<PAGE> 1
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2
SUPPLEMENT DATED MARCH 27, 2000
TO THE PROSPECTUS DATED MARCH 1, 2000
American General Corporation has acquired the assets of CypressTree
Investments, Inc., including its investment advisor, CypressTree Asset
Management Corporation, Inc. and CypressTree Funds Distributors, Inc., its
mutual fund distributor. CypressTree Asset Management Corporation, Inc. is the
investment advisor to the North American Funds, headquartered in Boston,
Massachusetts.
The Board of Trustees of American General Series Portfolio Company 2
("American General Funds") has unanimously approved the merger of the American
General Funds into the North American Funds and will recommend the merger to the
shareholders. In late Spring 2000, proxy materials will be mailed to the
shareholders of the American General Funds. The shareholder meetings are
expected to be held in late June; and if approved by the shareholders, the
merger of the fund groups would become effective in July. In the interim, the
management and operations of the American General Funds will remain unchanged.
This supplement supersedes all previous supplements.
<PAGE> 2
American General Series Portfolio Company 2
Class A Shares
Class B Shares
March 1, 2000
(as supplemented through March 27, 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 98
</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.
[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 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 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: 5.59%
Average Annual Total Return Class B: 5.79%
40% Lehman Brothers Government and
Corporate Bond/60% S&P 500: 11.40%
</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.
[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 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
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: 7.16%
Average Annual Total Return Class B: 8.71%
Conservative Growth Lifestyle Blended
Benchmark: 10.63%
</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
The numbers below show the total combined operating expenses as a percentage of
net assets, including indirect expenses of the Underlying Funds, after expense
reimbursements. 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.
[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 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 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: (5.74)%
Average Annual Total Return Class B: (6.42)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</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.
[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 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 sales charge deducted. No
14
<PAGE> 16
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: (7.90)%
Average Annual Total Return Class
B: (8.41)%
Lehman Brothers Aggregate Bond
Index: (0.83)%
</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.
[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 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
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: 21.50%
Average Annual Total Return Class B: 23.89%
Growth Lifestyle Blended Benchmark Index: 18.43%
</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.
The numbers below show the total combined operating expenses as a percentage of
net assets, including indirect expenses of the Underlying Funds, after expense
reimbursements. 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.
[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 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 sales charge deducted. No sales charge has
21
<PAGE> 23
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: (0.90)%
Average Annual Total Return Class B: (1.48)%
Salomon Smith Barney High Yield Market Index: 1.74%
</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 0.70% 0.70%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 1.06% 0.67 %
----- -----
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.
[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 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 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: 47.07%
Average Annual Total Return Class B: 49.15%
Salomon Smith Barney Primary Market Index: 24.51%
</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.
[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 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 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: 56.45%
Average Annual Total Return Class B: 59.42%
Salomon Smith Barney Primary
Market Index: 24.51%
</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.
[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 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 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: 29.23%
Average Annual Total Return Class B: 30.88%
Russell 1000(R) Growth Index: 33.16%
</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>
30
- ---------------
(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.
31
<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 to that of
the Russell 1000(R) Value Index. The average total return table shows returns
with the maximum 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: (0.78)%
Average Annual Total Return Class B: (0.65)%
Russell 1000(R) Value Index: 7.35%
</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.
[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 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 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: (2.65)%
Average Annual Total Return Class B: (2.65)%
Russell Midcap(TM) Growth Index: 51.29%
</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 the performance of its target index as closely as
possible by owning only stocks in the index, and holding them in the same
proportions, so the fund will mimic the overall performance of the index. 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 its assets in companies that are listed in the Index, except
for a small portion in cash, to be available for redemptions. 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.
An index fund seeks a tracking difference of about 0.05% or less. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, after 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 to that of
the S&P Mid Cap 400 Index. The average total return table shows returns with the
maximum 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: 7.30%
Average Annual Total Return Class B: 7.84%
S&P Mid Cap 400 Index: 14.71%
</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%.
37
(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.
38
<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, 177% 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.
39
<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 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 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: 16.83%
Average Annual Total Return Class B: 17.29%
Russell Midcap(TM) Value Index: (0.11)%
</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 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
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: 11.84%
Average Annual Total Return Class B: 14.03%
Moderate Growth Lifestyle Blended
Benchmark: 13.77%
</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(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.
43
<PAGE> 45
The numbers below show the total combined operating expenses as a percentage of
net assets, including indirect expenses of the Underlying Funds, after expense
reimbursements. 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.
