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RREEF
RReal Estate
Securities
Fund
A No-Load Mutual Fund
Class A Shares
Class B Shares
Prospectus
& Application
February 23, 2000
[LOGO]
The RREEF Funds
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
RREEF RReal Estate Securities Fund
875 North Michigan Avenue, 41st Floor
Chicago, Illinois 60611
Investment Adviser
RREEF America L.L.C.
875 North Michigan Avenue, 41st Floor
Chicago, Illinois 60611
Trustees
Nicholas C. Babson
Peter J. Broccolo
Richard W. Burke
Kim G. Redding
Robert L. Stovall
Custodian
UMB Bank, N.A.
928 Grand Boulevard, 10th Floor
Kansas City, Missouri 64106
Transfer Agent and Administrator
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 315
Milwaukee, Wisconsin 53202
Distributor
Sunstone Distribution Services, LLC
207 East Buffalo Street, Suite 315
Milwaukee, Wisconsin 53202
Legal Counsel
D'Ancona & Pflaum LLC
111 East Wacker Drive, Suite 2800
Chicago, Illinois 60601
Independent Accountants
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601
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TABLE OF CONTENTS
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An Overview of the Fund......................................................2
What is the Fund's Investment Objective?...................................2
What are the Fund's Primary Investment Strategies and Principal Risks?.....2
Who May Want to Invest in the Fund?........................................2
Who May Not Want to Invest in the Fund?....................................2
Fees and Expenses..........................................................3
Example....................................................................3
Information About the Fund...................................................4
What is the Fund's Investment Objective?...................................4
How Does the Fund Pursue its Investment Objective?.........................4
What is a REIT?............................................................5
What are the Primary Risks of Investing in the Fund?.......................5
Other Investment Matters...................................................6
Fundamental and Non-Fundamental Policies.................................6
Portfolio Turnover.......................................................6
The Year 2000 Computer Problem.............................................6
Management...................................................................7
Who Manages the Fund?......................................................7
The Board of Trustees......................................................7
The Investment Adviser.....................................................7
The Investment Adviser's Past Performance with a Similar Fund..............7
The Fund Management Team...................................................8
Custodian..................................................................8
Transfer Agent and Administrator...........................................9
Distributor................................................................9
Multiple Class Information...................................................9
Distribution Fees..........................................................9
Shareholder Information......................................................9
Buying and Selling Shares..................................................9
Opening an Account and Making the Initial Purchase of Shares.............9
Buying More Shares......................................................10
Making Automatic Investments............................................10
When Your Purchase is Processed.........................................11
Selling Your Shares (Redemptions).......................................11
You May Sell Your Shares................................................11
Redemption of Shares in Low-Balance Accounts............................12
Abusive Trading Practices...............................................12
Special Requirements for Large Redemptions..............................12
Investing Through Financial Intermediaries..............................13
Other Purchase and Redemption Policies....................................13
Good Order..............................................................13
Telephone Transactions..................................................13
Signature Guarantees....................................................14
Share Price and Distributions...............................................14
Share Price...............................................................14
Distributions.............................................................14
Taxes.......................................................................15
Tax-Deferred Accounts.....................................................15
Taxable Accounts..........................................................15
Taxability of Distributions...............................................15
Taxes on Distributions....................................................16
Buying a Dividend.........................................................16
Taxes on Transactions.....................................................17
More Information About the Fund.............................................17
You May Request These Documents...........................................17
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RREEF RREAL ESTATE SECURITIES FUND
AN OVERVIEW OF THE FUND
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What is the Fund's Investment Objective?
The investment objective of the RREEF RReal Estate Securities Fund (the "Fund")
is long-term capital appreciation and current income.
What are the Fund's Primary Investment Strategies and Principal Risks?
The Fund invests primarily in real estate securities. These securities include
shares of real estate investment trusts (REITs) and companies engaged in the
real estate industry. The Adviser looks for real estate securities it believes
will provide superior returns to the Fund, focusing on companies with the
potential for stock price appreciation and a record of paying dividends.
Loss of money is a risk of investing in the Fund. An investment in the Fund is
also subject to market risk. The market value of securities in the Fund's
portfolio will fluctuate, both because of general market conditions and because
of the traditionally cyclical nature of the financial markets. In addition, the
value of the Fund's portfolio will vary with the success or failure of the
issuers of the securities the Fund holds. Finally, because the Fund concentrates
its investments in real estate securities, it is subject to greater risks and
market fluctuations than funds investing in a broader range of industries.
An investment in the RREEF RReal Estate Securities Fund is not a bank deposit
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Who May Want to Invest in the Fund?
The Fund may be a good investment if you are:
. Seeking long-term capital growth and current income from your investment.
. Seeking diversification of your investment portfolio through an investment
in real estate securities.
. Comfortable with the risks associated with investing in real estate
securities.
. Comfortable with the Fund's short-term price volatility.
. Investing through an IRA or other tax-advantaged retirement plan.
Who May Not Want to Invest in the Fund?
The Fund may not be a good investment if you are:
. Investing for a short period of time.
. Uncomfortable with the risks associated with investments in real estate.
. Uncomfortable with short-term volatility in the value of your investment.
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Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The Fund is a "no-load" fund, meaning you do not pay
sales charges. Class B shares are subject to a 12b-1 distribution fee.
RREEF RReal Estate Securities Fund Shareholder Fees
(Fees Paid Directly from Your Investment)
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Class A Shares Class B Shares
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Maximum Sales Charge (Load) Imposed on Purchases.. None None
Maximum Deferred Sales Charge (Load).............. None None
Maximum Sales Charge (Load)
You Pay on Reinvested Dividends................... None None
Redemption Fees*.................................. None None
Exchange Fees..................................... None None
Wire Transfer Fees................................ None None
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Annual Fund Operating Expenses
(Expenses That Are Deducted from the Fund's Assets)
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Management Fee**.................................. 1.00% 1.00%
Distribution (12b-1) fees......................... 0 0.25%
Other Expenses***................................. 0 0
Total Fund Operating Expenses..................... 1.00% 1.25%
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* There is a $10.00 fee for wire redemptions and a $12.50 fee for redemptions
from an IRA account.
** Out of the management fee, the Adviser pays all expenses of managing and
operating the Fund except brokerage expenses, taxes, interest, fees and
expenses of the independent trustees (including legal counsel fees), and
extraordinary expenses. The Adviser may use a portion of the management fee
to pay for distribution of Fund shares and to pay unaffiliated third
parties who provide recordkeeping and administrative services.
*** Other expenses, which include the fees and expenses of the independent
trustees, are expected to be less than 0.005%.
Example
The 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 and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
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1 year 3 years
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Class A Shares................... $102 $318
Class B Shares................... $127 $397
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INFORMATION ABOUT THE FUND
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What is the Fund's Investment Objective?
The Fund seeks long-term capital appreciation and current income.
How Does the Fund Pursue its Investment Objective?
The Fund's investment objective is non-fundamental and may be changed without
shareholder approval. The Fund invests primarily in equity securities issued by
real estate investment trusts (REITs) and companies engaged in the real estate
industry. Equity securities include common stock, preferred stock and securities
convertible into common stock. The Adviser looks for real estate securities it
believes will provide superior returns to the Fund. The Adviser attempts to
focus the Fund's investments on real estate companies and REITs with the
potential for stock price appreciation and a record of paying dividends.
To find these issuers, the Adviser tracks economic conditions and real estate
market performance in major metropolitan areas and analyzes performance of
various property types within those regions. To perform this analysis, it uses
information from a nationwide network of real estate professionals to evaluate
the holdings of real estate companies and REITs in which the Fund may invest.
