ATTEST:
/s/ CYNTHIA TOLES
- -------------------------------
Secretary
5
<PAGE> 6
SCHEDULE A
to Investment Advisory Agreement
Annual Fee computed at the following annual rate, based on average monthly net
asset value and payable monthly:
American General International
Value Fund.............. 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% over $250 million
American General International
Growth Fund............ 0.90% on the first $100 million
0.80% over $100 million
American General Large Cap
Value Fund.............. 0.50%
American General Large Cap
Growth Fund............ 0.55%
American General Mid Cap
Value Fund.............. 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% over $750 million
American General Mid Cap
Growth Fund............ 0.65% on the first $25 million
0.55% on the next $25 million
0.45% over $50 million
6
<PAGE> 7
American General Small Cap
Value Fund.............. 0.75% on the first $50 million
0.65% over $50 million
American General Small Cap
Growth Fund............ 0.85%
American General Socially
Responsible Fund....... 0.25%
American General Money
Market Fund............ 0.25%
American General Domestic
Bond Fund............... 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% over $300 million
American General Stock
Index Fund............... 0.27% on the first $500 million
0.26% over $500 million
American General Mid Cap
Index Fund............... 0.28% on the first $500 million
0.27% over $500 million
American General Small Cap
Index Fund............... 0.28% on the first $500 million
0.27% over $500 million
American General Balanced
Fund..................... 0.80% on the first $25 million
0.65% on the next $25 million
0.45% over $50 million
7
<PAGE> 8
American General Conservative
Growth Lifestyle Fund.... 0.10%
American General Moderate
Growth Lifestyle Fund.... 0.10%
American General Growth
Lifestyle Fund........... 0.10%
American General Municipal
Money Market Fund........ 0.50% on first $200 million
0.45% on next $300 million
0.40% over $500 million
American General Municipal
Bond Fund................ 0.50% on first $200 million
0.45% on next $300 million
0.40% over $500 million
American General
Core Bond Fund........... 0.50% on first $200 million
0.45% on next $300 million
0.40% over $500 million
American General Strategic
Bond Fund................ 0.60% on first $200 million
0.50% on next $300 million
0.45% over $500 million
American General High
Yield Bond Fund.......... 0.70% on first $200 million
0.60% on next $300 million
0.55% over $500 million
American General Science &
Technology Fund.......... 0.90%
8
<PAGE> 1
EXHIBIT d.5(b)(1)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and JACOBS
ASSET MANAGEMENT, hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers
Act").
(b) VALIC is engaged as the investment adviser of American
General International Growth Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of
1940, as amended ("1940 Act"). The 1940 Act prohibits any person from
acting as an investment adviser of a registered investment company
except pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund,
American General Domestic Bond Fund, American General S&P 500 Index
Fund, American General Mid Cap Index Fund, American General Small Cap
Index Fund, American General Balanced Fund, American General
Conservative Growth Lifestyle Fund, American General Moderate Growth
Lifestyle Fund, American General Growth Lifestyle Fund, American
General Core Bond Fund, American General Strategic Bond Fund, American
General High Yield Bond Fund, American General Municipal Bond Fund and
American General Municipal Money Market Fund. In accordance with the
FUND's Agreement and Declaration of Trust (the "Declaration"), new
Funds may be added to the FUND upon approval of the FUND's Board of
Trustees without approval of the FUND's shareholders. This Agreement
will apply only to the Fund(s) set forth on the attached Schedule A,
and any other Funds as may be added or deleted by amendment to the
attached Schedule A ("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign
to the SUB-ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"),
1
<PAGE> 2
the FUND's Declaration, Bylaws, registration statements, prospectus and stated
investment objectives, policies and restrictions and any applicable procedures
adopted by the FUND's Board of Trustees shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their request all of the Covered Funds' investment records and
ledgers to assist VALIC and the FUND in compliance with respect to each Covered
Fund's securities transactions as required by the 1940 Act and the Advisers
Act, as well as other applicable laws. The SUB-ADVISER will furnish the FUND's
Board of Trustees such periodic and special reports as VALIC and the FUND's
Board of Trustees may reasonably request. The SUB-ADVISER will furnish to
regulatory authorities any information or reports in connection with such
services which may be requested in order to ascertain whether the operations of
the Covered Funds are being conducted in a manner consistent with applicable
laws and regulations. The SUB-ADVISER will not disclose or use any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as expressly authorized in this Agreement, and will keep confidential any
information obtained pursuant to this service relationship, and disclose such
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB- ADVISER of such determination, the
SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for the FUND, on
a daily basis, such confirmation, trade tickets and other documents as may be
necessary to enable it to perform its administrative responsibilities with
respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
2
<PAGE> 3
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in
furtherance of the SUB-ADVISER's duties and responsibilities as set forth in
this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities
hereunder and VALIC shall pay, or arrange for others to pay, all VALIC's
expenses, except that VALIC shall in all events pay the compensation described
in Section 2 of this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the
manner provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the
SUB-ADVISER under this Agreement shall be the sole responsibility of VALIC and
shall not be the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which
does not impair the services which the SUB-ADVISER renders to the Covered
Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB- ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
3
<PAGE> 4
(a) The SUB-ADVISER (i) is registered as an investment adviser
under the Advisers Act and will continue to be so registered for so
long as this Agreement remains in effect: (ii) is not prohibited by the
1940 Act or the Advisers Act from performing the services contemplated
by this Agreement; (iii) has met, and will continue to meet for so long
as this Agreement remains in effect, any applicable federal or state
requirements, or the applicable requirements of any regulatory or
industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the
authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of
any event that would disqualify the SUB-ADVISER from serving as an
investment adviser of an investment company pursuant to Section 9(a) of
the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the 1940 Act and if
it has not already done so, will provide VALIC and the FUND with a copy
of such code of ethics together with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a
copy of its Form ADV as most recently filed with the SEC and will
promptly after filing any amendment to its Form ADV with the SEC,
furnish a copy of such amendment to VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC:(i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the authority to
enter into and perform the services contemplated by this Agreement, and (v)
will immediately notify the SUB-ADVISER of the occurrence of any event that
would disqualify VALIC from serving as an investment adviser of an investment
company pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (i) on at least 60
days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
4
<PAGE> 5
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the FUND as the SUB-ADVISER at
any time, or from time to time, may reasonably request in order to discharge
obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement,
or (ii) as the result of any untrue statement of a material fact or any
omission to state a material fact required to be stated or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to the FUND,
except insofar as any such statement or omission was made in reliance on
information provided by the SUB-ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub- Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB- ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund)
or (ii) as the result of any untrue statement of a material fact or any
omission to state a material fact required to be stated or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to
5
<PAGE> 6
the FUND to the extent any such statement or omission was made in reliance on
information provided by the SUB-ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations,
including definitions therein and such exemptions as may be granted to VALIC or
the SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that
the applicable law of the State of Texas, or any of the provisions herein,
conflict with applicable provisions of the federal securities laws, the latter
shall control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
--------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ---------------------
JACOBS ASSET MANAGEMENT
By: /s/ DANIEL L. JACOBS
--------------------------------
Name: Daniel L. Jacobs
Title: President
ATTEST:
/s/ [ILLEGIBLE]
- ---------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General International Growth Fund 0.65% of the first $100 million
0.55% on the excess over $100 million
</TABLE>
7
<PAGE> 1
EXHIBIT d.5(b)(2)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and GOLDMAN
SACHS ASSET MANAGEMENT, hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Large Cap Growth Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). The 1940 Act prohibits any person from acting
as an investment adviser of a registered investment company except
pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund, American
General Domestic Bond Fund, American General S&P 500 Index Fund,
American General Mid Cap Index Fund, American General Small Cap Index
Fund, American General Balanced Fund, American General Conservative
Growth Lifestyle Fund, American General Moderate Growth Lifestyle Fund,
American General Growth Lifestyle Fund, American General Core Bond
Fund, American General Strategic Bond Fund, American General High Yield
Bond Fund, American General Municipal Bond Fund and American General
Municipal Money Market Fund. In accordance with the FUND's Agreement
and Declaration of Trust (the "Declaration"), new Funds may be added to
the FUND upon approval of the FUND's Board of Trustees without approval
of the FUND's shareholders. This Agreement will apply only to the
Fund(s) set forth on the attached Schedule A, and any other Funds as
may be added or deleted by amendment to the attached Schedule A
("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign to
the SUB-ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including the diversification requirements pursuant
to section 817(h) and Subchapter M
1
<PAGE> 2
of the Internal Revenue Code of 1986, as amended (the "Code"), the FUND's
Declaration, Bylaws, registration statements, prospectus and stated investment
objectives, policies and restrictions and any applicable procedures (which
procedures to the extent they govern transactions involving affiliates, will
identify any affiliate of VALIC or the Fund) adopted by the FUND's Board of
Trustees (provided that (i) the FUND or VALIC has provided the SUB-ADVISER with
copies of all applicable provisions of the foregoing FUND documents which relate
to the investment and management of the FUND and promptly notifies the
SUB-ADVISER of any changes in such FUND documents and (ii) VALIC informs the
SUB-ADVISER of all applicable state insurance laws relating to the investment
and management of the FUND, including restrictions or limitations on investments
in the Fund, and promptly notifies the SUB-ADVISER of any changes in such laws
or restrictions) shall:
(a) manage the investment and reinvestment of the assets.
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER will make available to VALIC and the FUND promptly
upon their request all of the Covered Funds' investment records and ledgers to
assist VALIC and the FUND in compliance with respect to each Covered Fund's
securities transactions as required by the 1940 Act and the Advisers Act, as
well as other applicable laws. The SUB-ADVISER will furnish the FUND's Board of
Trustees such periodic and special reports as VALIC and the FUND's Board of
Trustees may reasonably request. The SUB-ADVISER will furnish to regulatory
authorities any information or reports in connection with such services which
may be requested in order to ascertain whether the operations of the Covered
Funds are being conducted in a manner consistent with applicable laws and
regulations. VALIC and the SUB-ADVISER will not disclose or use any records or
information obtained pursuant to this Agreement (excluding investment research
and investment advice) in any manner whatsoever except as expressly authorized
in this Agreement, or in the ordinary course of business of performing the
services described herein and will keep confidential any information obtained
pursuant to this service relationship, and disclose such information only if
VALIC and the SUB-ADVISER or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities or as
may be required by the legal process or in connection with any litigation
arising out of this Agreement.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB- ADVISER of such determination, the
SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked.
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The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for the FUND, on
a daily basis, such confirmation, trade tickets and other documents as may be
necessary to enable it to perform its administrative responsibilities with
respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in furtherance
of the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
The SUB-ADVISER may on occasion when the purchase or sale of a security
is deemed to be in the best interest of the FUND as well as any other investment
advisory clients, to the extent permitted by applicable laws and regulations,
but shall not be obligated to aggregate the securities sold or purchased with
those of its other clients where such aggregation is not inconsistent with the
policies set forth in the FUND's registration statement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which does
not impair the services which the SUB-ADVISER renders to the Covered Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER,
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<PAGE> 4
and any person controlling, controlled by or under common control with the
SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB- ADVISER.
VALIC shall perform quarterly and annual tax compliance tests and
promptly furnish reports of such tests to the SUB-ADVISER after each quarter end
to ensure that the Fund is in compliance with Subchapter M of the Code and
Section 817(h) of the Code. VALIC shall apprise the SUB-ADVISER promptly after
each quarter end of any potential non-compliance with the diversification
requirements in such Code provisions. If so advised, the SUB-ADVISER shall take
prompt action so that the Fund(s) comply with such Code diversification
provisions, as directed by VALIC.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv) has
the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and if it has not already done
so, will provide VALIC and the FUND with a copy of such code of ethics together
with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of its
Form ADV as most recently filed with the SEC and will promptly after filing any
amendment to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC:(i) is registered as an investment adviser under the Advisers Act
and will continue to be so registered for so long as this Agreement remains in
effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify the SUB-ADVISER of the occurrence of any event that would
disqualify VALIC from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
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<PAGE> 5
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (i) on at least 60
days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish SUB-ADVISER copies of any amendments or supplements thereto before or at
the time the amendments or supplements become effective. Until VALIC delivers
any amendments or supplements to the SUB-ADVISER, the SUB-ADVISER shall be
fully protected in relying on the documents previously furnished to it.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND by any of the
persons whose names, addresses and specimen signatures will be provided by VALIC
from time to time. The SUB-ADVISER shall not be liable for so acting in good
faith upon such instructions, confirmation or authority, notwithstanding that it
shall subsequently be shown that the same was not given or signed or sent by an
authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. It is understood that the name "Goldman, Sachs &
Co." or "Goldman Sachs" or any derivative thereof, any trade name, trade device,
service mark, symbol or logo associated with the names are the valuable property
of the SUB-ADVISER and that VALIC has the right to use such name (or simulation
or logo), in offering materials of the Fund with the prior written approval of
the SUB-ADVISER and for so long as the
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<PAGE> 6
SUB-ADVISER is a SUB-ADVISER to the Fund. Upon termination of this Agreement
between the Fund, VALIC and the SUB-ADVISER, the Fund and VALIC shall forthwith
cease to use such name (or simulation or logo). In the event of termination of
this agreement, VALIC will continue to furnish to the SUB-ADVISER copies of any
of the above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC
shall furnish or otherwise make available to the SUB-ADVISER such other
information relating to the business affairs of VALIC and the FUND as the SUB-
ADVISER at any time, or from time to time, may reasonably request in order to
discharge obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement, or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND, except insofar as any
such statement or omission was made in reliance on information provided by the
SUB-ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by the SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub-Advisory
Agreement, including actions which may be based upon any willful malfeasance,
bad faith, or gross negligence of or by reckless disregard of, the SUB-ADVISER's
obligations and/or duties under this Agreement by the SUB-ADVISER or (ii) as the
result of any untrue statement of a material fact or any omission to state a
material fact required to be stated or necessary to make the statements, in
light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND to the extent any such
statement or omission was made in reliance on information provided by the
SUB-ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
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The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
---------------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ---------------------
GOLDMAN SACHS ASSET MANAGEMENT
By: /s/ [ILLEGIBLE]
---------------------------------------
Name:
Title:
ATTEST:
/s/ [ILLEGIBLE]
- ---------------------
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<PAGE> 8
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
Covered Fund Fee
American General Large Cap Growth Fund 0.30%
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<PAGE> 1
EXHIBIT d.5(b)(3)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and BROWN
CAPITAL MANAGEMENT, INC., hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Mid Cap Growth Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). The 1940 Act prohibits any person from acting
as an investment adviser of a registered investment company except
pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund, American
General Domestic Bond Fund, American General S&P 500 Index Fund,
American General Mid Cap Index Fund, American General Small Cap Index
Fund, American General Balanced Fund, American General Conservative
Growth Lifestyle Fund, American General Moderate Growth Lifestyle Fund,
American General Growth Lifestyle Fund, American General Core Bond
Fund, American General Strategic Bond Fund, American General High Yield
Bond Fund, American General Municipal Bond Fund and American General
Municipal Money Market Fund. In accordance with the FUND's Agreement
and Declaration of Trust (the "Declaration"), new Funds may be added to
the FUND upon approval of the FUND's Board of Trustees without approval
of the FUND's shareholders. This Agreement will apply only to the
Fund(s) set forth on the attached Schedule A, and any other Funds as
may be added or deleted by amendment to the attached Schedule A
("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign to
the SUB-ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"),
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<PAGE> 2
the FUND's Declaration, Bylaws, registration statements, prospectus and stated
investment objectives, policies and restrictions and any applicable procedures
adopted by the FUND's Board of Trustees shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their request all of the Covered Funds' investment records and
ledgers to assist VALIC and the FUND in compliance with respect to each Covered
Fund's securities transactions as required by the 1940 Act and the Advisers Act,
as well as other applicable laws. The SUB-ADVISER will furnish the FUND's Board
of Trustees such periodic and special reports as VALIC and the FUND's Board of
Trustees may reasonably request. The SUB-ADVISER will furnish to regulatory
authorities any information or reports in connection with such services which
may be requested in order to ascertain whether the operations of the Covered
Funds are being conducted in a manner consistent with applicable laws and
regulations. The SUB-ADVISER will not disclose or use any records or information
obtained pursuant to this Agreement in any manner whatsoever except as expressly
authorized in this Agreement, and will keep confidential any information
obtained pursuant to this service relationship, and disclose such information
only if VALIC or the Board of Trustees of the FUND has authorized such
disclosure, or if such information is or hereafter becomes ascertainable from
public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB-ADVISER of such determination, the
SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for the FUND, on
a daily basis, such confirmation, trade tickets and other documents as may be
necessary to enable it to perform its administrative responsibilities with
respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
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<PAGE> 3
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in furtherance
of the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which does
not impair the services which the SUB-ADVISER renders to the Covered Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB-ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
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<PAGE> 4
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv) has
the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and if it has not already done
so, will provide VALIC and the FUND with a copy of such code of ethics together
with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of its
Form ADV as most recently filed with the SEC and will promptly after filing any
amendment to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify the SUB-ADVISER of the occurrence of any event that would
disqualify VALIC from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (i) on at least 60
days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
4
<PAGE> 5
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the FUND as the SUB-ADVISER at any
time, or from time to time, may reasonably request in order to discharge
obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement, or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND, except insofar as any
such statement or omission was made in reliance on information provided by the
the SUB-ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub- Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB- ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund) or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading
5
<PAGE> 6
in any registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND to the extent any such
statement or omission was made in reliance on information provided by the SUB-
ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ----------------------------
BROWN CAPITAL MANAGEMENT, INC.
By: /s/ EDDIE BROWN
-----------------------------------
Name: Eddie C. Brown
Title: President
ATTEST:
/s/ LAZETTA RAINEY BRAXTON
- ----------------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General Mid Cap Growth Fund 0.40% of the first $25 million
0.30% of the next $25 million
0.20% on the excess over $50 million
</TABLE>
7
<PAGE> 1
EXHIBIT d.5(b)(4)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and J. P.
MORGAN INVESTMENT MANAGEMENT INC., hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Small Cap Growth Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). The 1940 Act prohibits any person from acting
as an investment adviser of a registered investment company except
pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund, American
General Domestic Bond Fund, American General S&P 500 Index Fund,
American General Mid Cap Index Fund, American General Small Cap Index
Fund, American General Balanced Fund, American General Conservative
Growth Lifestyle Fund, American General Moderate Growth Lifestyle Fund,
American General Growth Lifestyle Fund, American General Core Bond
Fund, American General Strategic Bond Fund, American General High Yield
Bond Fund, American General Municipal Bond Fund and American General
Municipal Money Market Fund. In accordance with the FUND's Agreement
and Declaration of Trust (the "Declaration"), new Funds may be added to
the FUND upon approval of the FUND's Board of Trustees without approval
of the FUND's shareholders. This Agreement will apply only to the
Fund(s) set forth on the attached Schedule A, and any other Funds as
may be added or deleted by amendment to the attached Schedule A
("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign to
the SUB-ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"),
1
<PAGE> 2
the FUND's Declaration, Bylaws, registration statements, prospectus and stated
investment objectives, policies and restrictions and any applicable procedures
adopted by the FUND's Board of Trustees shall:
(a) manage the investment and reinvestment of the assets.
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In selecting brokers or dealers to execute transactions on behalf of
the Covered Funds, the SUB-ADVISER will seek the best overall terms available.
In assessing the best overall terms available for any transaction, the SUB-
ADVISER will consider factors it deems relevant, including, without limitation,
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the brokers or dealers and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the SUB-ADVISER
is authorized to consider the brokerage and research services (within the
meaning of Section 28(e) of the Securities and Exchange Act of 1934, as amended)
provided to the Covered Funds and/or other accounts over which the SUB-ADVISER
or its affiliates exercise discretion.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their request all of the Covered Funds' investment records and
ledgers to assist VALIC and the FUND in complying with regulations applicable to
each Covered Fund's securities transactions as required by the 1940 Act and the
Advisers Act, as well as other applicable laws. The SUB-ADVISER will furnish the
FUND's Board of Trustees such periodic and special reports as VALIC and the
FUND's Board of Trustees may reasonably request. The SUB-ADVISER will furnish to
regulatory authorities any information or reports in connection with such
services which may be requested in order to ascertain whether the operations of
the Covered Funds are being conducted in a manner consistent with applicable
laws and regulations. The SUB-ADVISER will not disclose or use any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as expressly authorized in this Agreement, and will keep confidential any
information obtained pursuant to this service relationship, and disclose such
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for the FUND, on
a daily basis, such confirmation, trade tickets and other documents as may be
necessary to enable it to perform its administrative responsibilities with
respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
2
<PAGE> 3
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in furtherance
of the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
VALIC understands that the SUB-ADVISER and its affiliates now act, will
continue to act and may act in the future as investment adviser to fiduciary and
other managed accounts and as investment adviser to other investment companies,
and VALIC has no objection to the SUB-ADVISER so acting, provided that whenever
a Covered Fund and one or more other accounts or investment companies advised by
the SUB-ADVISER have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a methodology believed
to be equitable to each entity. The SUB-ADVISER similarly agrees to allocate
opportunities to sell securities. VALIC recognizes that, in some cases, this
procedure may limit the size of the position that may be acquired or sold for a
Covered Fund. In addition, VALIC understands that the persons employed by the
SUB-ADVISER to assist in the performance of the SUB-ADVISER's duties hereunder
will not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of the SUB-ADVISER or any
affiliate of the SUB- ADVISER to engage in and devote time and attention to
other business or to render services of whatever kind or nature.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this Agreement relates, so
long as there has been no willful
3
<PAGE> 4
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties on the part of the SUB- ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv) has
the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and if it has not already done
so, will provide VALIC and the FUND with a copy of such code of ethics together
with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of its
Form ADV as most recently filed with the SEC and will promptly after filing any
amendment to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify the SUB-ADVISER of the occurrence of any event that would
disqualify VALIC from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the
4
<PAGE> 5
payment of any penalty, by vote of the FUND's Board of Trustees or by vote of a
majority of that Covered Fund's outstanding voting securities on at least 60
days' prior written notice to the SUB-ADVISER. This Agreement may also be
terminated by VALIC: (i) on at least 60 days' prior written notice to the
SUB-ADVISER, without the payment of any penalty; or (ii) if the SUB-ADVISER
becomes unable to discharge its duties and obligations under this Agreement. The
SUB-ADVISER may terminate this Agreement at any time, or preclude its renewal
without the payment of any penalty, on at least 60 days' prior written notice to
VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish SUB-ADVISER copies of any amendments or supplements thereto before or at
the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the FUND as the SUB-ADVISER at any
time, or from time to time, may reasonably request in order to discharge
obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement, or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, advertisements or sales literature,
pertaining to the FUND, except insofar as any such statement or omission was
made in reliance on information provided in writing by the SUB-ADVISER or its
affiliates.
5
<PAGE> 6
The SUB-ADVISER shall indemnify and hold harmless VALIC (and its
affiliated companies and their respective officers, directors and employees)
from any and all claims, losses, liabilities or damages (including reasonable
attorney's fees and other related expenses) arising out of or in connection with
(1) any willful misfeasance, bad faith, gross negligence, or reckless disregard
of obligations or duties of the SUB-ADVISER in performing hereunder; or (2) any
untrue statement of material fact or any omission to state a material fact
required to be stated or necessary to make statements, in light of the
circumstances under which they are made, not misleading in any registration
statement, proxy materials, advertisements or sales literature, pertaining to
the Funds to the extent any such statement or omission was made in reliance on
information provided in writing by the SUB-ADVISER to VALIC for the express
purpose of inclusion in such materials.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ----------------------------
J. P. MORGAN INVESTMENT MANAGEMENT INC.
By: /s/ DIANE J. MINARDI
-----------------------------------
Name: Diane J. Minardi
Title: Vice President
ATTEST:
/s/ [ILLEGIBLE]
- ----------------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General Small Cap Growth Fund 0.60%
</TABLE>
7
<PAGE> 1
EXHIBIT d.5(b)(5)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and CAPITAL
GUARDIAN TRUST COMPANY, hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers
Act").
(b) VALIC is engaged as the investment adviser of American
General International Value Fund, American General Domestic Bond Fund
and American General Balanced Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open- end,
management investment company under the Investment Company Act of
1940, as amended ("1940 Act"). The 1940 Act prohibits any person from
acting as an investment adviser of a registered investment company
except pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small
Cap Value Fund, American General Small Cap Growth Fund, American
General Socially Responsible Fund, American General Money Market Fund,
American General Domestic Bond Fund, American General S&P 500 Index
Fund, American General Mid Cap Index Fund, American General Small Cap
Index Fund, American General Balanced Fund, American General
Conservative Growth Lifestyle Fund, American General Moderate Growth
Lifestyle Fund, American General Growth Lifestyle Fund, American
General Core Bond Fund, American General Strategic Bond Fund, American
General High Yield Bond Fund, American General Municipal Bond Fund and
American General Municipal Money Market Fund. In accordance with the
FUND's Agreement and Declaration of Trust (the "Declaration"), new
Funds may be added to the FUND upon approval of the FUND's Board of
Trustees without approval of the FUND's shareholders. This Agreement
will apply only to the Fund(s) set forth on the attached Schedule A,
and any other Funds as may be added or deleted by amendment to the
attached Schedule A ("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is exempt from registration
as an investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign
to the SUB- ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with provisions of:
(I) the 1940 Act; (ii) all applicable laws and regulations thereunder; and
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<PAGE> 2
(iii) all other applicable federal and state laws and regulations, including
section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
as are set forth in the Fund's Compliance Manual as mutually agreed upon by
VALIC and the SUB-ADVISER and in conformity with the FUND's Declaration,
Bylaws, registration statements, prospectus and stated investment objectives,
policies and restrictions and any applicable procedures adopted by the FUND's
Board of Trustees, which are communicated in writing to the SUB-ADVISER, shall:
(a) manage the investment and reinvestment of the assets,
other than the investment of cash, of the Covered Funds including, for
example, the evaluation of pertinent economic, statistical, financial,
and other data, the determination of the industries and companies to
be represented in each Covered Fund's portfolio, and the formulation
and implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (which may include futures contracts
and options thereon) for each Covered Fund's account with brokers or
dealers (which may include futures commission merchants) selected by
the SUB-ADVISER, or arrange for any other entity to provide a trading
desk and to place orders with brokers and dealers (which may include
futures commission merchants) selected by the SUB-ADVISER, which
brokers or dealers may include brokers or dealers (which may include
futures commission merchants) affiliated with the SUB-ADVISER, subject
to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the
FUND promptly upon their request all of the Covered Funds' investment records
and ledgers to assist VALIC and the FUND in compliance with respect to each
Covered Fund's securities transactions as required by the 1940 Act and the
Advisers Act, as well as other applicable laws. The SUB-ADVISER will furnish
the FUND's Board of Trustees such periodic and special reports as VALIC and the
FUND's Board of Trustees may reasonably request. The SUB-ADVISER will furnish
to regulatory authorities any information or reports in connection with such
services which may be requested in order to ascertain whether the operations of
the Covered Funds are being conducted in a manner consistent with applicable
laws and regulations. The SUB-ADVISER will not disclose or use any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as expressly authorized in this Agreement, and will keep confidential any
information obtained pursuant to this service relationship, and disclose such
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
required or requested by applicable federal or state authorities.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB-ADVISER of such determination, the
SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND.
The SUB-ADVISER will arrange for the transmission to the Custodian for the
FUND, on a daily basis, such confirmation, trade tickets and other documents as
may be necessary to enable it to perform its administrative responsibilities
with respect to the Covered Funds.
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<PAGE> 3
The SUB-ADVISER will not invest cash for the Covered Funds. The
investment of cash will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in
furtherance of the SUB-ADVISER's duties and responsibilities as set forth in
this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities
hereunder and VALIC shall pay, or arrange for others to pay, all VALIC's
expenses, except that VALIC shall in all events pay the compensation described
in Section 2 of this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB- ADVISER, a quarterly fee or fees based
on each Covered Fund's average monthly net asset value computed for each
Covered Fund as provided for herein and in the fee schedule attached hereto as
Schedule A. Schedule A may be amended from time to time, provided that
amendments are made in conformity with applicable laws and regulations and the
Declaration and Bylaws of the FUND. Any change in Schedule A pertaining to any
new or existing Fund shall not be deemed to affect the interest of any other
Fund and shall not require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the
manner provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar quarter as soon as
practicable after the end of that quarter but in any event no later than thirty
(30) days following the end of the quarter.
If the SUB-ADVISER serves for less than a whole quarter, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the
SUB-ADVISER under this Agreement shall be the sole responsibility of VALIC and
shall not be the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which
does not impair the services which the SUB-ADVISER renders to the Covered
Funds.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this Agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB-ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (I) is exempt from registration as an investment
adviser under the Advisers Act: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state
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<PAGE> 4
requirements, or the applicable requirements of any regulatory or industry
self-regulatory agency, necessary to be met in order to perform the services
contemplated by this Agreement, (iv) has the authority to enter into and
perform the services contemplated by this Agreement, and (v) will immediately
notify VALIC of the occurrence of any event that would disqualify the
SUB-ADVISER from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and if it has not
already done so, will provide VALIC and the FUND with a copy of such code of
ethics together with evidence of its adoption.
