<PAGE> 1
THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO, AMONG OTHER THINGS, THIS PROSPECTUS HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SECURITIES OF THE FUND
REFERENCED IN THIS PROSPECTUS MAY NOT BE SOLD NOR MAY OFFERS TO BUY SUCH
SECURITIES BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF SECURITIES
REFERENCED HEREIN IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO SUCH REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED AUGUST 17, 1999
SUBJECT TO COMPLETION
commonfund
Commonfund
Institutional Funds
PRELIMINARY PROSPECTUS
AUGUST 17, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Commonfund Short Duration Fund
Investment Manager
Commonfund Asset Management Company, Inc.
Investment Sub-Advisers
Wellington Management Company, LLP
Western Asset Management Company
Distributor
Commonfund Securities, Inc.
The Securities and Exchange Commission has not approved the Fund's shares
or determined whether this prospectus is accurate or complete.
It is a crime for anyone to tell you otherwise.
<PAGE> 2
COMMONFUND INSTITUTIONAL FUNDS
- --------------------------------------------------------------------------------
Commonfund Institutional Funds ("CIF") is a no-load, open-end, diversified
management investment company that seeks to improve the net investment returns
of its shareholders by making available to them a series of investment funds,
each with its own investment objectives and policies. The investment funds are
sold primarily to institutional investors, including colleges, universities,
private secondary schools, hospitals, foundations, pension funds, museums,
libraries, performing arts groups and centers, public secondary school
districts, charitable service organizations and others. The investment funds are
not available to individuals, except directors, officers and employees of the
Investment Manager and its affiliates.
HOW TO READ THIS PROSPECTUS
- --------------------------------------------------------------------------------
The Commonfund Short Duration Fund (the "Fund") has individual investment goals
and strategies. This prospectus gives you important information about the Fund
that you should know before investing. This prospectus has been arranged into
different sections so that you can easily review this important information.
Please read this prospectus and keep it for future reference.
The Fund...................................................................... 3
Investments and Portfolio Management.......................................... 3
Purchasing and Redeeming Shares............................................... 6
Dividends, Distributions and Taxes............................................ 8
To obtain more information about Commonfund Institutional Funds please refer to
the Back Cover of the Prospectus
2
<PAGE> 3
COMMONFUND SHORT DURATION FUND
- ------------------------------------------------------
INVESTMENT GOAL
- ------------------------------------------------------
Current income consistent with liquidity and safety of principal.
INVESTMENT FOCUS
- ------------------------------------------------------
A portfolio of U.S. Government securities and other high quality debt
securities.
PRINCIPAL INVESTMENT STRATEGY
- ------------------------------------------------------
The Commonfund Short Duration Fund invests in a diversified portfolio of
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities, obligations of highly-rated banks, high quality corporate
debt securities, including commercial paper, and fully collateralized repurchase
agreements with highly rated counterparties. The fixed income securities
acquired by the Fund may include mortgage-backed and asset-backed securities.
The Fund seeks to produce for shareholders a monthly total rate of return that
exceeds the total return on 90 day U.S. Treasury securities.
The Fund seeks to maintain a relatively stable net asset value by maintaining
high credit quality standards and employing a relatively short effective
duration. The Fund's effective duration generally will not exceed one (1) year,
and the maximum remaining maturity of any individual security will be five and
one-half (5 1/2) years, except for certain mortgage-related and asset-backed
securities. The Fund is diversified both by issuer and by industry.
Commonfund Asset Management Company, Inc. (the "Investment Manager"), allocates
the Fund's assets among selected Sub-Advisers, who in turn manage the Fund's
assets on a day-to-day basis. Subject to oversight by the Investment Manager,
the Fund's Sub-Advisers, Wellington Management Company, LLP ("Wellington") and
Western Asset Management Company ("Western Asset") select investments for its
portion of the Fund's assets based on its own investment style and strategy.
Wellington's investment philosophy is to maximize total return while limiting
the level of risk appropriate for the strategy by combining a top-down strategy
which directs portfolio structure including duration and sector weights and a
bottom up securities selection process. Western Asset applies a team approach to
portfolio management that revolves around their investment outlook, focusing on
duration weighting, term structure position, sector and issue selection. While
duration and yield curve structure decisions underlie Western Asset's investment
process, the company concentrates primarily on sector and issue selection for
adding value. The Sub-Advisers seek to achieve the Fund's objectives on a total
return basis and without regard to tax consequences. The Fund's portfolio
turnover rate, and associated transaction costs, may be higher as a result.
OTHER INVESTMENTS
- ------------------------------------------------------
The Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in greater detail in the Fund's
Statement of Additional Information ("SAI").
During unusual economic or market conditions, or for temporary defensive or
liquidity purposes, the Fund may invest up to 100% of its assets in cash,
repurchase agreements and short-term obligations that would not ordinarily be
consistent with the Fund's objective.
RELATED RISKS
- ------------------------------------------------------
The value of an investment in the Fund is based on the market value of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which they trade.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa. The price of fixed income securities also may
fluctuate in reprise to changes in credit risk. Also, prices of longer-term
securities are generally more volatile, so the average maturity of the Fund's
portfolio affects risk.
The Investment Manager's allocation of Fund assets to the Sub-Advisers and the
Sub-Advisers' judgments about the markets, the economy and/or companies may not
anticipate actual market movements, economic conditions or company performance,
and these judgments may affect the Fund's return. In fact, no matter how good a
job the Investment Manager and the Sub-Advisers do, you can lose money on your
investment in the Fund,
3
<PAGE> 4
just as you could with other investments. A Fund share is not a bank deposit,
and it is not insured or guaranteed by the FDIC or any government agency.
RISKS OF HOLDING CERTAIN SECURITIES
U.S. Government Securities. U.S. Government securities are considered to be
those with the least credit risk, but U.S. Government securities are subject to
price movements due to changing interest rates. Obligations issued by some U.S.
Government agencies are backed by the U.S. Treasury, while others are backed
solely by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources, and are subject to slightly greater credit risks.
Asset-Backed Securities. Asset-backed securities are fixed income securities
representing an interest in a pool of loans or receivables of an entity, such as
a bank or credit card company. Therefore, repayment depends largely on the cash
flows generated by the assets backing the securities. It is possible that
prepayments on the underlying assets will alter the cash flow on asset-backed
securities, making it difficult to predict with certainty the actual maturity
date or average life of an asset-backed security and, therefore, to assess the
volatility risk of the Fund.
Mortgage-Backed Securities. Mortgage-backed securities are fixed income
securities representing an interest in a pool of underlying mortgage loans.
Mortgage-backed securities are sensitive to changes in interest rates, but may
respond to these changes differently from other fixed income securities due to
the possibility of prepayment of the underlying mortgage loans. It may not be
possible to determine in advance the actual maturity date or average life of a
mortgage-backed security and, therefore, to assess the volatility risk of the
Fund.
YEAR 2000 RISKS
Like other mutual funds, the Fund could be affected by computer problems related
to the transition to the year 2000. While no one knows if these problems will
have any impact on the Fund or on the financial markets in general, the Fund is
taking steps to protect investors. These include efforts to ensure that the
Fund's own systems are prepared to make the transition to the year 2000, and to
determine that the problem will not affect the systems used by the Fund's major
service providers. Whether these steps will be effective can only be known for
certain in the year 2000. In addition, year 2000 problems may negatively affect
the companies and governments whose securities the Fund purchases, which may
ultimately have an impact on the value of the Fund's shares.
PRIOR PERFORMANCE INFORMATION
As of [October 31, 1999,] the Fund had not yet commenced operations, and did not
have a performance history.
FUND FEES AND EXPENSES
- ------------------------------------------------------
This table describes the Fund's fees and expenses that you will pay if you buy
and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
<TABLE>
<S> <C>
Investment Advisory Fees.......... 0.19%
Distribution (12b-1) Fees......... None
Other Expenses*................... 0.30%
TOTAL ANNUAL FUND OPERATING
EXPENSES........................ 0.49%
Fee waivers and expense
reimbursements.................. 0.24%
NET TOTAL OPERATING EXPENSES...... 0.25%**
- -------------------------------------------
</TABLE>
* OTHER EXPENSES ARE ESTIMATED ASSUMING THE AVERAGE DAILY NET ASSETS OF THE
FUND WILL BE $100 MILLION.