Its analysis also includes the companies' management structure, financial
structure and business strategy. The goal of these analyses is to determine
which of the issuers the Adviser believes will be the most profitable to the
Fund. The Adviser also considers the effect of the real estate securities
markets in general when making investment decisions.
The Adviser does not attempt to time the market. Instead, under normal market
conditions, it intends to keep at least 80% of the Fund's assets invested in
equity securities of REITs or real estate companies. A company is considered to
be a real estate company if, in the opinion of the Adviser, at least 50% of its
revenues or 50% of the market value of its assets at the time its securities are
purchased by the Fund are attributed to the ownership, construction, management
or sale of real estate.
The Fund may employ other investment techniques that are not principal
investment strategies but could impact the Fund's performance. When the Adviser
believes that it is prudent, the Fund may invest a portion of its assets in
other types of securities. These securities may include convertible securities,
short-term securities, bonds, notes, securities of companies not principally
engaged in the real estate industry, non-leveraged stock index futures contracts
and other similar securities. Stock index futures contracts, a type of
derivative security, can help the Fund's cash assets remain liquid while
performing more like stocks. The Fund has a policy governing stock index futures
which prohibits leverage of the Fund's assets by investing in a derivative
security. For example, the Adviser cannot invest in a derivative security if it
would be possible for the Fund to lose more money than it invested. A complete
description of the derivatives policy is included in the Statement of Additional
Information.
Additional information about the Fund's investments will be available in the
Annual and Semiannual Reports. In these reports you will find a discussion of
the market conditions and investment strategies that significantly affected the
Fund's performance during the most recent
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fiscal period. You may get these reports at no cost by calling the Fund at
1-888-897-8480.
What is a REIT?
A real estate investment trust, or REIT, invests primarily in income-producing
real estate or makes loans to persons involved in the real estate industry.
Some REITs, called equity REITs, buy real estate and pay investors income from
the rents received from the real estate owned by the REIT and from any profits
on the sale of its properties. Other REITs, called mortgage REITs, lend money to
building developers and other real estate companies and pay investors income
from the interest paid on those loans. There are also hybrid REITs which engage
in both owning real estate and making loans.
If a REIT meets certain requirements, it is not taxed on the income it
distributes to its investors.
Based on its recent practices, the Adviser expects that the Fund's assets will
be invested primarily in equity REITs. In changing market conditions, the Fund
may invest in other types of REITs.
What are the Primary Risks of Investing in the Fund?
The value of the Fund's shares depends on the value of the stocks and other
securities it owns. The value of the individual securities the Fund owns will go
up and down depending on the performance of the companies that issued them,
general market and economic conditions, and investor confidence.
As with all funds, at any given time the value of your shares of the Fund may be
worth more or less than the price you paid. If you sell your shares when the
value is less than the price you paid, you will lose money.
The three principal risks of investing in the Fund: market risk, concentrated
portfolio risk and company risk.
.Market Risk. The market value of the shares of common stock in the Fund's
portfolio can change rapidly and unpredictably in response to political or
economic events having little or nothing to do with the issuer. In addition,
market performance tends to be cyclical, and certain investment styles may be
in or out of favor. If the market does not favor the Fund's style, the Fund's
gains may be smaller or its losses greater than those of equity funds with
different styles.
.Concentrated Portfolio. The Fund concentrates its investments in real estate
securities. A fund with a concentrated portfolio is vulnerable to the risks of
the industry in which it invests. Real estate securities are susceptible to
the risks associated with direct ownership of real estate, such as:
.declines in property values;
.increases in property taxes, operating expenses, interest rates, or
competition;
.overbuilding;
.zoning changes; and
.losses from casualty or condemnation.
.Company Risk. The price of common stock will vary with the success and failure
of its issuer. The Fund is classified as a "non-diversified" investment
company, which means the Fund may invest up to 25% of the
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market value of the Fund's total assets in each of two issuers. Therefore,
the success of the companies in which the Fund invests will determine to a
large degree the Fund's performance.
Under adverse market conditions, or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and invest in
liquid reserves, such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, government securities, and repurchase agreements. Taking a temporary
defensive position is not required and may be impossible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
Other Investment Matters
Fundamental and Non-Fundamental Policies
The fundamental investment restrictions set forth in the Statement of Additional
Information cannot be changed without a vote of the shareholders. None of these
fundamental policies is a principal strategy of the Fund. The investment
objective and all other investment policies of the Fund are not fundamental and
may be changed without shareholder approval. In the event the Fund's investment
objective were changed, the new objective could differ from the objective the
shareholder considered appropriate at the time of making the decision to invest
in the Fund. The Board of Trustees may change any of the Fund's other policies
and investment strategies, including the Fund's investment objectives.
Portfolio Turnover
The Fund may realize some short-term gains or losses if the Adviser chooses to
sell a security because it believes that one or more of the following is true:
. a security is not fulfilling its investment purpose;
. a security has reached its optimum valuation; or
. a particular company or general economic conditions have changed.
The higher the turnover rate, the more brokerage commissions the Fund will pay,
which may adversely affect performance. Higher turnover may also result in
increased distributions of taxable capital gains.
The Year 2000 Computer Problem
Many computer software systems historically could not distinguish the year 2000
from the year 1900 because of the way dates were encoded and calculated. To
date, it appears that the Adviser and third parties providing investment
advisory, administrative, transfer agent, custodial and other services were not
adversely affected by Year 2000 transition issues. Year 2000 issues, however,
may still arise. Difficulties with Year 2000 issues could have a negative
impact on handling securities trades, payments of interest and dividends,
pricing, and account services. Although there can be no assurance that there
will be no adverse impact on the Fund, the service providers have advised the
Fund that they have implemented changes to their computer systems and expect
that their systems, and those of parties they deal with, will not experience any
material Year 2000 difficulties. In addition, there can be no assurance that
the issuers of securities that the Fund owns will not experience difficulties
with Year 2000 issues which may negatively affect the market value of those
securities.
6
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MANAGEMENT
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Who Manages the Fund?
A number of entities provide services to the Fund. This section shows how the
Fund is organized, the entities that perform these services, and how these
entities are compensated. Additional information on the organization of the Fund
is provided in the RREEF RReal Estate Securities Fund Statement of Additional
Information. For information on how to receive this document, see the back cover
of this prospectus.
The Board of Trustees
The Board of Trustees oversees the management of the Fund and meets at least
quarterly to review reports about Fund operations. Although the Board of
Trustees does not manage the Fund, it has hired RREEF America L.L.C. (the
"Adviser") to do so. A majority of the trustees are independent of the Adviser
(they are not employed by and have no financial interest in the Adviser).
The Investment Adviser
The Adviser is located at 875 North Michigan Avenue, 41st Floor, Chicago,
Illinois 60611.
The Adviser is responsible for managing the investment portfolios of the Fund
and directing the purchase and sale of its investment securities. The Adviser
also arranges for transfer agency, custody and all other services necessary for
the Fund to operate.
For the services it provides to the Fund, the Adviser receives a unified
management fee of 1.00% of the average net assets of the shares of the Fund. The
amount of the management fee is calculated on a daily basis and paid monthly.
The Statement of Additional Information contains detailed information about the
calculation of the management fee. Out of that fee, the Adviser pays all
expenses of managing and operating the Fund except brokerage expenses, taxes,
interest, fees and expenses of the independent trustees (including legal counsel
fees), and extraordinary expenses. A portion of the management fee may be paid
by the Adviser to unaffiliated third parties who provide recordkeeping and
administrative services.