VALIC represents, warrants, and agrees as follows:
VALIC: (I) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the authority to
enter into and perform the services contemplated by this Agreement, and (v)
will immediately notify the SUB-ADVISER of the occurrence of any event that
would disqualify VALIC from serving as an investment adviser of an investment
company pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (I) on at least
60 days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
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<PAGE> 5
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
The parties agree that the name "Capital Guardian Trust Company," the
names of the SUB-ADVISER's affiliates within the Capital Group of Companies,
Inc., and any derivative or logo or trade or service mark, are the valuable
property of the SUB-ADVISER and its affiliates. VALIC shall have the right to
use such name(s), derivatives, logos, trade or service marks only with the
prior written approval of the SUB-ADVISER, which approval shall not be
unreasonably withheld so long as this Agreement is in effect. Upon termination
of this Agreement, VALIC shall forthwith cease to use such name(s),
derivatives, logos, trade or service marks. VALIC agrees that it will review
with the SUB-ADVISER any advertisement, sales literature or notice prior to its
use that makes reference to the SUB-ADVISER so that the SUB- ADVISER may review
the context in which it is referred to, it being agreed that the SUB-ADVISER
shall have no responsibility to ensure the adequacy of the form or content of
such materials for purposes of the 1940 Act or other applicable laws and
regulations. If the Covered Funds or VALIC makes any unauthorized use of the
SUB-ADVISER's name(s), derivatives, logos, trade or service marks, the parties
acknowledge that the SUB-ADVISER shall suffer irreparable harm for which
monetary damages are inadequate and thus, the SUB-ADVISER shall be entitle to
injunctive relief. VALIC shall furnish or otherwise make available to the
SUB-ADVISER such other information relating to the business affairs of VALIC
and the FUND as the SUB-ADVISER at any time, or from time to time, may
reasonably request in order to discharge obligations hereunder.
The SUB-ADVISER shall indemnify and hold harmless VALIC (and its
affiliated companies and their respective officers, directors and employees)
from any and all claims, losses, liabilities or damages (including reasonable
attorney's fees and other related expenses) arising out of or in connection
with (1) any willful misfeasance, bad faith, gross negligence, or reckless
disregard of obligations or duties of the SUB-ADVISER in performing hereunder;
or (2) any untrue statement of a material fact or any omission to state a
material fact required to be stated or necessary to make statements, in light
of the circumstances under which they are made, not misleading in any
registration statement, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the Funds to the extent any such
statement or omission was made in reliance on information provided by the
SUB-ADVISER to VALIC for the express purpose of inclusion in such materials.
VALIC shall indemnify and hold harmless the SUB-ADVISER (and its
affiliated companies and their respective officers, directors and employees)
from any and all claims, losses, liabilities or damages (including reasonable
attorney's fees and other related expenses) arising out of any matter which
does not require the SUB-ADVISER to provide an indemnity under the preceding
paragraph, including without limitation, any claim that is based upon any
untrue statement of a material fact or any omission to state a material fact
required to be stated or necessary to make statements, in light of the
circumstances under which they are made, not misleading not misleading
contained
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<PAGE> 6
in the registration statement, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the Funds except those statements
that were provided by the SUB-ADVISER to VALIC for the express purpose of
inclusion in such materials.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations,
including definitions therein and such exemptions as may be granted to VALIC or
the SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that
the applicable law of the State of Texas, or any of the provisions herein,
conflict with applicable provisions of the federal securities laws, the latter
shall control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ----------------------------
CAPITAL GUARDIAN TRUST COMPANY
By: /s/ ROBERTA A. CONVOY
-----------------------------------
Name: Roberta A. Convoy
Title: Senior Vice President
ATTEST:
/s/ [ILLEGIBLE]
- ---------------------
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<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable quarterly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General International Value Fund* 0.75% of the first $25 million
0.60% of the next $25 million
0.425% of the next $200 million
0.375% on the excess over $250 million
American General Domestic Bond Fund* 0.35% of the first $50 million
0.20% of the next $50 million
0.18% of the next $200 million
0.15% on the excess over $300 million
American General Balanced Fund* 0.55% of the first $25 million
0.40% of the next $25 million
0.20% on the excess over $50 million
</TABLE>
*Fees with respect to each Fund are aggregated and the Sub-Adviser
applies a 5% discount to all fees if all fees are between $1.25
million and $4 million, a 7.5% discount to all fees between $4 million
and $8 million, and a 12.5% discount to all fees if total fees exceed
$12 million.
7
<PAGE> 1
EXHIBIT d.5(b)(6)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and STATE
STREET BANK & TRUST COMPANY, through its division, STATE STREET GLOBAL ADVISORS,
hereinafter referred to as the "SUB- ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Large Cap Value Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). The 1940 Act prohibits any person from acting
as an investment adviser of a registered investment company except
pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund, American
General Domestic Bond Fund, American General S&P 500 Index Fund,
American General Mid Cap Index Fund, American General Small Cap Index
Fund, American General Balanced Fund, American General Conservative
Growth Lifestyle Fund, American General Moderate Growth Lifestyle Fund,
American General Growth Lifestyle Fund, American General Core Bond
Fund, American General Strategic Bond Fund, American General High Yield
Bond Fund, American General Municipal Bond Fund and American General
Municipal Money Market Fund. In accordance with the FUND's Agreement
and Declaration of Trust (the "Declaration"), new Funds may be added to
the FUND upon approval of the FUND's Board of Trustees without approval
of the FUND's shareholders. This Agreement will apply only to the
Fund(s) set forth on the attached Schedule A, and any other Funds as
may be added or deleted by amendment to the attached Schedule A
("Covered Funds").
(d) The SUB-ADVISER is engaged in the business of rendering
investment advisory services and is a "bank" as defined under the
Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign to
the SUB-ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal
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<PAGE> 2
and state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"), the FUND's Declaration, Bylaws,
registration statements, prospectus and stated investment objectives, policies
and restrictions and any applicable procedures adopted by the FUND's Board of
Trustees and provided to the SUB- ADVISER shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their request all of the Covered Funds' investment records and
ledgers to assist VALIC and the FUND in compliance with respect to each Covered
Fund's securities transactions as required by the 1940 Act and the Advisers Act,
as well as other applicable laws. The SUB-ADVISER will furnish the FUND's Board
of Trustees such periodic and special reports as VALIC and the FUND's Board of
Trustees may reasonably request. The SUB-ADVISER will furnish to regulatory
authorities any information or reports in connection with such services which
may be requested in order to ascertain whether the operations of the Covered
Funds are being conducted in a manner consistent with applicable laws and
regulations. The SUB-ADVISER will not disclose or use any records or information
obtained pursuant to this Agreement in any manner whatsoever except as expressly
authorized in this Agreement, and will keep confidential any information
obtained pursuant to this service relationship, and disclose such information
only if VALIC or the Board of Trustees of the FUND has authorized such
disclosure, or if such information is or hereafter becomes ascertainable from
public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB- ADVISER of such determination in writing,
the SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND (the
"Custodian"). The SUB-ADVISER will arrange for the transmission to the Custodian
for the FUND, on a daily basis, such confirmation, trade tickets and other
documents as may be necessary to enable it to perform its administrative
responsibilities the with respect to the Covered Funds. The SUB- ADVISER further
shall have the authority to instruct the custodian of the FUND (i) to pay cash
for securities and other
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<PAGE> 3
property delivered to the Custodian for the FUND (ii) to deliver securities and
other property against payment for the FUND, and (iii) to transfer assets and
funds to such brokerage accounts as the SUB-ADVISER may designate, all
consistent with the powers, authorities and limitations set forth herein. The
SUB-ADVISER shall not have the authority to cause the Custodian to deliver
securities and other property except as expressly provided for in this
Agreement.
The SUB-ADVISER may aggregate sales and purchase orders of securities
held by the FUND with similar orders being made simultaneously for other
accounts managed by the SUB-ADVISER or with accounts of the affiliates of the
SUB-ADVISER, if in the SUB-ADVISER's reasonable judgment such aggregation shall
result in an overall economic benefit to the FUND considering the advantageous
selling or purchase price, brokerage commission and other expenses. In
accounting for such aggregated order price, commission and other expenses shall
be averaged on a per bond or share basis daily. VALIC acknowledges that the
determination of such economic benefit to the FUND by the SUB- ADVISER is
subjective and represents the SUB-ADVISER's evaluation that the FUND is
benefited by relatively better purchase or sales prices, lower commission
expenses and beneficial timing of transactions or a combination of these and
other factors.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in furtherance
of the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time with the express written consent
of the parties hereto, provided that amendments are made in conformity with
applicable laws and regulations and the Declaration and Bylaws of the FUND. Any
change in Schedule A pertaining to any new or existing Fund shall not be deemed
to affect the interest of any other Fund and shall not require the approval of
shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER terminates its services prior to month end, the
foregoing compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which does
not impair the services which the SUB-ADVISER renders to the Covered Funds.
VALIC agrees that the
3
<PAGE> 4
SUB-ADVISER may give advice and take action in the performance of its duties
with respect to any of its other clients which differ from action taken with
respect to any Covered Fund.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB- ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is a "bank" as defined under the Advisers Act
and will continue to maintain such status for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify VALIC of the occurrence of any event that would disqualify
the SUB-ADVISER from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and if it has not already done
so, will provide VALIC and the FUND with a copy of such code of ethics together
with evidence of its adoption.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement including the authority to appoint a
SUB-ADVISER to the FUND, (iv) has the authority to enter into and perform the
services contemplated by this Agreement, and (v) will immediately notify the
SUB-ADVISER of the occurrence of any event that would disqualify VALIC from
serving as an investment adviser of an investment company pursuant to Section
9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least
4
<PAGE> 5
annually by the vote of a majority of the FUND's trustees who are not parties to
this Agreement or interested persons of any such parties, cast in person at a
meeting called for the purpose of voting on such approval, and by a vote of a
majority of the FUND's Board of Trustees or a majority of that Fund's
outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (i) on at least 60
days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the FUND as the SUB-ADVISER at any
time, or from time to time, may reasonably request in order to discharge
obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory
5
<PAGE> 6
Agreement, or (ii) as the result of any untrue statement of a material fact or
any omission to state a material fact required to be stated or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to the FUND,
except insofar as any such statement or omission was made in reliance on
information provided by the SUB-ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub- Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB- ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund) or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND to the extent any such
statement or omission was made in reliance on information provided by the SUB-
ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- -----------------------
STATE STREET BANK & TRUST COMPANY, through its
division,
STATE STREET GLOBAL ADVISORS
By: /s/ TIMOTHY B. HARBERT
-----------------------------------
Name: Timothy B. Harbert
Title: Executive Vice President
ATTEST:
/s/ [ILLEGIBLE]
- -----------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General Large Cap Value Fund 0.25%
$50,000 minimum annual fee
</TABLE>
7
<PAGE> 1
EXHIBIT d.5(b)(7)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and
NEUBERGER&BERMAN MANAGEMENT, INC., hereinafter referred to as the "SUB-ADVISER."
VALIC represents the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Mid Cap Value Fund pursuant to an Investment Advisory Agreement
dated October 7, 1998 between VALIC and American General Series
Portfolio Company 2 ("FUND"), an investment company organized under the
laws of Delaware as a business trust, as a series type of investment
company issuing separate classes (or series) of shares of beneficial
interest and is registered as a diversified, open-end, management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"). The 1940 Act prohibits any person from acting as an
investment adviser of a registered investment company except pursuant
to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Money Market Fund, American
General Domestic Bond Fund, American General S&P 500 Index Fund,
American General Mid Cap Index Fund, American General Small Cap Index
Fund, American General Balanced Fund, American General Conservative
Growth Lifestyle Fund, American General Moderate Growth Lifestyle Fund,
American General Growth Lifestyle Fund, American General Core Bond
Fund, American General Strategic Bond Fund, American General High Yield
Bond Fund, American General Municipal Bond Fund and American General
Municipal Money Market Fund. In accordance with the FUND's Agreement
and Declaration of Trust (the "Declaration"), new Funds may be added to
the FUND upon approval of the FUND's Board of Trustees without approval
of the FUND's shareholders. This Agreement will apply only to the
Fund(s) set forth on the attached Schedule A, and any other Funds as
may be added or deleted by amendment to the attached Schedule A
("Covered Funds").
(d) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Fund(s) set forth on the attached Schedule A, and any other Funds
as may be added or deleted by amendment to the attached Schedule A
("Covered Funds") which VALIC determines from time to time to assign to
the SUB-ADVISER.
(e) The SUB-ADVISER represents that it is engaged principally
in the business of rendering investment advisory services and is
registered as an investment adviser under the Advisers Act.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
This Agreement will apply only to the Covered Funds.
1
<PAGE> 2
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"), the FUND's Declaration, Bylaws,
registration statements, prospectus and stated investment objectives, policies
and restrictions and any applicable procedures adopted by the FUND's Board of
Trustees shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their reasonable request all of the Covered Funds' investment
records and ledgers to assist VALIC and the FUND in compliance with respect to
each Covered Fund's securities transactions as required by the 1940 Act and the
Advisers Act, as well as other applicable laws. The SUB-ADVISER will furnish the
FUND's Board of Trustees such periodic and special reports as VALIC and the
FUND's Board of Trustees may reasonably request. The SUB-ADVISER will furnish to
regulatory authorities any information or reports in connection with such
services which may be requested in order to ascertain whether the operations of
the Covered Funds are being conducted in a manner consistent with applicable
laws and regulations. The SUB-ADVISER will not disclose any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as expressly authorized in this Agreement, and will keep confidential any
information obtained pursuant to this service relationship, and disclose such
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
Notwithstanding the foregoing, the SUB-ADVISER may disclose the total return
earned by the Covered Funds and may include such total return in the calculation
of composite performance information without prior approval by VALIC or the
Board of Trustees of the Fund.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB- ADVISER of such determination in writing,
the SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for
2
<PAGE> 3
the FUND, on a daily basis, such confirmation, trade tickets and other documents
as may be necessary to enable it to perform its administrative responsibilities
with respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in furtherance
of the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than ten (10)
days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which does
not impair the services which the SUB-ADVISER renders to the Covered Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
claims, damages, liabilities or litigation (including reasonable counsel fees
and expenses) sustained in connection with the matters to which this Agreement
relates, so long as there has been no willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties on the part of the
SUB-ADVISER.
3
<PAGE> 4
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is registered as an investment adviser
under the Advisers Act and will continue to be so registered for so
long as this Agreement remains in effect: (ii) is not prohibited by the
1940 Act or the Advisers Act from performing the services contemplated
by this Agreement; (iii) has met, and will continue to meet for so long
as this Agreement remains in effect, any applicable federal or state
requirements, or the applicable requirements of any regulatory or
industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the
authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of
any event that would disqualify the SUB-ADVISER from serving as an
investment adviser of an investment company pursuant to Section 9(a) of
the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the 1940 Act and if
it has not already done so, will provide VALIC and the FUND with a copy
of such code of ethics together with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a
copy of its Form ADV as most recently filed with the SEC and will
promptly after filing any amendment to its Form ADV with the SEC,
furnish a copy of such amendment to VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify the SUB-ADVISER of the occurrence of any event that would
disqualify VALIC from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also
4
<PAGE> 5
be terminated by VALIC: (i) on at least 60 days' prior written notice to the
SUB-ADVISER, without the payment of any penalty; or (ii) if the SUB-ADVISER
becomes unable to discharge its duties and obligations under this Agreement. The
SUB-ADVISER may terminate this Agreement at any time, or preclude its renewal
without the payment of any penalty, on at least 60 days' prior written notice to
VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the FUND as the SUB-ADVISER at any
time, or from time to time, may reasonably request in order to discharge
obligations hereunder. Subject to provisions of this paragraph, SUB-ADVISER
grants VALIC and the FUND a non-exclusive right to use the "Neuberger&Berman"
name in connection with the SUB-ADVISER's management of the FUND (i) for so long
as the Agreement, any other investment management agreement between VALIC and
SUB-ADVISER with respect to the FUND, or to any extension, renewal or amendment
thereof, remain in effect, and (ii) for subsequent periods as long as required
by law, rule or regulation or to the extent necessary to refer to or illustrate
the historical performance of the FUND.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement, or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials
5
<PAGE> 6
pertaining to the FUND, except insofar as any such statement or omission was
made in reliance on information provided by the SUB-ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by the SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub- Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB- ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund) or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the FUND to the extent any such
statement or omission was made in reliance on information provided by the SUB-
ADVISER or its affiliates. Provided, however, that the SUB-ADVISER's
responsibility for indemnification pursuant to this paragraph shall not, for any
Covered Fund, exceed the lesser of $1,000,000 or 2% of the Covered Fund's net
assets (measured as of the end of the first calendar quarter during which
non-compliance occurred) for any failure to comply with the diversification
requirements specified in section 817(h) or the qualification of Subchapter M of
the Code.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- --------------------------
NEUBERGER&BERMAN MANAGEMENT, INC.
By: /s/ MICHAEL WEINER
------------------------------------
Name: Michael Weiner
Title: Senior Vice President
ATTEST:
/s/ LAWRENCE B. STOLLER
- --------------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
Covered Fund Fee
- ------------ ---
American General Mid Cap Value Fund 0.50% of the first $100 million
0.475% of the next $150 million
0.45% of the next $250 million
0.425% of the next $250 million
0.40% on the excess over $750 million
7
<PAGE> 1
EXHIBIT d.5(b)(8)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and
FIDUCIARY MANAGEMENT ASSOCIATES, INC., hereinafter referred to as the "SUB-
ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers
Act").
(b) VALIC is engaged as the investment adviser of American
General Small Cap Value Fund pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of
1940, as amended ("1940 Act"). The 1940 Act prohibits any person from
acting as an investment adviser of a registered investment company
except pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small
Cap Value Fund, American General Small Cap Growth Fund, American
General Socially Responsible Fund, American General Money Market Fund,
American General Domestic Bond Fund, American General S&P 500 Index
Fund, American General Mid Cap Index Fund, American General Small Cap
Index Fund, American General Balanced Fund, American General
Conservative Growth Lifestyle Fund, American General Moderate Growth
Lifestyle Fund, American General Growth Lifestyle Fund, American
General Core Bond Fund, American General Strategic Bond Fund, American
General High Yield Bond Fund, American General Municipal Bond Fund and
American General Municipal Money Market Fund. In accordance with the
FUND's Agreement and Declaration of Trust (the "Declaration"), new
Funds may be added to the FUND upon approval of the FUND's Board of
Trustees without approval of the FUND's shareholders. This Agreement
will apply only to the Fund(s) set forth on the attached Schedule A,
and any other Funds as may be added or deleted by amendment to the
attached Schedule A ("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign
to the SUB- ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in conformity with the 1940 Act, all
applicable laws and regulations thereunder, all other applicable federal and
state laws and regulations, including section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"),
1
<PAGE> 2
the FUND's Declaration, Bylaws, registration statements, prospectus and stated
investment objectives, policies and restrictions and any applicable procedures
adopted by the FUND's Board of Trustees shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB- ADVISER, subject to applicable
law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the most
favorable overall price and execution. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services, including statistical data, to the SUB-ADVISER. The
SUB-ADVISER shall not be deemed to have acted unlawfully, or to have breached
any duty created by this Agreement, or otherwise, solely by reason of acting
according to such authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of services
under this Agreement. The SUB-ADVISER will make available to VALIC and the
FUND promptly upon their request all of the Covered Funds' investment records
and ledgers to assist VALIC and the FUND in compliance with respect to each
Covered Fund's securities transactions as required by the 1940 Act and the
Advisers Act, as well as other applicable laws. The SUB-ADVISER will furnish
the FUND's Board of Trustees such periodic and special reports as VALIC and the
FUND's Board of Trustees may reasonably request. The SUB-ADVISER will furnish
to regulatory authorities any information or reports in connection with such
services which may be requested in order to ascertain whether the operations of
the Covered Funds are being conducted in a manner consistent with applicable
laws and regulations. The SUB-ADVISER will not disclose or use any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as expressly authorized in this Agreement, and will keep confidential any
information obtained pursuant to this service relationship, and disclose such
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter becomes ascertainable
from public or published information or trade sources, or if such disclosure is
expressly required or requested by applicable federal or state authorities.
Should VALIC at any time make any definite determination as to
investment policy and notify the SUB-ADVISER of such determination, the
SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND.
The SUB-ADVISER will arrange for the transmission to the Custodian for the
FUND, on a daily basis, such confirmation, trade tickets and other documents as
may be necessary to enable it to perform its administrative responsibilities
with respect to the Covered Funds.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
2
<PAGE> 3
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent VALIC or the FUND other than in
furtherance of the SUB-ADVISER's duties and responsibilities as set forth in
this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities
hereunder and VALIC shall pay, or arrange for others to pay, all VALIC's
expenses, except that VALIC shall in all events pay the compensation described
in Section 2 of this Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB- ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the
manner provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than thirty
(30) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the
SUB-ADVISER under this Agreement shall be the sole responsibility of VALIC and
shall not be the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
The SUB-ADVISER, and any person controlled by or under common control
with the SUB-ADVISER, shall remain free to provide similar investment advisory
services to other persons or engage in any other business or activity which
does not impair the services which the SUB-ADVISER renders to the Covered
Funds.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB-ADVISER.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
3
<PAGE> 4
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv)
has the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and if it has not
already done so, will provide VALIC and the FUND with a copy of such code of
ethics together with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of
its Form ADV as most recently filed with the SEC and will promptly after filing
any amendment to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the authority to
enter into and perform the services contemplated by this Agreement, and (v)
will immediately notify the SUB-ADVISER of the occurrence of any event that
would disqualify VALIC from serving as an investment adviser of an investment
company pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment, as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (i) on at least
60 days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
4
<PAGE> 5
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fitted to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in accordance
with the 1940 Act and rules thereunder. The SUB-ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC
shall furnish or otherwise make available to the SUB-ADVISER such other
information relating to the business affairs of VALIC and the FUND as the
SUB-ADVISER at any time, or from time to time, may reasonably request in order
to discharge obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses and claims which
arise (i) as a result of a failure by VALIC to provide the services or furnish
materials required under the terms of this Investment Sub-Advisory Agreement,
or (ii) as the result of any untrue statement of a material fact or any
omission to state a material fact required to be stated or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to the FUND,
except insofar as any such statement or omission was made in reliance on
information provided by the SUB- ADVISER or its affiliates.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub-Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB- ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund)
or (ii) as the result of any untrue statement of a material fact or any
omission to state a material fact required to be stated or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to
5
<PAGE> 6
the FUND to the extent any such statement or omission was made in reliance on
information provided by the SUB-ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations,
including definitions therein and such exemptions as may be granted to VALIC or
the SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that
the applicable law of the State of Texas, or any of the provisions herein,
conflict with applicable provisions of the federal securities laws, the latter
shall control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
----------------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ----------------------------
FIDUCIARY MANAGEMENT ASSOCIATES, INC.
By: /s/ ROBERT W. THORNBURGH, JR.
----------------------------------------
Name: Robert W. Thornburgh, Jr., CFA
Title: Executive Vice President
ATTEST:
/s/ [ILLEGIBLE]
- ----------------------------
6
<PAGE> 7
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
<TABLE>
<CAPTION>
Covered Fund Fee
------------ ---
<S> <C>
American General Small Cap Value Fund 0.50% of the first $50 million
0.40% on the excess over $50 million
</TABLE>
7
<PAGE> 1
EXHIBIT d.5(b)(10)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 7th day of October, 1998, by and between THE VARIABLE
ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and
AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P., hereinafter referred to as the
"SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers
Act").
(b) VALIC is engaged as the investment adviser of American
General Core Bond Fund, American General Strategic Bond Fund, American
General High Yield Bond Fund, American General Municipal Bond Fund and
American General Municipal Money Market Fund pursuant to an Investment
Advisory Agreement dated October 7, 1998 between VALIC and American
General Series Portfolio Company 2 ("FUND"), an investment company
organized under the laws of Delaware as a business trust, as a series
type of investment company issuing separate classes (or series) of
shares of beneficial interest and is registered as a diversified,
open-end, management investment company under the Investment Company
Act of 1940, as amended ("1940 Act"). The 1940 Act prohibits any
person from acting as an investment adviser of a registered investment
company except pursuant to a written contract.
(c) The FUND currently consists of twenty-three portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small
Cap Value Fund, American General Small Cap Growth Fund, American
General Socially Responsible Fund, American General Money Market Fund,
American General Domestic Bond Fund, American General S&P 500 Index
Fund, American General Mid Cap Index Fund, American General Small Cap
Index Fund, American General Balanced Fund, American General
Conservative Growth Lifestyle Fund, American General Moderate Growth
Lifestyle Fund, American General Growth Lifestyle Fund, American
General Core Bond Fund, American General Strategic Bond Fund, American
General High Yield Bond Fund, American General Municipal Bond Fund and
American General Municipal Money Market Fund. In accordance with the
FUND's Agreement and Declaration of Trust (the "Declaration"), new
Funds may be added to the FUND upon approval of the FUND's Board of
Trustees without approval of the FUND's shareholders. This Agreement
will apply only to the Fund(s) set forth on the attached Schedule A,
and any other Funds as may be added or deleted by amendment to the
attached Schedule A ("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign
to the SUB- ADVISER.
VALIC and the SUB-ADVISER AGREE AS FOLLOWS:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISER
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in material conformity with the 1940
Act, all applicable laws and regulations thereunder, all other
1
<PAGE> 2
applicable federal and state securities and tax laws and regulations, including
section 817(h) and Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), the FUND's Declaration, Bylaws, registration statements,
prospectus and stated investment objectives, policies and restrictions and any
applicable procedures adopted by the FUND's Board of Trustees and provided to
the SUB-ADVISER shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB- ADVISER, subject to applicable
law.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the best
execution of portfolio transactions. Subject to approval by the FUND's Board
of Trustees of appropriate policies and procedures, the SUB-ADVISER may cause
the Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services to the SUB-ADVISER. The SUB-ADVISER shall not be deemed to
have acted unlawfully, or to have breached any duty created by this Agreement,
or otherwise, solely by reason of acting in accordance with such
authorization.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of its
services under this Agreement. The SUB-ADVISER will make available to VALIC
and the FUND promptly upon their reasonable written request all of the Covered
Funds' investment records and ledgers to assist VALIC and the FUND in
compliance with respect to each Covered Fund's securities transactions as
required by the 1940 Act and the Advisers Act, as well as other applicable
laws. The SUB-ADVISER will furnish the FUND's Board of Trustees such periodic
and special reports as VALIC and the FUND's Board of Trustees may reasonably
request. The SUB-ADVISER will furnish to regulatory authorities any
information or reports in connection with such services which may be requested
in order to ascertain whether the operations of the Covered Funds are being
conducted in a manner consistent with applicable laws and regulations. The
SUB-ADVISER will not disclose or use any records or information obtained
pursuant to this Agreement in any manner whatsoever except as expressly
authorized in this Agreement, and will keep confidential any non-public
information obtained directly as a result of this service relationship, and the
SUB-ADVISER shall disclose such non-public information only if VALIC or the
Board of Trustees of the FUND has authorized such disclosure, or if such
information is or hereafter otherwise is known by the SUB-ADVISER or has been
disclosed, directly or indirectly, by VALIC or the Fund to others becomes
ascertainable from public or published information or trade sources, or if such
disclosure is expressly required or requested by applicable federal or state
regulatory authorities, or to the extent such disclosure is reasonably required
by auditors or attorneys of the SUB-ADVISER in connection with the performance
of their professional services. Notwithstanding the foregoing, the SUB-ADVISER
may disclose the total return earned by the Covered Funds and may include such
total return in the calculation of composite performance information without
prior approval by VALIC or the Board of Trustees of the FUND.
Should VALIC at any time make any definite determination as to any
investment policy and notify the SUB-ADVISER in writing of such determination,
the SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination
has been revoked, provided such determination will permit SUB-ADVISER to comply
with the first paragraph of this Section.
2
<PAGE> 3
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND.
The SUB-ADVISER will arrange for the transmission to the Custodian for the
FUND, on a daily basis, such confirmation, trade tickets and other documents as
may be necessary to enable it to perform its administrative responsibilities
with respect to the Covered Funds. The SUB-ADVISER further shall have the
authority to instruct the custodian of the FUND (i) to pay cash for securities
and other property delivered to the Custodian for the FUND (ii) to deliver
securities and other property against payment for the FUND, and (iii) to
transfer assets and funds to such brokerage accounts as the SUB-ADVISER may
designate, all consistent with the powers, authorities and limitations set
forth herein. The SUB-ADVISER shall not have the authority to cause the
Custodian to deliver securities and other property except as expressly provided
for in this Agreement.
The SUB-ADVISER may aggregate sales and purchase orders of securities
held by the FUND with similar orders being made simultaneously for other
accounts managed by the SUB-ADVISER or with accounts of the affiliates of the
SUB- ADVISER, if in the SUB-ADVISER's reasonable judgment such aggregation
shall result in an overall economic benefit to the FUND considering the
advantageous selling or purchase price, brokerage commission and other
expenses. In accounting for such aggregated order price, commission and other
expenses shall be averaged on a per bond or share basis daily. VALIC
acknowledges that the determination of such economic benefit to the FUND by the
SUB-ADVISER is subjective and represents the SUB-ADVISER's evaluation that the
FUND is benefited by relatively better purchase or sales prices, lower
commission expenses and beneficial timing of transactions or a combination of
these and other factors.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act or represent VALIC or the Fund other than in furtherance of
the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities
hereunder and VALIC shall pay, or arrange for others to pay, all VALIC's
expenses, except that VALIC shall in all events pay the compensation described
in Section 2 of the Agreement.