** THE INVESTMENT MANAGER HAS AGREED TO WAIVE FEES AND TO REIMBURSE EXPENSES IN
ORDER TO KEEP TOTAL OPERATING EXPENSES FROM EXCEEDING 0.25% FOR A PERIOD OF
TWO YEARS FROM THE DATE OF THIS PROSPECTUS.
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. The Example also
assumes that each year your investment has a 5% return and Fund expenses remain
the same. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<S> <C>
1 Year $26
3 Years $79
</TABLE>
4
<PAGE> 5
INVESTMENT MANAGER
- ------------------------------------------------------
Commonfund Asset Management Company, Inc. (the "Investment Manager") is an
indirect, wholly-owned subsidiary of The Commonfund for Non-Profit Organizations
("Commonfund"). Employees of the Investment Manager also are responsible for the
Commonfund's investment program, which is comprised of more than 20 funds with
more than $20 billion in assets and is conducted in a "manager of managers"
format.
The Investment Manager acts as a "manager of managers" for the Fund, and
supervises adherence by the Sub-Advisers with the Fund's investment policies and
guidelines. The Investment Manager also recommends the appointment of additional
or replacement Sub-Advisers to the Fund's Board of Directors. It is anticipated
that the Fund and the Investment Manager will obtain exemptive relief from the
SEC necessary to permit the Investment Manager and the Fund to add or terminate
Sub-Advisers without shareholder approval.
INVESTMENT SUB-ADVISERS
- ------------------------------------------------------
WELLINGTON MANAGEMENT COMPANY, LLP traces its origins to 1928 and, as of June
30, 1999, managed approximately $223 billion of assets, with approximately $91
billion in fixed income securities, for domestic and foreign clients.
Wellington, headquartered in Boston, Massachusetts, with affiliates in London,
Singapore, Sydney and Tokyo is a Massachusetts limited liability partnership
with 59 general partners, all of whom provide full time service to the firm, and
over 200 investment professionals.
WESTERN ASSET MANAGEMENT COMPANY manages over $50 billion in assets. The firm
has managed short-duration portfolios since 1974. It is wholly-owned by Legg
Mason Inc., a financial services company headquartered in Baltimore, Maryland.
PORTFOLIO MANAGERS
Commonfund Asset Management Company, Inc. The Investment Manager employs a team
to supervise the Sub-Advisers, which includes the following members:
Todd E. Petzel is President and Chief Investment Officer of Commonfund
Asset Management Company, a position he assumed in August, 1999. From January
1996 until August 1999, he served as Executive Vice President and Chief
Investment Officer for Commonfund after having been the Vice President for
Financial Research of the Chicago Mercantile Exchange for 8 years. Todd received
his A.B., A.M., and Ph.D. degrees from the University of Chicago.
MaryEllen Beaudreault is a Senior Vice President with Commonfund
responsible for the oversight of all fixed income funds and strategies including
cash management, domestic, global and international fixed income managers and
strategies. MaryEllen has 15 years of professional experience, 6 of which have
been with Commonfund. MaryEllen is a graduate of Central Connecticut State
University.
Wellington Management Company, LLP. Responsibility for investment decisions will
rest with two persons:
John C. Keogh, Chairman of the Short Term Strategy Group, a Senior Vice
President and Portfolio Manager who has 20 years of professional experience, 16
of which have been with Wellington. Mr. Keogh received a B.A. from Tufts
University in 1979.
Timothy E. Smith, Vice President and Portfolio Manager who has 14 years of
professional experience, 7 of which have been with Wellington. Mr. Smith
received his MBA from Babson College in 1992.
Western Asset Management Western Asset's Investment Strategy Group is
responsible for investment decisions. The group consists of senior portfolio
managers who specialize in all major sectors of the fixed income market, such as
U.S. Government securities, money market instruments, mortgage-related
securities, and asset-backed securities. Each sector specialist is responsible
for selecting individual securities to implement an overall strategy set by the
Investment Strategy Group. The following individuals are members of Western
Asset's Investment Strategy Group:
Stephen A. Walsh, a Managing Director with 18 years of professional
experience, has been with Western Asset since 1991. Mr. Walsh received his B.S.
from the University of Colorado at Boulder.
Carl E. Eichstaedt, a Portfolio Manager who has 13 years of professional
experience, has been with Western Asset since 1994. Mr. Eichstaedt received his
B.S. from University of Illinois and his
5
<PAGE> 6
M.B.A. from the Kellogg Graduate School of Management at Northwestern
University.
PRIOR PERFORMANCE
The following tables present a composite of each Sub-Adviser's past performance
when managing other accounts that have investment objectives, policies and
strategies that are similar to the Fund's in all material respects. This table
does not indicate how the Fund may perform in the future.
Wellington Management Company
Historical Performance of Account for Periods Ended June 30, 1999*
<TABLE>
<S> <C> <C>
1 year 2 years Since Inception (9/96)
5.41% 5.75% 5.80%
</TABLE>
* Performance results are before the deduction of fees and reflect composite
returns for all discretionary accounts managed in accordance with Wellington's
short duration strategy with similar investment guidelines, none of which are
registered investment companies.
Western Asset Management Company
Historical Performance for Periods Ended June 30, 1999*
<TABLE>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
5.55% 5.67% 5.66% 5.75%
</TABLE>
* Performance results are before the deduction of fees and reflect composite
returns for all discretionary accounts managed in accordance with Western
Asset's short duration strategy with similar investment objectives, none of
which are registered investment companies.
INVESTING IN THE COMMONFUND INSTITUTIONAL FUNDS A SUMMARY:
- ---------------------------------------------------------
In order to open a new account, you must complete and mail the New Account
Application that you receive with this prospectus to:
Commonfund Institutional Funds
450 Post Road East
Westport, CT 06881-0909
The Fund's minimum initial investment is $100,000 for institutions and $5,000
for individuals. The minimum subsequent investment is $1,000 except that no
minimum applies to reinvestments from dividends and distributions.
- ---------------------------------------------------------
Once you are a shareholder of the Commonfund Institutional Funds you can do the
following:
- ---------------------------------------------------------
* Purchase or redeem Fund shares by phone.
Call 1-888-TCF-FUND to place a trade.
- ---------------------------------------------------------
* Purchase or redeem Fund shares at the Commonfund Website:
www.commonfund.org
Click on "Portfolio Access" and follow instructions provided.
- ---------------------------------------------------------
* Purchase Fund shares by wiring funds to:
Investors Bank & Trust Company
ABA #011001438
Account #
Further Credit: Commonfund Short Duration Fund, shareholder name and
Commonfund Institutional Funds account number
PURCHASING AND REDEEMING COMMONFUND INSTITUTIONAL FUNDS SHARES
- ------------------------------------------------------
This section tells you how to buy and redeem shares of the Fund.
PURCHASING SHARES
WHEN CAN YOU PURCHASE SHARES?
You may purchase shares of the Fund on any day that the New York Stock Exchange
and the Federal Reserve System are both open for business (a Business Day).
To open an account:
Please send your completed New Account Application to Commonfund
Institutional
6
<PAGE> 7
Funds, 450 Post Road East, Westport, CT 06881-0909. All investments by
institutions must be made by wire.
Please call us to let us know that you intend to make an investment. You
will need to instruct your bank to wire money to: Investors Bank & Trust
Company, ABA #011001438; for Account Number ; Further Credit:
Commonfund Short Duration Institutional Fund. The shareholder's name and
account number must be specified in the wire.
HOW ARE FUND SHARE PRICES CALCULATED?
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after the Fund receives your purchase order. The Fund's
NAV is calculated once each Business Day at the regularly-scheduled close of
normal trading on the New York Stock Exchange (NYSE) (normally, 4:00 p.m.,
Eastern time).
NET ASSET VALUE
NAV for one Fund share is the value of that share's portion of all of the net
assets in the Fund. In calculating NAV, the Fund generally values its portfolio
at market price. If market prices are unavailable or we think that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors.
ACCEPTANCE OF SUBSCRIPTIONS
We may reject any purchase order if we determine that accepting the order would
not be in the best interests of the Fund or its shareholders.