The Investment Adviser's Past Performance with a Similar Fund
The Adviser manages the investment program of the mutual fund now known as the
RREEF RReal Estate Securities Fund of the RREEF Securities Trust, and is
primarily responsible for the day-to-day management of the Fund's portfolio.
Previously, the Adviser was the sole investment manager of a similar mutual fund
which was known as the RREEF Real Estate Securities Fund, a portfolio of RREEF
Securities, Inc., from its inception on September 21, 1995 through June 13,
1997. In 1997, this RREEF Real Estate Securities Fund merged with and into
American Century Capital Portfolios, Inc.'s Real Estate Fund (the "American
Century fund"). The American Century fund was managed by the Adviser, as
investment subadviser, in a manner substantially similar to the Fund since its
inception on June 13, 1997, through December 31, 1999. Effective at the close of
business on December 31, 1999, the Adviser ceased managing the American Century
fund. At December 31, 1999, that fund had $118.5 million in net assets. As
subadviser to the American Century
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Real Estate Fund, the Adviser had full discretionary authority over the
selection of investments. The Adviser manages the RREEF RReal Estate Securities
Fund with the same investment objective, material policies, restrictions and
principal investment strategy that it used in managing the American Century
fund. Calendar Year and Average Annual Total Returns of the American Century
fund, under the investment management of the Adviser, are listed below.
[BAR CHART APPEARS HERE]
1996 40.81%
1997 25.21%
1998 -18.10%
1999 -2.71%
American Century Real Estate Fund
Calendar Year Total Returns*
(As of December 31 of Each Year)
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Best Quarter 4th Quarter 1996 19.92%
Worst Quarter 3rd Quarter 1998 (13.35%)
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<CAPTION>
Average Annual Total Returns*
(for the periods ended
December 31, 1999) Past 1 Year Life of Fund
<S> <C> <C>
American Century
Real Estate Fund (2.71%) 9.51%
Wilshire REIT Index** (2.49%) 7.88%
</TABLE>
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*Reflects total annual fund operating expenses of 1.20%. The Class A shares and
the Class B shares of the RREEF RReal Estate Securities Fund are estimated to
have total annual fund operating expenses of 1.00% and 1.25%, respectively.
**The Wilshire REIT Index is a market cap index of equity securities issued by
equity real estate investment trusts (REITs). An investor cannot invest in an
index. Life of Fund number is from 9/30/95, the nearest date for which data is
available.
The American Century Real Estate Fund is a separate fund and its historical
performance is not indicative of the potential performance of the Fund. The
"Life of Fund" index figure includes returns from September 30, 1995. Past
performance is not a guarantee of future results. Share prices and investment
returns will fluctuate reflecting market conditions.
The Fund Management Team
The Fund's portfolio is managed by the Adviser through a management team led by
two portfolio managers.
Kim G. Redding
Mr. Redding, Portfolio Manager, is a Senior Vice President and Principal of
RREEF America L.L.C. From 1990 to 1993, he was a principal in K.G. Redding &
Associates, an investment adviser, and was previously the President of Redding,
Melchor & Company, an investment adviser. He has been managing portfolios of
real estate securities since 1987.
Karen J. Knudson
Ms. Knudson, Portfolio Manager, is a Senior Vice President and Principal of
RREEF America L.L.C. Prior to joining RREEF, she was a Senior Vice President and
Chief Financial Officer for Security Capital Group, an investment adviser. She
has more than 16 years of real estate investment experience, specializing in
real estate investment trusts.
Custodian
UMB Bank, N.A.
928 Grand Boulevard, 10th floor
Kansas City, Missouri 64106
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Transfer Agent and Administrator
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 315
Milwaukee, Wisconsin 53202
Distributor
Sunstone Distribution Services, LLC
207 East Buffalo Street, Suite 315
Milwaukee, Wisconsin 53202
MULTIPLE CLASS INFORMATION
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The RREEF RReal Estate Securities Fund offers two classes of shares, Class A and
Class B, both of which are offered by this prospectus. Class A shares are sold
directly by the Fund through Sunstone Distribution Services, LLC, the Fund's
Distributor. Class B shares are sold by the Distributor to broker-dealers,
financial advisers, and other financial intermediaries.
Class A shares are subject to a management fee of 1.00% and are not subject to
any distribution fees. Class B shares are subject to a management fee of 1.00%
and also to a distribution fee of 0.25%. The difference in the fee structure
between the two classes is the result of separate arrangements for shareholder
and distribution services and not the result of any difference in amounts
charged by the Adviser for its investment advisory services. Different fees and
expenses will affect performance.
Both classes of the Fund have identical voting, dividend, liquidation, and other
rights, preferences, terms, and conditions. The only differences between the two
classes are
. each class is subject to different expenses,
. each class has a different identifying designation or name, and
. each class has exclusive voting rights with respect to matters solely
affecting that class.
Distribution Fees
The Fund has adopted a plan under Investment Company Act Rule 12b-1 covering
distribution fees for the Class B shares. The plan allows the Fund to pay
distribution and other fees for the distribution of its shares and for services
provided to shareholders by broker-dealers, financial advisers, or other
financial intermediaries other than the Distributor. Class B shares pay
distribution fees of 0.25% of average annual net assets. Because the fees are
paid out of the Fund's assets on an ongoing basis, over time these fees will
increase the cost of an investment in the Class B shares and may cost you more
than paying other types of sales charges.
SHAREHOLDER INFORMATION
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This section describes how you may buy, sell and exchange shares in the RREEF
RReal Estate Securities Fund, how an investment in the Fund is valued, how money
is earned on an investment and how those earnings are taxed by the government.
Buying and Selling Shares
Subject to a minimum initial investment of $10,000.00 ($1,000.00 for tax
sheltered accounts such as IRAs and similar accounts) and minimum subsequent
investments of $1,000.00, you may invest any amount you choose, as often as you
want.
Opening an Account and
Making the Initial Purchase of Shares
You may open an account and purchase shares of the Fund by completing and
signing an investment application form. Mail it, together with a check (subject
to the minimum amounts) made payable to RREEF RReal Estate Securities Fund, to
the Transfer Agent at:
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By Mail
RREEF RReal Estate Securities Fund
c/o Sunstone Financial Group, Inc.
P.O. Box 1147
Milwaukee, WI 53201-1147
By Overnight Courier
RREEF RReal Estate Securities Fund
c/o Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
If your check does not clear, you will be charged $20.00 and will be responsible
for any loss incurred. If you are already a shareholder, the Fund can redeem
shares from any identically registered account in the Fund as reimbursement for
any loss incurred. You may be prohibited or restricted from making future
purchases in the Fund.
By Wire
You may purchase shares of the Fund by wiring federal funds from your bank. If
money is to be wired, you must call Sunstone Financial Group, Inc., the Fund's
Transfer Agent, at 1-888-897-8480 to set up a new account. Once you have been
issued an account number by the Transfer Agent, you must contact your bank to
place your wire order. You will need to provide your bank with the following
information:
UMB Bank, N.A.
ABA # 101000695
Attn: RREEF RReal Estate Securities Fund
Acct # 9870984865
Account Name
(write in shareholder name)
Shareholder Account #
(write in account #)
You must mail a signed application to the Transfer Agent at the above address in
order to complete your initial wire purchase. Any delays which may occur in
wiring money, including delays which may occur in processing by the bank, are
not the responsibility of the Fund or the Transfer Agent. Your bank may also
charge you a fee for wiring funds. A wire purchase will not be considered made
until the wired money is received and the purchase is accepted.