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB- ADVISER, a monthly fee or fees based on
each Covered Fund's average monthly net asset value computed for each Covered
Fund as provided for herein and in the fee schedule attached hereto as Schedule
A. Schedule A may be amended from time to time, provided that amendments are
made in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average monthly net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the
manner provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than ten
(10) days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the
SUB-ADVISER under this Agreement shall be the sole responsibility of VALIC and
shall not be the responsibility of the FUND.
3
<PAGE> 4
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
VALIC understands that the SUB-ADVISER and its affiliates now act,
will continue to act and may act in the future as investment adviser to
fiduciary and other managed accounts and as investment adviser to other
investment companies, and VALIC has no objection to the SUB-ADVISER so acting,
provided that whenever a Covered Fund and one or more other accounts or
investment companies advised by the SUB-ADVISER have available funds for
investment, investments suitable and appropriate for each will be allocated in
accordance with a methodology believed to be equitable to each entity. The
SUB-ADVISER similarly agrees to allocate opportunities to sell securities.
VALIC recognizes that, in some cases, this procedure may limit the size of the
position that may be acquired or sold for a Covered Fund. In addition, VALIC
understands that the persons employed by the SUB-ADVISER to assist in the
performance of the SUB-ADVISER's duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the SUB-ADVISER or any affiliate of the SUB-ADVISER to
engage in and devote time and attention to other business or to render services
of whatever kind or nature.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the FUND, and VALIC shall indemnify the SUB-ADVISER, for any act
or omission in rendering services under this Agreement, or for any losses
sustained in connection with the matters to which this agreement relates, so
long as there has been no willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties on the part of the SUB-ADVISER in
performing its duties under this Agreement.
VALIC shall perform quarterly and annual tax compliance tests and
promptly furnish reports of such tests to the SUB-ADVISER after each quarter
end to ensure that the Fund is in compliance with Subchapter M of the Code and
Section 817(h) of the Code. VALIC shall apprise the SUB-ADVISER promptly after
each quarter end of any potential non-compliance with the diversification
requirements in such Code provisions. If so advised, the SUB-ADVISER shall take
prompt action so that the Fund(s) comply with such Code diversification
provisions, as directed by VALIC.
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv)
has the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and if it has not
already done so, will provide VALIC and the FUND with a copy of such code of
ethics together with evidence of its adoption.
4
<PAGE> 5
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of
its Form ADV as most recently filed with the SEC and will promptly after filing
any amendment to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement, (iv) has the authority to
enter into and perform the services contemplated by this Agreement, and (v)
will immediately notify the SUB-ADVISER of the occurrence of any event that
would disqualify VALIC from serving as an investment adviser of an investment
company pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Fund(s) set forth on
Schedule A on the date hereof and as to any other Fund on the date of the
Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on at least 60 days' prior written notice to the
SUB-ADVISER. This Agreement may also be terminated by VALIC: (I) on at least
60 days' prior written notice to the SUB-ADVISER, without the payment of any
penalty; or (ii) if the SUB-ADVISER becomes unable to discharge its duties and
obligations under this Agreement. The SUB-ADVISER may terminate this Agreement
at any time, or preclude its renewal without the payment of any penalty, on at
least 60 days' prior written notice to VALIC.
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fit to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the FUND are the FUND's property. The SUB-ADVISER also agrees upon request
of VALIC or the FUND, to promptly surrender the books and records in
accordance with the 1940 Act and rules thereunder. The SUB-ADVISER further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records required to be maintained by Rule 31a-1 under the 1940 Act.
5
<PAGE> 6
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective. Until VALIC
delivers any amendments or supplements to the SUB-ADVISER, the SUB-ADVISER
shall be fully protected in relying on the documents previously furnished to
it.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the FUND in writing
signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
interest holders of the FUND or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC
shall furnish or otherwise make available to the SUB-ADVISER such other
information relating to the business affairs of VALIC and the FUND as the
SUB-ADVISER at any time, or from time to time, may reasonably request in order
to discharge obligations hereunder. Subject to provisions of this paragraph,
SUB-ADVISER grants VALIC and the FUND a non-exclusive right to use the
"American General Investment Management" name in connection with the
SUB-ADVISER's management of the FUND (i) for so long as the this Agreement, any
other investment management agreement between VALIC and SUB-ADVISER with
respect to the FUND, or to any extension, renewal or amendment thereof, remain
in effect, and (ii) for subsequent periods as long as required by law, rule or
regulation or to the extent necessary to refer to or illustrate the historical
performance of the FUND.
VALIC agrees to indemnify the SUB-ADVISER for losses, costs, fees,
expenses and claims which arise directly or indirectly (i) as a result of a
failure by VALIC to provide the services or furnish materials required under
the terms of this Investment Sub-Advisory Agreement, or (ii) as the result of
any untrue statement of a material fact or any omission to state a material
fact required to be stated or necessary to make the statements, in light of the
circumstances under which they were made, not misleading in any registration
statements, proxy materials, reports, advertisements, sales literature, or
other materials pertaining to the FUND, except insofar as any such statement or
omission was specifically made in reliance on written information provided by
the SUB-ADVISER to VALIC.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub-Advisory
Agreement, or (ii) as the result of any untrue statement of a material fact or
any omission to state a material fact required to be stated or necessary to
make the statements, in light of the circumstances under which they were made,
not misleading in any registration statements, proxy materials, reports,
advertisements, sales literature, or other materials pertaining to the FUND,
but only to the extent that such statement or omission was specifically made in
reliance on written information provided by the SUB-ADVISER to VALIC. Provided,
however, that the SUB-ADVISER's responsibility, if any, to provide VALIC with
indemnification pursuant to this paragraph or any other provision of this
Agreement for any failure on the SUB-ADVISER's part to comply with the
diversification requirements specified in Section 817(h) of the Code or the
qualification standards of Subchapter M of the Code shall not for any Covered
Fund exceed the lesser of $1 million or 2% of the Covered Fund's net assets
(measured as of the end of the first calendar quarter during which
non-compliance with Section 817(h) or Subchapter M of the Code first occurred).
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
6
<PAGE> 7
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations,
including definitions therein and such exemptions as may be granted to VALIC or
the SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that
the applicable law of the State of Texas, or any of the provisions herein,
conflict with applicable provisions of the federal securities laws, the latter
shall control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
-----------------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
ATTEST:
/s/ NORI L. GABERT
- ----------------------------
AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P.
By: /s/ RICHARD W. SCOTT
-----------------------------------------
Name: Richard W. Scott
Title: President and CEO
ATTEST:
/s/ PETER TUTERS
- -----------------------
7
<PAGE> 8
SCHEDULE A
(Effective October 7, 1998)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
Covered Fund Fee
------------ ---
American General Core Bond Fund 0.25% on first $200 million
0.20% on next $300 million
0.15% over $500 million
American General Strategic Bond Fund 0.35% on first $200 million
0.25% on next $300 million
0.20% over $500 million
American General High Yield Bond Fund 0.45% on first $200 million
0.35% on next $300 million
0.30% over $500 million
American General Municipal Bond Fund 0.25% on first $200 million
0.20% on first $300 million
0.15% on first $500 million
American General Municipal Money Market Fund 0.25% on first $200 million
0.20% on first $300 million
0.15% on first $500 million
8
<PAGE> 1
EXHIBIT d.5(b)(11)
INVESTMENT SUB-ADVISORY AGREEMENT
This AGREEMENT made this 1st day of March, 2000, by and between THE
VARIABLE ANNUITY LIFE INSURANCE COMPANY, hereinafter referred to as "VALIC," and
T. ROWE PRICE ASSOCIATES, INC., hereinafter referred to as the "SUB-ADVISER."
VALIC and the SUB-ADVISER recognize the following:
(a) VALIC is a life insurance company organized under Chapter
3 of the Texas Insurance Code and an investment adviser registered
under the Investment Advisers Act of 1940, as amended ("Advisers Act").
(b) VALIC is engaged as the investment adviser of American
General Science & Technology Fund, pursuant to an Investment Advisory
Agreement dated October 7, 1998 between VALIC and American General
Series Portfolio Company 2 ("FUND"), an investment company organized
under the laws of Delaware as a business trust, as a series type of
investment company issuing separate classes (or series) of shares of
beneficial interest and is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). The 1940 Act prohibits any person from acting
as an investment adviser of a registered investment company except
pursuant to a written contract.
(c) The FUND currently consists of twenty-four portfolios
("Funds"): American General International Value Fund, American General
International Growth Fund, American General Large Cap Value Fund,
American General Large Cap Growth Fund, American General Mid Cap Value
Fund, American General Mid Cap Growth Fund, American General Small Cap
Value Fund, American General Small Cap Growth Fund, American General
Socially Responsible Fund, American General Science & Technology Fund,
American General Money Market Fund, American General Domestic Bond
Fund, American General Stock Index Fund, American General Mid Cap Index
Fund, American General Small Cap Index Fund, American General Balanced
Fund, American General Conservative Growth Lifestyle Fund, American
General Moderate Growth Lifestyle Fund, American General Growth
Lifestyle Fund, American General Core Bond Fund, American General
Strategic Bond Fund, American General High Yield Bond Fund, American
General Municipal Bond Fund and American General Municipal Money Market
Fund. In accordance with the FUND's Agreement and Declaration of Trust
(the "Declaration"), new Funds may be added to the FUND upon approval
of the FUND's Board of Trustees without approval of the FUND's
shareholders. This Agreement will apply only to the Fund(s) set forth
on the attached Schedule A, and any other Funds as may be added or
deleted by amendment to the attached Schedule A ("Covered Funds").
(d) The SUB-ADVISER is engaged principally in the business of
rendering investment advisory services and is registered as an
investment adviser under the Advisers Act.
(e) VALIC desires to enter into an Investment Sub-Advisory
Agreement with the SUB-ADVISER for all or a portion of the assets of
the Covered Funds which VALIC determines from time to time to assign to
the SUB-ADVISER.
VALIC and the SUB-ADVISER agree as follows:
1. SERVICES RENDERED AND EXPENSES PAID BY THE SUB-ADVISERA
The SUB-ADVISER, subject to the control, direction, and supervision of
VALIC and the FUND's Board of Trustees and in material conformity with the 1940
Act, all applicable laws and regulations thereunder, all other applicable
federal and state securities and tax laws and regulations, including section
817(h) and Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), the FUND's Declaration, Bylaws, registration statements, prospectus
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<PAGE> 2
and stated investment objectives, policies and restrictions and any applicable
procedures adopted by the FUND's Board of Trustees and provided to the
SUB-ADVISER shall:
(a) manage the investment and reinvestment of the assets,
other than cash, of the Covered Funds including, for example, the
evaluation of pertinent economic, statistical, financial, and other
data, the determination of the industries and companies to be
represented in each Covered Fund's portfolio, and the formulation and
implementation of investment programs.
(b) maintain a trading desk and place orders for the purchase
and sale of portfolio investments (including futures contracts and
options thereon) for each Covered Fund's account with brokers or
dealers (including futures commission merchants) selected by the
SUB-ADVISER, or arrange for any other entity to provide a trading desk
and to place orders with brokers and dealers (including futures
commission merchants) selected by the SUB-ADVISER, subject to the
SUB-ADVISER's control, direction, and supervision, which brokers or
dealers may include brokers or dealers (including futures commission
merchants) affiliated with the SUB-ADVISER, subject to applicable law.
The SUB-ADVISER will assist the Covered Fund and its agents in
determining whether prices obtained for valuation purposes accurately reflect
the prices on the SUB-ADVISER's portfolio records relating to the assets of the
Covered Fund for which the SUB-ADVISER has responsibility on a monthly basis
(unless otherwise agreed upon by the parties hereto) and at such other times as
VALIC shall reasonably request.
In performing the services described in paragraph (b) above, the
SUB-ADVISER shall use its best efforts to obtain for the Covered Funds the best
execution of portfolio transactions. Subject to approval by the FUND's Board of
Trustees of appropriate policies and procedures, the SUB-ADVISER may cause the
Covered Funds to pay to a broker a commission, for effecting a portfolio
transaction, in excess of the commission another broker would have charged for
effecting the same transaction, if the first broker provided brokerage and/or
research services to the SUB-ADVISER. The SUB-ADVISER shall not be deemed to
have acted unlawfully, or to have breached any duty created by this Agreement,
or otherwise, solely by reason of acting in accordance with such authorization.
The SUB-ADVISER may aggregate sales and purchase orders of securities
held by the Covered Fund with similar orders being made simultaneously for other
accounts managed by the SUB-ADVISER or with accounts of the affiliates of the
SUB-ADVISER, if in the SUB-ADVISER's reasonable judgment such aggregation shall
result in an overall economic benefit to the Covered Fund considering the
advantageous selling or purchase price, brokerage commission and other expenses.
In accounting for such aggregated order price, commission and other expenses
shall be averaged on a per bond or share basis daily. VALIC acknowledges that
the determination of such economic benefit to the Covered Fund by the
SUB-ADVISER is subjective and represents the SUB-ADVISER's evaluation that the
Covered Fund is benefitted by relatively better purchase or sales prices, lower
commission expenses and beneficial timing of transactions or a combination of
these and other factors.
VALIC may direct the SUB-ADVISER to use a particular broker or dealer
for one or more trades if, in the sole opinion of VALIC, it is in the best
interest of the Covered Fund to do so. Any such direction shall be in writing
and in a form satisfactory to SUB-ADVISER.
VALIC authorizes and empowers the SUB-ADVISER to direct the Covered
Fund's Custodian to open and maintain brokerage accounts for securities and
other property, including financial and commodity futures and commodities and
options thereon (all such accounts hereinafter called "brokerage accounts") for
and in the name of the Covered Fund and to execute for the Covered Fund as its
agent and attorney-in-fact standard customer agreements with such broker or
brokers as the SUB-ADVISER shall select as provided above. With respect to
brokerage accounts for financial and commodity futures and commodities and
options thereon, the SUB-ADVISER shall select such brokers, as approved by
VALIC, prior to the establishment of such brokerage account. The SUB-ADVISER
may, using such of the securities and other property in the Covered Fund as the
SUB-ADVISER deems necessary or desirable, direct the Covered Fund's custodian to
deposit for the Covered Fund original and maintenance brokerage and margin
deposits and
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<PAGE> 3
otherwise direct payments of cash, cash equivalents and securities and other
property into such brokerage accounts and to such brokers as the SUB-ADVISER
deems desirable or appropriate.
The SUB-ADVISER shall maintain records adequately demonstrating
compliance with its obligations under this Agreement and report periodically to
VALIC and the FUND's Board of Trustees regarding the performance of its services
under this Agreement. The SUB-ADVISER will make available to VALIC and the FUND
promptly upon their reasonable written request all of the Covered Funds'
investment records and ledgers to assist VALIC and the FUND in compliance with
respect to each Covered Fund's securities transactions as required by the 1940
Act and the Advisers Act, as well as other applicable laws. The SUB-ADVISER will
furnish the FUND's Board of Trustees such periodic and special reports as VALIC
and the FUND's Board of Trustees may reasonably request. The SUB-ADVISER will
furnish to regulatory authorities any information or reports in connection with
such services which may be requested in order to ascertain whether the
operations of the Covered Funds are being conducted in a manner consistent with
applicable laws and regulations. The SUB-ADVISER will not disclose or use any
records or information obtained pursuant to this Agreement in any manner
whatsoever except as expressly authorized in this Agreement, and will keep
confidential any non-public information obtained directly as a result of this
service relationship, and the SUB-ADVISER shall disclose such non-public
information only if VALIC or the Board of Trustees of the FUND has authorized
such disclosure, or if such information is or hereafter otherwise is known by
the SUB-ADVISER or has been disclosed, directly or indirectly, by VALIC or the
Fund to others becomes ascertainable from public or published information or
trade sources, or if such disclosure is expressly required or requested by
applicable federal or state regulatory authorities, or to the extent such
disclosure is reasonably required by auditors or attorneys of the SUB-ADVISER in
connection with the performance of their professional services. Notwithstanding
the foregoing, the SUB-ADVISER may disclose the total return earned by the
Covered Funds and may include such total return in the calculation of composite
performance information without prior approval by VALIC or the Board of Trustees
of the FUND.
Should VALIC at any time make any definite determination as to any
investment policy and notify the SUB-ADVISER in writing of such determination,
the SUB-ADVISER shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked, provided such determination will permit SUB-ADVISER to comply with
the first paragraph of this Section.
The SUB-ADVISER will not hold money or investments on behalf of the
FUND. The money and investments will be held by the Custodian of the FUND. The
SUB-ADVISER will arrange for the transmission to the Custodian for the FUND, on
a daily basis, such confirmation, trade tickets and other documents as may be
necessary to enable it to perform its administrative responsibilities with
respect to the Covered Funds. The SUB-ADVISER further shall have the authority
to instruct the Custodian of the FUND (i) to pay cash for securities and other
property delivered, or to be delivered, to the Custodian for the FUND (ii) to
deliver securities and other property against payment for the FUND, and (iii) to
transfer assets and funds to such brokerage accounts as the SUB-ADVISER may
designate, all consistent with the powers, authorities and limitations set forth
herein. The SUB-ADVISER shall not have the authority to cause the Custodian to
deliver securities and other property except as expressly provided for in this
Agreement.
The SUB-ADVISER will not perform cash management services for the
Covered Funds. The cash management function will be performed by VALIC.
The SUB-ADVISER shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act or represent VALIC or the Fund other than in furtherance of
the SUB-ADVISER's duties and responsibilities as set forth in this Agreement.
Except as otherwise agreed, or as otherwise provided herein, the
SUB-ADVISER shall bear the expense of discharging its responsibilities hereunder
and VALIC shall pay, or arrange for others to pay, all VALIC's expenses, except
that VALIC shall in all events pay the compensation described in Section 2 of
the Agreement.
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<PAGE> 4
2. COMPENSATION OF THE SUB-ADVISER
VALIC shall pay to the SUB-ADVISER, as compensation for the services
rendered and expenses paid by the SUB-ADVISER, a monthly fee or fees based on
each Covered Fund's average daily net asset value computed for each Covered Fund
as provided for herein and in the fee schedule attached hereto as Schedule A.
Schedule A may be amended from time to time, provided that amendments are made
in conformity with applicable laws and regulations and the Declaration and
Bylaws of the FUND. Any change in Schedule A pertaining to any new or existing
Fund shall not be deemed to affect the interest of any other Fund and shall not
require the approval of shareholders of any other Fund.
The average daily net asset value shall be determined by taking the
mean average of all of the determinations of net asset value, made in the manner
provided in the FUND's Declaration, for each business day during a given
calendar month. VALIC shall pay this fee for each calendar month as soon as
practicable after the end of that month, but in any event no later than ten (10)
business days following the end of the month.
If the SUB-ADVISER serves for less than a whole month, the foregoing
compensation shall be prorated.
The payment of advisory fees related to the services of the SUB-ADVISER
under this Agreement shall be the sole responsibility of VALIC and shall not be
the responsibility of the FUND.
3. SCOPE OF THE SUB-ADVISER'S ACTIVITIES
VALIC understands that the SUB-ADVISER and its affiliates now act, will
continue to act and may act in the future as investment adviser to fiduciary and
other managed accounts and as investment adviser to other investment companies,
and VALIC has no objection to the SUB-ADVISER so acting, provided that whenever
a Covered Fund and one or more other accounts or investment companies advised by
the SUB-ADVISER have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a methodology believed
to be equitable to each entity. The SUB-ADVISER similarly agrees to allocate
opportunities to sell securities. VALIC recognizes that, in some cases, this
procedure may limit the size of the position that may be acquired or sold for a
Covered Fund. In addition, VALIC understands that the persons employed by the
SUB-ADVISER to assist in the performance of the SUB-ADVISER's duties hereunder
will not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of the SUB-ADVISER or any
affiliate of the SUB-ADVISER to engage in and devote time and attention to other
business or to render services of whatever kind or nature.
Except as otherwise required by the 1940 Act, any of the shareholders,
directors, officers and employees of VALIC may be a shareholder, director,
officer or employee of, or be otherwise interested in, the SUB-ADVISER, and in
any person controlling, controlled by or under common control with the
SUB-ADVISER; and the SUB-ADVISER, and any person controlling, controlled by or
under common control with the SUB-ADVISER, may have an interest in VALIC.
The SUB-ADVISER shall not be liable to VALIC, the FUND, or to any
shareholder in the Covered Fund, and VALIC shall indemnify the SUB-ADVISER, for
any act or omission in rendering services under this Agreement, or for any
losses sustained in connection with the matters to which this agreement relates,
so long as there has been no willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties on the part of the SUB-ADVISER in
performing its duties under this Agreement.
VALIC shall perform quarterly and annual tax compliance tests and
promptly furnish reports of such tests to the SUB-ADVISER after each quarter end
to ensure that the Covered Fund is in compliance with Subchapter M of the Code
and Section 817(h) of the Code. VALIC shall apprise the SUB-ADVISER promptly
after each quarter end of any potential non-compliance with the diversification
requirements in such Code provisions. If so advised, the SUB-ADVISER shall take
prompt action so that the Covered Fund complies with such Code diversification
provisions, as directed by VALIC.
-4-
<PAGE> 5
4. REPRESENTATIONS OF THE SUB-ADVISER AND VALIC
The SUB-ADVISER represents, warrants, and agrees as follows:
(a) The SUB-ADVISER (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect: (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement; (iii)
has met, and will continue to meet for so long as this Agreement remains in
effect, any applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (iv) has
the authority to enter into and perform the services contemplated by this
Agreement, and (v) will immediately notify VALIC of the occurrence of any event
that would disqualify the SUB-ADVISER from serving as an investment adviser of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
(b) The SUB-ADVISER has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and if it has not already done
so, will provide VALIC and the FUND with a copy of such code of ethics together
with evidence of its adoption.
(c) The SUB-ADVISER has provided VALIC and the FUND with a copy of its
Form ADV as most recently filed with the SEC and will promptly after filing its
annual update to its Form ADV with the SEC, furnish a copy of such amendment to
VALIC.
VALIC represents, warrants, and agrees as follows:
VALIC: (i) is registered as an investment adviser under the Advisers
Act and will continue to be so registered for so long as this Agreement remains
in effect: (ii) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement; (iii) has met, and will
continue to meet for so long as this Agreement remains in effect, any applicable
federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by this Agreement, (iv) has the authority to enter into
and perform the services contemplated by this Agreement, and (v) will
immediately notify the SUB-ADVISER of the occurrence of any event that would
disqualify VALIC from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise.
5. TERM OF AGREEMENT
This Agreement shall become effective as to the Covered Fund(s) set
forth on Schedule A on the date hereof and as to any other Fund on the date of
the Amendment to Schedule A adding such Fund in accordance with this Agreement.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect for two years from its effective date. Thereafter, this Agreement shall
continue in effect, but with respect to any Covered Fund, subject to the
termination provisions and all other terms and conditions hereof, only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Board of
Trustees or a majority of that Covered Fund's outstanding voting securities.
This Agreement shall automatically terminate in the event of its
assignment as that term is defined in the 1940 Act, or in the event of the
termination of the Investment Advisory Agreement between VALIC and the FUND as
it relates to any Covered Fund. The Agreement may be terminated as to any
Covered Fund at any time, without the payment of any penalty, by vote of the
FUND's Board of Trustees or by vote of a majority of that Covered Fund's
outstanding voting securities on not more than 60 days' nor less than 30 days'
written notice to the SUB-ADVISER, or upon such shorter notice as may be
mutually agreed upon by the parties. This Agreement may also be terminated by
VALIC: (i) on not more than 60 days' nor less than 30 days' written notice to
the SUB-ADVISER, or upon such shorter notice as may be mutually agreed upon by
the parties, without the payment of any penalty; or (ii) if the SUB-ADVISER
becomes unable to discharge its duties and obligations under this Agreement. The
SUB-ADVISER may terminate this Agreement at any time, or preclude its renewal
without the payment of any penalty, on not more than 60 days' nor less than 30
days' written notice to VALIC, or upon such shorter notice as may be mutually
agreed upon by the parties.
-5-
<PAGE> 6
6. OTHER MATTERS
The SUB-ADVISER may from time to time employ or associate with itself
any person or persons believed to be particularly fit to assist in its
performance of services under this Agreement, provided no such person serves or
acts as an investment adviser separate from the SUB-ADVISER so as to require a
new written contract pursuant to the 1940 Act. The compensation of any such
persons will be paid by the SUB-ADVISER, and no obligation will be incurred by,
or on behalf of, VALIC or the FUND with respect to them.
The SUB-ADVISER agrees that all books and records which it maintains
for the Covered Fund are the Covered Fund's property. The SUB-ADVISER also
agrees upon request of VALIC or the FUND, to promptly surrender the books and
records in accordance with the 1940 Act and rules thereunder. The SUB-ADVISER
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
VALIC has herewith furnished the SUB-ADVISER copies of the FUND's
Prospectus, Statement of Additional Information, Declaration and Bylaws as
currently in effect and agrees during the continuance of this Agreement to
furnish the SUB-ADVISER copies of any amendments or supplements thereto before
or at the time the amendments or supplements become effective. Until VALIC
delivers any amendments or supplements to the SUB-ADVISER, the SUB-ADVISER shall
be fully protected in relying on the documents previously furnished to it.
The SUB-ADVISER is authorized to honor and act on any notice,
instruction or confirmation given by VALIC on behalf of the Covered Fund in
writing signed or sent by any of the persons whose names, addresses and specimen
signatures will be provided by VALIC from time to time. The SUB-ADVISER shall
not be liable for so acting in good faith upon such instructions, confirmation
or authority, notwithstanding that it shall subsequently be shown that the same
was not given or signed or sent by an authorized person.
VALIC agrees to furnish the SUB-ADVISER at its principal office prior
to use thereof, copies of all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Covered Fund or the public that refer in any way to the
SUB-ADVISER, and not to use such material if the SUB-ADVISER reasonably objects
in writing within ten (10) business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this agreement,
VALIC will continue to furnish to the SUB-ADVISER copies of any of the
above-mentioned materials that refer in any way to the SUB-ADVISER. VALIC shall
furnish or otherwise make available to the SUB-ADVISER such other information
relating to the business affairs of VALIC and the Covered Fund as the
SUB-ADVISER at any time, or from time to time, may reasonably request in order
to discharge obligations hereunder.
VALIC agrees to indemnify the SUB-ADVISER for losses, costs, fees,
expenses and claims which arise directly or indirectly (i) as a result of a
failure by VALIC to provide the services or furnish materials required under the
terms of this Investment Sub-Advisory Agreement, or (ii) as the result of any
untrue statement of a material fact or any omission to state a material fact
required to be stated or necessary to make the statements, in light of the
circumstances under which they were made, not misleading in any registration
statements, proxy materials, reports, advertisements, sales literature, or other
materials pertaining to the Covered Fund, except insofar as any such statement
or omission was specifically made in reliance on written information provided by
the SUB-ADVISER to VALIC.
The SUB-ADVISER agrees to indemnify VALIC for losses and claims which
arise (i) as a result of a failure by SUB-ADVISER to provide the services or
furnish the materials required under the terms of this Investment Sub-Advisory
Agreement, including a negligent failure whether unintentional or in good faith
or otherwise, to comply with the diversification requirements specified in
section 817(h), and the qualification standards of Subchapter M of the Code, as
amended, and the regulations thereunder, (other than a failure which is
subsequently timely corrected by the SUB-ADVISER in accordance with applicable
law and regulations such that no loss is incurred by VALIC or a Covered Fund) or
(ii) as the result of any untrue statement of a material fact or any omission to
state a material fact required to be stated or necessary to make the statements,
in light of the circumstances under which they were made, not misleading in any
registration statements, proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the
-6-
<PAGE> 7
Covered Fund to the extent any such statement or omission was made in reliance
on information provided by the SUB-ADVISER or its affiliates.
7. APPLICABILITY OF FEDERAL SECURITIES LAWS
This Agreement shall be interpreted in accordance with the laws of the
State of Texas and applicable federal securities laws and regulations, including
definitions therein and such exemptions as may be granted to VALIC or the
SUB-ADVISER by the Securities and Exchange Commission or such interpretive
positions as may be taken by the Commission or its staff. To the extent that the
applicable law of the State of Texas, or any of the provisions herein, conflict
with applicable provisions of the federal securities laws, the latter shall
control.
The parties hereto have each caused this Agreement to be signed in
duplicate on its behalf by its duly authorized officer on the above date.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ JOHN A. GRAF
------------------------------------
Name: John A. Graf
Title: President and CEO
ATTEST:
/s/ CHERYL J. HEMLEY
- ----------------------
T. ROWE PRICE ASSOCIATES, INC.
By: /s/ DARRELL N. BRAMAN
------------------------------------
Name: Darrell N. Braman
Title: Vice President
ATTEST:
/s/ PATRICIA LIPPERT
- ----------------------
-7-
<PAGE> 8
SCHEDULE A
(Effective March 1, 2000)
Annual Fee computed at the following annual rate, based on average daily net
asset value for each month and payable monthly:
Covered Fund Fee
------------ ---
American General Science & Technology Fund .60% on first $500 million
.55% over $500 million
-8-
<PAGE> 1
EXHIBIT e.6
DISTRIBUTION AND SERVICE AGREEMENT
BETWEEN
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
AND
VALIC INVESTMENT SERVICES COMPANY
THIS AGREEMENT made this 1st day of May, 1999 by and between AMERICAN
GENERAL SERIES PORTFOLIO COMPANY 2, a Delaware business trust, hereafter
referred to as the "Fund" and A.G. Distributors, Inc., a Delaware corporation
hereafter referred to as the "Distributor."