PURCHASING ADDITIONAL SHARES
* By Phone -- Current shareholders are eligible to purchase shares by phone by
calling 1-888-TCF-FUND if they have requested that privilege by checking the
appropriate box on the New Account Application.
* By Internet -- Current shareholders are eligible to purchase shares over the
Internet by logging in to www.commonfund.org if they have requested that
privilege by checking the appropriate box on the New Account Application.
PURCHASES BY INDIVIDUALS
Individuals who are eligible to invest may purchase shares by mail at the
address of Commonfund Institutional Funds. The purchase price may be tendered by
personal check. We do not accept third party checks or cash.
TELEPHONE AND INTERNET TRANSACTIONS
Purchasing or redeeming Fund shares over the telephone or the Internet is
extremely convenient, but not without risk. Although we have certain safeguards
and procedures to confirm the identity of callers and the authenticity of
instructions, we are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with us over the telephone or the Internet,
you will generally bear the risk of any loss.
REDEEMING SHARES
You may redeem your shares on any Business Day by contacting us directly by mail
or telephone or the Internet. The sale price of each share will be the NAV next
determined after we receive your request.
In the case of institutions, payments in redemption will be made to the account
designated in your New Account Application or another account that has properly
been designated with a signature guarantee. In the case of individuals, payments
in redemption will be made by check payable to the individual or by wire
transfer to a properly designated account.
Payments in redemption will only be sent to the account designated in your New
Account Application or to an account that you designate with a properly
guaranteed signature. In the case of individuals, payments in redemption may be
made by check. A proper signature guarantee must be provided when redemption
proceeds are to be sent to a different person or address.
SIGNATURE GUARANTEES
A signature guarantee is a widely accepted way to protect shareholders by
verifying signatures. Signature guarantees can be obtained from any of the
following institutions: a national or state bank, a trust company, a federal
savings and loan association, or a broker-dealer that is a member of a
7
<PAGE> 8
national securities exchange. A notarized signature is not sufficient.
METHODS FOR REDEEMING SHARES
* By Mail -- If you wish to redeem shares of the Fund you should send us a
letter with your name, Fund and account number and the amount of your
request. All letters must be signed by the owner(s) of the account.
* By Phone or Internet -- When filling out your New Account Application, you
are given the opportunity to establish telephone or Internet redemption
privileges.
* Systematic Withdrawal Plan -- Under the plan you may arrange monthly,
quarterly, semi-annual or annual automatic withdrawals.
REDEMPTIONS IN KIND -- The Fund generally pays redemption proceeds in cash.
However, under unusual conditions that make the payment of cash unwise (and for
the protection of the Fund's remaining shareholders), the Fund might pay all or
part of your redemption proceeds in liquid securities with a market value equal
to the redemption price (redemption in kind). In the highly unlikely event that
your shares are redeemed in kind, you will have to pay brokerage costs to sell
the securities distributed to you.
SUSPENSION OF YOUR RIGHT TO REDEEM SHARES -- The Fund may suspend your right to
redeem your shares if the NYSE restricts trading, the SEC declares an emergency
or for other reasons.
INVOLUNTARY SALES OF YOUR SHARES -- If your account balance drops below the
required minimum of $100,000 for institutions or $5,000 for individuals, you may
be required to sell your shares. You will always be given at least 60 days'
written notice to give you time to add to your account and avoid selling your
shares.
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds the next Business Day after we receive
your request. In unusual circumstances, it may take up to seven days. Your
proceeds can be wired to your properly designated account at a financial
institution or, in the case of individuals, sent to you by check.
DISTRIBUTION OF FUND SHARES
- ------------------------------------------------------
Commonfund Securities, Inc. is the distributor of the Fund and receives no
compensation from the Fund for that service.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- ------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund accrues dividends of net investment income on a daily basis, and
declares and pays dividends monthly. The Fund makes distributions of capital
gains, if any, at least annually.
Shareholders will receive dividends and distributions in the form of additional
shares. Dividends generally are not paid in cash.
TAXES
The Fund is managed without regard to tax consequences. Shareholders seeking to
finance tax obligations may need to redeem shares.
The Fund will distribute substantially all of its investment income and capital
gains, if any. The dividends and distributions you receive may be subject to
federal, state and local taxation, depending upon your tax situation. Capital
gains distributions may be taxable at different rates depending on the length of
time the Fund holds its portfolio securities. EACH SALE OR EXCHANGE OF FUND
SHARES IS A TAXABLE EVENT.
This summary is based on current tax laws, which may change
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
8
<PAGE> 9
COMMONFUND
INSTITUTIONAL FUNDS
INVESTMENT MANAGER
Commonfund Asset Management Company, Inc.
INVESTMENT SUB-ADVISERS
Wellington Management Company, LLP
Western Asset Management Company
DISTRIBUTOR
Commonfund Securities, Inc.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
More information about the Commonfund Institutional Funds is available without
charge through the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
- ------------------------------------------------------
The SAI dated August 17, 1999, includes more detailed information about
Commonfund Institutional Funds. The SAI is on file with the SEC and is
incorporated by reference into this prospectus. This means that the SAI, for
legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
- ------------------------------------------------------
These reports list the Fund's holdings and contain information from the Fund's
managers about Fund strategies and recent market conditions and trends. The
reports also contain detailed financial information about the Fund.
TO OBTAIN MORE INFORMATION:
BY TELEPHONE: Call 1-888-TCF-FUND
BY MAIL: Write to
Commonfund Institutional Funds
450 Post Road East
Westport, CT 06881
BY INTERNET: http://www.commonfund.org
FROM THE SEC: You can also obtain the SAI or the Annual or Semi-Annual Reports,
as well as other information about Commonfund Institutional Funds, from the
SEC's website ("http://www.sec.gov"). You may review and copy documents at the
SEC Public Reference Room in Washington, DC (for information call
1-800-SEC-0330). You may request documents by mail from the SEC, upon payment of
a duplicating fee, by writing to: Securities and Exchange Commission, Public
Reference Section, Washington, DC 20549-6009.
The Fund's Investment Company Act registration number is 811- .
<PAGE> 10
THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO, AMONG OTHER THINGS, THIS STATEMENT OF
ADDITIONAL INFORMATION HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. SECURITIES OF THE FUND REFERENCED IN THIS STATEMENT OF
ADDITIONAL INFORMATION MAY NOT BE SOLD NOR MAY OFFERS TO BUY SUCH
SECURITIES BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF SECURITIES REFERENCED HEREIN IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO SUCH
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 17, 1999
SUBJECT TO COMPLETION
COMMONFUND INSTITUTIONAL FUNDS
COMMONFUND SHORT DURATION FUND
INVESTMENT MANAGER
COMMONFUND ASSET MANAGEMENT COMPANY, INC.
INVESTMENT SUB-ADVISERS
WELLINGTON MANAGEMENT COMPANY, LLP
WESTERN ASSET MANAGEMENT COMPANY
DISTRIBUTOR
COMMONFUND SECURITIES, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Commonfund Short Duration Fund (the "Fund"). It is intended to provide
additional information regarding the activities and operations of the Commonfund
Institutional Funds (the "Company") and should be read in conjunction with the
Fund's Prospectus dated August 17, 1999. The Prospectus may be obtained without
charge by calling 1-888-TCF-FUND.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE COMPANY................................................. S-2
INVESTMENT OBJECTIVE........................................ S-2
INVESTMENT POLICIES......................................... S-2
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS....... S-3
INVESTMENT LIMITATIONS...................................... S-9
THE INVESTMENT MANAGER...................................... S-10
FUND ADMINISTRATION......................................... S-11
DISTRIBUTION................................................ S-12
DIRECTORS AND OFFICERS OF THE COMPANY....................... S-12
COMPUTATION OF YIELD AND TOTAL RETURN....................... S-13
PURCHASE AND REDEMPTION OF SHARES........................... S-13
DETERMINATION OF NET ASSET VALUE............................ S-13
TAXES....................................................... S-14
PORTFOLIO TRANSACTIONS...................................... S-15
VOTING...................................................... S-16
DESCRIPTION OF SHARES....................................... S-16
5% SHAREHOLDERS............................................. S-16
CUSTODIAN................................................... S-16
EXPERTS..................................................... S-16
LEGAL COUNSEL............................................... S-16
FINANCIAL STATEMENTS........................................ S-16
APPENDIX.................................................... A-1
</TABLE>
August 17, 1999
<PAGE> 11
THE COMPANY
This Statement of Additional Information relates only to the Commonfund Short
Duration Fund (the "Fund"). The Fund is a separate series of Commonfund
Institutional Funds (the "Company"), an open-end management investment company
established as a Delaware business trust under an Agreement and Declaration of
Trust dated August 7, 1999. The Agreement and Declaration of Trust permits the
Company to offer separate series of units of beneficial interest ("shares"), and
separate classes of shares within the Fund. Each share of the Fund represents an
equal proportionate interest in the Fund.
