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commonfund
Commonfund
Institutional Funds
PROSPECTUS
JANUARY 20, 2000
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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 or disapproved the
Fund's shares or determined whether this prospectus is accurate or complete.
It is a crime for anyone to tell you otherwise.
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COMMONFUND INSTITUTIONAL FUNDS
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Commonfund Institutional Funds (the "Company") is a no-load, open-end 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 current and former directors, officers and
employees of Commonfund Asset Management Company, Inc. (the "Investment
Manager") and its affiliates ("Eligible Individuals").
HOW TO READ THIS PROSPECTUS
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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's Investments........................................................ 3
Fees and Portfolio Management................................................. 4
Purchasing and Redeeming Shares............................................... 7
Dividends, Distributions and Taxes............................................ 8
To obtain more information about Commonfund Institutional Funds please refer to
the Back Cover of the Prospectus.
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COMMONFUND SHORT DURATION FUND
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INVESTMENT GOAL
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Current interest income with some price appreciation, each as consistent with
liquidity and safety of principal.
INVESTMENT FOCUS
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A portfolio of U.S. Government securities and other high quality debt
securities.
PRINCIPAL INVESTMENT STRATEGY
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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 U.S. and foreign commercial banks, 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's investment strategies are designed to produce a total rate of return
that exceeds the total return on 90 day U.S. Treasury bills.
The Fund seeks to minimize fluctuations in net asset value by maintaining high
credit quality standards and employing a relatively short effective duration.
Duration is a measure of a security's price volatility or risk associated with
changes in interest rates. 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 will invest only in fixed
income securities rated at the time of investment in one of the three highest
rating categories by a major rating agency, or determined by the Investment
Manager or a Sub-Adviser to be of equivalent quality.
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, each of the Fund's Sub-Advisers, Wellington
Management Company, LLP ("Wellington Management") 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 Management's
investment philosophy is to maximize total return while limiting the level of
risk appropriate for the Fund 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
may be higher as a result. Higher portfolio turnover will result in higher
transaction costs and may result in taxable gains being passed through to
taxable shareholders.
OTHER INVESTMENTS
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The Fund also may invest in other securities, use other strategies and engage in
other investment practices, which are not principal investments and strategies.
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. When so invested, the Fund may
not achieve its investment objective.
PRINCIPAL RISKS
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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 larger or smaller 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 response 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.
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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, you can lose money on
your investment in the Fund, 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. Declining
interest rates tend to encourage the prepayment of mortgage-backed securities.
As a result, the Fund may have to reinvest prepaid amounts in securities paying
lower interest rates. 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 TRANSITION
The Fund and its service providers do not appear to have been adversely affected
by computer problems related to the transition to the year 2000. However, there
remains a risk that such problems could arise or be discovered in the future.
Year 2000 related problems also may negatively affect issuers whose securities
the Fund purchases, which could have an impact on the value of your investment.
PRIOR PERFORMANCE INFORMATION
As of the date of this prospectus, the Fund had not yet commenced operations,
and did not have a performance history.
FUND FEES AND EXPENSES
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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)
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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 ANNUAL FUND OPERATING
EXPENSES........................ 0.25%**
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* OTHER EXPENSES ARE ESTIMATED ASSUMING THE AVERAGE DAILY NET ASSETS OF THE
FUND WILL BE $100 MILLION.
** THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE FEES AND TO
REIMBURSE EXPENSES, SO LONG AS IT SERVES AS INVESTMENT ADVISER TO THE FUND,
IN ORDER TO KEEP TOTAL OPERATING EXPENSES FROM EXCEEDING 0.25% OF NET ASSETS
PER YEAR. THIS FEE WAIVER MAY BE AMENDED OR TERMINATED ONLY WITH THE CONSENT
OF THE BOARD OF DIRECTORS.
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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:
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1 Year $26*
3 Years $80*
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* EXPENSES ARE CALCULATED BASED ON ANNUAL FUND OPERATING EXPENSES NET OF THE
INVESTMENT MANAGER'S FEE WAIVERS AND EXPENSE REIMBURSEMENTS (0.25%).
INVESTMENT MANAGER
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COMMONFUND ASSET MANAGEMENT COMPANY, INC. is an indirect, wholly-owned
subsidiary of The Commonfund for Non-Profit Organizations ("Commonfund").
Employees of the Investment Manager also are responsible for 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 Fund
will pay the Investment Manager an annual fee of 0.19% of average net assets for
its services.
The Investment Manager acts as a "manager of managers" for the Fund, and
supervises adherence by the Sub-Advisers to 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 Fund and the
Investment Manager have requested exemptive relief from the Securities and
Exchange Commission (the "Commission") to permit the Investment Manager and the
Fund to add or terminate Sub-Advisers without shareholder approval.