THE FUND AND THE DISTRIBUTOR RECOGNIZE THE FOLLOWING:
1. The Fund is registered as a diversified, open-end management
investment company under the Investment Company Act of 1940 (the "1940
Act"). The Fund consists of a number of investment portfolios, as may
now exist and may hereinafter be established (each, a "Portfolio"), as
set forth on Schedule A hereto. In addition, each Portfolio issues
several classes of shares, as may now exist and may hereinafter be
established (each, a "Class") as set forth on Schedule B hereto. The
Fund intends to continuously offer Classes of the Portfolio's shares
for sale to the public. Under certain circumstances, applicable sales
charges with respect to a Class may be reduced or waived on the terms
set forth in the Fund's then current registration statement or related
prospectus. The Fund may suspend sales of the shares of any one or
more Portfolios or Classes at any time, and may resume sales of any
such Portfolio(s) or Class(es) at a later date.
2. The Distributor is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is currently a member of the National
Association of Securities Dealers, Inc. (the "NASD").
THE FUND AND THE DISTRIBUTOR AGREE AS FOLLOWS:
1. The Fund hereby appoints the Distributor as principal underwriter and
distributor to sell to the public the Classes of the Portfolios' shares
(hereinafter "its shares" or "the Fund's shares"). The appointment of
the Distributor hereunder shall not preclude the Fund from selling its
shares directly to the public.
(a) The Distributor, subject to applicable federal and state law
and the Fund's Agreement and Declaration of Trust and Bylaws,
shall: (i) provide services to the Fund primarily intended to
result in sale of its shares; (ii) solicit orders for the
purchase of its shares subject to such terms and conditions as
the Fund may specify; and (iii) accept orders for the purchase
of its shares on behalf of the Fund (collectively,
"Distribution Services").
1
<PAGE> 2
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries,
providing shareholders with information on their investments
and any other services now or hereafter deemed to be
appropriate subjects for the payment of "service fees" under
Rule 2830 of the Conduct Rules of the NASD (collectively,
"Shareholder Services").
2. The Distributor accepts such appointment. The Distributor shall offer
the Fund's shares only on the terms set forth in the Fund's then
current registration statement or related prospectus.
3. The Distributor may enter into agreements with registered and
qualified securities dealers and financial intermediaries it may
select for the performance of Distribution Services, Shareholder
Services, record keeping and sub-accounting services, the form of such
agreements to be as mutually agreed upon and approved by the Fund and
the Distributor. In making such arrangements, the Distributor shall
act only as principal and not as agent for the Fund. No such dealer,
financial intermediary or other entity is authorized to act as agent
for the Fund in connection with the offering or sale of its shares or
otherwise.
4. As compensation for providing the Distribution Services and/or
Shareholder Services under this Agreement with respect to all Classes
of the Fund's shares, other than the Class(es) of the Fund's shares
set forth on Schedule C hereto, the Distributor shall receive from the
Fund a distribution fee and/or a service fee at the rates and under
the terms and conditions of the Distribution and Service Plan (the
"Plan") adopted by the Fund, as such Plan is in effect from time to
time, and subject to any further limitations on such fees as the
Fund's Board of Trustees may impose. The Distributor may reallow any
or all of the distribution fee and/or service fee that is has received
under this Agreement to such dealers or other qualified entities as it
may from time to time determine.
With respect to the Class(es) of the Fund's shares that are not
subject to the Plan, set forth on Schedule C hereto, the Distributor
will receive no compensation and, will assume and pay from its own
resources, all expenses related to the provision of Distribution and
Shareholder Services.
5. Allocation of Expenses.
(a) The Fund will pay (or will enter into arrangements providing
that persons other than the Fund will pay) for all expenses of
the offering of its shares incurred in connection with:
(1) The registration of the Fund or the registration or
qualification of the Fund's shares for offer or sale
under the federal securities laws and the securities
laws of any state or other jurisdiction in which the
Distributor may arrange for the sale of the Fund's
shares; and
2
<PAGE> 3
(2) The printing and distribution of the Fund's
prospectuses to existing shareholders as may be
required under the federal securities laws and the
applicable securities laws of any state or other
jurisdiction; and
(3) The preparation, printing and distribution of any
proxy statements, notices and reports, and the
performance of any acts required to be performed by
the Fund by and under the federal securities laws and
the applicable securities laws of any state or other
jurisdiction; and
(4) The issuance of the Fund's shares, including any
share issue and transfer taxes.
(b) The Distributor will pay from its own resources (or will enter
into arrangements providing that persons other than the
Distributor or the Fund shall pay), or promptly reimburse the
Fund, for all expenses in connection with:
(1) The printing and distribution of the Fund's
prospectuses utilized in connection with the
provision of Distribution Services;
(2) The preparation, printing and distribution of
advertising and sales literature for use in the
offering of the Fund's shares and printing and
distribution of reports to shareholders used as sales
literature;
(3) The qualification of the Distributor as a distributor
or broker or dealer under any applicable federal or
state securities laws;
(4) Any investment program of the Fund, including the
reinvestment of dividends and capital gains
distributions, to the extent such expenses exceed the
Fund's normal costs of issuing its shares; and
(5) All other expenses in connection with the provision
of Shareholder Services and Distribution Services
which have not been herein specifically allocated to
the Fund.
6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to
effect sales of the Fund's shares, but it shall not be
obligated to sell any specific number of shares.
3
<PAGE> 4
(b) The Distributor shall use its best efforts in all respects
duly to conform with the requirements of all federal and state
laws and regulations and the regulations of the NASD, in
providing Distribution Services and Shareholder Services.
Neither the Distributor nor any other person is authorized by
the Fund to give any information or to make any
representations, other than those contained in the Fund's then
current registration statement or related prospectus and any
sales literature authorized by responsible officers of the
Distributor.
(c) The Distributor shall act as an independent contractor and
nothing herein contained shall constitute the Distributor, its
agents or representatives, or any employees thereof as
employees of the Fund in connection with the sale of the
Fund's shares.
The Distributor is responsible for its own conduct and the
employment, control and conduct of its agents and employees
and for injury to such agents or employees or to others
through its agents or employees. The Distributor assumes full
responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
7. Sale and Redemption of the Fund's Shares
(a) Orders for the purchase and redemption of the Fund's shares
(and payment for the Fund's shares, in the case of a purchase)
shall be transmitted directly from the Purchaser to the Fund
or its agent.
(b) The Fund shall have the right to suspend the redemption of the
Fund's shares pursuant to the conditions set forth in the
Fund's then current registration statement or related
prospectus. The Fund shall also have the right to suspend the
sale of the Fund's shares at any time.
(c) The Fund will give the Distributor prompt notice of any such
suspension and shall promptly furnish such other information
in connection with the sale and redemption of the Fund's
shares as the Distributor reasonably requests.
(d) The Fund (or its agent) will make appropriate book entries
upon receipt by the Fund (or its agent) of orders and payments
for the Fund's shares or requests for redemption thereof, and
will issue and redeem the Fund's shares and confirm such
transactions in accordance with applicable laws and
regulations.
8. Indemnification.
The Distributor agrees to indemnify, defend and hold the Fund, its
officers and trustees (or former officers and trustees) and any person
who controls the Fund within the meaning of Section 15 of the
Securities Act of 1933 (the "1933 Act"), (collectively, "Indemnities")
free
4
<PAGE> 5
and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) incurred by any Indemnitee under the 1933 Act or
under common law or otherwise, which arise out of or are based upon
(1) any untrue or alleged untrue statement of a material fact or
omission or alleged omission of a material fact in information
furnished by the Distributor to the Fund's registration statement or
related prospectus, (2) any misrepresentation or omission or alleged
misrepresentation or omission to state a material fact on the part of
the Distributor or any agent or employee of the Distributor or any
other person for whose acts the Distributor is responsible or is
alleged to be responsible, unless such misrepresentation or omission
or alleged misrepresentation or omission was made in reliance on
written information furnished by the Fund, or (3) the willful
misconduct or failure to exercise reasonable care and diligence on the
part of any such persons with respect to services rendered under this
Agreement. The foregoing rights of indemnification shall be in
addition to any other rights to which any Indemnitee may be entitled
as a matter of law. The Fund agrees promptly to notify the
Distributor of any action brought against any Indemnitee, such
notification being given to the Distributor by letter or telegram
addressed to the Distributor at its principal business office and the
Distributor's agreement to indemnify the Indemnities pursuant to this
paragraph is expressly conditioned upon such notification.
The Fund agrees to indemnify, defend and hold the Distributor, its
officers and trustees (or former officers and trustees) and any person
who controls the Distributor within the meaning of Section 15 of the
1933 Act, (collectively, "Indemnities") free and harmless from and
against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
incurred by any Indemnitee under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement
of a material fact contained in the Fund's registration statement or
related prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated or necessary
to make the Fund's registration statement or related prospectus not
misleading, provided that in no event shall anything contained in this
Agreement be construed so as to protect the Distributor against any
liability to the Fund or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by
reason of its reckless disregard of its obligations and duties under
this Agreement, and further provided that the Fund shall not indemnify
the Distributor for any claims, demands, liabilities and expenses
arising out of or based upon any alleged untrue statement of a
material fact or omission to state a material fact in information
furnished by the Distributor to the Fund's registration statement or
related prospectus.
9. This Agreement is effective as of May 1, 1999 and unless sooner
terminated as provided herein, shall continue in effect for two years
from said date. Thereafter this Agreement shall continue in effect from
year- to-year, provided, that such continuance of effectiveness is
specifically approved at least annually (a)(i) by the Board of Trustees
of the Fund, or (ii) by
5
<PAGE> 6
vote of a majority of the Fund's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act), and (b) by the
affirmative vote of a majority of the Trustees who are not interested
persons (as defined in Section 2(a)(19) of the 1940 Act) of the Fund
by votes cast in person at a meeting called for such purpose.
10. (a) This Agreement may be terminated at any time, without penalty,
by a vote of the Board of Trustees of the Fund or by a vote of
a majority of the outstanding voting securities of the Fund,
or by the Distributor, on sixty (60) days' written notice to
the other party.
(b) This Agreement shall automatically terminate in the event of
its assignment, as defined in Section 2(a)(4) of the 1940 Act.
11. Notwithstanding anything to the contrary contained in this Agreement,
the Fund acknowledges and agrees that, as provided by Section 8.1 of
the Fund's Agreement and Declaration of Trust, this Agreement is
executed on behalf of the Fund or the Trustees of the Fund as Trustees
and not individually and that the obligations of this Agreement are
not binding upon any of the Trustees, Officers or shareholders
individually, but are binding only upon the assets and property of the
Fund. A Certificate of Trust in respect of the Fund is on file with
the Secretary of the State of Delaware
12. Each party shall mail (postage paid) or deliver, in writing, all
notices to the other party, at an address designated for this purpose
by the other party. Until changed, this address for both parties is:
2929 Allen Parkway, Houston, Texas 77019.
13. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND
THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE LAWS OF THE
STATE OF TEXAS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the date
above.
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
on behalf of the Portfolios:
By: /s/ THOMAS L. WEST, JR.
-------------------------------
Name: Thomas L. West, Jr.
--------------------------
Title: Chairman and CEO
-------------------------
ATTEST:
/s/ NORI L. GABERT
- -----------------------------
Name: Nori L. Gabert
------------------------
Title: Vice President &
Assistant Secretary
-----------------------
A.G. DISTRIBUTORS, INC.
By: /s/ BRUCE ABRAMS
-------------------------------
Name: Bruce Abrams
--------------------------
Title: President & CEO
-------------------------
ATTEST:
/s/ CYNTHIA TOLES
- -----------------------------
Name: Cynthia Toles
------------------------
Title: Secretary
-----------------------
7
<PAGE> 8
SCHEDULE A
American General Series Portfolio Company 2 Portfolios
American General Balanced Fund American General Moderate Growth
American General Conservative Growth Lifestyle Fund
Lifestyle Fund American General Money Market Fund
American General Domestic Bond Fund American General Municipal Bond Fund
American General Growth Lifestyle Fund American General Municipal Money
American General High Yield Market Fund
Bond Fund American General Stock Index Fund
American General International American General Small Cap Growth
Growth Fund Fund
American General International Value Fund American General Small Cap Index
American General Large Cap Growth Fund Fund
American General Large Cap Value American General Small Cap Value
Fund Fund
American General Mid Cap Index American General Socially
Fund Responsible Fund
American General Mid Cap Growth American General Strategic Bond Fund
Fund American General Core Bond Fund
American General Mid Cap Value Fund American General Science &
Technology Fund
8
<PAGE> 9
SCHEDULE B
American General Series Portfolio Company 2 Classes of Shares
Class A Shares: Class A shares are sold at net asset value plus an
initial sales charge.
Class B Shares: Class B shares are sold at net asset value, and are
subject to a contingent deferred sales charge upon redemption within a
specified period.
Institutional Class I Shares: Institutional Class I shares are sold at
net asset value to employer retirement plans.
Institutional Class II Shares: Institutional Class II shares are sold
at net asset value to employer retirement plans.
9
<PAGE> 10
SCHEDULE C
American General Series Portfolio Company 2
Classes Not Subject to Distribution and Service Plan
Institutional Class I Shares
Institutional Class II Shares
10
<PAGE> 1
EXHIBIT g.8(a)
CUSTODIAN CONTRACT
This Contract between AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2, a
business trust organized and existing under the laws of Delaware, having its
principal place of business at 2929 Allen Parkway, Houston, Texas 77019,
hereinafter called the "Fund," and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the
"Custodian."
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, the Fund intends to initially offer shares in twenty-three
(23) series listed on Exhibit A hereto (such series together with all other
series subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 19, being herein referred to as the "Portfolio(s)")
and desires to retain the Custodian to perform certain services therefor;
WHEREAS, each series of each Fund may offer classes of shares as
reflected in their Certificates of Designation; and
WHEREAS, certain Portfolios (hereinafter sometimes referred to as the
"Lifestyle Portfolio(s)") may invest in uncertificated shares of certain other
Portfolios or uncertificated shares of any registered investment company, or
series thereof, which is part of the same "group of investment companies" (as
defined in Section 12 of the Investment Company Act of 1940, as amended (the
"1940 Act")) (hereinafter sometimes referred to as the "Underlying Portfolios").
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Agreement and
Declaration of Trust (the "Declaration of Trust"). The Fund on behalf of the
Portfolio(s) agrees to deliver to the Custodian all securities and cash of the
Portfolios, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the
Portfolio(s) from time to time, and the cash consideration received by it for
such new or treasury shares of beneficial interest of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian. With
respect to uncertificated shares of the Underlying Portfolios (the "Underlying
Shares") the holding of
<PAGE> 2
confirmation statements that identify the shares as being recorded in the
Custodian's name on behalf of the Lifestyle Portfolios will be deemed custody
for purposes hereof.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury (each, a "U.S. Securities System"); (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing
and paying agent ("Direct Paper") which is deposited and/or maintained
in the Direct Paper System of the Custodian (the "Direct Paper System")
pursuant to Section 2.11; and (c) the Underlying Shares owned by the
Lifestyle Portfolios which are maintained pursuant to Section 2.10A in
an account with State Street Bank and Trust Company or such other
entity which may from time to time act as a transfer agent for the
Underlying Portfolios and with respect to which the Custodian is
provided with Proper Instructions (the "Underlying Transfer Agent").
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System Account")
or in an account at the Underlying Transfer Agent, only upon receipt of
Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate
by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
2.
<PAGE> 3
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
3.
<PAGE> 4
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption;
15) In the case of a sale processed through the Underlying
Transfer Agent for the Underlying Shares, in accordance with
Section 2.10A hereof; and
16) For any other proper corporate purpose, but only upon receipt
of Proper Instructions from the Fund on behalf of the
applicable Portfolio specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee name of any agent appointed
pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian
4.
<PAGE> 5
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income
due the Fund on such securities and to notify the Fund on a best
efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained by
the Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company and the funds to
be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the
Board of Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to bearer domestic securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent and shall credit such income, as collected, to
such Portfolio's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the responsibility of the
Fund except for securities loaned pursuant to a securities lending
agreement with the Custodian, in which case any income due shall be the
responsibility of the Custodian. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such
5.
<PAGE> 6
information or data as may be necessary to assist the Fund in arranging
for the timely delivery to the Custodian of the income to which the
Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase of
Underlying Shares, in accordance with the conditions set forth
in Section 2.10A hereof; (d) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (e) in the case of
repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Portfolio; or (f) for transfer to a time deposit account
of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
6.
<PAGE> 7
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short; and
7) For any other proper corporate purpose, but only upon receipt
of Proper Instructions from the Fund on behalf of the
Portfolio specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring
such purpose to be a proper corporate purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by
the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder. The Underlying Transfer Agent shall not be deemed an agent
or subcustodian of the Custodian for purposes of this Section 2.9 or
any other provision of this Contract.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "U.S. Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
U.S. Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
7.
<PAGE> 8
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account
of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the Fund
at its request. Upon request, the Custodian shall furnish the
Fund on behalf of the Portfolio confirmation of each transfer
to or from the account of the Portfolio in the form of a
written advice or notice and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets
reflecting each day's transactions in the U.S. Securities
System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the U.S. Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the U.S.
Securities System; and
5) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the U.S. Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the
Portfolio has not been made whole for any such loss or damage.
2.10A Deposit of Fund Assets with the Underlying Transfer Agent. Underlying
Shares shall be deposited and/or maintained in an account or accounts
maintained with the Underlying Transfer Agent. The Underlying Transfer
Agent shall be deemed to be acting as if it is a "depository" for
purposes of Rule 17f-4 under the 1940 Act. The Fund hereby directs the
Custodian to deposit and/or maintain such Underlying Shares with the
Underlying Transfer Agent, subject to the following provisions:
8.
<PAGE> 9
1) The Custodian shall keep Underlying Shares owned by a
Lifestyle Portfolio with the Underlying Transfer Agent
provided that such Underlying Shares are maintained in an
account or accounts on the books and records of the Underlying
Transfer Agent in the name of the Custodian as custodian for
the Portfolio.
2) The records of the Custodian with respect to Underlying Shares
which are maintained with the Underlying Transfer Agent shall
identify by book-entry those Underlying Shares belonging to a
Lifestyle Portfolio;
3) The Custodian shall pay for Underlying Shares purchased for
the account of a Lifestyle Portfolio upon (i) receipt of
advice from the Lifestyle Portfolio's investment adviser that
such Underlying Shares have been purchased and will be
transferred to the account of the Custodian, on behalf of the
Lifestyle Portfolio, on the books and records of the
Underlying Transfer Agent, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Lifestyle Portfolio. The
Custodian shall receive confirmation from the Underlying
Transfer Agent of the purchase of such Underlying Shares and
the transfer of such Underlying Shares to the Custodian's
account with the Underlying Transfer Agent only after such
payment is made. The Custodian shall transfer Underlying
Shares redeemed for the account of a Lifestyle Portfolio (i)
upon receipt of an advice from the Lifestyle Portfolio's
investment adviser that such Underlying Shares have been
redeemed and that payment for such Underlying Shares will be
transferred to the Custodian and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and
payment for the account of the Lifestyle Portfolio. The
Custodian will receive confirmation from the Underlying
Transfer Agent of the redemption of such Underlying Shares and
payment therefor only after such Underlying Shares are
redeemed. Copies of all advices from the Lifestyle Portfolio's
investment adviser of purchases and sales of Underlying Shares
for the account of the Lifestyle Portfolio shall identify the
Lifestyle Portfolio, be maintained for the Lifestyle Portfolio
by the Custodian, and be provided to the investment adviser at
its request; and
4) The Custodian shall be not be liable to the Fund or any
Lifestyle Portfolio for any loss or damage to the Fund or any
Lifestyle Portfolio resulting from maintenance of Underlying
Shares with the Underlying Transfer Agent except for losses
resulting directly from the negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of
its or their employees.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
9.
<PAGE> 10
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the U.S. Securities System for the
account of the Portfolio; and
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper
10.
<PAGE> 11
corporate purposes, but only, in the case of clause (iv), upon receipt
of Proper Instructions from the Fund on behalf of the applicable
Portfolio setting forth the purpose or purposes of such segregated
account and declaring such purposes to be a proper corporate purpose.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Portfolio held by
it and in connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Fund on behalf of the Portfolio such
proxies, all proxy soliciting materials and all notices relating to
such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Fund on behalf of the Portfolio. With respect to
tender or exchange offers, the Custodian shall transmit promptly to the
Fund on behalf of the Portfolio all written information received by the
Custodian from issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the tender or exchange
offer. If the Fund on behalf of the Portfolio desires to take action
with respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
11.
<PAGE> 12
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Portfolio's foreign securities
transactions. The Custodian shall identify on its books as belonging to
the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall
be maintained in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of
securities located outside the United States (each a "Foreign
Securities System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to the
terms hereof (Foreign Securities Systems and U.S. Securities Systems
are collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of the Fund which are maintained
in such account shall identify by book-entry those securities and other
non-cash property belonging to the Fund and (ii) the Custodian shall
require that securities and other non-cash property so held by the
foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
each Portfolio will be freely transferable without the payment of money
or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to each
applicable Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the Custodian
or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a
12.
<PAGE> 13
foreign sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
account of each applicable Portfolio may be effected in accordance with
the customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent
as set forth in Section 2.3 of this Contract, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record
of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
13.
<PAGE> 14
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Nothwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay
the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S. dollars
or the equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
14.
<PAGE> 15
(b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be subject
to the direction of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of America
or any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of jurisdictions other than those mentioned in the above
sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Proper Instructions may include
15.
<PAGE> 16
communications effected directly between electro-mechanical or electronic
devices. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund on behalf of
the Portfolio, checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund on behalf of the Portfolio except as otherwise
directed by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
Share of the outstanding Shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per Share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so,
16.
<PAGE> 17
shall advise the Transfer Agent periodically of the division of such net income
among its various components. The Fund acknowledges and agrees that, with
respect to investments maintained with the Underlying Transfer Agent, the
Underlying Transfer Agent is the sole source of information on the number of
shares of an Underlying Portfolio held by it on behalf of a Lifestyle Portfolio
and that the Custodian has the right to rely on holdings information furnished
by the Underlying Transfer Agent to the Custodian in performing its duties under
this Contract, including without limitation, the duties set forth in this
Section 8 and in Section 9 hereof; provided, however, that the Custodian shall
be obligated to reconcile information as to purchases and sales of Underlying
Shares contained in trade instructions and confirmations received by the
Custodian and to report promptly any discrepancies to the Underlying Transfer
Agent. The calculations of the net asset value per Share and the daily income of
each Portfolio shall be made at the time or times described from time to time in
the Fund's currently effective prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
17.
<PAGE> 18
12. Rights of Inspection
The Custodian shall allow the inspection of the Fund's securities, at
any time as may be requested by the Fund's Independent Public Accountants
pursuant to Rule 17f-2 under the 1940 Act.
13. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian as provided in Schedule B, as agreed upon
from time to time between the Fund on behalf of each applicable Portfolio and
the Custodian.
14. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund or the Investment Advisor
in their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent payment or clearing
system to deliver to the Custodian's sub-custodian or agent securities purchased
or in the remittance or payment made in connection with securities sold; (v) any
delay or failure of any company, corporation, or other body in charge of
registering or transferring securities in the name of the Custodian, the Fund,
the Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including
non-receipt of bonus,
18.
<PAGE> 19
dividends and rights and other accretions or benefits; (vi) delays or inability
to perform its duties due to any disorder in market infrastructure with respect
to any particular security or Securities System; and (vii) any provision of any
present or future law or regulation or order of the United States of America, or
any state thereof, or any other country, or political subdivision thereof or of
any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
15. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Declaration of Trust, and further provided, that the Fund on behalf of
one or more of the Portfolios may at any time by action of its Board of Trustees
(i) substitute another bank or trust company for the Custodian by giving notice
as described above to the Custodian, or (ii) immediately terminate this Contract
in the event of the appointment of a conservator or receiver for the Custodian
by the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
19.
<PAGE> 20
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
16. Notices
Except as otherwise provided under this Contract, notices and other
writings shall be delivered or mailed postage prepaid to:
If to the Company: The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
Attention: Gregory R. Seward, Treasurer
If to the Custodian: State Street Bank and Trust Company
Insurance and Bank Services Division
105 Rosemont Road - WES/2S
Westwood, Massachusetts 02090-2318
Attention: Kenneth A. Bergeron, Vice President
or to such other address as the parties may hereafter specify in writing and any
notice or other writing when mailed shall be deemed to have been received on the
fifth business day after it was mailed.
Telephone and facsimile notices shall be sufficient if communicated to
the party entitled to receive such notice at the following numbers:
If to the Company:
Telephone: (713) 831-5301 Facsimile: (713) 831-5380
If to the Custodian:
Telephone: (781) 302-5348 Facsimile: (781) 302-8048
or to such other numbers as the parties may specify by written notice under this
Section and any facsimile notice shall be deemed to have been received on the
date of its transmission provided that if such day is not a business day or it
is received after normal business hours on the day of its transmission, it shall
be deemed to have been received at the opening of business on the first business
day next following the transmission thereof.
17. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities
20.
<PAGE> 21
and other assets of each applicable Portfolio then held by it hereunder and
shall transfer to an account of the successor custodian all of the securities
and other assets of each such Portfolio held in a Securities System or at the
Underlying Transfer Agent.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System or at the Underlying Transfer Agent.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
18. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Fund. No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
19. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to those listed on Exhibit A hereto, with respect to which it desires
to have the Custodian render services as custodian under the terms hereof, it
shall so notify the Custodian in writing, and if the Custodian agrees in writing
to provide such services, such series of Shares shall become a Portfolio
hereunder.
21.
<PAGE> 22
20. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
21. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
22. Counterparts
This Contract may be executed in several counterparts, each of which
shall be deemed to be an original, and all such counterparts taken together
shall constitute but one and the same Contract.
23. Reproduction of Documents
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
24. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
22.
<PAGE> 23
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
25. Miscellaneous Provision
The execution of this Contract has been authorized by the Fund's
Trustees and by the sole shareholder. This Contract is executed on behalf of the
Fund or the Trustees of the Fund as Trustees and not individually and that the
obligations of this Contract are not binding upon any of the Trustees, officers
or shareholders of the Fund individually, but are binding only upon the assets
and property of the Fund. A Certificate of Trust in respect of the Fund is on
file with the Secretary of the State of Delaware.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
23.
<PAGE> 24
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 7th day of October, 1998.
ATTEST AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 2
/s/ CYNTHIA A. GIBBONS By: /s/ NORI L. GABERT
- ------------------------------- ----------------------------------------
Name: Nori L. Gabert
Its: Vice President and Assistant Secretary
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ K. BERGERON By: /s/ MARK J. BOWLER
- ------------------------------- ----------------------------------------
Name: Mark J. Bowler
Its: Senior Vice President
<PAGE> 25
EXHIBIT A
to
Custodian Contract
by and between
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
and
STATE STREET BANK AND TRUST COMPANY
American General Stock Index Fund
American General Mid Cap Index Fund
American General Small Cap Index Fund
American General International Growth Fund
American General Large Cap Growth Fund
American General Mid Cap Growth Fund
American General Small Cap Growth Fund
American General International Value Fund
American General Large Cap Value Fund
American General Mid Cap Value Fund
American General Small Cap Value Fund
American General Socially Responsible Fund
American General Balanced Fund
American General Domestic Bond Fund
American General Money Market Fund
American General Growth Lifestyle Fund
American General Moderate Growth Lifestyle Fund
American General Conservative Growth Lifestyle Fund
American General Core Bond Fund
American General Strategic Bond Fund
American General High Yield Bond Fund
American General Municipal Bond Fund
American General Municipal Money Market Fund
American General Science & Technology Fund
<PAGE> 1
EXHIBIT h.9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
and
NATIONAL FINANCIAL DATA SERVICES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Terms of Appointment; Duties of NFDS...............................1
2. Fees and Expenses..................................................4
3. Representations and Warranties of NFDS.............................4
4. Representations and Warranties of the Fund.........................5
5. Wire Transfer Operating Guidelines.................................6
6. Data Access and Proprietary Information............................7
7. Indemnification....................................................9
8. Standard of Care..................................................10
9. Year 2000.........................................................10
10. Confidentiality...................................................11
11. Covenants of the Fund and NFDS....................................11
12. Termination of Agreement..........................................12
13. Additional Funds..................................................12
14. Assignment........................................................12
15. Amendment.........................................................13
16. Massachusetts Law to Apply........................................13
17. Force Majeure.....................................................13
18. Consequential Damages.............................................13
19. Merger of Agreement...............................................13
20. Counterparts......................................................13
21. Reproduction of Documents.........................................14
22. Limitations of Liability of the Trustees and Shareholders ........14
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 7th day of October, 1998, by and between AMERICAN
GENERAL SERIES PORTFOLIO COMPANY 2, a Delaware business trust, having its
principal office and place of business at 2929 Allen Parkway, Houston, Texas
77253-3206 (the "Fund"), NATIONAL FINANCIAL DATA SERVICES, INC., a
Massachusetts corporation having its principal office and place of business at
1004 Baltimore, Kansas City, Missouri 64105-1807 ("NFDS").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Fund intends to initially offer shares in twenty-three (23) series,
such series shall be named in the attached Schedule A which may be amended by
the parties from time to time (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 13, being herein referred to as a "Portfolio", and
collectively as the "Portfolios");
WHEREAS, each Portfolio may issue several classes of shares, as may now exist
and may hereafter be established (each class, together with all other classes
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 13, being referred to as a "Class," and collectively as
"Classes"); and
WHEREAS, the Fund on behalf of the Portfolios desires to appoint NFDS as its
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities, and NFDS desires to
accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Terms of Appointment; Duties of NFDS
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund, on behalf of the Portfolios, hereby employs and appoints NFDS
to act as, and NFDS agrees to act as its transfer agent for the
Fund's authorized and issued shares of its beneficial interest,
$0.01 par value, ("Shares"), dividend disbursing agent and agent in
connection with any accumulation, open-account or similar plans
provided to the shareholders of each of the respective Portfolios of
the Fund ("Shareholders") and set out in the currently effective
prospectus and statement of additional information ("prospectus") of
the Fund on behalf of the applicable Portfolio, including without
limitation any periodic investment plan or periodic withdrawal
program.