INVESTMENT OBJECTIVE
The Fund seeks current income from interest and price appreciation consistent
with liquidity and capital preservation. There can be no assurance that the Fund
will achieve its investment objective. Net asset value of the Fund is expected
to fluctuate modestly in response to changes in interest rates.
INVESTMENT POLICIES
The Fund invests in a diversified portfolio of fixed income securities issued or
guaranteed by the U.S. Government and its agencies and instrumentalities,
obligations of highly-rated banks, high quality corporate debt securities,
including commercial paper, and repurchase agreements. The securities acquired
by the Fund may include mortgage-backed and asset-backed securities. The Fund
seeks to produce for shareholders a monthly total rate of return that exceeds
the total return on 90 day U.S. Treasury securities.
The Fund seeks to maintain a relatively stable net asset value by maintaining
high credit quality standards and employing a relatively short effective
duration. The Fund's effective duration generally will not exceed one (1) year,
and the maximum maturity of any individual security will be five and one-half
(5 1/2) years, except for certain mortgage-related and asset-backed securities.
The Fund is diversified both by issuer and by industry.
The Fund will purchase the following types of securities if, at the time of
purchase, such securities either have been classified as investment grade by a
nationally recognized statistical rating organization ("NRSRO") or are
determined by the Investment Manager or a Sub-Adviser to be of comparable
quality: (i) obligations issued or guaranteed as to principal and interest by
the U.S. Government or its agencies or instrumentalities; (ii) corporate bonds
and debentures of U.S. or foreign issuers rated in one of the three highest
rating categories and denominated in U.S. Dollars; (iii) private mortgage-backed
securities rated in one of the three highest rating categories; (iv)
asset-backed securities rated in one of the three highest rating categories; (v)
commercial paper rated in one of the two highest rating categories; (vi)
obligations of highly-rated U.S. and foreign commercial banks ("bank
obligations"); and (vii) repurchase agreements. If a security is downgraded to
below the minimum quality level specified above, the Investment Manager and the
Sub-Adviser(s) involved will review the situation and take appropriate action.
The Fund may purchase fixed income securities with variable and floating rates.
The Fund may purchase securities that are eligible for resale under Rule 144A
and other restricted securities, provided that said securities will be deemed to
be illiquid unless they are deemed liquid under guidelines adopted by the
Company.
The Fund may purchase securities on a when-issued basis or delayed delivery
basis.
The Fund may borrow money only for temporary or emergency circumstances, and
then only in amounts not to exceed 5% of the Fund's net assets.
The Fund may enter into futures and options transactions to the extent permitted
for registered investment companies under positions adopted by the Securities
and Exchange Commission (the "SEC") and the staff thereof.
The Fund may invest in illiquid securities, but in an amount not to exceed 15%
of its net assets.
S-2
<PAGE> 12
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
ASSET-BACKED SECURITIES
Asset-backed securities are secured by non-mortgage assets such as company
receivables, truck and auto loans, leases and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; however, the payment of principal and interest on
such obligations may be guaranteed up to certain amounts and for a certain
period by a letter of credit issued by a financial institution (such as a bank
or insurance company) unaffiliated with the issuers of such securities. The
purchase of asset-backed securities raises risk considerations peculiar to the
financing of the instruments underlying such securities. For example, there is a
risk that another party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. There also is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities. Asset-backed securities
entail prepayment risk, which may vary depending on the type of asset, but is
generally less than the prepayment risk associated with mortgage-backed
securities. In addition, credit card receivables are unsecured obligations of
card holders.
BANKERS' ACCEPTANCES
The Fund may invest in bankers' acceptances or notes, which are fixed income
instruments evidencing a bank's obligation to pay a draft drawn on it by a
customer. These instruments represent the obligation of the bank and of the
drawer to pay the full amount of the instrument upon maturity.
BORROWING
Borrowing may exaggerate changes in the net asset value of the Fund's shares and
in the return on the Fund's portfolio. Although the principal of any borrowing
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. The Fund may be required to liquidate portfolio
securities at a time when it would be disadvantageous to do so in order to make
payments with respect to any borrowing. The Fund may be required to segregate
liquid assets in an amount sufficient to meet its obligations in connection with
such borrowings.
CERTIFICATES OF DEPOSIT
The Fund may invest in certificates of deposit or time deposits, which are
obligations issued against funds deposited in a banking institution for a
specified period of time as a specified interest rate.
DERIVATIVES
Derivatives are securities that derive their value from other securities,
financial instruments or indices. The following are considered derivative
securities: financial futures, options (e.g., puts and calls) on financial
futures, options on securities, swap agreements, mortgage-backed securities
(e.g., CMOs), when issued securities, floating and variable rate securities and
"stripped" U.S. Treasury securities (e.g., STRIPs). See elsewhere in the
"Description of Permitted Investments" for discussions of these various
instruments.
FIXED INCOME SECURITIES
The market value of fixed income investments will change in response to interest
rate changes and other factors. During periods of falling interest rates, the
values of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the prices of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates. Changes by
recognized agencies
S-3
<PAGE> 13
in the rating of any fixed income security and in the ability of an issuer to
make payments of interest and principal also affect the value of these
investments. Changes in the value of these securities will not necessarily
affect cash income derived from these securities, but will affect the Fund's net
asset value.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option.
The Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. The Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts that are traded on pre-approved futures exchanges.
No price is paid upon entering into futures contracts. Instead, the Fund would
be required to deposit an amount of cash or U.S. Treasury securities known as
"initial margin." Subsequent payments, called "variation margin," to and from
the broker, would be made on a daily basis as the value of the futures position
varies (a process known as "marking to market"). The margin is in the nature of
a performance bond or good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
The Fund may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), as long as, to the extent that such transactions are not for "bona
fide hedging purposes" or risk management, the aggregate initial margin and
premiums on such positions (excluding the amount by which such options are in
the money) do not exceed 5% of the Fund's net assets. The Fund may buy and sell
futures contracts and related options to manage its exposure to changing
interest rates and securities prices. Some strategies reduce the Fund's exposure
to price fluctuations, while others tend to increase its market exposure.
Futures and options on futures can be volatile instruments and involve certain
risks that could negatively impact the Fund's return.
ILLIQUID SECURITIES
Illiquid securities are securities that cannot be disposed of within seven
business days at approximately the price at which they are being carried on the
Fund's books. Illiquid securities include demand instruments with demand notice
periods exceeding seven days, securities for which there is no active secondary
market, and repurchase agreements with durations or maturities over seven days
in length.
MORTGAGE-RELATED SECURITIES
A mortgage-related security is an interest in a pool of mortgage loans. Most
mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a pro rata share of both principal and
interest (less servicing and other fees), as well as unscheduled prepayments, as
mortgages in the underlying mortgages pool are paid off by the borrowers.
Agency-Mortgage-Related Securities: The dominant issuers or guarantors of
mortgage-related securities today are GNMA, Fannie Mae and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA creates pass-through securities from pools
of U.S. government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages originated by mortgage bankers, commercial banks and
savings associations. Fannie Mae and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or
S-4
<PAGE> 14
guaranteed residential mortgages obtained from various entities, including
savings associations, savings banks, commercial banks, credit unions and
mortgage bankers.
Fannie Mae Securities: Fannie Mae is a federally chartered and privately owned
corporation established under the Federal National Mortgage Association Charter
Act. Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from local lenders, thereby providing them with funds for
additional lending. Fannie Mae acquires funds to purchase loans from investors
that may not ordinarily invest in mortgage loans directly, thereby expanding the
total amount of funds available for housing.