INVESTMENT SUB-ADVISERS
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WELLINGTON MANAGEMENT COMPANY, LLP traces its origins to 1928. As of June 30,
1999, the firm had investment management authority with respect to approximately
$223 billion in assets, with approximately $91 billion in fixed income
securities, for domestic and foreign clients. Wellington Management is
headquartered in Boston, Massachusetts, with affiliates in London, Singapore,
Sydney and Tokyo.
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 Executive Vice President,
Business Development, of the Chicago Mercantile Exchange, where he worked in
positions of increasing responsibility for eight years. Mr. Petzel received his
A.B., A.M., and Ph.D. degrees from the University of Chicago.
MaryEllen Beaudreault, a Senior Vice President of Commonfund Asset
Management Company, joined Commonfund in 1993. She is responsible for the
oversight of all fixed income funds. Those funds implement cash management,
domestic, global and international fixed income and strategies. Ms. Beaudreault
has 15 years of professional experience. Ms. Beaudreault is a graduate of
Central Connecticut State University.
Wellington Management Company, LLP.
Responsibility for investment decisions will rest with two persons:
John C. Keogh, a Partner and Senior Vice President of Wellington
Management, will serve as the Fund's Portfolio Manager. Mr. Keogh has 20 years
of professional experience, 16 of which have been with Wellington Management.
Mr. Keogh received a B.A. from Tufts University in 1979.
Timothy E. Smith, a Vice President of Wellington Management, will also
serve as Portfolio Manager of the Fund. Mr. Smith has 14 years of professional
experience, seven of which have been with Wellington Management. Mr. Smith
received his MBA from Babson College in 1992.
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Western Asset Management Company. 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 Western Asset since 1991, has 18
years of professional experience. 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 M.B.A. from the Kellogg Graduate School
of Management at Northwestern University.
PRIOR PERFORMANCE OF SUB-ADVISERS
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 substantially similar to the Fund's in all material
respects. This information has been provided by the Sub-Advisers and calculated
in accordance with AIMR Performance Presentation Standards. This table does not
indicate how the Fund may perform in the future. The extent to which the
performance of a particular Sub-Adviser affects Fund performance will be limited
to the portion of the Fund's assets allocated to that Sub-Adviser by the
Investment Manager.
Wellington Management Company, LLP
Historical Performance for Periods Ended December 31, 1999*
Average Annual Total Return
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Wellington 3 Month-T-Bill
Management
Past three years 5.43% 5.13%
Past one year 5.00% 4.82%
Since inception 9/96 5.43% 5.16%
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* Performance results reflect the deduction of fees equal to the Fund's total
operating expenses net of the Investment Manager's fee waivers (0.25%).
Performance results reflect composite returns for all discretionary accounts
managed in accordance with Wellington Management's short duration strategy
with investment guidelines that are substantially similar to those of the
Fund, none of which are registered investment companies.
Western Asset Management Company
Historical Performance for Periods Ended December 31, 1999*
Average Annual Total Return
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Western Asset 3 Month-T-Bill
Past ten years 5.29% 5.26%
Past five years 5.43% 5.35%
Past three years 5.36% 5.13%
Past one year 5.08% 4.82%
</TABLE>
* Performance results reflect deduction of fees equal to the Fund's total
operating expenses net of the Investment Manager's fee waivers (0.25%).
Performance results reflect composite returns for all discretionary accounts
managed in accordance with Western Asset's short duration strategy with
investment guidelines that are substantially similar to those of the Fund,
none of which are registered investment companies.
The accounts are not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the Investment Company Act of
1940 and the Internal Revenue Code which, if applicable, may have adversely
affected performance results.
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INVESTING IN THE COMMONFUND INSTITUTIONAL FUNDS -- A SUMMARY:
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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
P.O. Box 9130, Mail Code OPS22
Boston, MA 02117-9130
The Fund's minimum initial investment is $100,000 for institutions and $5,000
for Eligible Individuals. The minimum subsequent investment is $1,000, except
that no minimum applies to reinvestments from dividends and distributions.
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Once you are a shareholder of the Commonfund Institutional Funds you can do the
following:
* Purchase or redeem Fund shares by phone.
Call 1-877-426-6600 to place a trade.
* Purchase Fund shares by wiring funds to:
Investors Bank & Trust Company
ABA #011001438
Account #020103345
Further Credit: Commonfund Short Duration Fund, shareholder name and
Commonfund Institutional Funds account number.
PURCHASING AND REDEEMING COMMONFUND INSTITUTIONAL FUNDS SHARES
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This section tells you how to purchase 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 Funds, P.O. Box 9130, Mail Code OPS22, Boston, MA 02117-9130.