<PAGE> 4
1.2 NFDS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time
by the Fund on behalf of each of the Portfolios, as
applicable or by agreement between the Fund and NFDS, NFDS
shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and
appropriate documentation thereof to the Custodian
of the Fund authorized pursuant to the Agreement
and Declaration of Trust of the Fund (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii)
and (iii) above, VALIC Retirement Services Company,
shall execute transactions directly with
broker-dealers authorized by the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed
by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit or credit to Shareholders'
accounts payments for dividends and distributions
declared by the Fund on behalf of the applicable
Portfolio;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by NFDS of indemnification
satisfactory to NFDS and protecting NFDS and the
Fund, and NFDS at its option, may issue replacement
certificates in place of mutilated stock
certificates upon presentation thereof and without
such indemnity;
(ix) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
2
<PAGE> 5
(x) Record the issuance of shares of the Fund
and maintain pursuant to SEC Rule 17Ad-10(e) a
record of the total number of shares of the Fund
which are authorized, based upon data provided to
it by the Fund, and issued and outstanding. NFDS
shall also provide the Fund and/or its agent on a
daily basis with the total number of Shares which
are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of
Shares, to monitor the issuance of such Shares or
to take cognizance of any laws relating to the
issue or sale of such Shares, which functions shall
be the sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), NFDS
will: (i) perform the customary services of a transfer
agent, dividend disbursing agent, and agent in connection
with accumulation, open-account or similar plans (including,
without limitation, any periodic investment plan or periodic
withdrawal program) of a registered open-end management
investment company, including, but not limited to,
maintaining all Shareholder accounts, preparing Shareholder
meeting lists, mailing Shareholder proxies, Shareholder
reports and prospectuses to current Shareholders,
withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department
Forms 1099 and other appropriate forms required with respect
to dividends, distributions and sales of Shares, by federal
authorities for all Shareholders, preparing and mailing
Shareholders' annual notice of dividends and capital gains
distributions, preparing and mailing confirmation forms and
statements of accounts to Shareholders for all purchases and
redemptions of Shares, and other confirmable transactions in
Shareholder accounts, preparing and mailing activity
statements to Shareholders for purposes of capital gains
reporting, and providing Shareholder account information;
and (ii) provide a system which will enable the Fund, or its
agent, to monitor the total number of Shares purchased and
redeemed in each State.
(c) In addition, the Fund, or its agent, shall (i) identify to
NFDS in writing those transactions and assets to be treated
as exempt from blue sky reporting for each State and (ii)
verify the establishment of transactions for each State on
the system prior to activation and thereafter monitor the
daily activity for each State. The responsibility of NFDS
for the Fund's blue sky State registration status is solely
limited to the initial establishment of transactions subject
to blue sky compliance by the Fund, or its agent, and the
reporting of such transactions to the Fund, or its agent, as
provided above.
3
<PAGE> 6
(d) Procedures as to who shall provide certain of these services
in Section 1 may be established from time to time by
agreement between the Fund on behalf of each Portfolio and
NFDS per the attached service responsibility schedule. NFDS
may at times perform only a portion of these services and
the Fund or its agent may perform these services on the
Fund's behalf.
(e) NFDS shall provide additional services on behalf of the Fund
(e.g., escheatment services) which may be agreed upon in
writing between the Fund and NFDS.
2. Fees and Expenses
2.1 For the performance by NFDS pursuant to this Agreement, the Fund
agrees on behalf of each of the Portfolios to pay NFDS an annual
maintenance fee for each Shareholder account as set out in the
initial fee schedule attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 2.2 below may be
changed from time to time subject to mutual written agreement between
the Fund and NFDS.
2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees
on behalf of each of the Portfolios to reimburse NFDS for
out-of-pocket expenses, including but not limited to confirmation
production, postage, forms, telephone, microfilm, microfiche, mailing
and tabulating proxies, records storage, or advances incurred by NFDS
for the items set out in the fee schedule attached hereto. In
addition, any other expenses incurred by NFDS at the request or with
the consent of the Fund, will be reimbursed by the Fund on behalf of
the applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees
and reimbursable expenses within thirty days following the receipt of
the respective billing notice. Postage for mailing of dividends,
proxies, Fund reports and other mailings to all shareholder accounts
shall be advanced to NFDS by the Fund at least seven (7) days prior
to the mailing date of such materials.
3. Representations and Warranties of NFDS
NFDS represents and warrants to the Fund that:
3.1 It is a corporation duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.2 It is empowered under applicable laws and by its Agreement and
Declaration of Trust and By-Laws to enter into and perform this
Agreement.
4
<PAGE> 7
3.3 All corporate proceedings required by said Agreement and Declaration
of Trust and By-Laws have been taken to authorize it to enter into
and perform this Agreement.
3.4 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
3.5 It is, and will continue to be, a registered transfer agent.
3.6 It has and will maintain a sufficient disaster recovery program that
complies with all federal and state laws and regulations, as well as
of the rules of any applicable organization to NFDS belongs.
3.7 It will provide, at least annually, a SAS 70 report to the Fund. Such
reports, may be, in turn, provided to the Fund's outside auditors and
other interested parties in determining regulatory compliance with
industry standard processing and control procedures.
4. Representations and Warranties of the Fund
The Fund represents and warrants to NFDS that:
4.1 It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
4.2 It is empowered under applicable laws and by its Agreement and
Declaration of Trust and By-Laws to enter into and perform this
Agreement.
4.3 All proceedings required by said Agreement and Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform
this Agreement.
4.4 It is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended
on behalf of the Fund has been filed with the Securities and Exchange
Commission and is currently effective and will remain effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of the Fund being
offered for sale.
5
<PAGE> 8
5. Wire Transfer Operating Guidelines/Articles 4A of the Uniform
Commercial Code
5.1 NFDS is authorized to promptly debit the appropriate Fund account(s)
upon the receipt of a payment order in compliance with the selected
security procedure (the "Security Procedure") chosen for funds
transfer and in the amount of money that NFDS has been instructed to
transfer. NFDS shall execute payment orders in compliance with the
Security Procedure and with the Fund instructions on the execution
date provided that such payment order is received by the customary
deadline (presently 3:00 P.M. Eastern Time) for processing such a
request, unless the payment order specifies a later time. All payment
orders and communications received after this the customary deadline
will be deemed to have been received the next business day.
5.2 The Fund acknowledges that the Security Procedure it has designated
on the Fund Selection Form was selected by the Fund from security
procedures offered by NFDS. The Fund shall restrict access to
confidential information relating to the Security Procedure to
authorized persons as communicated to NFDS in writing. The Fund must
notify NFDS immediately if it has reason to believe unauthorized
persons may have obtained access to such information or of any change
in the Fund's authorized personnel. NFDS shall verify the
authenticity of all Fund instructions according to the Security
Procedure.
5.3 NFDS shall process all payment orders on the basis of the account
number contained in the payment order. In the event of a discrepancy
between any name indicated on the payment order and the account
number, the account number shall take precedence and govern.
5.4 NFDS reserves the right to decline to process or delay the processing
of a payment order which (a) is in excess of the collected balance in
the account to be charged at the time of NFDS' receipt of such
payment order; (b) if initiating such payment order would cause NFDS,
in NFDS' sole judgement, to exceed any volume, aggregate dollar,
network, time, credit or similar limits which are applicable to NFDS;
or (c) if NFDS, in good faith, is unable to satisfy itself that the
transaction has been properly authorized.
5.5 NFDS shall use reasonable efforts to act on all authorized requests
to cancel or amend payment orders received in compliance with the
Security Procedure provided that such requests are received in a
timely manner affording NFDS reasonable opportunity to act. NFDS
shall not be held liable if, despite NFDS's exhaustion of reasonable
efforts, the request for amendment or cancellation cannot be
satisfied.
5.6 NFDS shall assume no responsibility for failure to detect any
erroneous payment order, unless NFDS knew or should have known that
the payment order was erroneous, and provided that NFDS complied with
the payment order instructions as received and
6
<PAGE> 9
NFDS complied with the Security Procedure. NFDS represents to the
Fund that the Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of
errors in payment orders.
5.7 NFDS shall assume no responsibility for lost interest with respect to
the refundable amount of any unauthorized payment order, unless NFDS
is notified of the unauthorized payment order within thirty (30) days
of notification by NFDS of the acceptance of such payment order. In
no event (including failure to execute a payment order) shall NFDS be
liable for special, indirect or consequential damages, even if
advised of the possibility of such damages.
5.8 When the Fund initiates or receives Automated Clearing House credit
and debit entries pursuant to these guidelines and the rules of the
National Automated Clearing House Association and the New England
Clearing House Association, NFDS will act as an Originating
Depository Financial Institution and/or receiving depository
Financial Institution, as the case may be, with respect to such
entries. Credits given by NFDS with respect to an ACH credit entry
are provisional until NFDS receives final settlement for such entry
from the Federal Reserve Bank. If NFDS does not receive such final
settlement, the Fund agrees that NFDS shall receive a refund of the
amount credited to the Fund in connection with such entry, and the
party making payment to the Fund via such entry shall not be deemed
to have paid the amount of the entry.
5.9 Confirmation of State Street Bank and Trust Company's (the "Bank's")
execution of payment orders shall ordinarily be provided within
twenty four (24) hours notice of which may be delivered through NFDS'
proprietary information systems, or by facsimile or call-back. Fund
must report any objections to the execution of an order within thirty
(30) days.
6. Data Access and Proprietary Information
6.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by NFDS as part of the
Fund's ability to access certain Fund-related data ("Customer Data")
maintained by NFDS on data bases under the control and ownership of
NFDS ("Data Access Services") constitute copyrighted, trade secret,
or other proprietary information (collectively, "Proprietary
Information") of substantial value to NFDS or other third party. In
no event shall Proprietary Information be deemed Customer Data. The
Fund agrees to treat all Proprietary Information as proprietary to
NFDS and further agrees that it shall not divulge any Proprietary
Information to any person or organization except as may be provided
hereunder. Without limiting the foregoing, the Fund agrees for itself
and its employees and agents:
7
<PAGE> 10
(a) to access Customer Data solely from locations as may be
designated in writing by NFDS and solely in accordance with
NFDS' applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any portion
of the Proprietary Information, and if such access is
inadvertently obtained, to inform in a timely manner of such
fact and dispose of such information in accordance with
NFDS' instructions;
(d) to refrain from causing or allowing the data acquired
hereunder from being retransmitted to any other computer
facility or other location, except with the prior written
consent of NFDS;
(e) that the Fund shall have access only to those authorized
transactions (e.g. look-ups) agreed upon by the parties;
(f) to honor all reasonable written requests made by NFDS to
protect at NFDS' expense the rights of NFDS in Proprietary
Information at common law, under federal copyright law and
under other federal or state law.
6.2 If the Fund notifies NFDS that any of the Data Access Services do not
operate in material compliance with the most recently issued user
documentation for such services, NFDS shall endeavor in a timely
manner to correct such failure. Organizations from which NFDS may
obtain certain data (i.e., NSCC, 401(k) third party administrators
included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against
NFDS arising out of the contents of such third-party data, including,
but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND
ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION
THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. NFDS
EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED
HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.3 If the transactions available to the Fund include the ability to
originate electronic instructions to NFDS in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information, then in such event NFDS shall be
entitled to rely on the validity and authenticity of such instruction
without undertaking any further inquiry as long as such instruction
is undertaken in conformity with security procedures established by
NFDS from time to time.
8
<PAGE> 11
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 6. The obligations of this Section shall
survive any earlier termination of this Agreement.
7. Indemnification
7.1 NFDS shall not be responsible for, and the Fund shall on behalf of
the applicable Portfolio indemnify and hold NFDS and with respect to
Section 7.1(f) herein, also the Bank, harmless from and against, any
and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) all actions of NFDS or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or
willful misconduct;
(b) the Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any
representation or warranty of the Fund hereunder;
(c) the reliance on or use by NFDS or its agents or
subcontractors of information, records, documents or
services which (i) are received by NFDS or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf
of the Fund including but not limited to any previous
transfer agent or registrar;
(d) the reliance on, or the carrying out by NFDS or its agents
or subcontractors of any instructions or requests of the
Fund on behalf of the applicable Portfolio;
(e) the offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be
registered or in violation of any stop order or other
determination or ruling by any federal or any state agency
with respect to the offer or sale of such Shares;
(f) the negotiations and processing of checks made payable to
prospective or existing Shareholders tendered to NFDS for
the purchase of Shares, such checks are commonly known as
"third party checks"; and
(g) upon the Fund's request entering into any agreements
required by the National Securities Clearing Corporation
(the "NSCC") required by the NSCC for the transmission of
Fund or Shareholder data through the NSCC clearing systems.
7.2 At any time NFDS may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any
matter arising in connection with the
9
<PAGE> 12
services to be performed by NFDS under this Agreement, and NFDS and
its agents or subcontractors shall not be liable and shall be
indemnified by the Fund on behalf of the applicable Portfolio for any
action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. NFDS, its agents and subcontractors
shall be protected and indemnified in acting upon any paper or
document, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction,
information, data, records or documents provided NFDS or its agents
or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to
have notice of any change of authority of any person, until receipt
of written notice thereof from the Fund. NFDS, its agents and
subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Fund, and the
proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
7.3 In order that the indemnification provisions contained in this
Section 7 shall apply, upon the assertion of a claim for which the
Fund may be required to indemnify NFDS, NFDS shall promptly notify
the Fund of such assertion, and shall keep the Fund advised with
respect to all developments concerning such claim. The Fund shall
have the option to participate with NFDS in the defense of such claim
or to defend against said claim in its own name or in the name of
NFDS. NFDS shall in no case confess any claim or make any compromise
in any case in which the Fund may be required to indemnify NFDS
except with the Fund's prior written consent.
8. Standard of Care
NFDS shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no
responsibility and shall not be liable for loss or damage due to
errors unless said errors are caused by its negligence, bad faith, or
willful misconduct or that of its employees.
9. Year 2000
NFDS will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available technology
to offer products that are Year 2000 ready, including, but not
limited to, century recognition of dates, calculations that correctly
compute same century and multi century formulas and date values, and
interface values that reflect the date issues arising between now and
the next one-hundred years, and if any changes are required, NFDS
will make the changes to its products at a price to be agreed upon by
the parties and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
10
<PAGE> 13
10. Confidentiality
10.1 NFDS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
10.2 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, NFDS will endeavor to notify the
Fund and to secure instructions from an authorized officer of the
Fund as to such inspection. NFDS reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised
by its counsel that it may be held liable for the failure to exhibit
the Shareholder records to such person.
11. Covenants of the Fund and NFDS
11.1 The Fund shall on behalf of each of the Portfolios promptly furnish
to NFDS the following:
(a) A certified copy of the resolution of the Board of Trustees
of the Fund authorizing the appointment of NFDS and the
execution and delivery of this Agreement.
(b) A copy of the Agreement and Declaration of Trust and By-Laws
of the Fund and all amendments thereto.
11.2 NFDS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of Share
certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of,
such certificates, forms and devices.
11.3 NFDS shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable, however,
all such records shall comply in both form and substance with all
applicable statutes and regulations including, but not limited to,
Section 31 of the Investment Company Act of 1940 and Rule 31a-1
thereunder, and/or their successors, replacements or equivalents.
NFDS agrees that all such records prepared or maintained by NFDS
relating to the services performed by NFDS hereunder are the property
of the Fund and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be surrendered
promptly to the Fund on and in accordance with its request.
11
<PAGE> 14
11.4 In the event that any requests or demands are made for the inspection
of the Shareholder records of the Fund, other than request for records
of Shareholders pursuant to standard subpoenas from state or federal
government authorities (i.e., divorce and criminal actions), NFDS will
endeavor to notify the Fund and to secure instructions from an
authorized officer of the Fund as to such inspection. NFDS expressly
reserves the right, however, to exhibit the Shareholder records to any
person whenever it is advised by counsel that it may be held liable for
the failure to exhibit the Shareholder records to such person.
12. Termination of Agreement
12.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
12.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be
borne by the Fund on behalf of the applicable Portfolio(s).
Additionally, NFDS reserves the right to charge for any other
reasonable expenses associated with such termination and a charge
equivalent to the average of one (1) month's fees.
13. Additional Funds
In the event that the Fund establishes one or more series of Shares, in
addition to those named in Schedule A, or one or more Classes, in
addition to those named in the attached Schedule A, with respect to
which it desires to have NFDS render services as transfer agent under
the terms hereof, it shall so notify NFDS in writing, and if NFDS
agrees in writing to provide such services, such series of Shares shall
become a Portfolio hereunder.
14. Assignment
14.1 Except as provided in Section 14.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
14.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
14.3 NFDS may, without further consent on the part of the Fund, subcontract
for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(2) of the Securities
Exchange Act of 1934, as amended ("Section 17A(c)(2)"),
12
<PAGE> 15
(ii) a BFDS subsidiary duly registered as a transfer agent pursuant
to Section 17A(c)(2) or (iii) a BFDS affiliate; provided, however,
that NFDS shall be as fully responsible to the Fund for the acts and
omissions of any subcontractor as it is for its own acts and
omissions.
15. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution
of the Board of Trustees of the Fund.
16. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts.
17. Force Majeure
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage beyond its control, or
other unforeseeable causes beyond its control, such party shall not
be liable for damages to the other for any damages resulting from
such failure to perform or otherwise from such actions.
18. Consequential Damages
Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to
act hereunder.
19. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
20. Counterparts
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
13
<PAGE> 16
21. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and
amendments hereto may be reproduced by any photographic, photostatic,
microfilm, micro-card, miniature photographic or other similar
process. The parties hereto each agree that any such reproduction
shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is
in existence and whether or not such reproduction was made by a party
in the regular course of business, and that any enlargement,
facsimile or further reproduction shall likewise be admissible in
evidence.
22. Limitations of Liability of the Trustees and Shareholders
The Fund acknowledges and agrees that, as provided by Section 8.1 of
the Fund's Agreement and Declaration of Trust, this Agreement is
executed on behalf of the Fund or the Trustees of the Fund as
Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or
shareholders of the Fund individually, but are binding only upon the
assets and property of the Fund. A Certificate of Trust in respect of
the Fund is on file with the Secretary of the State of Delaware.
14
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 2
BY: /s/ JOHN A. GRAF
--------------------------------------
ATTEST:
/s/ NORI L. GABERT
- -------------------------
NATIONAL FINANCIAL DATA SERVICES,
INC.
BY: /s/ [ILLEGIBLE]
--------------------------------------
ATTEST:
/s/ [ILLEGIBLE]
- -------------------------
<PAGE> 18
NATIONAL FINANCIAL DATA SERVICES, INC.
FUND SERVICE RESPONSIBILITIES *
<TABLE>
<CAPTION>
Service Performed Responsibility
- ----------------- --------------
NFDS Fund
---- ----
<S> <C> <C>
1. Receives orders for the purchase X
of Shares.
2. Issue Shares and hold Shares in X Shareholders accounts.
3. Receive redemption requests. X
4. Effect transactions 1-3 above X directly with broker-dealers.
5. Pay over monies to redeeming X Shareholders.
6. Effect transfers of Shares. X
7. Prepare and transmit dividends X and distributions.
8. Issue Replacement Certificates. X
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and X
accurate control book for each
issue of securities.
12. Mail proxies. X
13. Mail Shareholder reports. X
14. Mail prospectuses to current X Shareholders.
15. Withhold taxes on U.S. resident and non-resident X alien accounts and
promptly remit, as required under applicable laws, to government taxing
authorities.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Service Performed Responsibility
- ----------------- --------------
NFDS Fund
---- ----
<S> <C> <C> <C>
16. Prepare and file U.S. Treasury Department forms. X
17. Prepare and mail account and X
confirmation statements for
Shareholders.
18. Provide Shareholder account information. X
19. Blue sky reporting. X
</TABLE>
* Such services are more fully described in Section 1.2 (a), (b) and (c) of the
Agreement.
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 2
BY: /s/ JOHN A. GRAF
--------------------------------------
ATTEST:
/s/ NORI L. GABERT
- -------------------------
NATIONAL FINANCIAL DATA SERVICES,
INC.
BY: /s/ [ILLEGIBLE]
--------------------------------------
ATTEST:
/s/ [ILLEGIBLE]
- -------------------------
<PAGE> 20
SCHEDULE A
The following Funds are structured as four share classes. The classes are A,B,
Institutional I and Institutional II. Funds marked with an * are structured as
two classes only, A and B. Funds marked with an ** are structured as three
classes only, A, B, and Institutional I.
<TABLE>
<S> <C>
American General International Value Fund American General International Growth Fund
American General Large Cap Value Fund American General Large Cap Growth Fund
American General Mid Cap Value Fund American General Mid Cap Growth Fund
American General High Yield Bond Fund American General Small Cap Value Fund
American General Small Cap Growth Fund American General Balanced Fund
American General Socially Responsible Fund American General Domestic Bond Fund
American General Money Market Fund American General Aggressive Lifestyle Fund
American General Conservative Lifestyle Fund American General Core Bond Fund
American General Moderate Lifestyle Fund American General Strategic Bond Fund
American General Municipal Money Market Fund*
American General Small Cap Index Fund*
American General Stock Index Fund*
American General Municipal Bond Fund*
American General Mid Cap Index Fund*
American General Science & Technology Fund**
</TABLE>
<PAGE> 1
EXHIBIT h.9(c)
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT, dated as of the 7th day of October, 1998, made by and between
American General Series Portfolio Company 2 (the "Company"), a business trust
operating as an open end investment company, duly organized and existing under
the laws of the State of Delaware, and The Variable Annuity Life Insurance
Company ("VALIC"), a stock insurance company duly organized and existing under
the laws of the State of Texas:
WITNESSETH THAT:
WHEREAS, The Company desires to appoint VALIC as its Administrative
Services Agent to maintain and keep current the books, accounts, records,
journals or other records of original entry relating to the business of the
Company as set forth in Section 1 of this Agreement (the "Accounts and
Records") and to perform certain daily functions in connection with such
Accounts and Records; and
WHEREAS, VALIC is authorized to contract on behalf of the Company with
service providers for the purpose of daily valuation of the Company portfolios;
and
WHEREAS, VALIC is willing to perform such functions upon the terms and
conditions set forth below; and
NOW, THEREFORE, In consideration of the premises and mutual covenants
herein contained, the parties hereto, intending to be legally bound, do hereby
agree as follows:
Section 1.
VALIC, upon receipt of necessary information and written or verbal instructions
from the Company, shall maintain and keep current the following books: Accounts
and Records, journals or other records of original entry relating to the
business of the Company, and necessary or advisable for compliance with
applicable regulations, including Rules 31(a)-1 and 31(a)-2 of the Investment
Company Act of 1940, as amended (the "1940 Act"), in such form as may be
mutually agreed to between the Company and VALIC:
(a) Cash Receipts
(b) Cash Disbursements
(c) Dividend Record
(d) Purchase and Sales of Portfolio Securities
(e) Subscription and Redemption Journals
(f) Security Ledgers
(g) Broker Ledger
1
<PAGE> 2
(h) General Ledger
(i) Daily Expense Accruals
(j) Securities and Monies borrowed or loaned and collateral therefor
(k) Daily Trial Balances
It shall be the responsibility of the Company to furnish or cause to be
furnished to VALIC, the declaration, record, payment dates and amounts of any
dividends or income and any other special actions required on or concerning
each of its portfolio securities.
Section 2.
Upon receipt by VALIC of written or verbal instructions, VALIC shall make the
proper accounting entries in accordance therewith and notify the Company of all
cash and securities. VALIC, as Investment Adviser, shall direct that the
broker-dealer, or other person through whom a transaction has occurred, send a
confirmation to VALIC. VALIC shall verify this confirmation against the
written or verbal instructions when received from the Company.
Section 3.
VALIC shall calculate the Company's net asset value in accordance with the
Company's currently effective Registration Statement, once daily.
VALIC shall calculate the daily dividend rate for the Money Market Fund in
accordance with the prospectus of the Money Market Fund and with resolutions of
the Company's Board of Trustees. VALIC shall prepare and maintain a daily
evaluation of securities and other investments for which market quotations are
available by VALIC's approved pricing services; all other securities or
investments shall be evaluated in accordance with the Company's written
instructions.
Section 4.
For all purposes under this Agreement, VALIC is authorized to act upon receipt
of any written or verbal instructions it receives from the Company.
Section 5.
VALIC shall supply daily and periodic reports to the Company as requested by
the Company and agreed upon by VALIC.
Section 6.
VALIC shall compile daily reports of share purchases, redemptions, and total
shares outstanding. Reports of purchases and redemptions so received shall be
deemed to be share orders to the Company and shall be deemed to be orders
accepted by the Company when so received.
2
<PAGE> 3
Section 7.
The accounts and records, in the agreed upon format, maintained by VALIC shall
be the property of the Company, and shall be made available to the Company
within a reasonable period of time, upon proper demand. VALIC shall assist the
Company's independent auditors, or upon approval of the Company, or upon
demand, any regulatory body, in any requested review of the Company's accounts
and records but shall be reimbursed for all expenses and employee time invested
in such review outside of routine and normal periodic reviews. Upon receipt
from the Company of the necessary information VALIC shall supply the necessary
data for the Company or accountant's completion of any necessary tax return,
questionnaires, periodic reports to shareholders and such other reports and
information requests as the Company and VALIC shall agree upon from time to
time.
Section 8.
VALIC and the Company may from time to time adopt such procedures as they agree
upon, and VALIC may conclusively assume that any procedure approved in writing
by the Company or directed in writing by the Company, does not conflict with or
violate any requirements of its prospectus, Agreement and Declaration of Trust,
Bylaws, or any rule or regulation of any body or governmental agency. The
Company shall be responsible for notifying VALIC of any changes in regulations
or rules which might necessitate changes in VALIC's procedures.
Section 9.
VALIC may rely on information reasonably believed by it to be accurate and
reliable. Except as may otherwise be required by the 1940 Act and the rules
thereunder, neither VALIC nor its shareholders, officers, directors, employees,
agents, control persons or affiliates of any thereof shall be subject to any
liability for, or any damages, expenses or losses incurred by the Company in
connection with, any error of judgment, mistake of law, any act or omission
connected with or arising out of any services rendered under or payments made
pursuant to this Agreement or any other matter to which this Agreement relates,
except by reason of willful misfeasance, bad faith or gross negligence on the
part of any of such persons in the performance of the duties of VALIC under the
Agreement or by reason of reckless disregard by any of such persons of the
obligations and duties of VALIC under this Agreement.
Section 10.
The Company agrees to pay VALIC monthly compensation for its services as set
forth in Schedule A, which is hereby attached and made a part of this
Agreement.
Section 11.
Nothing contained in this Agreement is intended to or shall require VALIC, in
any capacity hereunder, to perform any functions or duties on any holiday, day
of special observance or any other
3
<PAGE> 4
day on which VALIC or the New York Stock Exchange is closed. Functions or
duties normally scheduled to be performed on such days shall be performed on
the next succeeding business day on which both the New York Stock Exchange and
VALIC are open.
Section 12.
VALIC may from time to time in its sole discretion delegate some or all of its
duties hereunto to an entity designated by VALIC, which entity shall perform
such functions as the agent of VALIC. To the extent of such delegation, the
term "VALIC" in this Agreement shall be deemed to refer to both VALIC and to
such entity designated by VALIC, or to either of them, as the context may
indicate.
Section 13.
The following terms used in this Agreement, or in any amendment or supplement
hereto, shall have the meanings herein specified unless the context otherwise
requires.
VALIC: The term "VALIC" shall mean The Variable Annuity Life Insurance Company
and if used in connection with or relative to any act or omission involving an
entity designated by VALIC, the term shall refer to The Variable Annuity Life
Insurance Company and such designated entity.