Each Fannie Mae pass-through security represents a proportionate interest in one
or more pools of loans, including conventional mortgage loans (that is, mortgage
loans that are not insured or guaranteed by any U.S. Government agency). The
loans contained in those pools consist of one or more of the following: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate growing equity mortgage
loans; (3) fixed-rate graduated payment mortgage loans; (4) variable rate
mortgage loans; (5) other adjustable rate mortgage loans; and (6) fixed-rate
mortgage loans secured by multifamily projects.
Federal Home Loan Mortgage Corporation Securities: The operations of FHLMC
currently consist primarily of the purchase of first lien, conventional,
residential mortgage loans and participation interests in mortgage loan and the
resale of the mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of fixed rate
or adjustable rate mortgage loans with original terms to maturity of between 10
to 30 years, substantially all of which are secured by first liens on
one-to-four-family residential properties or multifamily projects. Each mortgage
loan must include whole loans, participation interests in whole loans and
undivided interests in whole loans and participation in another FHLMC security.
Government National Mortgage Association Securities: GNMA is a wholly owned
corporate instrumentality of the U.S. Government within the Department of
Housing and Urban Development. In order to meet its obligations under a
guarantee, GNMA is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in one or
more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. Fannie Mae
guarantees full and timely payment of all interest and principal, while FHLMC
guarantees timely payment of interest and ultimate collection of principal, of
its pass-through securities. Fannie Mae and FHLMC securities are not backed by
the full faith and credit of the United States; however, they are generally
considered to present minimal credit risks. The yields provided by these
mortgage-related securities historically have exceeded the yields on other types
of U.S. government securities with comparable maturities in large measure due to
the risks associated with prepayment.
Adjustable rate mortgage securities ("ARMs") are a form of pass-through security
representing interests in pools of mortgage loans, the interest rates of which
are adjusted from time to time. The adjustments usually are determined in
accordance with a predetermined interest rate index and may be subject to
certain limits. The adjustment feature of ARMs tends to make their values less
sensitive to interest rate changes. As the interest rates on the mortgages
underlying ARMs are reset periodically, yields of such portfolio securities will
gradually align themselves to reflect changes in market rates. Unlike fixed rate
mortgages, which generally decline in value during periods of rising interest
rates, ARMs allow the Funds to participate in increases in interest rates
through periodic adjustments in the coupons of the underlying mortgages,
resulting in both higher current yields and low price fluctuations. Furthermore,
if prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, the Funds may be able to reinvest such amounts in
securities with a higher current rate of
S-5
<PAGE> 15
return. During periods of declining interest rates, of course, the coupon rates
may readjust downward, resulting in lower yields to the Funds. Further, because
of this feature, the value of ARMs are unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments.
Collateralized mortgage obligations ("CMOs") are mortgage-related securities
that separate the cash flows of mortgage pools into different components called
classes or "tranches." Each class of a CMO is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the collateral pool may cause the various classes of a
CMO to be retired substantially earlier than their stated maturities or final
distribution dates. The principal of, and interest on, the collateral pool may
be allocated among the several classes of a CMO in a number of different ways.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to some of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. Certain classes of
CMOs may have priority over others with respect to the receipt of prepayments on
the mortgages.
The Fund considers GNMA-, Fannie Mae-, and FHLMC-issued pass-through
certificates, CMOs, and other mortgage-related securities to be U.S. Government
securities for purposes of each Fund's investment policies.
Privately Issued Mortgage-Related Securities: Mortgage-related securities
offered by private issuers include pass-through securities for pools of
conventional residential mortgage loans; mortgage pay-through obligations and
mortgage-backed bonds, which are considered to be obligations of the institution
issuing the bonds and are collateralized by mortgage loans; and bonds and CMOs
which are collateralized by mortgage-related securities issued by GNMA, Fannie
Mae, FHLMC or by pools of conventional mortgages. The Fund limits its
investments in privately issued mortgage-related securities to "mortgage related
securities" within the meaning of the Secondary Mortgage Market Enhancement Act
of 1984, as amended.
The Fund may invest in, among other things, "parallel pay" CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which like the other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.
Mortgage-related securities created by private issuers generally offer a higher
rate of interest (and greater credit and interest rate risk) than U.S.
Government and U.S. Government mortgage-related securities because they offer no
direct or indirect government guarantees of payments. However, many issuers or
servicers of mortgage-related securities guarantee, or provide insurance for,
timely payment of interest and principal on such securities.
Additional Risk Factors: Due to the possibility of prepayments of the underlying
mortgage instruments, mortgage-backed securities generally do not have a known
maturity. In the absence of a known maturity, market participants generally
refer to an estimated average life. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns, based upon current
interest rates, current conditions in the relevant housing markets and other
factors. The assumption is necessarily subjective, and thus different market
participants can produce different average life estimates with regard to the
same security. There can be no assurance that estimated average life will be a
security's actual average life.
OPTIONS
A put option gives the purchaser of the option the right to sell, and the writer
of the option the obligation to buy, the underlying security at any time during
the option period. A call option gives the purchaser of the option the right to
buy, and the writer of the option the obligation to sell, the underlying
security at any time during the option period. The premium paid to the writer is
the consideration for undertaking the obligations under the option contract. The
initial purchase (sale) of an option contract is an "opening transaction." In
order to close out an option position, the Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an
S-6
<PAGE> 16
option contract on the same security with the same exercise price and expiration
date as the option contract originally opened. If the Fund is unable to effect a
closing purchase transaction with respect to an option it has written, it will
not be able to sell the underlying security until the option expires or the Fund
delivers the security upon exercise.
The Fund may purchase put and call options to protect against a decline in the
market value of the securities in its portfolio or to anticipate an increase in
the market value of securities that the Fund may seek to purchase in the future.
The Fund purchasing put and call options pays a premium therefor. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, loss of the premium paid may be offset by
an increase in the value of the Fund's securities or by a decrease in the cost
of acquisition of securities by the Fund.
The Fund may write covered call options as a means of increasing the yield on
its portfolio and as a means of providing limited protection against decreases
in its market value. When the Fund sells an option, if the underlying securities
do not increase or decrease to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Fund will realized as profit the premium
received for such option. When a call option written by the Fund is exercised,
the Fund will be required to sell the underlying securities to the option holder
at the strike price, and will not participate in any increase in the price of
such securities above the strike price. When a put option written by the Fund is
exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
The Fund may purchase and write options on an exchange or over the counter. Over
the counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are generally illiquid.
Risk Factors: Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while the Fund will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
PORTFOLIO TURNOVER
An annual portfolio turnover rate in excess of 100% may result from the
Investment Manager's use of a multimanager approach. Transaction costs and the
amount of taxable gains vary directly with portfolio turnover rates.
REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which the Fund obtains a security in
exchange for cash and simultaneously commits to return the security to the
seller (typically, a member bank of the Federal Reserve System or primary
securities dealer as recognized by the Federal Reserve Bank of New York) at an
agreed upon price (including principal and interest) on an agreed upon date
within a number of days (usually not more than seven) from the date of purchase.
The resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the underlying
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of the
underlying security.
Repurchase agreements are considered to be loans by the Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Fund will
provide that the underlying security at all times shall have a
S-7
<PAGE> 17
value at least equal to the resale price stated in the agreement. Under all
repurchase agreements entered into by the Fund, the Company's Custodian or its
agent must take possession of the underlying collateral. However, if the seller
defaults, the Fund could realize a loss on the sale of the underlying security
to the extent that the proceeds of sale, including accrued interest, are less
than the resale price provided in the agreement including interest. In addition,
even though the Bankruptcy Code provides protection for most repurchase
agreements, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may experience delays and incur costs in selling the
underlying security, or may suffer a loss of principal and interest if it is
treated as an unsecured creditor and is required to return the underlying
security to the seller's estate.
RULE 144A SECURITIES
Rule 144A securities are securities exempt from registration on resale pursuant
to Rule 144A under the 1933 Act. Rule 144A securities are traded in the
institutional market pursuant to this registration exemption, and, as a result,
may not be as liquid as exchange-traded securities since they may only be resold
to certain qualified institutional investors. Due to the relatively limited size
of this institutional market, these securities may affect the Fund's liquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Nevertheless, Rule 144A securities
may be treated as liquid securities pursuant to guidelines adopted by the
Company's Board of Directors.