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)
44
<PAGE> 46
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>
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>
February 15, 2000:
7 Day Current Yield 5.11%
7 Day Effective Yield 5.24%
</TABLE>
45
<PAGE> 47
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 $256 $445 $994
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
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>
- --------------------------------------------------------------------------------
MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
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
46
<PAGE> 48
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 1st 1999 (0.18)%
Worst Quarter: Class A 2nd 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
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: (10.23)%
Average Annual Total Return Class B: (11.12)%
Lehman Brothers Seven Through
Long Municipal Bond Index: (3.07)%
</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) 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>
February 15, 2000:
7 Day Current Yield 2.50%
7 Day Effective Yield 2.53%
</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 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 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: 52.89%
Average Annual Total Return Class
B: 55.86%
Russell 2000(R) Growth Index: 43.09%
</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>
53
- ---------------
(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.
54
<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 the performance of its target index as closely as
possible by owning only stocks in the index, and holding them in the same
proportions, so the fund will mimic the overall performance of the index. 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 its assets in companies that are listed in the Index, except
for a small portion in cash, to be available for redemptions. 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.
An index fund seeks a tracking difference of about 0.05% or less. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, after expenses, is considered to be good, while a correlation of 1.00 is
perfect.
55
<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.
56
<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 to that of
the Russell 2000(R) Index. The average total return table shows returns with the
maximum 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: 11.54%
Average Annual Total Return Class B: 12.63%
Russell 2000(R) Index: 21.26%
</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 (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."
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 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 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: (10.23)%
Average Annual Total Return Class B: (10.36)%
Russell 2000(R) Value Index: (1.49)%
</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 risk - 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 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 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: 11.50%
Average Annual Total Return Class
B: 12.38%
S&P 500 Index: 21.05%
</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 the performance of its target index as closely as
possible by owning only stocks in the index, and holding them in the same
proportions, so the fund will mimic the overall performance of the index. 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 its assets in a sampling of common stocks in the Index, except
for a small portion in cash, to be available for redemptions. 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.
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.
An index fund seeks a tracking difference of about 0.05% or less. The tracking
difference may also be shown as a correlation factor. A correlation factor of
0.95, after 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 risk - 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 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 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: 13.46%
Average Annual Total Return Class
B: 13.72%
S&P 500 Index: 21.05%
</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 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 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: (0.44)%
Average Annual Total Return Class
B: (1.13)%
Lehman Brothers Aggregate Bond Index: (0.83)%
</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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<PAGE> 74
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 had more than $340 billion in assets under management.
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Investment decisions are made by a team that consists of portfolio managers and
analysts. The team meets regularly to review portfolio holdings and to discuss
purchase and sale activity.
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.
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.
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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
79
<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(45)
</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%.
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.
80
<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
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Charge 5% 4% 3% 2% 1%
</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.
81
<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. 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.
82
<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
83
<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.
- - 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.
84
<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.
85
<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. For Class A, both the line graphs and the average annual total
return information are calculated as though the maximum front-end sales charge
was paid.
AMERICAN GENERAL BALANCED FUND
[GRAPH]
86
<PAGE> 88
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
[GRAPH]
AMERICAN GENERAL CORE BOND FUND
[GRAPH]
87
<PAGE> 89
AMERICAN GENERAL DOMESTIC BOND FUND
[GRAPH]
AMERICAN GENERAL GROWTH LIFESTYLE FUND
[GRAPH]
88
<PAGE> 90
AMERICAN GENERAL HIGH YIELD BOND FUND
[GRAPH]
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
[GRAPH]
89
<PAGE> 91
AMERICAN GENERAL INTERNATIONAL VALUE FUND
[GRAPH]
AMERICAN GENERAL LARGE CAP GROWTH FUND
[GRAPH]
90
<PAGE> 92
AMERICAN GENERAL LARGE CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL MID CAP GROWTH FUND
[GRAPH]
91
<PAGE> 93
AMERICAN GENERAL MID CAP INDEX FUND
[GRAPH]
AMERICAN GENERAL MID CAP VALUE FUND
[GRAPH]
92
<PAGE> 94
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
[GRAPH]
AMERICAN GENERAL MUNICIPAL BOND FUND
[GRAPH]
93
<PAGE> 95
AMERICAN GENERAL SMALL CAP GROWTH FUND
[GRAPH]
AMERICAN GENERAL SMALL CAP INDEX FUND
[GRAPH]
94
<PAGE> 96
AMERICAN GENERAL SMALL CAP VALUE FUND
[GRAPH]
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
[GRAPH]
95
<PAGE> 97
AMERICAN GENERAL STOCK INDEX FUND
[GRAPH]
AMERICAN GENERAL STRATEGIC BOND FUND
[GRAPH]
96
<PAGE> 98
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%
Municipal Bond Fund (10.32)% (11.28)%
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>
97
<PAGE> 99
- --------------------------------------------------------------------------------
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 LLP, 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>
98
<PAGE> 100
- --------------------------------------------------------------------------------
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>
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 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>
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 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>
101
<PAGE> 103
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)