Verbal Instruction: The term "verbal instruction" shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to VALIC in person or by facsimile, telephone, telegram, telecopy,
or other mechanical, electronic or documentary means lacking original
signature, by a person or persons believed in good faith by VALIC to be a
person or persons authorized by a resolution of the Board of Trustees of the
Company to give verbal instructions on behalf of the Company.
Shares: The term "shares" shall mean the issued and outstanding shares of
common stock of the Company.
Written Instruction: The term "written instruction" shall mean an
authorization, instruction, approval, item or set of data, or information of
any kind transmitted to VALIC in original writing containing original
signatures believed in good faith by VALIC to be the signature of a person
authorized by a resolution of the Board of Trustees of the Company to give
written instructions on behalf of the Company.
Section 14.
The Company shall from time to time file with VALIC a certified copy of each
resolution of its Board of Trustees authorizing the transmittal of verbal
instructions and specifying the person or persons authorized to give verbal
instructions in accordance with the Agreement. If the certifying officer is
authorized to give verbal instructions, the certification also shall be signed
by a second officer of the Company. Upon transmitting any verbal instruction,
the Company shall promptly
4
<PAGE> 5
forward to VALIC a written instruction confirming the authorization,
instruction or approval transmitted by such verbal instruction.
Section 15.
Either the Company or VALIC may give written notice to the other of the
termination of this Agreement, such termination to take effect at the time
specified in the notice not less than sixty (60) days after the giving of the
notice.
Section 16.
This Agreement shall be governed by the laws of the State of Texas.
Section 17.
The execution of this Agreement has been authorized by the Company's Trustees
and by the sole shareholder. This Agreement is executed on behalf of the
Company or the Trustees of the Company as Trustees and not individually and
that the obligations of this Agreement are not binding upon any of the
Trustees, officers or shareholders of the Company individually, but are not
binding only upon the assets and property of the Company. A Certificate of
Trust in respect of the Company is on file with the Secretary of the State of
Delaware.
IN WITNESS WHEREOF, The parties hereto have caused this Agreement to be signed
by their duly authorized officers and their corporate seals hereunto duly
affixed and attested, as of the day of year first above written.
AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 2
By: /s/ CRAIG RODBY
----------------------------
Title: Vice Chairman
Witness: /s/ CYNTHIA TOLES
----------------------------
THE VARIABLE ANNUITY
LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
----------------------------
Title: Chairman
Witness: /s/ CYNTHIA TOLES
----------------------------
5
<PAGE> 6
SCHEDULE A
Accounting Services Compensation Schedule
(Effective October 7, 1998)
The Accounting Services Fee of 3 basis points is an annual fee payable monthly
based on average daily net assets.
* Effective as of March 1, 2000 for American General Science & Technology Fund.
6
<PAGE> 1
EXHIBIT h.9(d)
ADMINISTRATIVE SERVICES AGREEMENT
This Agreement is entered into as of the 1st day of May, 1999, by and
among VALIC Retirement Services Company, a Texas corporation, ("Service
Provider"), A.G. Distributors, Inc., a Delaware corporation, ("Dealer"), and
American General Series Portfolio Company 2 (the "Trust"), a Delaware business
trust, all of which have their principal offices at 2929 Allen Parkway, Houston,
Texas 77019.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"), and offers shares of
beneficial interests ("Shares") in several series (each a "Fund" and
collectively, the "Funds"), each Fund having its own investment objectives and
investment policies and issuing Shares in several classes ("Classes"); and
WHEREAS, a Certificate of Trust is on file with the Secretary of the
State of Delaware; and
WHEREAS, the Service Provider has been selected by certain employee
retirement benefit plans (each a "Plan" and collectively, the "Plans") to
provide certain administrative and recordkeeping services to the Plans and their
participants ("Participants") in connection with their investments in the Funds;
and
WHEREAS, the Dealer provides securities order processing services to
the trustee and/or custodian of the Plans and provides services to Plan
Participants; and
WHEREAS, the Service Provider, the Dealer, and the Trust desire that
the purchase and redemption of shares of the Funds be facilitated through one or
more omnibus accounts that has or have been established in the name of VALIC
Trust Company as trustee and/or custodian of the Plan; and
WHEREAS, the services to be provided by the Service Provider and the
Dealer hereunder will benefit the Trust by relieving it of the expense it would
incur if such services were to be provided by the Trust;
WHEREAS, the Trust desires that the Service Provider and the Dealer
provide services with respect to the Plans and the Service Provider and the
Dealer desire to provide such services; and
<PAGE> 2
WHEREAS, this Agreement is executed on behalf of the Trust or the
Trustees of the Trust as Trustees and not individually and that the obligations
of this Agreement are not binding upon any of the Trustees, officers or
shareholders of the Trust individually, but are binding only upon the assets and
property of the Trust. A Certificate of Trust in respect of the Trust is on file
with the Secretary of the State of Delaware.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. TERMS OF APPOINTMENT; DUTIES OF THE PARTIES
1.01. The Service Provider and the Dealer. The Service Provider and
the Dealer shall perform the services described herein, with
respect to the Funds and Classes identified on Schedule A hereto,
in accordance with procedures established from time to time by
agreement of the Trust, the Service Provider, and the Dealer, and
between the Service Provider and the Plans, in each case subject
to terms and conditions set forth in each of the Trust's current
prospectus. Except as specifically provided herein, neither the
Service Provider nor the Dealer shall be or be held out to be an
agent of the Trust or any Fund.
(a) The Service Provider shall receive from the Plans, Plan
Participants, Plan sponsors, authorized Plan committees or
Plan trustees, according to the Service Provider's agreement
with each Plan, by the close of regular trading on the New
York Stock Exchange (the "Close of Trading") each business
day that the New York Stock Exchange is open for business
("Business Day") instructions for the purchase, redemption
and exchange of Shares (together, "Instructions");
(b) Based on Instructions received each Business Day, the
Service Provider shall compute net purchase requests or net
redemption requests for Shares for each Fund for each Plan
(together, "Orders"); (solely for purposes of receiving
Instructions for the processing of Orders, and subject to
the terms and conditions set forth in this Agreement, the
Service Provider shall be deemed to be an agent for the
Funds);
(c) The Service Provider and the Dealer shall maintain records
as required by applicable law related to, and advise the
Trust as to the foregoing as instructed by the Trust. The
Service Provider and the Dealer agree that such records
maintained by them in connection with their activities under
this Agreement will be preserved,
2
<PAGE> 3
maintained and made available in accordance with applicable
law and regulations, and copies or, if required, originals
will be surrendered promptly to the Trust on and in
accordance with its request. Records surrendered hereunder
shall be in machine readable form, except to the extent that
the Service Provider and the Dealer have maintained such
records only in paper form. This provision shall survive the
termination of this Agreement.
(d) The Dealer shall transmit Orders to the Trust or its agent
by the Close of Trading each Business Day. Such Orders shall
be based solely on Instructions received in proper form by
the Service Provider from the Plans, Plan Participants, Plan
sponsors, authorized Plan committees or Plan trustees,
according to the Service Provider's agreement with each
Plan, by the Close of Trading each Business Day.
Instructions received by the Service Provider after the
Close of Trading on any Business Day shall be treated as
though received on the next Business Day. The Dealer and the
Service Provider shall maintain internal controls reasonably
designed to prevent Plan Instructions received after the
Close of Trading on any Business Day from being aggregated
with any Order transmitted or otherwise communicated to the
Transfer Agent as if it were received prior to the Close of
Trading.
(e) The Dealer shall transmit Orders to the Trust or its agent
by no later than 9:00 AM Eastern Time on the first Business
Day following the Business Day on which the Order was
received. The Business Day on which Instructions are
received in proper form by the Service Provider prior to the
Close of Trading will be the Business Day as of which Orders
will be deemed received by the Trust or its agent. For
purposes of Section 1.01(d) and this Section 1.01(e), proper
form shall mean when amounts to be purchased or redeemed are
identified on the Service Provider's recordkeeping system by
Participant, Plan, and Fund.
(f) The Dealer shall promptly deliver, or instruct the Plans (or
the Plans' trustees as the case may be) to deliver to the
Trust or its agent, appropriate documentation and in the
case of purchase requests, payment therefor.
1.02. Equipment. The Service Provider and the Dealer shall maintain
adequate offices, personnel, computers and other equipment
necessary to perform the services contemplated by this Agreement.
The Service Provider and the Dealer shall notify the Trust or its
agent promptly in the event that either the Service Provider
3
<PAGE> 4
or the Dealer becomes unable for any reason to perform the
services contemplated by, or any other of its obligations under,
this Agreement. The Service Provider or the Dealer shall maintain
or cause the maintenance of back-up files of the records required
to be maintained hereunder and shall store such back-up files in
a secure off-premises location, so that, in the event of a power
failure or other interruption of whatever cause at the location
of the records, the Service Provider's and the Dealer's records
are maintained intact and transactions can be processed at
another location.
1.03. Disclosure to Plans. The Service Provider shall take all steps
necessary to ensure that the arrangements provided for in this
Agreement are properly disclosed to the Plans.
1.04. Transmission of Information to the Service Provider. In
accordance with procedures established from time to time by
agreement of the Trust and the Service Provider, the Trust or its
agent shall transmit to the Service Provider the following
information for each Fund, as received by the Trust or its agent:
(a) net asset value information as of the Close of Trading each
Business Day;
(b) dividend and capital gains distribution information, as it
arises; and
(c) daily accrual for dividend rate factor (mil rate)
information with respect to the Funds which declare
dividends daily. The Trust or its agent shall transmit to
the Service Provider such information, using its best
efforts by 6:30 PM Eastern Time, on each Business Day that
such information is available.
1.05. Representations Regarding Shares. Any representation made by the
Service Provider regarding any Shares of a Fund shall be in its
capacity as agent for the Plans and not in its capacity as agent
of the Trust or any of the Funds. Similarly, any representation
made by the Dealer regarding any Shares of a Fund shall be in its
capacity as agent for the trustee and/or custodian of a Plan or
as agent of a Participant. Neither the Service Provider nor the
Dealer shall make any representation in any capacity regarding
any Shares of a Fund that is not set forth in the Trust's current
prospectus, statement of additional information or current sales
literature as furnished by the Trust or its agent. To the extent
that the Service Provider or the Dealer shall create sales
literature identifying the Trust or the Funds, all such sales
literature shall be submitted for approval to the Trust within
ten (10) days in advance of the earlier of (a) its intended use
or (b) its filing
4
<PAGE> 5
with the National Association of Securities Dealers, Inc.
("NASD"). The Dealer shall be responsible for the expense and
filing of any sales literature that it, with the approval of the
Trust, creates.
1.06. Confidentiality of Information. The parties hereto agree that
all books, records, information, computer programs and data
pertaining to the business of any other party which are exchanged
or received pursuant to the negotiation or the carrying out of
this Agreement shall be kept confidential and shall not be
voluntarily disclosed to any other person, except as may be
permitted hereunder or may be required by law. This provision
shall not apply to information lawfully in the possession of a
party prior to the term hereof that has been lawfully obtained
from other sources or independently developed by a party without
reference to or reliance on information obtained from any other
party hereto. This provision shall survive the termination of
this Agreement.
1.07. Compliance with Law. All of the parties shall at all times
comply with all applicable federal and state laws and regulations
thereunder, including the rules of any self-regulatory
organization, in connection with the performance of each of the
parties' responsibilities under this Agreement.
1.08. Administrative Services. The Service Provider and the Dealer
shall perform the administrative and recordkeeping services (the
"Administrative Services") described in Schedule B attached
hereto, as such Schedule B may be amended from time to time with
the mutual consent of the parties hereto, with respect to Shares
purchased, held or redeemed by a Plan. Except as provided
specifically in Section 1.01(b) hereof, the Service Provider and
the Dealer shall perform the Administrative Services as
independent contractors and not as employees or agents of the
Trust or any Fund. The Service Provider and the Dealer shall
perform the Administrative Services in accordance with procedures
established from time to time by the agreement of the Trust, the
Service Provider, and the Dealer, and subject to terms and
conditions set forth in the Trust's current prospectus.
1.09. No Impairment of Trust's Authority. No provision of this
Agreement shall limit in any way the authority of the Trust to
take such action as it deems appropriate in connection with
matters relating to the operation of the Funds and the sale of
Shares.
1.10. Authority of the Service Provider and the Dealer. The Service
Provider and the Dealer acknowledge that neither is authorized by
the Trust or any Fund to register the transfer of Shares or to
transfer record ownership of Shares, and that only the Trust or
its agent is authorized to perform such activities.
5
<PAGE> 6
2. COMPENSATION
2.01. Service Provider's Expenses. The Service Provider and the Dealer
shall bear all expenses arising out of the performance of the
Administrative Services and of the performance of their functions
described herein. Neither the Service Provider nor the Dealer
shall receive (nor shall any agent of the Service Provider or
Dealer receive) from the Trust or any Fund (or from any affiliate
of the Trust) any monetary compensation or reimbursement for such
expenses.
2.02. Trust's and Fund Expenses. The Trust shall bear all the expenses
of the Funds hereunder and shall not receive (nor shall any agent
of the Trust receive) from the Service Provider or the Dealer any
monetary compensation or reimbursement for such expenses.
2.03. Administrative Fees. In consideration of the Service Provider's
and the Dealer's performance of the Administrative Services, the
Trust, from the assets of each Fund, severally and not jointly,
shall pay either to the Service Provider or the Dealer the fees
(the "Administrative Fees") described in Schedule C attached
hereto, as such Schedule C may be amended from time to time with
the mutual consent of the Service Provider or the Dealer (as the
case may be) and the Trust and the relevant Fund. The Service
Provider or the Dealer must notify the Trust in writing
immediately upon the opening of any new omnibus account with the
Trust. The Dealer shall perform Administrative Services
hereunder without compensation therefor.
2.04. Calculation and Payment of Fees. The Administrative Fees shall
be calculated in the manner described in Schedule C hereto and
shall be due each calendar month from the Trust on behalf of each
Fund for which the Service Provider and the Dealer perform
Administrative Services pursuant to this Agreement. The Trust
shall make a payment for Administrative Fees for a calendar month
within thirty (30) days after the last day of such month. The
Service Provider or the Dealer shall have sixty (60) days
following receipt of the payment to verify the amount of the
payment and after such time the amount will be considered final.
3. REPRESENTATIONS AND WARRANTIES
3.01. Service Provider's Representations. The Service Provider
represents and warrants to the Trust that:
(a) it is a corporation duly organized and validly existing and
in good standing under the laws of the State of Texas;
(b) it has full power and authority under applicable law to
carry on its business, and is registered or licensed as
required, in each jurisdiction where it conducts its
business, and the performance of its obligations hereunder
does not and will not violate or conflict with any governing
6
<PAGE> 7
document or agreement of the Service Provider or any
applicable law, including, but not limited to, the Employee
Retirement Income Security Act of 1974;
(c) it maintains and knows of no reason why it cannot or will
not during the term hereof maintain adequate offices,
personnel, computers and other equipment necessary to
perform the services contemplated by this Agreement;
(d) the Service Provider's internal control structure over the
processing and transmission of Plan Instructions is suitably
designed to (i) prevent Instructions received after the
Close of Trading from being aggregated and communicated to
the Trust with Instructions received before the Close of
Trading and (ii) minimize errors that could result in the
late transmission of such Instructions;
3.02. Dealer Representations. The Dealer represents and warrants to
the Trust and each Fund that:
(a) it is a corporation duly organized and validly existing and
in good standing under the laws of the State of Delaware;
(b) it has full power and authority under applicable law to
carry on its business, and is registered or licensed as
required, in each jurisdiction where it conducts its
business;
(c) (i) it is duly registered as a broker-dealer under section
15 of the Securities Exchange Act of 1934, (ii) it is duly
registered as an investment adviser under section 203 of the
Investment Advisers Act of 1940, and (iii) is a member in
good standing of the NASD, and is in compliance with the
conditions and qualifications set forth in the Conduct Rules
of the NASD;
(d) it will not purchase Shares of a Fund for its own account or
otherwise act as principal in connection with the purchase
or the redemption of Shares of a Fund;
(e) it maintains and knows of no reason why it cannot or will
not, during the term hereof, maintain adequate offices,
personnel, procedures, computers and other equipment
necessary to perform the services contemplated by this
Agreement; and
(f) its entering into and performing this Agreement are duly
authorized by any necessary corporate actions and will not
violate any provision of
7
<PAGE> 8
applicable law or regulation or order of any court,
governmental or regulatory body, or any agreement or
instrument by which it is bound.
3.03. Trust's Representations. The Trust represents on its own behalf,
and for each Fund, and warrants to the Service Provider and the
Dealer that:
(a) the Trust is registered with the SEC as an open-end
management investment company under the 1940 Act;
(b) and the Shares of each of the Funds identified in Schedule A
attached hereto are registered under the Securities Act of
1933 ("1933 Act");
(c) the Trust shall amend the Registration Statement for the
Shares on Form N-1A under the 1933 Act and the 1940 Act from
time to time in order to effect the continuous offering of
the Shares;
(d) the Trust shall register or qualify the Shares for sale in
accordance with the laws of various states only if and to
the extent deemed advisable by the Trust, the Service
Provider, or the Dealer; and
(e) the entering into and the performing of this Agreement by
the Trust are duly authorized and will not violate any
provision of applicable law, regulation or order of any
court, governmental or regulatory body, or any agreement or
instrument by which the Trust and the Funds are bound.
4. INDEMNIFICATION
4.01. By The Trust. The Trust, on behalf of each Fund, shall indemnify
and hold the Service Provider, the Dealer (including any
affiliate of the foregoing), and the directors, trustees,
officers and employees of the Service Provider and the Dealer
harmless from and against any and all losses, damages, costs,
charges, reasonable counsel fees, payments, expenses and
liabilities ("Losses") arising out of or attributable to:
(a) the Trust's, its agent's, or the Fund's refusal or failure
to comply with the provisions of this Agreement or
applicable law;
(b) the bad faith, negligence or willful misconduct of the
Trust, its agent, or any Fund; or
(c) the breach of any representation or warranty of the Trust on
behalf of itself or a Fund hereunder, in each case except to
the extent such Losses arise out of or are attributable to
another party's breach of any provision of this
8
<PAGE> 9
Agreement or the bad faith, negligence or willful misconduct
of another party in performing its obligations hereunder.
4.02. By Service Provider. The Service Provider shall indemnify and
hold the Trust, each affiliate of the Trust, each Fund, and the
trustees, officers and employees of the Trust harmless from and
against any and all Losses arising out of or attributable to:
(a) the Service Provider's or its agent's refusal or failure to
comply with the provisions of this Agreement or applicable
law or with instructions properly given hereunder, whether
it is performing functions on behalf of the Plans or
providing Administrative Services;
(b) the Service Provider's or its agent's performance of or
failure to perform the Administrative Services;
(c) the bad faith, negligence or willful misconduct of the
Service Provider or its agent, whether it is performing
functions on behalf of the Plans or providing Administrative
Services;
(d) the Service Provider's or its agent's furnishing to any
Plan, Plan Participant, Plan sponsor, authorized Plan
committee or Plan trustee any materially inaccurate,
misleading or untimely information regarding any Fund or the
Shares through no fault of the Trust or its agent; or
(e) the breach of any representation or warranty of the Service
Provider hereunder, in each case except to the extent such
Losses arise out of or are attributable to another party's
breach of any provision of this Agreement or the bad faith,
negligence or willful misconduct of another party in
performing its obligations hereunder.
4.03. By the Dealer. The Dealer shall indemnify and hold the Trust,
each affiliate of the Trust, each Fund, and the trustees,
officers and employees of the Trust and each harmless from and
against any and all Losses arising out of or attributable to:
(a) the Dealer's or its agent's refusal or failure to comply
with the provisions of this Agreement or applicable law or
with instructions properly given hereunder;
(b) the Dealer's or its agent's performance of or failure to
perform the Administrative Services;
(c) the bad faith, negligence or willful misconduct of the
Dealer or its agent;
9
<PAGE> 10
(d) the Dealer's or its agent's furnishing to any Plan, Plan
Participant, Plan sponsor, authorized Plan committee or Plan
trustee any materially inaccurate, misleading or untimely
information regarding any Fund or the Shares through no
fault of the Trust, its agent, or any Fund; or
(e) the breach of any representation or warranty of the Dealer
hereunder, in each case except to the extent such Losses
arise out of or are attributable to another party's breach
of any provision of this Agreement or the bad faith,
negligence or willful misconduct of another party in
performing its obligations hereunder.
4.04. Acts of God. In the event that any party is unable to perform
its obligations under the terms of this Agreement because of acts
of God, strikes, equipment or transmission failure or damage
beyond its reasonable control, or other causes beyond its
reasonable control, such party shall not be liable to any other
party for any damages resulting from such failure to perform or
otherwise from such causes.
4.05. No Consequential Damages. No party to this Agreement shall be
liable to any other party for consequential damages under any
provision of this Agreement.
4.06. Claim Procedure. In order that the indemnification provisions
contained herein shall apply, upon the assertion of a claim or
loss for which any party (the "Indemnitor") may be required to
indemnify another party (the "Indemnitee"), the Indemnitee shall
promptly notify the Indemnitor of such assertion or loss, and
shall keep the Indemnitor advised with respect to all
developments concerning any such claim. The Indemnitor shall have
the option to participate at its expense with the Indemnitee in
the defense of any such claim. In the event that there is more
than one Indemnitor with respect to any such claim, the
Indemnitors shall agree as to their exercise of this option. The
Indemnitee shall in no case confess any claim or make any
compromise in any case in which the Indemnitor may be required to
indemnify it except with the Indemnitor's prior written consent.
The obligations of the Trust, the Service Provider, and the
Dealer under this Section 4 shall survive the termination of this
Agreement.
10
<PAGE> 11
5. ACKNOWLEDGMENTS
5.01. Fees Solely for Administrative Services. The parties hereto
acknowledge that the Administrative Fees are for administrative
and recordkeeping services only and do not constitute payment in
any manner for investment advisory or distribution services or
services of an underwriter or principal underwriter within the
meaning of the 1933 Act or the 1940 Act. The parties acknowledge
that the Service Provider has been providing and will continue to
provide certain services to the Plans as agent of the Plans,
which, together with the Dealer, may involve, among other things,
preparing informational or promotional materials relating to
their services that may refer to the Funds and responding to
telephone inquiries from Plan Participants. The parties
acknowledge that the provision of such services and any other
actions of the Service Provider and the Dealer related to the
Funds and not specifically authorized herein are outside the
scope of this Agreement.
5.02. Service Provider Acting as Agent for the Plans; Supervision. The
parties acknowledge that the Service Provider has been selected
as a provider of administrative and recordkeeping services by the
Plans, and that, except as provided specifically in Section
1.01(b) hereof, the Service Provider will perform the
Administrative Services hereunder as an independent contractor
and not as an employee or agent of the Trust or any Fund. The
parties acknowledge, further, that neither the Trust nor any Fund
undertakes to supervise the Service Provider or the Dealer in the
performance of the Administrative Services; that neither the
Trust nor any Fund shall be responsible for the performance of
the Administrative Services by the Service Provider or the
Dealer; that neither the Trust nor any Fund shall be responsible
for the accuracy of the records maintained by the Service
Provider for the Plans; and that neither the Trust nor any Fund
shall be responsible for the performance of other functions by
the Service Provider or the Dealer for the Plans and the
Participants. This Agreement does not entitle the Service
Provider or the Dealer to purchase any Shares for each of its own
account.
5.03. Laws Applicable to Funds. The Service Provider acknowledges that
the Trust is a registered investment company under the 1940 Act,
is subject to the provisions of the 1940 Act and regulations
thereunder, and that the offer and sale of the Shares of the
Funds are subject to the provisions of federal and state laws and
regulations applicable to the offer and sale of securities. The
Trust acknowledges that the Service Provider and the Dealer are
not responsible for the Trust's or any Fund's compliance with
such laws and regulations. If the Trust or any Fund notifies the
Service Provider and the Dealer that a procedure or other
activity of the Service Provider or the Dealer related to the
discharge of either of its obligations hereunder has or may have
the effect of causing the Trust or any Fund to violate any of
such laws or regulations, the Service Provider, the Dealer, and
the Trust, on behalf of the Funds, shall develop a mutually
agreeable alternative procedure or activity which does not have
such effect.
11
<PAGE> 12
5.04. Agents of the Service Provider, the Dealer, and the Trust. Each
party shall notify the other parties to this Agreement prior to
the use of any agent. To the extent agents of the Service
Provider or the Dealer perform services under this Agreement that
are the responsibility of the Service Provider or the Dealer, as
the case may be, the Service Provider or the Dealer shall be
responsible for, and assume all liability for (including any
obligation for indemnification as provided in Sections 4.02 or
4.03 hereof, as applicable), the actions and inactions of such
agents as if such services had been provided by the Service
Provider or the Dealer. Similarly, to the extent agents of the
Trust perform services under this Agreement that are the
responsibility of the Trust, the Trust shall be responsible for,
and assume all liability for (including any obligation for
indemnification as provided in Section 4.01 hereof, as
applicable), the actions and inactions of such agents as if such
services had been provided by the Trust.
6. AMENDMENT AND TERMINATION OF AGREEMENT
6.01. Amendment. Except as otherwise provided herein, this Agreement
may be amended or modified only by a written instrument executed
by all the parties affected thereby; provided that an amendment
solely to add or remove any Fund may be made, and shall be valid
and binding, by the addition or removal of the relevant Fund's
listing on Schedule A and its signature below without requiring
the other parties' signatures and shall be effective as of the
date of execution, unless any other party objects in writing
within thirty (30) days after receiving notice of such amendment.
6.02. Termination Without Cause. This Agreement may be terminated by
any party upon ninety (90) days written notice to each other
party.
6.03. Termination by Trust for Cause. This Agreement may be terminated
by the Trust as to any Fund immediately upon notice to each other
party in the event that (a) the Service Provider or the Dealer
becomes unable for any reason to perform the services
contemplated by this Agreement, or (b) the performance by the
Service Provider or the Dealer of the services contemplated by
this Agreement becomes in the Trust's reasonable judgment
unlawful or ceases to satisfy the Trust's reasonable standards
and so becomes unacceptable to the Trust.
6.04. Termination by Service Provider or the Dealer for Cause. This
Agreement may be terminated by the Service Provider or the Dealer
immediately upon notice to the Trust in the event that (a) the
Trust becomes unable for any reason to fulfill the obligations
set forth in this Agreement or (b) the performance by the Trust
of the obligations contemplated by this Agreement becomes in the
reasonable judgment of the Service Provider or the Dealer
unlawful or ceases to satisfy the Service
12
<PAGE> 13
Provider's or the Dealer's reasonable standards and so becomes
unacceptable to the Service Provider or the Dealer.
6.05. Termination for Cause by Any Party. This Agreement may be
terminated by any party hereto immediately upon notice to each
other party in the event that (a) all the Funds cease to be
investment alternatives under all the Plans, (b) the Trust
declines to accept any additional purchase or redemption requests
for Shares, (c) the SEC issues any stop order suspending the
effectiveness of the registration statements or prospectus for
the Trust, or a current prospectus for the Trust is not on file
with the SEC as required by Section 10 of the 1933 Act, or (d)
any other party materially breaches this Agreement. To the extent
that any of the events enumerated (a) through (d) of this Section
6.05 occurs with respect to one or more Funds, but not with
respect to all the Funds, or that one or more Funds, but not all
the Funds, terminates this Agreement, in lieu of termination of
this Agreement, the Trust shall amend Schedule A hereto with
notice to the other parties to remove the relevant Funds from
such Schedule A.
6.06. Termination Procedures. Upon termination of this Agreement, each
party shall return to each other party all copies of confidential
or proprietary materials or information received from such other
party hereunder, other than materials or information required to
be retained by such party under applicable laws or regulations.
This provision shall survive the termination of this Agreement.
7. ASSIGNMENT AND DELEGATION
7.01. Assignment and Delegation. Except as otherwise provided herein,
neither this Agreement nor any rights, duties or obligations
hereunder may be assigned or delegated by any party without the
written consent of the other parties.
7.02. Successors. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted
successors and assigns.
13
<PAGE> 14
8. NOTICES
Notices hereunder shall be in writing, shall be signed by an authorized
officer, and shall be deemed to have been duly given if delivered personally,
sent by certified mail (return receipt requested), or sent by facsimile machine
in accordance with procedures established by agreement of the Trust and the
Service Provider or the Dealer, and if it is addressed to a party either at its
address below or at a changed address specified by it in a notice to the other
parties hereto:
Trust: AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
Service Provider: VALIC RETIREMENT SERVICES COMPANY
Dealer: A.G. DISTRIBUTORS, INC.
2929 Allen Parkway
Houston, Texas 77019
9. MISCELLANEOUS
9.01. Texas Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with
the laws of the State of Texas, without regard to conflicts of
laws principles.
9.02. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes any prior
agreement with respect to the subject matter hereof whether
oral or written. All exhibits and schedules hereto, as amended
from time to time, are incorporated herein and made a part
hereof. References herein to exhibits and schedules refer to
such exhibits and schedules as so amended. Nothing contained
in this Agreement is intended to convey rights to any third
parties, such as Plans, Plan trustees or Participants.
9.03. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original document and
all of which together shall be deemed one and the same
instrument.