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 #020103345; Further Credit: Commonfund
Short Duration Fund. The shareholder name and shareholder 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 (NAV) per
share 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. In order for your
purchase to be processed on the trade date, the Fund must receive funds by 4:00
p.m. Eastern time. Orders for which funds are received after 4:00 p.m. Eastern
time will be processed on the following Business Day.
PURCHASING ADDITIONAL SHARES
Current shareholders are eligible to purchase shares by phone by calling
1-877-426-6600 if they have requested that privilege by checking the appropriate
box on the New Account Application.
PURCHASES BY ELIGIBLE INDIVIDUALS
Eligible Individuals 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 TRANSACTIONS
Purchasing or redeeming Fund shares over the telephone is extremely convenient,
but not without
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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, 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. The redemption price of each share will be the NAV next determined
after we receive your request.
In the case of institutions and Eligible Individuals, payments in redemption
will be made by wire transfer to the account designated in your New Account
Application or another account that has properly been designated with a
signature guarantee.
SIGNATURE GUARANTEES
A signature guarantee is a widely accepted way to protect shareholders by
verifying signatures. The signature(s) must be guaranteed by an acceptable
financial institution such as a national or state bank, a trust company, a
federal savings and loan association, a credit union or a broker-dealer that is
a member of a national securities exchange. Notarization is not acceptable.
Financial institutions which participate in one of the medallion signature
programs must use the specific "Medallion Guaranteed" stamp.
METHODS FOR REDEEMING SHARES
* By Mail -- If you wish to redeem shares of the Fund by mail, 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. In
certain circumstances, additional documentation may be required. You may
obtain additional details by calling 1-877-426-6600.
* By Phone -- When filling out your New Account Application, you are given the
opportunity to establish telephone 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 transaction costs to sell
the securities distributed to you.
SUSPENSION OF YOUR RIGHT TO REDEEM SHARES -- The Fund may suspend your right to
redeem shares if the NYSE restricts trading, the SEC declares an emergency or
for such other periods as the SEC may by order permit.
INVOLUNTARY SALES OF YOUR SHARES -- If your account balance drops below the
required minimum of $100,000 for institutions or $5,000 for Eligible Individuals
as a result of shareholder redemptions, the Fund may redeem your shares. You
will always be given at least 60 days' written notice to give you time to add to
your account and avoid redemption of 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. Proceeds
will be wired to your properly designated account at a financial institution.
DISTRIBUTION OF FUND SHARES
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Commonfund Securities, Inc. is the distributor of the Fund and receives no
compensation from the Fund for that service.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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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.
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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.
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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 Commonfund Institutional Funds is available without
charge through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
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The SAI dated January 20, 2000, 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.
TO OBTAIN MORE INFORMATION ABOUT THE FUND:
BY TELEPHONE: Call 1-877-426-6600
BY MAIL: Write to
Commonfund Institutional Funds
15 Old Danbury Road
P.O. Box 812
Wilton, CT 06897-0812
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
EDGAR Database on 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 on the operation of the Public Reference Room, call 202-942-8090).
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 20549-0102. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
[email protected].
The Fund's Investment Company Act registration number is 811-9555.
<PAGE> 11
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 January 20, 2000. The Prospectus may be obtained without
charge by calling 1-877-426-6600.
TABLE OF CONTENTS
<TABLE>
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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 AND SUB-ADVISERS..................... S-11
FUND ADMINISTRATION......................................... S-12
CUSTODIAN................................................... S-12
EXPERTS..................................................... S-12
LEGAL COUNSEL............................................... S-12
DISTRIBUTION AND SHAREHOLDER SERVICES....................... S-12
DIRECTORS AND OFFICERS OF THE COMPANY....................... S-13
COMPUTATION OF YIELD AND TOTAL RETURN....................... S-15
PURCHASE AND REDEMPTION OF SHARES........................... S-16
DETERMINATION OF NET ASSET VALUE............................ S-16
TAXES....................................................... S-17
PORTFOLIO TRANSACTIONS...................................... S-18
VOTING...................................................... S-18
DESCRIPTION OF SHARES....................................... S-19
5% SHAREHOLDERS............................................. S-19
FUND BALANCE SHEET.......................................... S-19
APPENDIX.................................................... A-1
</TABLE>
January 20, 2000
<PAGE> 12
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 safety of principal. There can be no assurance that the Fund
will achieve its investment objective. The 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 securities issued or guaranteed
by the U.S. Government and its agencies and instrumentalities, obligations of
U.S. and foreign commercial banks, corporate debt securities, including
commercial paper, and fully-collateralized repurchase agreements with
highly-rated counterparties. The Fund will invest in obligations of national and
state commercial banks and bank holding companies and their foreign branches, as
well as foreign banks, provided that the obligations shall be payable in U.S.
dollars or fully hedged. The securities acquired by the Fund may include
mortgage-backed and asset-backed securities. The Fund's investment strategies
are designed to produce a total rate of return that exceeds the total return on
90 day U.S. Treasury bills. The Fund seeks to minimize fluctuation in net asset
value by maintaining high credit quality standards and employing a relatively
short effective duration.