SECURITIES LENDING
In order to generate additional income, the Fund may lend its securities
pursuant to agreements requiring that the loan be continuously secured by
collateral consisting of cash or securities of the U.S. Government or its
agencies equal to at least 100% of the market value of the loaned securities.
The Fund continues to receive interest on the loaned securities while
simultaneously earning interest on the investment of cash collateral. Collateral
is marked to market daily. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially or become insolvent.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities: U.S. Government securities are bills, notes and
bonds issued by the U.S. Government and backed by the full faith and credit of
the United States.
U.S. Treasury Obligations: U.S. Treasury Obligations are bills, notes and bonds
issued by the U.S. Treasury, and separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book-entry system known as Separately Traded Registered Interested and Principal
Securities ("STRIPS").
U.S. Government Agency Obligations: Certain Federal agencies, such as the GNMA,
have been established as instrumentalities of the U.S. Government to supervise
and finance certain types of activities. Issues of these agencies, while not
direct obligations of the U.S. Government, are either backed by the full faith
and credit of the United States (e.g., GNMA securities) or supported by the
issuing agencies' right to borrow from the Treasury. The issues of other
agencies are supported by the credit of the instrumentality (e.g., Fannie Mae
securities).
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations may carry variable or floating rates of interest, and may
involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset
daily, weekly, quarterly or some other reset period, and may have a floor or
ceiling on interest rate changes. There is a risk that the current interest rate
on such obligations may not accurately reflect existing market interest rates. A
demand instrument with a demand notice exceeding seven days may be considered
illiquid if there is no secondary market for such security.
S-8
<PAGE> 18
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although the Fund may purchase
securities on a when-issued [or forward commitment] basis with the intention of
actually acquiring securities for its investment portfolio, it may dispose of a
when-issued security or forward commitment prior to settlement if it deems
appropriate.
YANKEE DOLLARS
The Fund may invest in certain fixed income securities known as Yankee dollars,
which are dollar-denominated obligations issued by foreign banks in the U.S.
markets.
YEAR 2000
The Company depends on the smooth functioning of computer systems in almost
every aspect of its business. Like other mutual funds, business and individuals
around the world, the Company could be adversely affected if the computer
systems used by its service providers do not properly process dates on and after
January 1, 2000 and distinguish between the year 2000 and the year 1900. The
Company has asked its service providers whether they expect to have their
computer systems adjusted for the year 2000 transition, and received assurances
from each that its system is expected to accommodate the year 2000 without
material adverse consequences to the Company. The Company and its shareholders
may experience losses if these assurances prove to be incorrect or as a result
of year 2000 computer difficulties experienced by issuers of portfolio
securities or third parties, such as custodians, banks, broker-dealers or others
with which the Company does business.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of the Fund which
cannot be changed with respect to the Fund without the consent of the holders of
a majority of the Fund's outstanding shares. The term "majority of the
outstanding shares" means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the Fund's outstanding
shares, whichever is less.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements involving such securities) if, as a result, more than 5% of the
total assets of the Fund would be invested in the securities of such issuer;
or (ii) acquire more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of
the Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in obligations issued or guaranteed
by the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities.
3. Borrow money in an amount exceeding 33 1/3% of the value of its total assets,
provided that, for purposes of this limitation, investment strategies which
either obligate the Fund to purchase securities or require the Fund to
segregate assets are not considered to be borrowings.
4. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that the Fund may (i) purchase or hold debt
instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) lend its securities.
5. Purchase or sell real estate, physical commodities, or commodities contracts,
except that the Fund may purchase (i) marketable securities issued by
companies which own or invest in real estate (including real estate
S-9
<PAGE> 19
investment trusts), commodities, or commodities contracts; and (ii)
commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
6. Issue senior securities (as defined in the Investment Company Act of 1940
(the "1940 Act")) except as permitted by rule, regulation or order of the
SEC.
7. Act as an underwriter of securities of other issuers, except as it may be
deemed an underwriter in selling a portfolio security.
8. Invest in interests in oil, gas, or other mineral exploration or development
programs and oil, gas or mineral leases.
The foregoing percentages (except with respect to the limitation on borrowing)
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs immediately after or as a result
of a purchase of such security.
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Fund
and may be changed with respect to the Fund by the Board of Directors.
The Fund may not:
1. Pledge, mortgage or hypothecate assets, except to secure borrowings permitted
by the Fund's fundamental limitation on borrowing. Transfer of assets under
repurchase agreements is not considered a pledge or hypothecation subject to
this restriction.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that the Fund may
(i) obtain short-term credits as necessary for the clearance of security
transactions; (ii) provide initial and variation margin payments in
connection with transactions involving futures contracts and options on such
contracts; and (iii) make short sales "against the box" or in compliance with
the SEC's position regarding the asset segregation requirements imposed by
Section 18 of the 1940 Act.
4. Invest its assets in securities of any investment company.
5. Purchase or hold illiquid securities (i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less) if,
in the aggregate, more than 15% of its net assets would be invested in
illiquid securities. Unregistered securities sold in reliance on the
exemption from registration in Section 4(2) of the 1933 Act and securities
exempt from registration on re-sale pursuant to Rule 144A of the 1933 Act may
be treated as liquid securities under procedures adopted by the Board of
Directors.
THE INVESTMENT MANAGER
Commonfund Asset Management Company, Inc. (the "Investment Manager") is an
indirect, wholly owned subsidiary of The Commonfund for Nonprofit Organizations
("Commonfund"). Employees of the Investment Manager are responsible for the
Commonfund's investment programs which are also conducted in a "manager of
managers" format.
The Investment Manager serves as the investment adviser for the Fund under an
investment advisory agreement (the "Advisory Agreement"). Under the Advisory
Agreement, and subject to the supervision of, and policies established by, the
Fund's Board of Directors, the Investment Manager acts as a "manager of
managers" for the Fund, and supervises adherence by the Sub-Adviser(s) with the
Fund's investment policies and guidelines. The Investment Manager also
recommends the appointment of additional or replacement Sub-Advisers to the
Fund's Board of Directors. The Investment Manager makes recommendations to the
Board of Directors with respect to the appropriate allocation of assets to each
of the Sub-Advisers. It is anticipated that the Fund and the Investment Manager
will obtain exemptive relief from the SEC necessary to permit the Investment
Manager and the Fund to add or terminate Sub-Advisers without shareholder
approval.
S-10
<PAGE> 20
The Advisory Agreement provides that the Investment Manager shall not be
protected against any liability to the Company or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder.
The continuance of the Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the vote of the Board of
Directors or by a vote of the shareholders of the Fund, and (ii) by the vote of
a majority of the Board of Directors who are not parties to the Advisory
Agreement or "interested persons" of any party thereto (the "Independent
Directors"), cast in person at a meeting called for the purpose of voting on
such approval. The Advisory Agreement will terminate automatically in the event
of its assignment, and is terminable at any time without penalty by the Board of
Directors of the Company or, with respect to the Fund, by a majority of the
outstanding shares of the Fund, on not less than 30 days' nor more than 60 days'
written notice to the Investment Manager, or by the Investment Manager on 90
days' written notice to the Company.
THE SUB-ADVISERS
The Fund has two Sub-Advisers -- Wellington Management Company, LLP and Western
Asset Management Company (each a "Sub-Adviser" and, collectively, the
"Sub-Advisers"). Each Sub-Adviser will manage a portion of the Fund's assets
allocated to it, which allocation is determined by the Directors upon the
recommendation of the Investment Manager. Each Sub-Adviser makes the investment
decisions for the assets of the Fund subject to the supervision of, and policies
established by, the Board of Directors. Currently, each Sub-Adviser has been
allocated assets in the range of 50% of the Fund's total assets.