9.04. Limitation of Liability of the Trust, Trustees and
Shareholders. It is understood and expressly stipulated that
none of the trustees, officers, agents, or shareholders of the
Trust or any Fund shall be personally liable hereunder. It is
understood and acknowledged that all persons dealing with the
Trust or any Fund must look solely to the property of such
Fund for the enforcement of any claims against the Fund as
neither the trustees, officers, agents or shareholders assume
any personal liability for obligations entered into on behalf
of any Fund. No Fund shall be liable for the obligations or
liabilities of any other Fund.
14
<PAGE> 15
9.05. Headings. The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning
or interpretation of this Agreement.
9.06. Severability. If any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any
reason, the remaining provisions and portions of the Agreement
shall be unaffected thereby and shall remain in full force and
effect to the fullest extent by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
By: /s/ THOMAS L. WEST, JR.
-------------------------------------
Name: Thomas L. West, Jr.
Title: Chairman and CEO
VALIC RETIREMENT SERVICES COMPANY
By: /s/ J. DAVID CRANK
-------------------------------------
Name: J. David Crank
Title: Vice President - Group Services
A.G. DISTRIBUTORS, INC.
By: /s/ BRUCE ABRAMS
-------------------------------------
Name: Bruce Abrams
Title: President & CEO
15
<PAGE> 16
SCHEDULE A
LIST OF AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
FUNDS AND CLASSES OF SHARES COVERED BY THE AGREEMENT
American General International Growth Fund - Institutional Class I
American General Large Cap Growth Fund - Institutional Class I
American General Mid Cap Growth Fund - Institutional Class I
American General Small Cap Growth Fund - Institutional Class I
American General International Value Fund - Institutional Class I
American General Large Cap Value Fund - Institutional Class I
American General Mid Cap Value Fund - Institutional Class I
American General Small Cap Value Fund - Institutional Class I
American General Socially Responsible Fund - Institutional Class I
American General Balanced Fund - Institutional Class I
American General High Yield Bond Fund - Institutional Class I
American General Strategic Bond Fund - Institutional Class I
American General Domestic Bond Fund - Institutional Class I
American General Core Bond Fund - Institutional Class I
American General Money Market Fund - Institutional Class I
American General Municipal Bond Fund - Institutional Class I
American General Municipal Money Market Fund - Institutional Class I
American General Science & Technology Fund - Institutional Class I
ON BEHALF OF AMERICAN GENERAL
SCIENCE & TECHNOLOGY FUND
By: /s/ NORI L. GABERT
------------------------------
Name: Nori L. Gabert
Title: Vice President & Assistant Secretary
Date: March 1, 2000
<PAGE> 17
SCHEDULE B
THE ADMINISTRATIVE SERVICES
1. The Service Provider shall maintain adequate records for each Plan
reflecting Shares purchased and redeemed, including the date, price and number
of Shares purchased, redeemed or exchanged; dividend reinvestment dates and
amounts of dividends paid for at least the current year to date; records of
distributions and dividend payments; Share transfers; investment allocation
changes; and overall control records. Such records shall be preserved,
maintained and made available in accordance with the provisions of applicable
law and regulations, and copies or, if required, originals shall be surrendered
promptly to the Trust on and in accordance with its request. Records surrendered
hereunder shall be in machine readable form, except to the extent that such
records have been maintained only in paper form.
2. The Service Provider shall disburse or credit to the Plans, and
maintain records of, all proceeds of Share redemptions and distributions not
reinvested in Shares.
3. The Dealer shall cause and oversee the timely and accurate transfer
of funds in connection with Plan accounts with the Funds.
4. The Dealer or the Service Provider shall prepare and deliver
periodic account statements to the Plans showing for each Plan the total number
of Shares held as of the statement closing date, purchases and redemptions of
Shares during the statement period, and dividends and other distributions paid
during the statement period (whether paid in cash or reinvested in Shares),
including dates and prices for all transactions.
5. Subject to the terms of the agreements with each Plan, and to the
extent required by applicable law, the Service Provider shall deliver or cause
the delivery of prospectuses, proxy materials (where pass-through voting is
required), periodic reports to shareholders, and other materials provided to the
Service Provider by the Trust on behalf of the Funds.
6. The Dealer shall receive Instructions from the Service Provider or
the trustee and/or custodian of the Plans, and communicate Orders to the Trust
or its agent as specified in the Agreement.
7. The Dealer shall transmit Orders to the Trust or its agent and, in
accordance with applicable law, send to the Plans confirmations related to the
processing of Instructions and Orders.
8. The Service Provider shall maintain daily and monthly purchase
summaries (expressed in both Share and dollar amounts) for each Plan.
9. The Dealer shall use its best efforts to arrange for payment for net
purchases of Shares attributable to all Orders executed prior to 4:00 PM on a
given Business Day to be wired to the Trust or its agent by 12:00 PM (noon)
eastern time the first Business Day following receipt of such orders
<PAGE> 18
by the Service Provider. The Trust agrees that it will use its best efforts to
arrange for payment for net redemptions for Shares attributable to all orders
executed prior to 4:00 PM on a given Business Day to be wired to the trustee
and/or custodian of the Plans by 12:00 PM (noon) eastern time the first Business
Day following receipt of such orders by the Transfer Agent.
10. The Dealer and the Service Provider shall transmit to the Trust or
its agent, or to any Fund designated by the Trust, such occasional and periodic
reports as the Trust shall reasonably request from time to time to enable it or
such Fund to comply with applicable laws and regulations.
11. The Service Provider or the Dealer shall establish a voice response
system and make customer service representatives accessible to respond to Plan
or Participant inquiries regarding, among other things, Share prices, account
balances, dividend amounts, dividend payment dates, and any information changes
concerning a Plan or Participant.
12. The Service Provider shall provide average cost basis reporting to
Plan Participants to assist them in preparing their income tax returns.
13. The Service Provider shall prepare and file with the appropriate
governmental agencies such tax-related information, returns and reports as are
required under applicable laws or regulations to be filed for reporting (a)
dividends and other distributions, (b) amounts withheld on dividends and other
distributions and payments, and (c) gross proceeds of sales transactions.
14. The Service Provider shall assist with the solicitation of proxies
from Plan Participants, as requested from time to time by the Trust.
15. The Service Provider shall establish Internet access for
Participants to view account balances and perform certain limited transactions
as determined by the Service Provider and the Dealer.
16. The Service Provider shall perform all testing and Plan compliance
services, including consulting on proposed Plan amendments, determining Plan
eligibility, calculating Plan service and vesting, and processing forfeitures.
2
<PAGE> 19
SCHEDULE C
THE ADMINISTRATIVE FEES
The Trust, on behalf of the Funds, will pay the Service Provider or the
Dealer (but not both of them) a monthly fee at an annualized rate of .25 percent
(25 basis points) with respect to the Funds listed on Schedule A, of the average
daily account balance during the month for each account for which the Service
Provider and the Dealer perform Administrative Services. If the Service Provider
or the Dealer begins or ceases to perform Administrative Services during the
month, such fee shall be prorated according to the proportion which such portion
of the month bears to the full month.
<PAGE> 1
EXHIBIT h.9(e)
STATE FILING SERVICES AGREEMENT
THIS AGREEMENT is made as of the 3rd day of August, 1998 by and between
The Variable Annuity Life Insurance Company ("VALIC"), a Texas life insurance
company, and Automated Business Development Corporation ("ABD"), a Massachusetts
corporation on behalf of ClearSky ("ClearSky"), a division of ABD.
WITNESSETH:
WHEREAS, VALIC has been retained to provide certain services to those
investment companies registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), which, together with any portfolio series or class
thereof, are identified on Schedule A to this Agreement (the "Funds"); and
WHEREAS, VALIC wishes to retain ClearSky to provide certain administration
services with respect to the Funds, which services have been previously provided
by VALIC, and ClearSky is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. VALIC hereby appoints ClearSky to provide certain
administration services to the Funds for the period and on the terms set forth
in this Agreement. ClearSky accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 4 of this Agreement. In the event that VALIC decides to add one or
more new portfolio series or classes to a Fund, with respect to which it wishes
to retain ClearSky to provide services hereunder, VALIC shall notify ClearSky in
writing. If ClearSky is willing to render such services, it shall notify VALIC
in writing of any terms and compensation that differ from the provisions of this
Agreement, and upon acceptance by VALIC, such company, portfolio or class shall
become a Fund hereunder.
2. Delivery of Documents. VALIC will furnish ClearSky with copies of each
of the following:
(a) A listing of all jurisdictions in which each Fund is lawfully available
for sale as of the date of this Agreement and in which VALIC desires ClearSky to
effect such notice filing;
(b) Each Fund's most recent Post-Effective Amendment under the Securities
Act of 1933 and under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") and all amendments thereto; and
(c) Each Fund's most recent prospectus and statement of additional
information and all amendments and supplements thereto (the "Prospectus").
<PAGE> 2
VALIC will furnish ClearSky from time to time with copies of all amendments
of or supplements to the foregoing, if any.
3. Services and Duties. Subject to the supervision and control of VALIC,
ClearSky undertakes to perform the following specific services:
(a) Effecting and maintaining, as the case may be, the qualification of
shares of the Funds for sale under the securities laws of the jurisdictions
indicated for each Fund on the list furnished to ClearSky pursuant to Paragraph
2(a) of this Agreement;
(b) Filing with each appropriate jurisdiction, as required, the appropriate
materials relating to the Funds, such filings to be made promptly after
receiving such materials from VALIC: Post Effective Amendments to the Funds'
Registration Statements; definitive copies of the Funds' Prospectuses and
Statements of Additional Information and any Supplements thereto; and Notices of
Special Meetings of Shareholders and related Proxy materials which propose the
merger, reorganization or liquidation of a Fund;
(c) Conveying to VALIC any comments received on such filings and, if
desired by VALIC, responding to such comments in such manner as authorized by
VALIC; and
(d) In connection with the foregoing, receiving limited power of attorney
on behalf of the Funds to sign all Blue Sky filings and other related documents.
Subject to payment to ClearSky in advance, ClearSky will remit to the
respective jurisdictions notice filing fees for the shares of any Fund, and any
fees for qualifying or continuing the qualification of any Fund. VALIC will,
from time to time as specifically agreed between the parties, wire transfer
funds to ClearSky for the payment of said fees payable pursuant to this
provision promptly upon request by ClearSky. ClearSky will request the funds
necessary for the payment of fees ten business days in advance of the date the
fees become due, whenever possible. Upon receipt of the funds by ClearSky, it
will issue checks for the payment of fees.
In performing its duties under this Agreement, ClearSky will act in
accordance with the instructions and directions of VALIC.
VALIC will provide ClearSky, upon notification by ClearSky of the
appropriate number of copies of each document, all documents which must be filed
pursuant to this provision.
4. Compensation. For the services provided by ClearSky under this
Agreement, VALIC will pay to ClearSky a monthly fee based upon the number of
state securities notice filings (permits). The fee shall be based upon the rate
of $143,352.00 per year and billed monthly in arrears; provided that, during any
period in which ClearSky provides the same or substantially similar ongoing
state registration services to any other entity at a lower rate, ClearSky shall
charge VALIC no more than the lowest such rate then in effect.
<PAGE> 3
5. Limitations of Liability and Indemnification. ClearSky shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds or VALIC in connection with the matters to which this Agreement
relates, so long as it acts in good faith and with due diligence and is not
negligent or guilty of any willful misconduct. Without in any way limiting the
foregoing, ClearSky shall have no liability for failing to file on a timely
basis any material to be provided by VALIC that it has not received on a timely
basis from VALIC; ClearSky shall have no responsibility to review the accuracy
or adequacy of materials it receives from VALIC for filing or bear any liability
arising out of the timely filing of such materials.
VALIC agrees and acknowledges that ClearSky has not prior to the date
hereof assumed, and will not assume, any obligations or liabilities arising out
of the conduct of VALIC prior to the date hereof of those duties which ClearSky
has agreed to perform pursuant to this Agreement. VALIC further agrees to
indemnify ClearSky against any losses, claims, damages or liabilities to which
ClearSky may become subject in connection with the conduct by VALIC of such
duties prior to the date hereof.
VALIC represents and warrants to ClearSky that as of the date hereof each
Fund is lawfully eligible for sale in each jurisdiction indicated for such Fund
on the list furnished to ClearSky pursuant to Paragraph 2(a) of this Agreement.
6. Service to Other Companies or Accounts. VALIC understands that the
persons employed by ClearSky to assist in the performance of ClearSky's duties
hereunder will not devote their full time to such service and nothing contained
herein shall be deemed to limit or restrict the right of ClearSky or any
affiliate of ClearSky to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
7. Notices. Any notice or other instrument or materials authorized or
required by this Agreement to be given in writing to VALIC or to ClearSky shall
be sufficiently given if addressed to such party and received by it at its
office set forth below or at such other place as it may from time to time
designate in writing.
TO VALIC:
VALIC
2929 Allen Parkway
Suite L4-01
Houston, DC 77019
Attention: Ms. Nori L. Gabert
TO ClearSky:
ClearSky
529 Main Street
Schrafft Center Annex
Boston, MA 02129
Attention: Elizabeth A. Nystedt
<PAGE> 4
8. Files. All files maintained by ClearSky with respect to the Funds shall
be the property of VALIC and shall be returned to VALIC at the termination of
this Agreement or as mutually agreeable to ClearSky and VALIC.
9. Duration and Termination. This Agreement shall continue thereafter until
termination by VALIC or ClearSky on 60 days written notice.
10. Conversion. There will be no charge for system conversion provided
VALIC allow ClearSky to administrate complete Blue Sky filing services for a
period of at least six months. In the event VALIC terminates this Agreement
prior to this six month obligation, a one time conversion fee equivalent to
$10/permit shall be applied.
11. Amendment to this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought
12. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts.
13. Confidentiality. ClearSky agrees to maintain all information about
VALIC and the Funds that ClearSky acquires pursuant to this Agreement in
confidence, and ClearSky agrees not to use, or permit the use of, any such
information for any purpose except that set forth herein, or to disclose any
such information to any person, without the prior written consent of VALIC.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their constructions or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the date and year first above
written.
Attest: The Variable Annuity Life Insurance Company
/s/ NORI A. GABERT /s/ CYNTHIA TOLES
- ----------------------------- -------------------------------------------
Attest: Automated Business
Development Corporation
NOT LEGIBLE NOT LEGIBLE
- ----------------------------- --------------------------------------------
<PAGE> 6
AMENDMENT TO SCHEDULE A
(Effective October 7, 1998)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
SERIES CLASSES OFFERED
American General S&P 500 Index Fund A,B
American General Mid Cap Index Fund A,B
American General Small Cap Index Fund A,B
American General Municipal Bond Fund A,B
American General Municipal Money Market Fund A,B
American General Small Cap Value Fund A,B,I,II
American General Mid Cap Growth Fund A,B,I,II
American General International Value Fund A,B,I,II
American General Domestic Bond Fund A,B,I,II
American General Balanced Fund A,B,I,II
American General Large Cap Growth Fund A,B,I,II
American General Small Cap Growth Fund A,B,I,II
American General Mid Cap Value Fund A,B,I,II
American General Large Cap Value Fund A,B,I,II
American General International Growth Fund A,B,I,II
American General Money Market Fund A,B,I,II
American General Socially Responsible Fund A,B,I,II
American General Growth Lifestyle Fund A,B,I,II
American General Moderate Growth Lifestyle Fund A,B,I,II
American General Conservative Growth Lifestyle Fund A,B,I,II
American General Core Bond Fund A,B,I,II
American General High Yield Bond Fund A,B,I,II
American General Strategic Bond Fund A,B,I,II
Accepted:
The Variable Annuity Life Insurance Company
By: /s/ CYNTHIA TOLES
----------------------------------------------------------
Name: Cynthia Toles
----------------------------------------------------------
Its: Senior Vice President, General Counsel and Secretary
----------------------------------------------------------
Automated Business Development Corporation
By: /s/ ELIZABETH A. NYSTEDT
------------------------------------
Name: Elizabeth A. Nystedt
----------------------------------
Its: Director
-----------------------------------
<PAGE> 7
FORM OF
AMENDMENT TO SCHEDULE A
(EFFECTIVE MARCH 1, 2000)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
<TABLE>
<CAPTION>
SERIES CLASSES OFFERED
- ------ ---------------
<S> <C>
American General Stock Index Fund A, B
American General Mid Cap Index Fund A, B
American General Small Cap Index Fund A, B
American General Municipal Bond Fund A, B
American General Municipal Money Market Fund A, B
American General Science & Technology Fund A, B, I
American General Small Cap Value Fund A, B, I, II
American General Mid Cap Growth Fund A, B, I, II
American General International Value Fund A, B, I, II
American General Domestic Bond Fund A, B, I, II
American General Balanced Fund A, B, I, II
American General Large Cap Growth Fund A, B, I, II
American General Small Cap Growth Fund A, B, I, II
American General Mid Cap Value Fund A, B, I, II
American General Large Cap Value Fund A, B, I, II
American General International Growth Fund A, B, I, II
American General Money Market Fund A, B, I, II
American General Socially Responsible Fund A, B, I, II
American General Growth Lifestyle Fund A, B, I, II
American General Moderate Growth Lifestyle Fund A, B, I, II
American General Conservative Growth Lifestyle Fund A, B, I, II
American General Core Bond Fund A, B, I, II
American General High Yield Bond Fund A, B, I, II
American General Strategic Bond Fund A, B, I, II
</TABLE>
Accepted:
The Variable Annuity Life Insurance Company
By:
-------------------------
Name: John A. Graf
-------------------------
Its: President
-------------------------
Automated Business Development Corporation
By:
-------------------------
Name:
-------------------------
Its:
-------------------------
<PAGE> 1
EXHIBIT i.10
March 1, 2000
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Exhibit 10, Form N-1A
American General Series Portfolio Company 2
File Nos. 333-58979/811-08875
Ladies and Gentlemen:
As counsel to American General Fund Group, it is my opinion that the securities
being registered by this Post-Effective Amendment No. 4, will be legally issued,
fully paid and non-assessable when sold. My opinion is based on an examination
of documents related to American General Series Portfolio Company 2 (the
"Trust"), including its Declaration of Trust, its By-Laws, other original or
photostatic copies of Trust records, certificates of public officials,
documents, papers, statutes, and authorities as I deemed necessary to form the
basis of this opinion.
I therefore consent to filing this opinion of counsel with the Securities and
Exchange Commission as an Exhibit to the Trust's Post-Effective Amendment No. 4
to its Registration Statement.
Sincerely,
/s/ Katherine Stoner
Katherine Stoner
Senior Counsel
<PAGE> 1
EXHIBIT j.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference, in Post-Effective
Amendment No. 4 to the Registration Statement (Form N-1A No. 333-58979) and
related Prospectus of American General Series Portfolio Company 2, of those
references and of our report dated December 13, 1999 on the Stock Index Fund,
Mid Cap Index Fund, Small Cap Index Fund, International Growth Fund, Large Cap
Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, International Value
Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Value Fund, Socially
Responsible Fund, Balanced Fund, High Yield Bond Fund, Strategic Bond Fund,
Domestic Bond Fund, Core Bond Fund, Municipal Bond Fund, Money Market Fund,
Municipal Money Market Fund, Growth Lifestyle Fund, Moderate Growth Lifestyle
Fund, and Conservative Growth Lifestyle Fund of American General Series
Portfolio Company 2.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
March 1, 2000
<PAGE> 1
EXHIBIT m.15
DISTRIBUTION AND SERVICE PLAN
(Adopted October 7, 1998, as amended April 20, 1999)
American General Series Portfolio Company 2 (the "Company") is an open-end
management investment company, formed under the laws of the state of Delaware,
the shares of beneficial interest of the portfolios of which (each, a
"Portfolio") may be issued in multiple classes (each, a "Class").
This Plan is adopted by the Company, pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "Act"), to provide for payment
by the Company of certain expenses in connection with the distribution of the
Company's shares, the provision of personal services to the Company's
shareholders and/or the maintenance of its shareholder accounts. Payments
under the Plan are to be made to A.G. Distributors, Inc. (the
"Distributor"), which serves as the principal underwriter for the Portfolios'
shares under the terms of the Distribution and Servicing Agreement pursuant to
which the Distributor offers and sells each of the following Classes of the
Portfolios' shares as described below and in the Company's prospectus:1
o Class A Shares: Class A shares are sold at net asset
value plus an initial sales charge.
o Class B Shares: Class B shares are sold at net asset
value, and are subject to a contingent deferred sales
charge upon redemption within a specified period.
DISTRIBUTION FEE AND SERVICE FEE
CLASS A SHARES. The annual compensation payable by the Class A Shares of a
Portfolio to the Distributor is an amount equal to .25 of 1% on an annual basis
of the average net assets of that Class of a Portfolio's shares as either (1) a
"distribution fee" to finance the distribution of that Class of a Portfolio's
shares, or (2) a "service fee" to finance shareholder servicing by the
Distributor, its affiliated companies and broker-dealers who may sell that
Class of a Portfolio's shares and to encourage and foster the maintenance of
shareholder accounts, or as a combination of the two fees.
CLASS B SHARES. The annual compensation payable by the Class B Shares of a
Portfolio to the Distributor is an amount equal to 1% on an annual basis of the
average net assets of that Class of a Portfolio's shares such that (1) .75 of
1% shall be a "distribution fee" to finance the distribution of that Class of a
Portfolio's shares, and (2) .25 of 1% shall be a "service fee" to finance
shareholder servicing by the Distributor, its affiliated companies and
broker-dealers who may sell that Class of a Portfolio's shares and to encourage
and foster the maintenance of shareholder accounts.
- -------------------
1 The Company also offers Institutional Class I and Institutional
Class II shares. However, the Portfolios do not utilize Portfolio assets to
finance the distribution of Institutional Class I and Institutional Class II
shares, the provision of personal services to Institutional Class I and
Institutional Class II shareholders or the maintenance of Institutional Class I
and Institutional Class II shareholder accounts and, therefore, Institutional
Class I and Institutional Class II shares are not subject to the Plan.
<PAGE> 2
The amounts payable hereunder shall be paid to the Distributor monthly or at
such other intervals as the Board of Trustees may determine to compensate the
Distributor for services provided hereunder. The amount of the distribution
fee and/or service fee payable to the Distributor hereunder is not related
directly to expenses incurred by the Distributor on behalf of a Portfolio, or a
Class thereof, and the Company is not obligated to reimburse the Distributor
for such expenses.
NASD DEFINITION
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the net assets of a Class of a Portfolio and does
not include the service fee. The "service fee" shall be considered a payment
made by a Class of a Portfolio for personal service and/or maintenance of
shareholder accounts, as such is now defined by the National Association of
Securities Dealers Regulation, Inc. ("NASD"), provided , however, if the NASD
adopts a definition of "service fee" for purposes of Rule 2830 of the NASD
Conduct Rules that differs from the definition of "service fee" as presently
used, or if the NASD adopts a related definition intended to define the same
concept, the definition of "service fee" as used herein shall be automatically
amended to conform to the NASD definition.
QUARTERLY REPORTS
The Distributor shall provide to the Company's Board of Trustees and the Board
of Trustees shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid under this Plan and
the purposes for which such expenditures were made.
APPROVAL OF PLAN
This Plan shall become effective when it has been approved by a vote of the
Company's Board of Trustees and of the Trustees who are not interested persons
of the Company and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
trustees or shareholders of the Company) ("Independent Trustees") cast in
person at a meeting called for the purposes of voting on such Plan.
CONTINUANCE
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the Trustees,
including the Independent Trustees, as specified hereinabove for the adoption
of the Plan by the Trustees and Independent Trustees.
TRUSTEE CONTINUATION
In considering whether to adopt, continue or implement this Plan, the Trustees
shall have a duty to request and evaluate, and the Distributor shall have a
duty to furnish, such information as may be reasonably necessary to an informed
determination of whether this Plan should be adopted, implemented or continued.
2
<PAGE> 3
TERMINATION
This Plan may be terminated at any time with respect to a Portfolio, or a Class
thereof, by a vote of a majority of the Independent Trustees of the Company or
by a vote of the majority of the outstanding voting securities of such
Portfolio or Class thereof, without penalty. The distribution fee and service
fee will be paid by the Company, on behalf each Class of a Portfolio, to the
Distributor unless and until this Plan is terminated or not renewed, in which
event the Company, on behalf of a Portfolio or a Class thereof, shall pay the
Distributor for services provided on a pro-rata basis up through the date of
termination. Any expenses incurred by the Distributor, on behalf of a
Portfolio, or a Class thereof, in excess of the distribution fee and service
fee payable hereunder through the date of termination are the sole
responsibility and liability of the Distributor, and are not obligations of the
Company.
AMENDMENTS
This Plan may not be amended to increase materially the amount to be spent for
distribution of a Class of a Portfolio's shares, personal service and/or
maintenance of shareholder accounts without approval of that Class of the
Portfolio's shareholders, and all material amendments of this Plan must be
approved in the manner prescribed for the adoption of the Plan as provided
hereinabove.
TRUSTEES
While this Plan is in effect, the selection and nomination of the Trustees who
are not interested persons of the Company shall be committed to the discretion
of the Trustees who are not interested persons of the Company.
RECORDS
Copies of this Plan, the Distribution Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
Adopted as of October 7, 1998
* Effective as of March 1, 2000 for American General Science & Technology Fund
3
<PAGE> 1
EXHIBIT n.18
MULTI-CLASS PLAN
FOR
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
(Adopted August 26, 1998, as amended April 20, 1999)
This Plan is adopted pursuant to Rule 18f-3 under the Act to provide for
the issuance and distribution of multiple classes of shares by each of the
separate Series of American General Series Portfolio Company 2 (the "Trust") in
accordance with the terms, procedures and conditions set forth below. A majority
of the Trustees of the Trust, including a majority of the Trustees who are not
interested persons of the Trust within the meaning of the Act, found this
Multi-Class Plan, including the expense allocations, to be in the best interest
of the Trust and each Series of the Trust and each Class of Shares of each
Series and adopted this Plan on August 26, 1998.
A. Definitions. As used herein, the terms set forth below shall have the
meanings ascribed to them below.
1. The Act - Investment Company Act of 1940, as amended.
2. CDSC - contingent deferred sales charge.
3. CDSC Period - the period of years following acquisition during
which Shares are assessed a CDSC upon redemption.
4. Class - a class of Shares of a Series.
5. Class A Shares - shall have the meaning ascribed in Section B.1.
6. Class B Shares - shall have the meaning ascribed in Section B.1.
7. Institutional Class I Shares - shall have the meaning ascribed in
Section B.1.
8. Institutional Class II Shares - shall have the meaning ascribed
in Section B.1.
9. Distribution Expenses - expenses incurred in activities which are
primarily intended to result in the distribution and sale of
Shares as defined in a Distribution and Service Plan and/or board
resolutions.
10. Distribution Fee - a fee paid by a Series to the Distributor in
reimbursement of Distribution Expenses.
11. Distributor - A.G. Distributors, Inc.
<PAGE> 2
12. Trust - American General Series Portfolio Company 2.
13. Series - each separate Series of the Trust.
14. Money Market Fund - American General Money Market Fund or
American General Municipal Money Market Fund, each a Series of
the Trust.
15. Distribution and Service Plan - Any plan adopted under Rule 12b-1
under the Act with respect to payment of a Distribution Fee.
16. Service Fee - a fee paid to the Distributor, Inc. for the ongoing
provision of personal services to Trust shareholders and/or the
maintenance of shareholder accounts.
17. Share - a share of beneficial interest in the Trust.
18. Trustees - the trustees of the Trust.
B. Classes. Certain Series may offer up to four Classes as noted below.
1. Class A Shares. Class A Shares shall be offered at net asset
value plus a front-end sales charge as approved from time to time
by the Trustees and set forth in the Trust=s prospectus, which
may be reduced or eliminated for Money Market Funds, larger
purchases, under a combined purchase privilege, under a right of
accumulation, under a letter of intent or for certain categories
of purchasers as permitted by Rule 22(d) of the Act and as set
forth in the Trust=s prospectus. Class A Shares that are not
subject to a front-end sales charge as a result of the foregoing,
may be subject to a CDSC for the CDSC Period set forth in Section
D.1. The offering price of Shares subject to a front-end sales
charge shall be computed in accordance with Rule 22c-1 and
Section 22(d) of the Act and the rules and regulation thereunder.
Class A Shares shall be subject to ongoing Service Fees approved
from time to time by the Trustees and set forth in the Trust=s
prospectus.
2. Class B Shares. Class B Shares shall be (1) offered at net asset
value, (2) subject to a CDSC for the CDSC Period set forth in
Section D.1, (3) subject to ongoing Distribution Fees and Service
Fees approved from time to time by the Trustees and set forth in
the Trust=s prospectus and (4) converted to Class A Shares six
years after the shares were purchased.
3. Institutional Class I and Institutional Class II Shares.
Institutional Class I and Institutional Class II Shares are those
shares as set forth in the Trust's prospectus.
2
<PAGE> 3
C. Rights and Privileges of Classes. Each Class of each Series will
represent an interest in the same portfolio of investments of
that Series and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions except as
described otherwise herein.
D. CDSC. A CDSC may be imposed upon redemption of Class A Shares and
Class B Shares that do not incur a front-end sales charge subject
to the following conditions:
1. CDSC Period. The CDSC Period for Class A Shares shall be one
year. The CDSC Period for Class B Shares shall be at least
three but not more than ten years as recommended by the
Distributor and approved by the Trustees.