Duration is a measure of a security's expected price volatility or risk
associated with changes in the interest rate. Duration is not static, and
responds inversely to changes in interest rates, so that duration shortens when
rates rise and lengthens when rates fall. These changes may be magnified in a
low yield environment. For example, a 30 year, 10% coupon non-callable bond has
a 7.2 year duration in a 15% yield environment, a 9.9 year duration in a 10%
yield environment, and a 14 year duration in a 5% yield environment. Effective
duration is a measure of risk and sensitivity to interest rate changes of bonds
with implied call options, such as callable or putable bonds and mortgage-backed
securities. The calculation of the effective duration of a security takes into
consideration the possibility of early redemption or extension of these options.
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 will purchase the following types of securities if, at the time of
purchase, such securities either have been rated in one of the three highest
rating categories by a nationally recognized statistical rating organization
("NRSRO"), except as noted below, or are determined by Commonfund Asset
Management Company Inc. (the "Investment Manager") or a Sub-Adviser to be of
comparable quality, and are otherwise eligible for investment: (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 and denominated in U.S. dollars; (iii) private mortgage-backed
securities; (iv) asset-backed securities; (v) commercial paper rated in one of
the two highest rating categories; (vi) obligations of U.S. and foreign
commercial banks rated in one of the two highest rating sub-categories; and
(vii) fully collateralized 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 invest in illiquid securities in an amount not to exceed 15% of its
net assets. 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.
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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.
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.
Asset-backed securities also may be issued as 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 presents risk considerations specific 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 also
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 AND BANK OBLIGATIONS
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. The Fund will
only purchase obligations of banks that are rated in the top two categories by a
major rating agency.
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 at a specified interest rate.
DERIVATIVES
Derivatives are instruments that derive their value from other securities,
baskets of securities, financial instruments or indices (for each derivative
instrument, this is sometimes referred to as the "underlying"). The following
are considered derivative securities: financial futures, options (e.g., puts and
calls) on financial futures, options on securities, swap agreements, certain
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.
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FIXED INCOME SECURITIES
The market values of fixed income investments 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 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 or purchase by a party of a
specified amount of a specific underlying 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 seek to minimize the risk that it will be
unable to close out a futures contract by only entering into futures contracts
which are traded on recognized futures exchanges.
No price is paid upon entering into futures contracts. Instead, the Fund is
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 the individual underlying 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 underlying 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 options on futures.
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
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and interest (less servicing and other fees), as well as unscheduled
prepayments, as mortgages in the underlying mortgage pool are paid off by
borrowers.
Agency-Mortgage-Related Securities: The dominant issuers or guarantors of
mortgage-related securities today are the Government National Mortgage
Association ("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 (such as by the 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 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 uses its 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
pools consist of one or more of the following types of loans: (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 loans 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 be whole loans, participation interests in whole loans and undivided
interests in whole loans or 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.
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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 Fund 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 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 values 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, Planned
Amortization Class CMOs ("PAC Bonds") and REMICs. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986 (the
"Code") and invests in certain mortgages principally secured by interests in
real property. Investors may purchase beneficial interests in REMICS, which are
known as "regular" interests, or "residual" interests. The Portfolios will not
invest in residual REMICs. Guaranteed REMIC pass-through certificates (REMIC
Certificates) issued by Fannie Mae, FHLMC or GNMA represent beneficial ownership
interests in a REMIC trust consisting principally of mortgage loans or Fannie
Mae, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC
REMIC Certificates, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. Fannie Mae REMIC Certificates
are issued and guaranteed as to timely distribution of principal and interest by
Fannie Mae. GNMA REMIC certificates are supported by the full faith and credit
of the U.S. Treasury.
Parallel pay CMOs, as well as REMICs, 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
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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
Options give the holder of the option the right to buy or sell an underlying at
an agreed price, while obligating the writer of the option to buy or sell at the
agreed price if exercised by the buyer. 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." The writer of an option may close out an
option position that it has written, by entering into a "closing transaction,"
which is simply the purchase of an option contract on the same security with the
same exercise price and expiration date as the option contract originally
opened. If the writer is unable to effect a closing transaction, it will be
obligated to honor the option until the option expires or it delivers the
underlying upon exercise. When the Fund writes an option, it will "cover" its
obligation by holding the underlying (in the case of a call option) or
segregating or earmarking cash (in the case of a put option) needed to satisfy
its obligation until it enters into a closing transaction, the option expires,
or the Fund delivers the underlying security upon exercise by the option holder.