You should contact the Transfer Agent for the procedure to open an IRA, Roth IRA
or SEP plan, as well as more specific information regarding these retirement
plan options. Consultation with an attorney or tax adviser regarding these plans
is advisable. Custodial fees for tax sheltered accounts will be paid by the
shareholder by redemption of sufficient shares of the Fund from the account
unless the fees are paid directly to the custodian. You can obtain information
about the custodial fees from the Transfer Agent.
Buying More Shares
You may purchase additional shares of the Fund at any time (minimum of
$1,000.00) by mail or wire. Each additional purchase request must contain your
account registration and your account number(s). Checks should be made payable
RREEF RReal Estate Securities Fund and should be sent to the Transfer Agent's
address. A bank wire should be sent as indicated in "By Wire."
Making Automatic Investments
You may arrange to make additional investments ($1,000.00 minimum) automatically
via transfers from your checking account. You may choose to have the withdrawals
made on the 5th, 10th, 15th, 20th, 25th or last day of each month. You must
complete the optional automatic investment plan section of the investment appli-
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cation and provide the Transfer Agent with a voided check to institute this
option. You may terminate this automatic investment program at any time in
writing or by calling the Transfer Agent at 1-888-897-8480. The Fund may modify
or terminate the plan at any time.
When Your Purchase Is Processed
Your purchase of shares of the Fund will be effected at the next share price
calculated after the close of business on the day your investment is received by
the Transfer Agent. See also "Other Purchase and Redemption Policies" on page
13.
The Fund does not issue share certificates. All shares are held in non-
certificated form registered on the books of the Fund and the Fund's Transfer
Agent for the account of the shareholder. The Fund reserves the right to limit
the amount of purchases and to refuse to sell to any person.
Selling Your Shares (Redemptions)
You may sell, or redeem, your Fund shares at any time. The minimum redemption
amount allowed is $10,000 and the maximum redemption allowed without a signature
guarantee is $50,000. The price you receive will be the next net asset value
calculated after the Funds receive your request in good order.
There is no charge to redeem shares except if you redeem by wire ($10.00) or if
you redeem from an IRA account ($12.50) (detailed in your IRA Disclosure
Statement & Custodial Account Agreement) to cover tax reporting. The Fund may
withhold taxes on IRA redemptions to meet federal law requirements.
You May Sell Your Shares
By Mail or Courier
Send the Fund your unconditional written request with:
. the number of shares or dollar amount to be redeemed;
. the name(s) on the account registration;
. the account number;
. signature - exactly as it appears in the
account registration; and
. documentation required for corporate, partnership or fiduciary accounts.
Call 1-888-897-8480 for details.
If you are redeeming from an IRA, please tell us the proper tax withholding on
your redemption request. If you do not make your selection on your IRA
Application, we will automatically withhold 10% of your redemption proceeds.
You will need a signature guarantee if:
. the amount to be redeemed is more than $50,000;
. the proceeds are to be sent to someone other than the shareholders of record
or to somewhere other than the address of record; or
. the request is made within 30 days of an address change.
See "signature guarantees," under "Other Purchase and Redemption Policies" on
page 14.
By Mail
RREEF RReal Estate Securities Fund
P.O. Box 1147
Milwaukee, WI 53201-1147
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By Overnight Courier
RREEF RReal Estate Securities Fund
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
By Telephone
. If you did not waive this privilege on your New Account Application, you may
call the Fund at 1-888-897-8480 to redeem share amounts of $10,000 to
$50,000. You must request all redemptions exceeding $50,000 in writing with
all signatures guaranteed.
. The Funds will mail proceeds to your address of record or send by wire to
the bank account listed in your records.
. The Fund reserves the right to refuse a telephone redemption request and
does not accept redemption requests via fax.
Redemption of Shares in Low-Balance Accounts
If your balance or the balance of your financial intermediary, if applicable,
falls below the minimum investment requirements due to redemptions, we will
notify you and give you 90 days to meet the minimum. If you do not meet the
deadline, the Fund will redeem the shares in the account and send the proceeds
to your address of record.
Abusive Trading Practices
The Fund does not permit market timing or other abusive trading practices.
Excessive, short-term (market-timing) or other abusive trading practices may
disrupt portfolio management strategies and harm performance of the Fund. To
minimize harm to the Fund and its shareholders, we reserve the right to reject
any purchase order from any investor we believe has a history of abusive trading
or whose trading, in our judgment, has been or may be disruptive to the Fund. In
making this judgment, we may consider trading done in multiple accounts under
common ownership or control. We also reserve the right to delay delivery of your
redemption proceeds (up to seven days) or to honor certain redemptions with
securities, rather than cash, as described in the next section.
Special Requirements for Large Redemptions
If, during any 90-day period, you redeem Fund shares worth more than $250,000
(or 1% of the assets of the Fund if that percentage is less than this amount),
we reserve the right to pay part or all of the redemption proceeds in excess of
this amount in readily marketable securities instead of cash. If we make payment
in securities, we will value the securities selected by the Fund managers in the
same manner as we do in computing the Fund's net asset value. We may provide
these securities in lieu of cash without prior notice.
If your redemption would exceed this limit and you would like to avoid being
paid in securities, please provide us with an unconditional instruction to
redeem at least 15 days prior to the date on which the redemption transaction is
to occur. The instruction must specify the dollar amount or number of shares to
be redeemed and the date of the transaction. This minimizes the effect of the
redemption on the Fund and its remaining shareholders.
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<PAGE>
Investing Through Financial Intermediaries
If you do business with us through a financial intermediary or a retirement
plan, your ability to purchase, exchange and redeem shares will depend on the
policies of that entity. Some policy differences may include:
. Minimum investment requirements;
. Fund choices; and
. Cut-off time for investments.
Please contact your financial intermediary or plan sponsor for a complete
description of its policies. Copies of the Fund's Annual Report and Statement of
Additional Information are available from your intermediary or plan sponsor.
Certain financial intermediaries perform recordkeeping and administrative
services for their clients that would otherwise be performed by the Fund's
Transfer Agent. In some circumstances, the Fund will pay the service provider a
fee for performing those services.
Although transactions in Fund shares may be made directly with the Fund at no
charge, you also may purchase, redeem and exchange Fund shares through financial
intermediaries that charge a transaction-based or other fee for their services.
Those charges are retained by the intermediary and are not shared with the Fund.
The Fund has contracts with certain financial intermediaries requiring them to
track the time investment orders are received and to comply with procedures
relating to the transmission of orders. The Fund has authorized those
intermediaries to accept orders on its behalf up to the time at which the net
asset value is determined. If those orders are transmitted to the Fund and paid
for in accordance with the contract, they will be priced at the net asset value
next determined after your request is received in the form required by the
intermediary on the Fund's behalf. Financial intermediaries include banks,
broker-dealers, insurance companies and investment advisers.
Other Purchase and Redemption Policies
Good Order
The Fund must receive your request to buy or sell shares in good order. The
request must include:
. Your account number;
. The number or dollar amount of shares you want to buy or sell;
. Signatures of all owners, exactly as registered on the account;
. Signature guarantees for redemption requests over $50,000; and
. Any documentation required for redemptions by estates, trusts and other
organizations.
Telephone Transactions
Unless you waive telephone privileges on your new account application, you
automatically have the privilege to make telephone inquiries, exchanges and
redemptions. Once your account is established, you must make requests to change
these privileges in writing, signed by each registered holder of the account,
with all signatures guaranteed. A notary public is not an acceptable guarantor.