WELLINGTON MANAGEMENT COMPANY, LLP ("Wellington") traces its origins to 1928
and, as of June 30, 1999 managed approximately $223 billion of assets, with
approximately $91 billion in fixed income securities, for domestic and foreign
clients. Wellington, headquartered in Boston, Massachusetts, with affiliates in
London, Singapore, Sydney and Tokyo, is a Massachusetts limited liability
partnership with 59 general partners, all of whom provide full time service to
the firm, and over 200 investment professionals. Wellington's investment
philosophy is to maximize total return while limiting the level of risk
appropriate for the strategy by combining a top-down strategy which directs
portfolio structure, including duration and sector weights, and a bottom-up
securities selection process. For its services, Wellington is entitled to
receive a fee from the Fund, which is calculated daily and paid quarterly, equal
to the following percentage of the average daily net assets of the Fund
allocated to it: 0.10% of the first $100 million, 0.075% of the next $100
million, and 0.055% thereafter.
WESTERN ASSET MANAGEMENT COMPANY ("Western Asset") manages over $50 billion in
assets. The firm has managed short-duration portfolios since 1974. It is
wholly-owned by Legg Mason Inc., a financial services company headquartered in
Baltimore, Maryland. Western Asset applies a team approach to portfolio
management that revolves around their investment outlook, focusing on duration
weighting, term structure position, sector and issue selection. While duration
and yield curve structure decisions underlie Western Asset's investment process,
the company concentrates primarily on sector and issue selection for adding
value. For its services, Western Asset is entitled to receive a fee from the
Fund, which is calculated daily and paid quarterly, at an annual rate of 0.055%
of the average daily net assets of the Fund allocated to it.
FUND ADMINISTRATION
The Company and Investors Bank & Trust Company ("IBT Co.") have entered into an
administration agreement (the "Administration Agreement"), pursuant to which IBT
Co. provided general fund administration services to the Fund. The
Administration Agreement provides that IBT Co. shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Company in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Administrator in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
The Administration Agreement has an initial term of three years and is
automatically renewed for an additional three year term unless terminated by
either party on 90 days prior notice. The Administration Agreement is terminable
by the Company at any time during its term on 30 days notice upon payment of a
termination fee and
S-11
<PAGE> 21
is terminable by the Company or by IBT Co. without penalty in the event of a
material breach of the agreement that is not cured within 90 days of notice
thereof.
IBT Co. also acts as the Fund's Transfer Agent and Fund Accounting Agent
pursuant to separate transfer agency and fund accounting agreements between the
Company and IBT Co.
DISTRIBUTION
Commonfund Securities, Inc. (the "Distributor"), an indirect, wholly-owned
subsidiary of Commonfund, serves as the distributor of interests in the Company
under a Distribution Agreement. The Distribution Agreement shall remain in
effect for a period of two years after the effective date of the agreement and
is renewable annually thereafter with the approval of a majority of the Board of
Directors and a majority of the Independent Directors. The Distribution
Agreement may be terminated by the Distributor, by a majority vote of the
Directors who are not interested persons and have no financial interest in the
Distribution Agreement or by a majority vote of the outstanding securities of
the Company upon not more than 60 days' written notice by either party or upon
assignment by the Distributor. The distributor receives no compensation from the
Fund. The Investment Manager pays the distributor an annual fee equal to the
costs it incurs in distributing shares of the Fund, plus 5% of such costs.
DIRECTORS AND OFFICERS OF THE COMPANY
The management and affairs of the Company are supervised by the Directors under
the laws of the State of Delaware. The Directors have approved contracts under
which, as described above, certain companies provide essential management
services to the Company. The Directors and executive officers of the Company and
their principal occupations for the last five years are set forth below. Each
may have held other positions with the named companies during that period. The
Company pays the fees for the Independent Directors. Unless otherwise noted, the
business address of each Director and each Executive Officer is c/o Commonfund
Institutional Fund, 450 Post Road East, Westport, CT 06881.
Directors
Robert L. Bovinette -- 59
Mr. Bovinette has served as President and Chief Executive Officer of The
Common Fund for Nonprofit Organizations since January, 1996. Prior to that time,
he served as President and Chief Executive Officer of Albuquerque Academy in
Albuquerque, New Mexico, a private day school with a substantial endowment.
Officers
President -- Robert L. Bovinette -- see above.
Secretary -- John W. Auchincloss -- 41
Mr. Auchincloss is Associate General Counsel and Secretary of The Common
Fund for Nonprofit Organizations. He joined that organization as Assistant
General Counsel in July 1996. Prior to that time he was of Counsel to the
Westport, Connecticut law firm of Levett, Rockwood & Sanders, P.C. which he
joined after serving as an Assistant United States Attorney in the Office of the
United States Attorney for the Southern District of New York in the Spring of
1994.
Treasurer -- Marita K. Wein -- 37
Ms. Wein is Senior Vice President and Treasurer of The Common Fund for
Nonprofit Organizations. She has been employed by that organization for 12 years
in the fund accounting area and, since her appointment to her present position
in June 1997, she has been responsible for general investor accounting and
reporting functions of the company.
S-12
<PAGE> 22
COMPENSATION OF DIRECTORS AND OFFICERS
Officers of the company serve without compensation as such. The Company pays
each Independent Director an annual fee of $8,000, plus reasonable out-of-pocket
expenses.
The Directors and Officers of the Company own less than 1% of the outstanding
shares of the Fund.
COMPUTATION OF YIELD AND TOTAL RETURN
From time to time the Company may advertise yield and total return of the Fund.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of the Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The yield
is calculated by assuming that the income generated by the investment during
that 30-day period is generated in each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = 2[((a-b)/cd + 1)(to the 6th power) - 1] where a = dividends and interest
earned during the period; b = expenses accrued for the period (net of
reimbursement); c = the current daily number of shares outstanding during the
period that were entitled to receive dividends; and d = the maximum offering
price per share on the last day of the period.
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)(to the nth power) = ERV, where P = a hypothetical
initial payment of $1,000; T = average annual total return; n = number of years;
and ERV = ending redeemable value, as of the end of the designated time period,
of a hypothetical $1,000 payment made at the beginning of the designated time
period.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through Investors Bank & Trust Company
(the "Transfer Agent") on days when the Federal Reserve System and the New York
Stock Exchange are open for business. Currently, the weekdays on which the Fund
is closed for business are: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. Shares of the
Fund are offered on a continuous basis.
It is currently the Company's policy to pay all redemptions in cash. The Company
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Shareholders may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
The Company reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of the Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Company also
reserves the right to suspend sales of shares of the Fund for any period during
which the New York Stock Exchange, the Investment Manager, the Administrator,
the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The securities of the Fund are valued by the Fund Accounting Agent. The Fund
Accounting Agent may use an independent pricing service to obtain valuations of
securities. The pricing service relies primarily on prices of actual market
transactions as well as on trade quotations obtained from third parties.
However, the pricing service may use a matrix system to determine valuations of
fixed income securities. This system considers such factors as security prices,
yields, maturities, call features, ratings and developments relating to specific
securities in arriving at valuations. The procedures used by the pricing service
and its valuation are reviewed by the officers of the
S-13
<PAGE> 23
Company under the general supervision of the Board of Directors. If there is no
readily ascertainable market value for a security, the Investment Manager may
make a good faith determination as to the "fair value" of the security in
accordance with procedures adopted by the Board of Directors.
Securities with remaining maturities of 60 days or less will be valued by the
amortized cost method, unless it is determined not to represent fair value in
accordance with procedures adopted by the Board of Directors. The amortized cost
method involves valuing a security at its cost on the date of purchase and
thereafter (unless amortized cost is determined in accordance with procedures
approved by the Board of Directors not to represent fair value) assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuations in general market rates of interest on the value of the
instrument. While this method provides certainty in valuation, it may result in
periods during which value, as determined by this method, is higher or lower
than the price the Fund would receive if it sold the instrument.
TAXES
The following is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisors with
specific reference to their own tax situations, including their state and local
tax liabilities.
FEDERAL INCOME TAX
The following is only a summary of certain additional federal tax considerations
generally affecting the Fund that are not discussed in the Fund's Prospectus. No
attempt is made to present a detailed explanation of the federal, state or local
tax treatment of the Fund or its shareholders and the discussion here and in the
Fund's prospectus is not intended as a substitute for careful tax planning.
The discussion of federal income tax consequences is based on the Internal
Revenue Code of 1986 (the "Code"), and the regulations issued thereunder as in
effect on the date of this Statement of Additional Information. New legislation,
as well as administrative changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
The Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, the Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which it
may be subject.