The Fund may purchase put and call options to protect against declines in the
market values of the securities in its portfolio, or in anticipation of
movements in the market values of securities subject to the option. When the
Fund purchases put and call options it pays a premium. If price movements in the
underlying securities are such that exercise of the option would not be
profitable, the Fund's loss will equal the amount of the premium. In the case of
a put option, where the Fund already holds the underlying security, the loss of
the premium may be offset by an increase in the value of the Fund's security. In
the case of a call option, where the Fund acquires the underlying security in a
separate transaction, the loss of the premium may be offset by a decrease in the
cost of acquisition of the security.
The Fund may write covered call and put options as a means of increasing the
yield on its portfolio. When the Fund writes an option, if the underlying
securities do not increase or decrease to a price that would make the exercise
of the option by the option holder profitable, the holder generally will allow
the option to expire without being exercised. In such a situation, the Fund will
have realized as profit the premium received for writing the 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. This price
generally will be lower than the price the Fund could have received if it sold
the underlying at the market price. When a put option written by the Fund is
exercised, the Fund will be required to purchase the underlying securities from
the option holder at the strike price. This price generally will be higher than
the price the Fund would have paid if it bought the underlying at the market
price.
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
counterparty. OTC options are available for a greater variety of securities and
for a wider range of expiration dates and exercise
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prices than are available for exchange-traded options. Because OTC options are
not traded on an exchange, pricing normally is determined by reference to
information provided by a market maker. OTC options generally are considered to
be 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; and (3) there may not
be a liquid secondary market for options.
PORTFOLIO TURNOVER
An annual portfolio turnover rate in excess of 100% may result from the
Investment Manager's use of a multimanager approach. Higher portfolio turnover
may result in higher transaction costs and taxable gains being passed through to
taxable shareholders.
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 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 the Fund 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 Securities Act of 1933, as amended (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.
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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 Interest 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.
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. When the Fund agrees to
purchase when-issued or delayed delivery securities, it will earmark or
segregate cash or liquid securities in an amount equal to the Fund's commitment
to purchase these securities. 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 Fund and its service providers do not appear to have been adversely affected
by computer problems related to the transition to the year 2000. However, there
remains a risk that such problems could arise or be discovered in the future.
Year 2000 related problems also may negatively affect issuers whose securities
the Fund purchases, which could have an impact on the value of your investment.
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.
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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, (i) 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, without regard to this
limitation (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
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. For the purposes of fundamental restriction
number 2, finance companies are not considered a single industry, but are
grouped instead according to their services.
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. A transfer of assets under
a repurchase agreement or loan of securities 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.
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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.
6. Borrow money, except for temporary or emergency circumstances in amounts not
to exceed 5% of the Fund's net assets. For example, the Fund may borrow in
excess of 5% for temporary defensive purposes or to meet shareholder
redemptions when it would not be in the best interests of the Fund to
liquidate portfolio holdings. The Fund will not make additional purchases of
securities when the Fund's borrowings exceed 5% of total assets.
THE INVESTMENT MANAGER
Commonfund Asset Management Company, Inc. is an indirect, wholly owned
subsidiary of The Commonfund for Nonprofit Organizations ("Commonfund").
Employees of the Investment Manager are responsible for Commonfund's investment
programs which are conducted in a "manager of managers" format. The Fund will
pay the Investment Manager an annual fee of 0.19% of average net assets for its
services.
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. The Fund and the Investment Manager have requested
exemptive relief from the SEC necessary to permit the Investment Manager and the
Fund to add or terminate Sub-Advisers without shareholder approval. 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 currently 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 approximately 50% of the Fund's total assets.
WELLINGTON MANAGEMENT COMPANY, LLP ("Wellington Management") traces its origins
to 1928. As of June 30, 1999, the firm had investment management authority with
respect to approximately $223 billion of assets, with approximately $91 billion
in fixed income securities, for domestic and foreign clients. Wellington
Management is headquartered in Boston, Massachusetts, with affiliates in London,
Singapore, Sydney and Tokyo. Wellington Management'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
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Management 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. will provide general fund administration services to the Fund. For the
services rendered by IBT Co., the Company will pay IBT a fee, which is
calculated daily and paid monthly, equal to the following percentages of the
average daily net assets of the Fund allocated to it: 0.05% for $10 billion or
less and 0.0025% for over $10 billion.
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. Either party may terminate the
Administration Agreement in the event of a material breach of the Administration
Agreement that is not cured within 90 days of notice thereof, and the Company
may terminate this Administrative Agreement in the event that IBT Co. fails to
cure identified deficiencies within 30 days after a written 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.