The Fund, the Adviser, the Transfer Agent and the Custodian will take reasonable
measures to prevent unauthorized telephone transactions and will not be liable
for such transactions. The
13
<PAGE>
Fund reserves the right to refuse a telephone transaction.
The Funds may delay payment for up to 10 days after receiving a redemption
request, to allow checks used to purchase Fund shares to clear.
If the dollar amount you request to be redeemed is less than the current account
value (as determined by the NAV on the redemption date), the Fund will redeem
your entire account balance.
During times of extreme market activity it is possible that shareholders may
have some difficulty in contacting the Fund by telephone. You may mail your
redemption requests as described previously. The Fund may also suspend
redemptions if the New York Stock Exchange closes, or for other emergencies.
Signature Guarantees
Generally, whenever you change your account privileges, your bank information,
or your registration information, you need signature guarantees for each
registered holder. You also need signature guarantees when proceeds from
redemption requests are to be sent to someone other than the shareholders of
record or to somewhere other than the address of record, or if a redemption
request is made within 30 days of an address change. These guarantee
requirements help protect you from fraud. You can have signatures guaranteed by
a U.S. commercial bank or trust company, a member of the National Association of
Securities Dealers, Inc., or other eligible institutions. A notary public is not
acceptable.
SHARE PRICE AND DISTRIBUTIONS
- -----------------------------
Share Price
The Administrator determines the Net Asset Value ("NAV") of the Fund as of the
close of regular trading on the New York Stock Exchange (the "Exchange")
(usually 4:00 p.m. Eastern Time) on each day the Exchange is open. On days when
the Exchange is not open (including certain U.S. holidays), the Adviser does not
calculate the NAV. The NAV of a Fund share is the current value of the Fund's
assets, minus any liabilities, divided by the number of Fund shares outstanding.
If current market prices of securities owned by the Fund are not readily
available, the Adviser may determine their fair value in accordance with
procedures adopted by the Fund's Board of Trustees. Therefore, the value of the
Fund's portfolio may be affected on days when you cannot purchase or redeem
shares of the Fund.
We will price your purchase, exchange or redemption at the NAV next determined
after we receive your transaction request in good order.
Distributions
Federal tax law requires the Fund to make distributions to its shareholders in
order to qualify as a "regulated investment company." Qualification as a
regulated investment company means that the Fund itself will not be subject to
state or federal income tax on amounts distributed. The distributions generally
consist of dividends and interest received, as well as capital gains realized on
the sale of investment securities.
The Fund pays distributions of substantially all of its income quarterly.
Distributions from real-
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<PAGE>
ized capital gains are paid annually, usually in December. The Fund may make
more frequent distributions if necessary to comply with Internal Revenue Code
provisions. Distributions are reinvested automatically in additional shares
unless you choose another option.
You will participate in Fund distributions when they are declared, starting on
the day after your purchase is effective. For example, if you purchase shares on
a day that a distribution is declared, you will not receive that distribution.
If you redeem shares, you will receive any distribution declared on the day you
redeem. If you redeem all shares, we will include any distribution received with
your redemption proceeds.
Participants in employer-sponsored retirement or savings plans must reinvest all
distributions. For shareholders investing through taxable accounts, we will
reinvest distributions unless you elect to receive them in cash.
TAXES
- --------------------------------------------------------------------------------
The tax consequences of owning shares of the Fund will vary depending on whether
you own them through a taxable or tax-deferred account. Tax consequences result
from distributions by the Fund of dividend and interest income it has received
or capital gains it has generated through its investment activities. Tax
consequences also result from sales of Fund shares by investors after the net
asset value has increased or decreased.
Tax-Deferred Accounts
If you purchase Fund shares through a tax-deferred account, such as an IRA or a
qualified employer-sponsored retirement or savings plan, income and capital
gains distributions usually will not be subject to current taxation, but will
accumulate in your account under the plan on a tax-deferred basis. Likewise,
moving from one fund to another fund within a plan or tax-deferred account
generally will not cause you to be taxed. For information about the tax
consequences of making purchases or withdrawals through an employer-sponsored
retirement or savings plan, or through an IRA, please consult your plan
administrator, your summary plan description or a professional tax adviser.
Taxable Accounts
If you own Fund shares through a taxable account, distributions by the Fund and
sales by you of Fund shares may cause you to be taxed.
Taxability of Distributions
Fund distributions may consist of income earned by the Fund from sources such as
dividends and interest, or capital gains generated from the sale of Fund
investments. Distributions of income are taxed as ordinary income. Distributions
of capital gains are classified either as short-term (gains on Fund shares held
for 12 months or less), long-term (gains on Fund shares held for more than 12
months), or unrecaptured Section 1250 capital gains and are taxed as follows:
<TABLE>
<CAPTION>
Tax Rate for 15% Tax Rate for 28%
Type of Distribution Bracket Bracket or Above
<S> <C> <C>
Short-Term Ordinary Ordinary
Capital Gains income rate income rate
Long-Term
Capital Gains 10% 20%
Unrecaptured Section Ordinary
1250 Capital Gains income rate 25%
</TABLE>
The tax status of any distributions of capital gains is determined by how long
the Fund held the underlying security that was sold, not by
15
<PAGE>
how long you have been invested in the Fund or whether you reinvest your
distributions in additional shares or take them in cash. The Fund will send you
the tax status of Fund distributions for each calendar year in an annual tax
mailing (Form 1099-DIV) from the Fund.
The Fund may receive distributions of unrecaptured Section 1250 capital gains
from REITs. To the extent the Fund receives such distributions, unrecaptured
Section 1250 capital gains will be distributed to shareholders of the Fund.
Unrecaptured Section 1250 capital gains are named for the Internal Revenue Code
section that describes them and are frequently realized upon the sale of real
estate and are subject to a maximum tax rate of 25%. These gains are received by
the Fund from its REIT securities and are then subsequently passed through to
shareholders.
Because of the nature of REIT investments, REITs may generate significant non-
cash deductions, such as depreciation on real estate holdings, while generating
a greater cash flow to their shareholders. If a REIT distributes more cash flow
than it has taxable income, a return of capital results. A return of capital
represents the return of a portion of a shareholder's original investment that
is generally non-taxable when distributed, or returned, to the investor. The
Fund may pay a return of capital distribution to its shareholders by
distributing more cash than its taxable income. If you do not reinvest
distributions, the cost basis of your shares will be decreased by the amount of
returned capital, which may result in a larger capital gain when you sell your
shares. Although a return of capital generally is not taxable to you upon
distribution, it would be taxable to you as a capital gain if your cost basis in
the shares is reduced to zero. This could occur if you do not reinvest
distributions and the returns of capital are significant.
Taxes on Distributions
Distributions also may be subject to state and local taxes. Because everyone's
tax situation is unique, always consult your tax professional about federal,
state and local tax consequences.
Because the REITs invested in by the Fund do not provide complete information
about the taxability of their distributions until after the calendar year end,
the Fund may not be able to determine how much of the Fund's distribution is
taxable to shareholders until after the January 31 deadline for issuing Form
1099-DIV. As a result, the Fund may request permission from the Internal Revenue
Service each year for an extension of time to issue Form 1099-DIV until February
28.
Buying a Dividend
Purchasing Fund shares in a taxable account shortly before a distribution is
sometimes known as buying a dividend. In taxable accounts, you must pay income
taxes on the distribution whether you reinvest the distribution or take it in
cash. In addition, you will have to pay taxes on the distribution whether the
value of your investment decreased, increased or remained the same after you
bought the Fund shares.