2. CDSC Rate. The CDSC rate shall be recommended by the
Distributor and approved by the Trustees. If a CDSC is
imposed for a period greater than one year the CDSC rate
must decline during the CDSC Period such that (a) the CDSC
rate is less in the last year of the CDSC Period than in the
first and (b) in each succeeding year the CDSC rate shall be
less than or equal to the CDSC rate in the preceding year.
3. Disclosure and Changes. The CDSC rates and CDSC Period shall
be disclosed in the Trust=s prospectus and may be decreased
at the discretion of the Distributor but may not be
increased unless approved as set forth in Section M.
4. Method of Calculation. The CDSC shall be assessed on an
amount equal to the lesser of the then current market value
or the cost of the Shares being redeemed. No CDSC shall be
imposed on increases in the net asset value of the Shares
being redeemed above the initial purchase price. No CDSC
shall be assessed on Shares derived from reinvestment of
dividends or capital gains distributions. The order in which
Class B Shares are to be redeemed when not all of such
Shares would be subject to a CDSC shall be as determined by
the Distributor in accordance with the provisions of Rule
6c-10 under the Act.
5. Waiver. The Distributor may in its discretion waive a CDSC
otherwise due upon the redemption of Shares under
circumstances previously approved by the Trustees and
disclosed in the Trust=s prospectus or statement of
additional information and as allowed under Rule 6c-10 under
the Act.
6. Calculation of Offering Price. The offering price of Shares
subject to a CDSC shall be computed in accordance with Rule
22c-1 and Section 22(d) of the Act and the rules and
regulations thereunder.
3
<PAGE> 4
7. Retention by Distributor. The CDSC paid with respect to
Shares of a Series may be retained by the Distributor to
reimburse the Distributor for commissions paid by it in
connection with the sale of Shares subject to a CDSC and
Distribution Expenses.
E. Service Fees, Distribution Fees, and Administrative Fees. Class A
Shares shall be subject to either a Distribution Fee or a Service
Fee of 0.25% per annum of the average daily net assets of the
Class and Class B Shares shall be subject to a Service Fee of
0.25% per annum of the average daily net assets of the Class and
a Distribution Fee of 0.75% per annum of the average daily net
assets of the Class. All other terms and conditions with respect
to Service Fees and Distribution Fees shall be governed by the
Distribution and Service Plan adopted by the Trust with respect
to such fees and Rule 12b-1 of the Act. Institutional Class I
shares are subject to a monthly Administrative Fee at an
annualized rate of 0.25%.
F. Conversion. Shares purchased through the reinvestment of
dividends and distributions paid on Shares subject to conversion
shall be treated as if held in a separate sub-account. Each time
any Shares in a Shareholder=s account (other than Shares held in
a sub-account) convert to Class A Shares, a proportionate number
of Shares held in the sub-account shall also convert to Class A
Shares. All conversions shall be effected on the basis of the
relative net asset values of the two Classes without the
imposition of any sales load or other charge. So long as any
Class of Shares converts into Class A Shares, the Distributor
shall waive or reimburse each Series, or take such other actions
with the approval of the Trustees as may be reasonably necessary,
to ensure the expenses, including payments authorized under a
Distribution and Service Plan, applicable to the Class A Shares
are not higher than the expenses, including payments authorized
under the Distribution and Service Plan, applicable to the class
of shares converting into Class A Shares.
G. Allocation of Expenses, Income and Gains Among Classes.
1. Expenses applicable to a particular class. Each Class of
each Series shall pay any Service Fee, Distribution Fee and
CDSC applicable to that Class. Other expenses applicable to
a particular Class such as incremental transfer agency fees,
but not including advisory or custodial fees or other
expenses related to the management of the Series= assets,
shall be allocated between Classes in different amounts if
they are actually incurred in different amounts by the
Classes or the Classes receive services of a different kind
or to a different degree than other Classes.
2. Distribution Expenses. Distribution Expenses actually
attributable to the sale of all Classes shall be allocated
to each Class based upon the ratio which sales of each Class
bears to the sales of all Shares of the Series. For this
purpose, Shares issued upon reinvestment of dividends or
distributions, upon
4
<PAGE> 5
conversion from Class B Shares to Class A Shares or upon
share splits will not be considered sales.
3. Income, capital gains and losses, and other expenses
applicable to all Classes. Income, realized and unrealized
capital gains and losses, and expenses such as advisory fees
applicable to all Classes shall be allocated to each Class
on the basis of the net asset value of that Class in
relation to the net asset value of the Series.
4. Determination of nature of expenses. The Trustees shall
determine in their sole discretion whether any expenses
other than those listed herein is properly treated as
attributed to a particular Class or all Classes.
H. Exchange Privilege. Exchanges of Shares shall be permitted
between Series of the Trust as follows.
1. General. Shares of one Series may be exchanged for Shares of
the same Class of another Series at net asset value and
without sales charge, provided that
a. The Distributor may specify that certain Series may not
be exchanged within a designated period which shall not
exceed 90 days after acquisition without prior
Distributor approval.
b. Class A Shares of the Money Market Funds that were not
acquired in exchange for Class B Shares of a Series may
be exchanged for Class A Shares of another Series only
upon payment of the excess, if any, of the sales charge
rate applicable to the Shares being acquired over the
sales charge rate previously paid.
c. Shares of the Money Market Funds acquired through an
exchange of Class B Shares may be exchanged only for
the same Class of another Series as the Class they were
acquired in exchange for or any Class into which those
shares were converted.
2. CDSC Computation. The acquired Shares will remain subject to
the CDSC rate schedule and CDSC Period, if applicable, for
the original Series upon the redemption of the Shares from
the Trust. For purposes of computing the CDSC payable on a
disposition of the new Shares, the holding period for the
original Shares shall be added to the holding period of the
new Shares.
5
<PAGE> 6
I. Voting Rights of Classes.
1. Shareholders of each Class shall have exclusive voting
rights on any matter submitted to them that relates solely
to the Distribution and Service Plan related to that Class,
provided that
a. If any amendment is proposed to the Distribution and
Service Plan under which Distribution Fees and/or
Service Fees are paid with respect to Class A Shares of
a Series that would increase materially the amount to
be borne by Class A Shares under that Distribution and
Service Plan, then no Class B Shares shall convert into
Class A Shares of that Series until the holders of
Class B Shares of that Series have also approved the
proposed amendment.
b. If the holders of the Class B Shares referred to in
subparagraph a. do not approve the proposed amendment,
the Trustees of the Trust and the Distributor shall
take such action as is necessary to ensure that the
Class voting against the amendment shall convert into
another Class identical in all material respects to
Class A Shares of the Series as constituted prior to
the amendment.
2. Shareholders shall have separate voting rights on any matter
submitted to shareholders in which the interest of one Class
differs from the interest of any other Class.
J. Dividends. Dividends paid by a Series with respect to each Class,
to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in
substantially the same amount, except any Distribution Fees,
Service Fees or incremental expenses relating to a particular
Class will be borne exclusively by that Class.
K. Reports to Trustees. The Distributor shall provide to the
Trustees of the Trust quarterly and annual statements concerning
distribution and shareholder servicing expenditures complying
with paragraph (b)(3)(ii) of Rule 12b-1 of the Act, as it may be
amended from time to time. The Distributors also shall provide
the Trustees such information as the Trustees may from time to
time deem to be reasonable necessary to evaluate this Plan.
L. Amendment. Any material amendment to this Plan shall be approved
by the affirmative vote of a majority of the Trustees of the
Trust, including the affirmative vote of the Trustees of the
Trust who are not interested persons of the Trust, except that
any amendment that increases the CDSC rate schedule or CDSC
Period must also be approved by the affirmative vote of a
majority of the Shares of the affected Class. The Distributor
shall provide the Trustees such information as may be reasonably
necessary to evaluate any amendment to this Plan.
* Effective as of March 1, 2000 for American General Science & Technology Fund
6
<PAGE> 1
EXHIBIT o.20
AGC INVESTMENT ADVISER/
INVESTMENT COMPANY
CODE OF ETHICS
I. APPLICABILITY
This Code of Ethics (the "Code") is applicable to all persons designated as
"Access Persons" of the subsidiary firms of American General Corporation ("AGC")
that are registered as investment advisers ("AGC Investment Advisers") with the
Securities and Exchange Commission (the "SEC"), and officers, directors,
trustees and Access Persons of any Investment Company (collectively, "Covered
Persons"). This Code is supplemented by a number of other AGC published
compliance policies, including the Insider Trading Policy as discussed below.
II. OVERVIEW OF REGULATORY FRAMEWORK
The AGC Investment Advisers supervise the investment portfolios of registered
investment company accounts ("Investment Companies") and other investment
advisory client accounts (collectively, "Advisory Clients"). Pursuant to
investment advisory agreements with the Advisory Clients, the AGC Investment
Advisers are authorized to take all actions necessary and appropriate to carry
out the investment objectives and investment policies established for each
Advisory Client, including, but not limited to, the purchase and sale of
securities on each Advisory Client's behalf. In carrying out these contractual
obligations, the AGC Investment Advisers acknowledge that they have a fiduciary
duty to the Advisory Clients and that this duty is recognized under federal
securities laws and regulations. In particular, the Investment Advisers Act of
1940, as amended (the "Advisers Act"), establishes as a matter of federal law
the fiduciary status of investment advisers and regulates the relationship
between investment advisers and their advisory clients. The Advisers Act, among
other things, prohibits advisers from engaging in practices that constitute
fraud or deceit upon advisory clients, including the practice of an adviser or
an employee of an adviser trading privately in securities for personal benefit
at the same time that its advisory clients are caused to trade in the same
securities.
The Investment Company Act of 1940, as amended (the "1940 Act"), regulates and
controls the relationship between the AGC Investment Advisers and the Investment
Companies that they manage. The 1940 Act specifically prohibits certain types of
financial transactions, either directly or indirectly, involving both the
Investment Company and the Investment Adviser, or officers and employees of the
adviser, unless prior written approval is obtained from the SEC. The 1940 Act
also requires every investment company and each investment adviser for such
investment company to adopt a written code of ethics.
The AGC Investment Advisers and each Investment Company have adopted this Code
in compliance with both the Advisers Act and the 1940 Act. This Code, together
with the compliance policies of the AGC Investment Advisers, is designed to
detect and prevent violations of the Adviser's Act and the 1940 Act.
<PAGE> 2
The Insider Trading and Securities Fraud Enforcement Act of 1988 (the "Insider
Trading Act") requires all investment advisers to establish, maintain and
enforce written policies and procedures designed to detect and prevent both
insider trading and the misuse of material, nonpublic information. The AGC
Investment Advisers have adopted policies and procedures designed to detect and
prevent insider trading pursuant to the Insider Trading Act. Covered Persons
should examine this Code in conjunction with the provisions of the Insider
Trading Policy adopted by the AGC Investment Advisers.
All personal securities transactions must be conducted consistent with the Code
of Ethics and in a manner to avoid any actual or potential conflict of interest
or any abuse of a Covered Person's position of trust and responsibility. In
conducting personal securities transactions, Covered Persons must not take
inappropriate advantage of their positions and must at all times place the
interest of Advisory Clients first.
Although the AGC Investment Advisers respect the personal freedom and privacy of
their Covered Persons, they believe that, in the regulatory environment in which
they operate, these considerations are outweighed in certain circumstances by
the need to carry out their fiduciary duties to the fullest extent possible.
Therefore, the AGC Investment Advisers have adopted the standards outlined below
to prevent potential conflicts of interest between Covered Persons' personal
business activities and the investment activities of Advisory Clients.
III. DEFINITIONS
The following definitions are applicable to terms used in the Code:
1. Access Person. The term "Access Person" means any individual affiliated with
an AGC Investment Adviser or its Advisory Client in a control relationship who,
in connection with his or her regular functions or duties, makes, participates
in, or obtains information regarding the purchase or sale of a Security for an
Advisory Client, or whose functions relate to the making of any recommendations
with respect to these purchases or sales.
2. Beneficial Ownership. The term "Beneficial Ownership" includes accounts of a
spouse or domestic partner, minor children and relatives living in an Access
Person's home, as well as accounts of any other person if by reason of any
contract, understanding, relationship, agreement or other arrangement the Access
Person obtains benefits substantially equivalent to those of ownership,
including benefits associated with survivorship or inheritance. For purposes of
this Code, a prohibition or requirement applicable to any Access Person applies
also to transactions in securities for any account for which the Access Person
has a Beneficial Ownership, including transactions executed by the Access
Person's spouse or relatives living in the Access Person's household, unless
such account is specifically exempted from such requirement by the Chief
Compliance Officer. A copy of a Release issued by the SEC on the meaning of the
term "Beneficial Ownership" is available upon request, and should be studied
carefully by any Access Person concerned with this definition before preparing
any report.
3. Compliance Officer. The term "Compliance Officer" means a member of the
Compliance Department of an AGC Investment Adviser who is responsible for
monitoring compliance with regulatory requirements and this Code of Ethics, and
any
<PAGE> 3
person designated by the Chief Compliance Officer who assists in performing
the above described duties.
4. Considered for Purchase or Sale. A security is being Considered for Purchase
or Sale when a recommendation to purchase or sell the security has been made and
communicated by an authorized Access Person in the course of his or her duties.
With respect to the person making the recommendation, a security is being
Considered for Purchase or Sale when the person seriously considers making such
a recommendation.
5. Control. The term "Control" has the same meaning as in Section 2(a)(9) of the
1940 Act (i.e., the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely the result of
an official position with such company). Any person who owns beneficially,
either directly or through one or more controlled companies, more than 25% of
the voting securities of a company shall be presumed to control such company.
6. Exempt Officers, Directors and Trustees. The phrase "Exempt Officers,
Directors and Trustees" means an officer, director or trustee who is not an
"interested person" of an Investment Company within the meaning of Section
2(a)(19) of the 1940 Act. The determination as to the exempt status of any
officer, director, or trustee shall be made by the Chief Compliance Officer.
7. Investment Company. The term "Investment Company" means an investment company
affiliate of AGC which is registered with the SEC.
8. Investment Personnel. The term "Investment Personnel" includes those
employees who are authorized to make investment decisions or to recommend
securities transactions on behalf of clients, research analysts, and employees
who work directly with portfolio managers and traders in an assistant capacity.
9. Portfolio Manager. The term "Portfolio Manager" means a person with the
direct responsibility and authority to make investment decisions affecting an
Advisory Client, including, but not limited to, private placement, Investment
Company and private account Portfolio Managers.
10. Security or Securities. The term "Security" shall have the same meaning as
set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include
shares of registered open-end investment companies, securities issued or
guaranteed by the U.S. Government, banker's acceptances, bank certificates of
deposit, and commercial paper. Any prohibition or reporting obligation relating
to a Security shall apply equally to any option, warrant or right to purchase or
sell the Security and to any Security convertible into or exchangeable for such
Security (i.e., a "Related Security").
IV. STANDARDS OF CONDUCT
1. No Covered Person may engage, directly or indirectly, in any business
transaction or arrangement for personal profit that is inconsistent with the
best interests of Advisory Clients; nor shall he or she make use of any
confidential information gained by reason of his or her affiliation with the AGC
Investment Advisers or their affiliates in order to derive a personal profit for
himself or herself or for any beneficial interest, in violation of the fiduciary
duty owed by the AGC Investment Advisers and their affiliates to Advisory
Clients.
<PAGE> 4
2. No Access Person shall purchase or sell, directly or indirectly, any
Security (or Related Security) in which he or she has, or by reason of the
transaction acquires, any direct or indirect beneficial ownership and that he or
she knows or should have known, at the time of purchase or sale: (i) is being
Considered for Purchase or Sale for an Advisory Client; or (ii) is being
purchased or sold for an Advisory Client. Securities purchased or sold through
basket trades for index-based accounts may be exempted from this prohibition
with the approval of a Compliance Officer.
3. Access Persons and any other AGC employee may not trade in market options
(puts or calls), warrants or other derivative instruments of AGC securities.
Options granted to employees by AGC are not considered market options.
4. Access Persons who are senior officers (i.e., senior vice presidents and
above) of an AGC Investment Adviser may not engage in market transactions
involving AGC securities (including stock and stock options) from the last day
of each fiscal quarter until three business days after AGC releases its earnings
for that quarter.
5. When a Security in which a Portfolio Manager has Beneficial Ownership is
recommended to his/her client for purchase, the Portfolio Manager's interest
(including dates of acquisition and costs) must be disclosed to a Compliance
Officer prior to the recommendation being made. Securities purchased or sold
through basket trades for index-based accounts may be exempted from this
requirement with the approval of a Compliance Officer.
6. No Covered Person may use material, nonpublic information when engaging in
Securities transactions. For example, Covered Persons who are directors of
closed-end Investment Companies may not purchase the closed-end Investment
Company's Securities prior to a dividend distribution of which he or she has
knowledge. Any Access Person who obtains material, confidential information
(a) by reason of his or her employment;
(b) by entering into a special confidential relationship in the conduct of
his or her duties; or
(c) inadvertently, shall immediately report the receipt of such information to a
Compliance Officer.
7. Without obtaining prior written approval from a Compliance Officer, no Access
Person shall dispense any reports, recommendations, or other information
concerning Securities holdings or Securities transactions for Advisory Clients
to anyone outside or inside the AGC Investment Advisers, unless such persons
have a business need for this information as a part of their normal duties and
activities. However, Access Persons may disclose this information
(a) where there is a public report containing the same information;
(b) when the information is dispensed in accordance with compliance procedures
established to prevent conflicts of interest between the AGC Investment Advisers
and their Advisory Clients; or
(c) when the information is reported to directors or trustees of Advisory
Clients or to administrators or other fiduciaries of Advisory Clients and when
these persons receive the information in the course of carrying out their
fiduciary duties.
<PAGE> 5
Note: No such information may be dispensed without the prior approval of a
Compliance Officer.
8. No Access Person shall accept directly or indirectly from a broker/dealer or
any other person who transacts business with the AGC Investment Advisers or
their Advisory Clients gifts, gratuities, preferential treatment, valuable
consideration or favors that are excessive in value or frequency which might
reasonably be expected to interfere with or influence the exercise of
independent and objective judgment in carrying out such Access Person's duties
as a fiduciary. Additional limitations and prohibitions on the receipt of gifts
or entertainment can be found in AGC's Gift and Entertainment Policy.
9. No Access Person shall join an investment club, or enter into an investment
partnership (including hedge funds) without obtaining prior written approval
from a Compliance Officer.
10. Portfolio Managers are prohibited from buying or selling a Security,
directly or indirectly, within seven calendar days before and after any Advisory
Client trades in that same Security. All Access Persons are prohibited from
buying or selling a Security, directly or indirectly, within seven calendar days
after any Advisory Client trade and seven calendar days before any anticipated
trade for an Advisory Client in that same Security. With the prior written
approval of the Chief Compliance Officer, securities purchased or sold through
basket trades for index-based accounts may be exempted from this prohibition.
11. Access Persons are prohibited from profiting, directly or indirectly, in the
purchase and sale, or sale and purchase, of the same (or equivalent) Securities
within 60 calendar days. Securities exempted from the prior clearance
requirement as outlined in Section 1 of Article V below are also exempt from
this prohibition.
12. Access Persons shall not purchase, directly or indirectly, any Securities,
or by reason of a transaction, acquire direct or indirect beneficial ownership
of Securities, in an initial public offering.
13. Research Analysts are required to obtain prior approval from a Compliance
Officer prior to purchasing or selling an equity Security in an industry he or
she follows unless the analyst has communicated his or her idea to the
appropriate Portfolio Manager or Trader.
Note: The prohibitions outlined in sections 2, 10, 11, and 12 above do not apply
to accounts over which a broker or Power of Attorney has full investment
discretion, although the Compliance Department must be notified of such accounts
in writing and must receive duplicate account statements and confirmations.
V. PRIOR CLEARANCE REQUIREMENTS
1. No Access Person shall purchase or sell any Security without obtaining prior
written clearance from a Compliance Officer. This includes direct or indirect
purchases of the Security (e.g., purchases by an Access Person's spouse,
purchases for investment club accounts, etc.). The following Securities are
exempt from the prior clearance requirements (but not from personal trading
reporting requirements): commodities and commodity futures, DRIPs or stock
purchase plans sponsored by AGC or USLIFE Income Fund, Inc., other corporate
DRIPs, index-based securities, transactions for thrift and/or incentive plans
sponsored by AGC and (subject to applicable blackout periods)
<PAGE> 6
common stock of AGC. Any Exempt Officer, Director or Trustee may at his or her
option request preclearance for any proposed purchase or sale.
2. Preclearance is effective only until the close of trading on the day it is
granted, although "after-hours" Internet trades are permitted with proper
pre-clearance, provided that the transaction is effected prior to midnight on
the day it is granted.
3. Limit Orders must be pre-cleared on the day the order is placed with a
broker, prior to the opening of the order. Limit orders are required to be
pre-cleared on subsequent days so long as the order remains open.
4. No Access Person shall acquire directly or indirectly any Beneficial
Ownership of Securities in a private placement without obtaining prior written
approval of the Chief Compliance Officer.
5. No Access Person shall serve on the board of directors of a publicly traded
company without obtaining prior written clearance from a Compliance Officer.
6. No Access Person shall: (i) act as an investment adviser to any other person
or entity for compensation; or (ii) obtain a significant interest in a
broker/dealer.
VI. EXEMPT PURCHASES AND SALES
The prohibitions of Section 1 of Article IV and Section 1 of Article V shall not
apply to:
1. Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control.
2. Transactions in employee benefit plans or employer-sponsored investment
programs.
3. Purchases which are part of an automatic dividend reinvestment plan.
4. Purchases or sales effected upon the exercise of rights issued by the issuer
pro rata to all holders of a class of its Securities, to the extent the rights
were acquired from such issuer.
5. Purchases or sales effected for accounts for which a broker or Power of
Attorney has full investment discretion. The Compliance Department must be
notified of such accounts in writing and must receive duplicate account
statements and confirmations.
6. Other purchases or sales which are non-volitional (e.g., inherited securities
or Corporate Actions).
VII. EXCEPTIONS
1. Exceptions to this Code of Ethics will be granted only in rare circumstances,
and then only with the prior written approval of the Chief Compliance Officer.
Exceptions may be granted only when the Chief Compliance Officer believes that
the potential for conflict is remote. Copies of all written approvals will be
maintained by the Compliance Department and will describe the circumstances
surrounding and the justification for granting the exception. For exceptions
involving Covered Persons of an Investment Company, the Board of Directors of
the Investment Company will be notified at least annually regarding any
exceptions that have been granted pursuant to this provision.
2. The exceptions to the policies and procedures described in this Code of
Ethics should not be viewed as necessarily applicable to the other codes or
written standards of business conduct adopted by AGC or its subsidiaries which
may also be applicable to Access
<PAGE> 7
Persons covered under this Code. Exceptions to these other requirements must be
obtained independently.
VIII. REPORTING
1. Reporting Obligation. Every Access Person shall report to a Compliance
Officer the information described in Section 3 below with respect to
transactions in any Security in which such Access Person has, or by reason of
such transaction acquires, any direct or indirect Beneficial Ownership in the
Security (e.g., purchases or sales by an Access Person's spouse).
2. Exempt Officers, Directors and Trustees. An Exempt Officer, Director or
Trustee shall report a transaction in a Security if such Officer, Director or
Trustee, at the time of the transaction, knew or, in the ordinary course of
fulfilling his or her official duties as an Exempt Officer, Director or Trustee,
should have known that, during the 15-day period immediately preceding or after
the date of the transaction in a Security by the Officer, Director or Trustee,
such Security was purchased or sold for an Advisory Client or was considered by
such Advisory Client for purchase or sale.
3. Form of Report. Quarterly reports of securities transactions shall be made no
later than 10 calendar days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(a) The date of the transaction, the issuer's name and the number of shares,
and/or the principal amount of the shares involved;
(b) the nature of the transaction, i.e., purchase, sale or any other type of
acquisition or disposition;
(c) the price at which the transaction was effected; and
(d) the name of the broker, dealer or bank with or through whom the transaction
was affected.
All reports shall be made on an appropriate form, as distributed by the
Compliance Department. Originals (not copies) of brokerage statements may be
attached to a signed report in lieu of setting forth the information otherwise
required.
4. Disclaimer of Beneficial Ownership. Quarterly reports of securities
transactions shall not be construed as an admission by the person making the
report that he or she has any direct or indirect Beneficial Ownership in the
Security to which the report relates.
5. Notification of Reporting Obligation. The quarterly report of securities
transactions is designed to comply with the requirements of the SEC under the
Advisers Act and the 1940 Act. Every Access Person has a continuing obligation
to file such reports in a timely manner. Information supplied on the reports is
available for inspection by the SEC at any time.
6. Disclosure of Personal Holdings. All Access Persons must disclose all
personal Securities holdings upon commencement of employment and thereafter on
an annual basis.
7. Disclosure of Interest in Transaction. No Covered Person shall recommend any
securities transaction for any Advisory Client without having disclosed his or
her interest, if any, in such Securities or the issuer thereof, including
without limitation: (a) his or her direct or indirect Beneficial Ownership of
any Securities of such issuer; (b) any
<PAGE> 8
contemplated transaction by such person in such Securities; (c) any position
with the issuer or its affiliates; (d) any present or proposed business
relationship between the issuer or its affiliates and such person or any party
in which such person has a significant interest; and (e) any factors about the
transaction that are potentially relevant to a conflicts of interest analysis.
8. Confidentiality. All information obtained from any Covered Persons hereunder
shall be kept in strict confidence, except that reports of securities
transactions will be made available to the SEC or any other regulatory or
self-regulatory organization to the extent required by law or regulation.
IX. CERTIFICATIONS
1. All Access Persons, within 10 days of becoming an Access Person, shall
certify that they have: (a) received a copy of this Code; (b) read and
understood the provisions of this Code; and (c) agreed to serve the Advisory
Clients in accordance with the terms of this Code.
2. All Access Persons shall annually certify that they have: (a) read and
understood this Code; (b) complied with the principles of this Code; and (c)
disclosed or reported all personal securities transactions which are required by
the Code to be disclosed or reported.
X. RECORDS OF SECURITIES TRANSACTIONS
Every Access Person shall direct his or her broker to supply the Chief
Compliance Officer, on a timely basis, with duplicate copies of confirmations of
all personal Securities transactions and copies of periodic statements for
brokerage accounts.
XI. SANCTIONS
1. Any violation of this Code of Ethics shall be reported to and considered by
the Chief Compliance Officer and, in his or her discretion, by senior management
of the relevant AGC Investment Adviser. Such individuals or bodies shall impose
sanctions as deemed appropriate in the circumstances, and may include disgorging
of profits and termination of employment of the violator.
2. With respect to any Investment Company, the Chief Compliance Officer shall
furnish annually to the Investment Company's Board of Directors/Trustees a
report regarding the administration of this Code of Ethics, including any
material violations, and summarizing any reports filed hereunder. If the report
indicates that any changes are advisable, the Board of Directors/Trustees shall
make an appropriate recommendation to the Chief Compliance Officer.
<PAGE> 1
EXHIBIT p.21(c)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned Trustee of American
General Series Portfolio Company 2, does hereby constitute and appoint John A.
Dudley, David M. Leahy and Robert N. Hickey, or any of them, the true and lawful
agents and attorneys-in-fact of the undersigned with respect to all matters
arising in connection with the Registration Statement on Form N-1A of American
General Series Portfolio Company 2 and any and all amendments (including
post-effective amendments) thereto, with full power and authority to execute
said Registration Statement and any and all amendments for and on behalf of the
undersigned, in my name and in the capacity indicated below, and to file the
same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and any state securities
authorities. The undersigned hereby gives to said agents and attorneys-in-fact
full power and authority to act in the premises, including, but not limited to,
the power to appoint a substitute or substitutes to act hereunder with the same
power and authority as said agents and attorneys-in-fact would have if
personally acting. The undersigned hereby ratifies and confirms all that said
agents and attorneys-in-fact, or any substitute or substitutes, may do by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 27th day of July, 1999.
/s/ KENT E. BARRETT
- ------------------------------
Kent E. Barrett, Trustee
<PAGE> 2
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned Trustee of American
General Series Portfolio Company 2, does hereby constitute and appoint John A.
Dudley, David M. Leahy and Robert N. Hickey, or any of them, the true and lawful
agents and attorneys-in-fact of the undersigned with respect to all matters
arising in connection with the Registration Statement on Form N-1A of American
General Series Portfolio Company 2 and any and all amendments (including
post-effective amendments) thereto, with full power and authority to execute
said Registration Statement and any and all amendments for and on behalf of the
undersigned, in my name and in the capacity indicated below, and to file the
same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and any state securities
authorities. The undersigned hereby gives to said agents and attorneys-in-fact
full power and authority to act in the premises, including, but not limited to,
the power to appoint a substitute or substitutes to act hereunder with the same
power and authority as said agents and attorneys-in-fact would have if
personally acting. The undersigned hereby ratifies and confirms all that said
agents and attorneys-in-fact, or any substitute or substitutes, may do by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 27th day of July, 1999.
/s/ ALICE T. KANE
- ------------------------------
Alice T. Kane, Trustee