CUSTODIAN
IBT Co., 200 Clarendon Street, Boston, MA, 02116, 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 PricewaterhouseCoopers LLP
located at 1177 Avenue of the Americas, New York, NY 10036.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania
19103, serves as counsel to the Company.
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.
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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, from
its own assets, 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.
Unless otherwise noted, the business address of each Director and each Executive
Officer is c/o Commonfund Institutional Fund, 15 Old Danbury Road, P.O. Box 812,
Wilton, CT 06897-0812.
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.
John B. Carroll - 62
Since August 1997, Mr. Carroll has been Vice President of Investment
Management for GTE Corporation (GTE) and serves as a Senior Advisor to GTE and
its wholly owned subsidiary, GTE Investment Management Corporation (GTE IMC)
consulting on all investment related matters. From 1984 to August 1997 he was
President and Chief Executive of GTE IMC responsible for developing investment
policies and strategies for GTE's $25 billion in employee benefit funds and
other related financial investment worldwide.
Prior to 1984, Mr. Carroll was Executive Vice President and Director of
Consulting and Publishing for Evaluation Associates, Inc. (EAI), a pension fund
consulting firm. Prior to EAI, Mr. Carroll was Vice President and Head of
Pension Consulting Activities and National Expansion for the Trust and
Investment Division of Chemical Bank of New York (now The Chase Manhattan Bank).
Mr. Carroll is also a Director of World Equity Benchmark Shares (WEBS) and the
J.P. Morgan Private Equity Fund. He serves on the Advisory Boards/ Committees of
Ibbotson Associates, Triumph Capital Partners, and the Pension Committee of the
New York Stock Exchange. He is a former Trustee and Member of the Executive
Committee of Commonfund, a past Vice Chairman of CIEBA and a past Chairman of
the Noyes Foundation. Mr. Carroll resides in Ridgefield, CT and Kerry, Ireland.
Louis W. Moelchert - 57
Mr. Moelchert is a registered investment adviser and has been President &
Owner of Private Advisor, LLC since 1996. Since 1975 he has been employed by the
University of Richmond, first as Vice President for Business and Finance from
1975 through 1997, and since 1997 as Vice President for Investments.
Mr. Moelchert has served on the Investment Advisory Committee of the Virginia
State Retirement System since 1996, first as Vice Chairman from 1996 through
1997, and since 1998 as Chairman. He serves on the investment advisory and/or
valuation committees of approximately ten private capital investment funds, on
the Boards of Directors of Venture Lending and Leasing II and the Mentor Family
of Funds, and on the Pension Committee of Albermarle Corporation. He is
President of the Endowment Fund of the River Road Baptist Church.
S-13
<PAGE> 24
From 1986 to 1998, Mr. Moelchert was a member of the Board of Trustees of the
Commonfund, serving as Vice Chairman from 1991 through 1993 and as Chairman from
1994 through 1998. Mr. Moelchert resides in Richmond, Virginia.
Jerald L. Stevens - 59
Since 1985, Mr. Stevens has been a consultant in the areas of investment
and financial management to a range of clients including American Express,
Rockefeller & Company, James Wolfenson & Co., Indiana University and Xerox
Financial Services where he served as Executive Vice President and Chief of
Staff from 1988 through 1990. From 1983 through 1985 he was President and Chief
Operating Officer of Vanguard Group, and from 1978 through 1983 he served as
Vice President, Finance and Administration, and Treasurer of Yale University
where he had overall responsibility for all investment activities where major
initiatives were launched in real estate, venture capital, index investing and
international markets.
Mr. Stevens was Secretary of Human Services and Commissioner of Public Welfare
for the Commonwealth of Massachusetts from 1975 through 1978, Senior Vice
President of the Boston Company, from 1973 through 1975, and Senior Vice
President and Director of Wellington Management Company from 1967 through 1973.
Mr. Stevens has served as Trustee of Bryn Mawr College 1984-1994 and has been a
Board Member of the Long Wharf Theatre 1991-1993, University City Science Center
1983-1988, Thomas Jefferson University 1983-1988 and Yale New Haven Hospital
1978-1983. He was a trustee of the Hospital Fund, Inc. from 1991 through 1999,
serving as Chairman from 1995 through 1999. Mr. Stevens resides in Hamden, CT.
William T. Spitz - 48
Mr. Spitz has been Treasurer of Vanderbilt University since November 1985.
As a General Officer he has specific responsibility for management of the
University's $1.8 billion endowment, banking relationships and cash management,
external financing, life income trusts valued at $60.0 million, and management
of working capital of approximately $500.0 million. As a member of the
Chancellor's Management Group he also participates in the day-to-day
administration of the University. He is a Chartered Financial Analyst.