The risk in buying a dividend is that the Fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. We distribute those gains to you, after subtracting any losses, even
if you did not own the shares when the gains occurred.
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<PAGE>
If you buy a dividend, you incur the full tax liability of the distribution
period, but you may not enjoy the full benefit of the gains realized in the
Fund's portfolio.
Taxes on Transactions
Your redemptions are subject to capital gains tax. The table regarding the
taxability of distributions can provide a general guide for your potential tax
liability when selling or exchanging Fund shares. If your shares decrease in
value, their sale will result in a long-term or short-term capital loss.
However, you should note that any loss realized upon the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any distribution of long-term capital gains to you with respect
to such shares. If a loss is realized on the redemption of Fund shares, the
reinvestment in additional Fund shares within 30 days before or after the
redemption may be subject to the wash sale rules of the Internal Revenue Code.
This may result in a postponement of the recognition of such loss for federal
income tax purposes. Please consult your professional tax adviser for more
complete information.
If you have not certified to us that your Social Security number or tax
identification number is correct and that you are not subject to 31%
withholding, we are required to withhold and remit 31% of dividends, capital
gains distributions and redemptions to the IRS.
MORE INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
For more information about the RREEF RReal Estate Securities Fund, request a
free copy of the Statement of Additional Information or the Annual and Semi-
Annual Reports. The Statement of Additional Information provides more detailed
information about the Fund and its operations, investment restrictions, policies
and practices. Annual and Semi-Annual Reports to shareholders discuss the market
conditions and investment strategies that significantly affect the Fund's
performance and provide additional information about the Fund's investments.
The Fund's Statement of Additional Information has been filed electronically
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus.
You May Request These Documents
1 By Telephone. Call the Fund toll-free at 1-888-897-8480, Monday through
Friday, 7 a.m. to 7 p.m. Central Time. You may also call this number for
shareholder inquiries.
2 Via the Internet. Visit the SEC Web site at www.sec.gov.
3 From the SEC. You may obtain copies of the documents listed on the previous
page, for a duplicating fee, by writing the SEC's Public Reference Room,
Washington, DC, 20549-6009. For more information call 1-800-SEC-0330.
4 By Mail. Specify the document you are requesting when writing to us:
RREEF RReal Estate Securities Fund
c/o Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 315
Milwaukee, Wisconsin 53202
Distributed by Sunstone Distribution Services, LLC.
Investment Company Act File No. 811-09589.
17
<PAGE>
[RREEF LOGO]
STATEMENT OF ADDITIONAL INFORMATION
February 23, 2000
RREEF SECURITIES TRUST
RREEF RREAL ESTATE SECURITIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUND'S
PROSPECTUS, DATED FEBRUARY 23, 2000, BUT IS NOT A PROSPECTUS. THE STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S CURRENT
PROSPECTUS. IF YOU WOULD LIKE A COPY OF A PROSPECTUS, PLEASE CONTACT US AT P.O.
BOX 1147, MILWAUKEE, WI 53201-1147 OR 1-888-897-8480.
Distributed by
SUNSTONE DISTRIBUTION SERVICES, LLC
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S HISTORY.......................................................... 1
FUND INVESTMENT GUIDELINES.................................................. 1
DETAILED INFORMATION ABOUT THE FUND......................................... 2
INVESTMENT STRATEGIES AND RISKS........................................ 2
INVESTMENT POLICIES......................................................... 12
FUNDAMENTAL INVESTMENT POLICIES........................................ 12
NONFUNDAMENTAL INVESTMENT POLICIES..................................... 13
PORTFOLIO TURNOVER..................................................... 14
MANAGEMENT.................................................................. 15
TRUSTEES AND OFFICERS.................................................. 15
COMPENSATION OF TRUSTEES............................................... 16
THE FUND'S PRINCIPAL SHAREHOLDERS...................................... 17
INVESTMENT ADVISER..................................................... 17
OTHER ADVISORY RELATIONSHIPS........................................... 18
OTHER SERVICE PROVIDERS................................................ 18
OTHER INFORMATION ABOUT THE FUND............................................ 19
BROKERAGE ALLOCATION................................................... 19
CODE OF ETHICS......................................................... 20
DISTRIBUTION PLANS..................................................... 21
INFORMATION ABOUT FUND SHARES............................................... 22
THE SHARES OF THE TRUST................................................ 22
MULTIPLE CLASS STRUCTURE............................................... 23
RULE 12B-1............................................................. 23
VALUATION OF THE FUND'S SECURITIES..................................... 23
TAXES....................................................................... 24
FEDERAL INCOME TAXES................................................... 24
STATE AND LOCAL TAXES.................................................. 25
TAXATION OF CERTAIN MORTGAGE REITS..................................... 25
HOW PERFORMANCE IN THE FUND IS CALCULATED................................... 26
PERMISSIBLE ADVERTISING INFORMATION.................................... 27
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS.............................. 27
FINANCIAL INFORMATION....................................................... 30
MORE INFORMATION ABOUT THE FUND............................................. 35
</TABLE>
i
<PAGE>
THE FUND'S HISTORY
The RREEF RReal Estate Securities Fund (the "Fund") is the sole outstanding
series of RREEF Securities Trust (the "Trust"), an open-end investment company
established as a business trust under the laws of Delaware by an Agreement and
Declaration of Trust dated September 15, 1999 (the "Trust Agreement"). The
fiscal year of the Trust ends on November 30.
FUND INVESTMENT GUIDELINES
This section explains the extent to which the Fund's investment adviser, RREEF
America L.L.C. (the "Adviser"), can use various investment vehicles and
strategies in managing the Fund's assets. Descriptions of the investment
techniques and risks associated with the Fund appear in the section, "Detailed
Information About the Fund," which begins on page 2. In the case of the Fund's
principal investment strategies, these descriptions elaborate upon discussions
contained in the Prospectus.
The Fund is a non-diversified, open-end investment company as defined in the
Investment Company Act of 1940 (the "Investment Company Act"). Non-diversified
means that the proportion of the Fund's assets that may be invested in the
securities of a single issuer is not limited by the Investment Company Act.
To meet federal tax requirements for qualification as a regulated investment
company, the Fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S. government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
In general, within the restrictions outlined here and in the Fund's Prospectus,
the Adviser has broad powers to decide how to invest Fund assets, including the
power to hold them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is the Adviser's policy to retain maximum flexibility in
management without restrictive provisions as to the proportion of one or another
class of securities that may be held, subject to the investment restrictions
described below. It is the Adviser's intention that the Fund generally will
consist of common stocks and equity-equivalent securities. However, subject to
the specific limitations applicable to the Fund, the Adviser may invest the
assets of the Fund in varying amounts using other investment techniques, such as
those reflected below, when such a course is deemed appropriate in order to
attempt to attain the Fund's investment objective. Senior securities that are
high-grade issues, in the opinion of the Adviser, also may be purchased for
defensive purposes.
Current income is part of the Fund's objective. As a result, a portion of the
portfolio of the Fund may consist of debt securities.
So long as a sufficient number of acceptable securities are available, the
Adviser intends to keep the Fund fully invested. However, under exceptional
conditions, the Fund may assume a
1
<PAGE>
defensive position, temporarily investing all or a substantial portion of its
assets in cash or short-term securities.
The Adviser may use stock index futures and options as a way to expose the
Fund's cash assets to the market while maintaining liquidity. However, the
Adviser may not leverage the Fund's portfolios, so there is no greater market
risk to the funds than if they purchase stocks. See DERIVATIVE SECURITIES and
SHORT-TERM SECURITIES and FUTURES AND OPTIONS.