In order to qualify for treatment as a RIC under the Code, the Fund must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, or certain other income (including
gains from options, futures or forward contracts); (ii) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount that does not exceed 5% of
the value of the Fund's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which are
engaged in the same, similar or related trades or business if the Fund owns at
least 20% of the voting power of such issuer.
Notwithstanding the Distribution Requirement described above, which requires
only that the Fund distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income (the excess of short- and
long-term capital
S-14
<PAGE> 24
gains over short- and long-term capital losses) for the one-year period ending
on October 31 of that year, plus certain other amounts.
The Fund intends to make sufficient distributions to avoid liability for the
federal excise tax. The Fund may in certain circumstances be required to
liquidate Fund investments in order to make sufficient distributions to avoid
federal excise tax liability at a time when the investment advisor might not
otherwise have chosen to do so, and liquidation of investments in such
circumstances may affect the ability of the Fund to satisfy the requirements for
qualification as a RIC.
Any gain or loss recognized on a sale, exchange or redemption of shares of the
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months, and otherwise will be treated
as short-term capital gain or loss. However, if shares on which a shareholder
has received a net capital gain distribution are subsequently sold, exchanged or
redeemed and such shares have been held for six months or less, any loss
recognized will be treated as a long-term capital loss to the extent of the net
capital gain distribution. Long-term capital gains are currently taxed at a
maximum rate of 20% and short-term capital gains are currently taxed at ordinary
income tax rates.
In certain cases, the Fund will be required to withhold, and remit to the U.S.
Treasury, 31% of any distributions paid to a shareholder who (1) has failed to
provide a correct taxpayer identification number, (2) is subject to backup
withholding by the Internal Revenue Service, or (3) has not certified to the
Fund that such shareholder is not subject to backup withholding.
If the Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, and such
distributions may generally be eligible for the corporate dividends-received
deduction.
STATE TAXES
The Fund is not liable for any income or franchise tax in Delaware if it
qualifies as a RIC for federal income tax purposes. Distributions by the Fund to
shareholders and the ownership of shares may be subject to state and local
taxes.
PORTFOLIO TRANSACTIONS
The Sub-Advisers are authorized to select brokers and dealers to effect
securities transactions for the Fund. The Sub-Advisers will seek to obtain the
most favorable net results by taking into account various factors, including
price, commission, if any, size of the transactions and difficulty of
executions, the firm's general execution and operational facilities and the
firm's risk in positioning the securities involved. While the Sub-Advisers
generally seek reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available. The
Sub-Advisers seek to select brokers or dealers that offer the Fund best price
and execution or other services which are of benefit to the Fund.
The Sub-Advisers may, consistent with the interests of the Fund, select brokers
on the basis of the research services they provide. Such services may include
analyses of the business or prospects of a company, industry or economic sector,
or statistical and pricing services. Information so received by the Sub-Advisers
will be in addition to and not in lieu of the services required to be performed
by them under their Sub-Advisory Agreements. If, in the judgment of a
Sub-Adviser, the Fund or other accounts managed by the Sub-Adviser will be
benefitted by supplemental research services, the Sub-Adviser is authorized to
pay brokerage commissions to a broker furnishing such services which are in
excess of commissions which another broker may have charged for effecting the
same transaction. These research services include advice, either directly or
through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; furnishing of
analyses and reports concerning issuers, securities or industries; providing
information on economic factors and trends; assisting in determining portfolio
strategy; providing computer software used in security analyses; and providing
portfolio performance evaluation and technical market analyses. The expenses of
the Sub-Adviser will not necessarily be reduced as a
S-15
<PAGE> 25
result of the receipt of such supplemental information, such services may not be
used exclusively, or at all, with respect to the Fund or account generating the
brokerage, and there can be no guarantee that the Sub-Adviser will find all of
such services of value in advising the Fund.
VOTING
Each share held entitles the shareholder of record to one vote. Shares issued by
the Fund have no preemptive, conversion, or subscription rights. Each whole
share shall be entitled to one vote and each fractional share shall be entitled
to a proportionate fractional vote. The Fund, as a separate series of the
Company, votes separately on matters affecting the Fund. Voting rights are not
cumulative. Shareholders of each Class of the Fund will vote separately on
matters pertaining solely to that Class. As a Delaware business trust, the
Company is not required to hold annual meetings of shareholders, but approval
will be sought for certain changes in the operation of the Company and for the
election of Directors under certain circumstances.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds
and shares thereof. Each share of the Fund represents an equal proportionate
interest in the Fund with each other share. Shares are entitled upon liquidation
to a pro rata share in the net assets of the Fund. Shareholders have no
preemptive rights. The Declaration of Trust provides that the Directors of the
Company may create additional series of shares or separate classes of funds. All
consideration received by the Company for shares of any fund or separate class
and all assets in which such consideration is invested would belong to that fund
or separate class and would be subject to the liabilities related thereto. Share
certificates representing shares will not be issued.
5% SHAREHOLDERS
As of the date of this Statement of Additional Information, the following
shareholders owned more than 5% of the Fund's outstanding shares:
CUSTODIAN
Investors Bank & Trust (the "Custodian") acts as the custodian of the Company.
The Custodian holds cash, securities and other assets of the Company as required
by the 1940 Act.
EXPERTS
The Independent Accountants for the Company are [ ].
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania
19103, serves as counsel to the Company.
FINANCIAL STATEMENTS
S-16
<PAGE> 26
APPENDIX
The following descriptions are summaries of published ratings.
DESCRIPTION OF CORPORATE BOND RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA by S&P also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from AAA issues only in
small degree. Debt rated A by S&P has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
Bonds rated Aaa by Moody's are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large, or an exceptionally stable,
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with bonds
rated Aaa, they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than in Aaa securities. Bonds rated A by
Moody's possess many favorable investment attributes and are to be considered as
upper-medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Fitch uses plus and minus signs with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category. Bonds rated AAA by Fitch are considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA by
Fitch are considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+. Bonds rated A by Fitch
are considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings.
Bonds rated AAA by Duff are judged by Duff to be of the highest credit quality,
with negligible risk factors being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA by Duff are judged by Duff to be of high credit
quality with strong protection factors and risk that is modest but that may vary
slightly from time to time because of economic conditions. Bonds rated A by Duff
are judged by Duff to have average but adequate protection factors. However,
risk factors are more variable and greater in periods of economic stress.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly. Obligations for which there is a low expectation on investment
risk are rated A by IBCA. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A by Standard & Poor's Corporation ("S&P") is regarded by
S&P as having the greatest capacity for timely payment. Issues rated A are
further refined by use of the numbers 1, 1+, and 2 to indicate the
A-1
<PAGE> 27
relative degree of safety. Issues rated A-1+ are those with an "overwhelming
degree" of credit protection. Those rated A-1, the highest rating category,
reflect a "very strong" degree of safety regarding timely payment. Those rated
A-2, the second highest rating category, reflect a satisfactory degree of safety
regarding timely payment but not as high as A-1.
Commercial paper issues rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") are judged by Moody's to be of "superior" quality and "strong"
quality respectively on the basis of relative repayment capacity.
F-1+ (Exceptionally Strong) is the highest commercial paper rating Fitch
assigns; paper rated F-1+ is regarded as having the strongest degree of
assurance for timely payment. Paper rated F-1 (Very Strong) reflects an
assurance of timely payment only slightly less in degree than paper rated F-1+.
The rating F-2 (Good) reflects a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues rated F-1+ or
F-1.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by good fundamental protection
factors. Risk factors are minor. Duff has incorporated gradations of 1+ and 1-
to assist investors in recognizing quality differences within this highest tier.
Paper rated Duff-1+ has the highest certainty of timely payment, with
outstanding short-term liquidity and safety just below risk-free U.S. Treasury
short-term obligations. Paper rated Duff-1- has high certainty of timely payment
with strong liquidity factors which are supported by good fundamental protection
factors. Risk factors are very small. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets (although
ongoing funding may enlarge total financing requirements) and sound liquidity
factors and company fundamentals. Risk factors are small.
The designation A1, the highest rating by IBCA, indicates that the obligation is
supported by a strong capacity for timely repayment. Those obligations rated A1+
are supported by the highest capacity for timely repayment. Obligations rated
A2, the second highest rating, are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
A-2