From January 1985 to November 1985, Mr. Spitz was President and Chief Investment
Officer of NSR Asset Management Corporation with responsibility for managing
$500.0 million in pension, profit sharing and foundation investment assets. He
was Vice President, Director of Research, and Portfolio Manager at Wertheim
Asset Management Corporation from 1979 to January 1985 with responsibility for
$200.0 million in pension fund assets. From 1978 to October 1979 he served as
Vice President and Portfolio Manager at MD Sass Investors Services managing
$100.0 million in individual and retirement fund assets. Mr. Spitz was a Senior
Research Officer at Citibank NA from February 1975 to January 1978.
Mr. Spitz has been a Trustee of Commonfund since 1990, currently serving as
Chairman since 1998. He is also a Trustee of Commonfund Capital, Inc. and
Endowment Realty Investors I and II. He serves as a Director of Bradford Funds,
including Bradford Money Market Fund, advised by J.C. Bradford & Company, a
Director of Diversified Trust Company, a Tennessee chartered Trust Company with
five comingled investment funds, managed by independent investment advisers,
offered principally to individuals and small pension funds. Diversified will
accept assets from educational endowments, but that is not a target market, and
Diversified retains several managers also retained to advise funds maintained by
Commonfund.
Mr. Spitz is an Adjunct Professor of Management at the Owen Graduate School of
Management, Vanderbilt University, serves as Co-Director of the Commonfund
Endowment Institute, and is the author of a number of articles and several books
dealing with investment management issues. Mr. Spitz resides in Nashville, TN.
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
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<PAGE> 25
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.
Assistant Secretary - Susan C. Mosher - 44
Ms. Mosher is a Director of Mutual Fund Administration at Investors Bank &
Trust Company. She has been employed by the organization in such capacity since
1995. Prior to joining Investors Bank & Trust Company, Ms. Mosher served as
Associate Counsel to 440 Financial Group, Inc., a subsidiary of Allamerica
Financial, from 1992 to 1995.
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.
Assistant Treasurer - Timothy F. Osborne - 32
Mr. Osborne serves as a Director of Mutual Fund Administration at Investors
Bank & Trust Company, a position he assumed in 1998. Mr. Osborne joined
Investors Bank & Trust Company in 1995 as a Manager. Prior to that time, Mr.
Osbourne was an Account Supervisor at Chase Global Fund Services from 1992 to
1995.
COMPENSATION OF DIRECTORS AND OFFICERS
The Officers of the Company serve without compensation as such. The Company pays
Mr. Carroll, Mr. Moelchert, Mr. Stevens and Mr. Spitz each 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.
COMPENSATION TABLE*
<TABLE>
<CAPTION>
DIRECTOR AGGREGATE ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION PENSION OR BENEFITS UPON FROM FUND AND
FROM FUND RETIREMENT BENEFITS RETIREMENT FUND COMPLEX
ACCRUED AS PART OF PAID
FUND EXPENSES TO DIRECTORS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. Bovinette, None None None None
Director
John B. Carroll, $8,000 None None $8,000
Director
Louis W. Moelchert, $8,000 None None $8,000
Director
Jerald L. Stevens, $8,000 None None $8,000
Director
William T. Spitz, $8,000 None None $8,000
Director
</TABLE>
- ---------------
* The compensation figures are based on estimates of future payments for the
current fiscal year.
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
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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)(6) - 1] where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of any 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)(n) = 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 both 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. The Company has elected to be governed by Rule 18f-1 under the
1940 Act, under which the Trust is obligated to redeem shares for any one
shareholder of record in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period. 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 Investors Bank & Trust Company (the
"Custodian"), with assistance of the Sub-Advisers, under the general supervision
of a Valuation Committee appointed by the Board of Directors. The Custodian 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 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 and a Valuation Committee.
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
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<PAGE> 27
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 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 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 Manager or
Sub-Adviser 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.
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<PAGE> 28
Any gain or loss recognized on a sale, exchange or redemption of shares of the
Fund by a taxable 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
taxable 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 and other services which are of benefit to the Fund.
The Sub-Advisers may, consistent with the interests of the Fund, consider
research services that a broker or a dealer provides in selecting brokers and
dealers for the Fund. 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
result of the receipt of such supplemental information, such services may not be
used exclusively 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
S-18
<PAGE> 29
be entitled to a proportionate fractional vote. The Fund, as a separate series
of the Company, votes separately on matters affecting only the Fund. Voting
rights are not cumulative. To the extent the Fund may offer different classes of
shares in the future, 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:
Commonfund Asset Management Company, Attn: Todd E. Petzel, 15 Old Danbury Road,
P.O. Box 812, Wilton, CT 06897-0812 owned 100% of the Fund's outstanding shares.