DETAILED INFORMATION ABOUT THE FUND
INVESTMENT STRATEGIES AND RISKS
This section describes various investment vehicles and techniques that the
Adviser can use in managing the Fund's assets. It also details the risks
associated with each, because each technique contributes to the Fund's overall
risk profile.
EQUITY EQUIVALENTS
In addition to investing in common stocks, the Fund may invest in other equity
securities and equity equivalents, including securities that permit the Fund to
receive an equity interest in an issuer, the opportunity to acquire an equity
interest in an issuer, or the opportunity to receive a return on its investment
that permits the Fund to benefit from the growth over time in the equity of an
issuer. Examples of equity securities and equity security equivalents include
preferred stock, convertible preferred stock and convertible debt securities.
The Fund will limit its holdings of convertible debt securities to those that,
at the time of purchase, are rated at least B- by Standard & Poor's Corporation
("S&P") or B3 by Moody's Investors Service ("Moody's"), or, if not rated by S&P
and Moody's, are of equivalent investment quality as determined by the Adviser.
The Fund's investments in convertible debt securities and other high-yield/high-
risk, nonconvertible debt securities rated below investment-grade will comprise
less than 35% of the Fund's net assets. Debt securities rated below the four
highest categories are not considered "investment-grade" obligations. These
securities have speculative characteristics and present more credit risk than
investment-grade obligations.
Equity equivalents also may include securities whose value or return is derived
from the value or return of a different security.
DEBT SECURITIES
The Fund may invest in debt securities because the Fund has the creation of
income as a secondary investment objective. As a result, the Fund may invest in
debt securities when the Adviser believes such securities represent an
attractive investment for the Fund. It is intended that the Fund may invest in
debt securities for income or as a defensive strategy when the Adviser believes
adverse economic or market conditions exist.
The value of the debt securities in which the Fund may invest will fluctuate
based upon changes in interest rates and the credit quality of the issuer. Debt
securities that comprise part of the
2
<PAGE>
Fund's fixed-income portfolio will be limited primarily to "investment-grade"
obligations. However, the Fund may invest up to 5% of its assets in "high-
yield/high-risk" securities. "Investment grade" means that at the time of
purchase, such obligations are rated with the four highest categories by a
nationally recognized statistical rating organization (for example, at least Baa
by Moody's or BBB by S&P), or, if not rated, are of equivalent investment
quality as determined by the Adviser. According to Moody's, bonds rated Baa are
medium-grade and possess some speculative characteristics. A BBB rating by S&P
indicates S&P's belief that a security exhibits a satisfactory degree of safety
and capacity for repayment, but is more vulnerable to adverse economic
conditions and changing circumstances.
"High-yield" securities, sometimes referred to as "junk bonds," are higher risk,
non-convertible debt obligations that are rated below investment-grade
securities, or are unrated, but with similar credit quality.
There are no credit or maturity restrictions on the fixed-income securities in
which the high-yield portion of the Fund's portfolio may be invested. Debt
securities rated lower than Baa by Moody's or BBB by S&P or their equivalent are
considered by many to be predominantly speculative. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on such securities than is the case with
higher quality debt securities. Regardless of rating levels, all debt securities
considered for purchase by the Fund are analyzed by the Adviser to determine, to
the extent reasonably possible, that the planned investment is sound, given the
investment objective of the Fund.
The Fund will not necessarily dispose of high-yield securities if the aggregate
value of such securities exceeds 5% of the Fund's assets, if such level is
exceeded as a result of market appreciation of the value of such securities or
market depreciation of the value of the other assets of the Fund. Rather, the
Adviser will cease purchasing any additional high-yield securities until the
value of such securities is less than 5% of the Fund's assets and will monitor
such investments to determine whether continuing to hold such investments is
likely to assist the Fund in meeting its investment objectives.
In addition, the value of the Fund's investments in fixed-income securities will
change as prevailing interest rates change. In general, the prices of such
securities vary inversely with interest rates. As prevailing interest rates
fall, the prices of bonds and other securities that trade on a yield basis
generally rise. When prevailing interest rates rise, bond prices generally fall.
These changes in value may, depending upon the particular amount and type of
fixed-income securities holdings of the Fund, impact the net asset value of the
Fund's shares.
Notwithstanding the fact that the Fund will invest primarily in equity
securities, under adverse market or economic conditions, the Fund may
temporarily invest all or a substantial portion of its assets in cash or
investment-grade short-term securities (denominated in U.S. dollars or foreign
currencies).
To the extent that the Fund assumes a defensive position, it will not be
investing for capital growth.
3
<PAGE>
CONVERTIBLE DEBT SECURITIES
A convertible debt security is a fixed-income security that offers the potential
for capital appreciation through a conversion feature that enables the holder to
convert the fixed-income security into a stated number of shares of common
stock. As fixed-income securities, convertible debt securities provide a stable
stream of income with generally higher yields than common stocks. Because
convertible debt securities offer the potential to benefit from increases in the
market price of the underlying common stock, however, they generally offer lower
yields than non-convertible securities of similar quality. Of course, like all
fixed-income securities, there can be no assurance of current income because the
issuers of the convertible securities may default on their obligations. In
addition, there can be no assurance of capital appreciation because the value of
the underlying common stock will fluctuate.
Convertible debt securities generally are subordinated to other similar but non-
convertible debt securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Convertible debt securities that comprise part of the Fund's fixed-income
portfolio will be subject to the same limitations with respect to quality as
those described above under DEBT SECURITIES.
SHORT SALES
The Fund may engage in short sales, if, at the time of the short sale, the Fund
owns or has the right to acquire securities equivalent in kind and amount to the
securities being sold short.
In a short sale, the seller does not immediately deliver the securities sold and
is said to have a short position in those securities until delivery occurs. To
make delivery to the purchaser, the executing broker borrows the securities
being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Fund engages in a short sale, the collateral account will be
maintained by the Fund's custodian. While the short sale is open, the Fund will
maintain, in a segregated custodial account, an amount of securities convertible
into, or exchangeable for, such equivalent securities at no additional cost.
These securities would constitute the Fund's long position.
The Fund may make a short sale, as described above, when it wants to sell the
security it owns at a current attractive price, but also wishes to defer
recognition of gain or loss for federal income tax purposes. There will be
certain additional transaction costs associated with short sales, but the Fund
will endeavor to offset these costs with returns from the investment of the cash
proceeds of short sales.
4
<PAGE>
PORTFOLIO LENDING
In order to realize additional income, the Fund may lend its portfolio
securities. Such loans may not exceed one-third of the Fund's total assets
valued at market except (1) through the purchase of debt securities in
accordance with its investment objectives, policies and limitations, or (2) by
engaging in repurchase agreements with respect to portfolio securities.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, the Fund may
invest in securities that are commonly referred to as derivative securities.
Generally, a derivative is a financial arrangement, the value of which is based
on or derived from a traditional security, asset or market index. Certain
derivative securities are described more accurately as index/structured
securities. Index/structured securities are derivative securities whose value or
performance is linked to other equity securities (such as depository receipts),
currencies, interest rates, indices or other financial indicators (reference
indices).
Some derivatives, such as mortgage-related and other asset-backed securities,
are in many respects like any other investment, although they may be more
volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways to use
them. Futures and options are commonly used for traditional hedging purposes to
attempt to protect the Fund from exposure to changing interest rates, securities
prices or currency exchange rates, and for cash management purposes as a low-
cost method of gaining exposure to a particular securities market without
investing directly in those securities.