FUND BALANCE SHEET
COMMONFUND INSTITUTIONAL FUNDS
COMMONFUND SHORT DURATION FUND
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 20, 1999
<TABLE>
<S> <C>
ASSETS:
Cash $100,000
--------
Total Assets $100,000
--------
LIABILITIES:
Total Liabilities $ 0
--------
NET ASSETS $100,000
========
Shares outstanding (unlimited shares authorized, $.001 par
value) 10,000
========
Net Asset Value, offering and redemption price per share $ 10.00
========
</TABLE>
See Notes to Financial Statement
S-19
<PAGE> 30
COMMONFUND INSTITUTIONAL FUNDS
COMMONFUND SHORT DURATION FUND
NOTES TO FINANCIAL STATEMENT
OCTOBER 20, 1999
NOTE 1 -- GENERAL
Commonfund Institutional Funds (the "Company") was established as a Delaware
business trust under an Agreement and Declaration of Trust dated August 7, 1999
and is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end, diversified management investment company. The
Company currently consists of one series, Commonfund Short Duration Fund (the
"Fund").
The Fund seeks current income from interest and price appreciation consistent
with liquidity and capital preservation by investing in short duration fixed
income securities.
Commonfund Asset Management Company ("COMANCO") serves as investment adviser to
the Company. Investors Bank & Trust Company ("IBT") serves as the custodian,
fund accounting agent, administrator, transfer agent and dividend disbursing
agent to the Fund. Commonfund Securities, Inc. ("Commonfund Securities") serves
as distributor to the Fund.
The Company has had no operations through October 20, 1999, other than those
relating to organizational matters and the sale of 10,000 shares of common stock
to COMANCO. Organization expenses incurred in connection with the organization
and initial registration of the Company will be paid by COMANCO.
NOTE 2 -- AGREEMENTS
The Company has retained the services of COMANCO as investment adviser. COMANCO
exercises overall responsibility for supervision of the investment management
program for the Fund but has contracted out the day-to-day management of the
investment operations of the Fund to sub-advisers. As compensation for the
services rendered by COMANCO under the investment advisory agreement with the
Company, COMANCO receives a fee from the Fund, which is computed daily and paid
monthly, equal to an annual fee of 0.19% of the Fund's average daily net assets.
COMANCO has retained the services of Wellington Management Company, LLP and
Western Asset Management Company as investment sub-advisers to the Fund. As
compensation for their services, each sub-adviser receives a fee paid from
COMANCO that is based on the average daily net assets of the Fund.
The Company has retained the services of IBT as the transfer agent, dividend
disbursing agent, custodian and fund accounting agent for the Fund. For these
services, IBT will receive a fee from the Fund, which is computed daily and paid
monthly, at an annual rate of 0.0235% of the average daily net assets of the
Fund up to $10 billion and 0.0185% of such net assets in excess of $10 billion.
In addition, the Company has retained IBT as administrator of the Fund. For its
services as administrator, IBT will receive a fee from the Fund, which is
computed daily and paid monthly, at an annual rate of 0.005% of the average
daily net assets of the Fund up to $10 billion and 0.0025% of such net assets in
excess of $10 billion.
The Company has entered into a distribution agreement with Commonfund
Securities, an affiliate of COMANCO, to serve as principal distributor for
shares of the Fund. COMANCO has agreed to pay Commonfund Securities for services
rendered to the Company.
COMANCO has voluntarily agreed that it will waive its fee or reimburse the Fund
for expenses to the extent necessary to maintain the Fund's total operating
expenses at not more than 0.25% of the average daily net assets of the Fund.
Such waiver and/or reimbursement is determined on an annual basis. COMANCO has
undertaken to pay all organizational expenses of the Company.
The Fund will pay each director, other than Robert L. Bovinette, who is Chair of
the Board of Directors of the investment adviser, an annual fee of $8,000 plus
reimbursement of out-of-pocket expenses.
S-20
<PAGE> 31
COMMONFUND INSTITUTIONAL FUNDS
COMMONFUND SHORT DURATION FUND
NOTES TO FINANCIAL STATEMENT (CONTINUED)
OCTOBER 20, 1999
NOTE 3 -- INCOME TAXES
The Company intends to comply with the requirements of the Internal Revenue Code
necessary to qualify as a regulated investment company and make the requisite
distributions of taxable income to its shareholders which will be sufficient to
relieve it from all or substantially all federal income and excise taxes.
S-21
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Trustees of
Commonfund Institutional Funds --
Commonfund Short Duration Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Commonfund
Institutional Funds -- Commonfund Short Duration Fund (the "Fund") at October
20, 1999, in conformity with generally accepted accounting principles. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
January 18, 2000
<PAGE> 33
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> 34
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