The Fund may not invest in a derivative security unless the reference index or
the instrument to which it relates is an eligible investment for the Fund. For
example, a security whose underlying value is linked to the price of oil would
not be a permissible investment because the Fund may not invest in oil and gas
leases or futures.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There are a range of risks associated with derivative investments, including:
. The risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the Adviser anticipates.
. The possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired.
. The risk that adverse price movements in an instrument can result in a loss
substantially greater than the Fund's initial investment.
. The risk that the counterparty will fail to perform its obligations.
5
<PAGE>
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in other mutual funds,
including those of the Adviser, if any, provided that the investment is
consistent with the Fund's investment policies and restrictions. Under the
Investment Company Act, the Fund's investment in such securities, subject to
certain exceptions, currently is limited to (a) 3% of the total voting stock of
any one investment company; (b) 5% of the Fund's total assets with respect to
any one investment company; and (c) 10% of the Fund's total assets in the
aggregate. Such purchases will be made in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than the customary
brokers' commissions. As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the management fee than the Fund bears directly in connection
with its own operations.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements when such transactions present an
attractive short-term return on cash that is not otherwise committed to the
purchase of securities pursuant to the investment policies of the Fund.
A repurchase agreement occurs when, at the time the Fund purchases an interest-
bearing obligation, the seller (a bank or a broker-dealer registered under the
Securities Exchange Act of 1934) agrees to purchase it on a specified date in
the future at an agreed-upon price. The repurchase price reflects an agreed-upon
interest rate during the time the Fund's money is invested in the security.
Because the security purchased constitutes a security for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The Fund's risk is the ability of the seller to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
Fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the Fund could experience a loss.
The Fund will limit repurchase agreement transactions to securities issued by
the U.S. government and its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy pursuant to criteria adopted by the Fund's Board of Trustees.
6
<PAGE>
The Fund will not invest more than 15% of its assets in repurchase agreements
maturing in more than seven days.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The Fund may sometimes purchase new issues of securities on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of such a security may decline prior to
delivery, which could result in a loss to the Fund. While the Fund will make
commitments to purchase or sell securities with the intention of actually
receiving or delivering them, it may sell the securities before the settlement
date if doing so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the Fund
will establish and maintain a segregated account consisting of cash, cash
equivalents or other appropriate liquid securities until the settlement date in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the Fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the Fund's criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered restricted securities, they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of the
Securities and Exchange Commission (the "SEC") has taken the position that the
liquidity of such securities in the portfolio of a fund offering redeemable
securities is a question of fact for the Board of Trustees to determine, based
upon a consideration of the readily available trading markets and the review of
any contractual restrictions. Accordingly, the Board of Trustees is responsible
for developing and establishing the guidelines and procedures for determining
the liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Trustees of the Fund has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the Adviser. The Board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.
7
<PAGE>
Because the secondary market for such securities is limited to certain qualified
institutional investors, the liquidity of such securities may be limited
accordingly and the Fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the Fund managers will consider
appropriate remedies to minimize the effect on the Fund's liquidity.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, to hold pending the purchase of
additional securities for the Fund's portfolio, or, in some cases, for temporary
defensive purposes, the Fund may invest a portion of its assets in money market
and other short-term securities.
Examples of those securities include:
. Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
. Commercial Paper;
. Certificates of Deposit and Euro Dollar Certificates of Deposit;
. Bankers' Acceptances;
. Short-term notes, bonds, debentures or other debt instruments; and
. Repurchase agreements.
In addition, the Fund may invest up to 5% of its total assets in any money
market fund, including those advised by the Adviser, if any.
FUTURES AND OPTIONS
The Fund may enter into futures contracts, options or options on futures
contracts. Generally, futures transactions may be used to:
. Protect against a decline in market value of the Fund's securities (taking
a short futures position);
. Protect against the risk of an increase in market value for securities in
which the Fund generally invests at a time when the Fund is not fully
invested (taking a long futures position); and
. Provide a temporary substitute for the purchase of an individual security
that may not be purchased in an orderly fashion.
Some future and options strategies, such as selling futures, buying puts and
writing calls, hedge the Fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
8
<PAGE>
Although other techniques may be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For example, the sale of a future by the Fund means the Fund becomes obligated
to deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the Fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. Futures contracts provide for the sale by one party and purchase
by another party of a specific security at a specified future time and price.
The Adviser may engage in futures and options transactions based on securities
indices that are consistent with the Fund's investment objectives. An example of
an index that may be used is the S&P 500(R) Index. The managers also may engage
in futures and options transactions based on specific securities, such as U.S.
Treasury bonds or notes. Futures contracts are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (the "CFTC"), a U.S.
government agency.
Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike the situation in which the Fund purchases or sells an equity security, no
price is paid or received by the Fund upon the purchase or sale of the future.
Initially, the Fund will be required to deposit an amount of cash or securities
equal to a varying specified percentage of the contract amount. This amount is
known as initial margin. The margin deposit is intended to ensure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. A margin deposit does not
constitute margin transactions for purposes of the Fund's investment
restrictions. Minimum initial margin requirements are established by the futures
exchanges and may be revised. In addition, brokers may establish margin deposit
requirements that are higher than the exchange minimums. Cash held in the margin
account is not income-producing. Subsequent payments to and from the broker,
called variation margin, will be made on a daily basis as the price of the
underlying debt securities or index fluctuates, making the future more or less
valuable, a process known as marking the contract to market. Changes in
variation margin are recorded by the Fund as unrealized gains or losses. At any
time prior to expiration of the future, the Fund may elect to close the position
by taking an opposite position that will operate to terminate its position in
the future. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or gain.
9
<PAGE>
Risks Related to Futures and Options Transactions
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the Adviser applies a hedge at an inappropriate time
or judges interest rate or equity market trends incorrectly, futures and options
strategies may lower the Fund's return.
The Fund could suffer losses if it is unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the Adviser considers it appropriate or desirable to do
so. In the event of adverse price movements, the Fund would be required to
continue making daily cash payments to maintain its required margin. If the Fund
had insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the Adviser would not otherwise elect to do
so. In addition, the Fund may be required to deliver or take delivery of
instruments underlying futures contracts it holds. The Adviser will seek to
minimize these risks by limiting the contracts entered into on behalf of the
Fund to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
The Fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by the Fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation may give rise
to circumstances in which the Fund loses money on a futures contract at the same
time that it experiences a decline in the value of its hedged portfolio
securities. The Fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Options on Futures
By purchasing an option on a futures contract, the Fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. The Fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the Fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require the Fund to make margin payments unless the option is exercised.
10
<PAGE>
Although it does not currently intend to do so, the Fund may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the Fund would give up some
ability to participate in a price increase on the underlying security. If the
Fund were to engage in options transactions, it would own the futures contract
at the time a call were written and would keep the contract open until the
obligation to deliver it pursuant to the call expired.
Restrictions on the Use of Futures Contracts and Options
Under the Commodity Exchange Act, the Fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for purposes other than
hedging, provided that assets committed to initial margin and option premiums do
not exceed 5% of the Fund's total assets. To the extent required by law, the
Fund will segregate cash or securities on its records in an amount sufficient to
cover its obligations under the futures contracts and options.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may purchase and sell foreign currency on a spot (i.e., cash) basis and
may engage in forward currency contracts, currency options and futures
transactions for hedging or any other lawful purpose. See DERIVATIVE
SECURITIES.
The Fund expects to use forward contracts under two circumstances:
(1) When the Adviser wishes to lock in the U.S. dollar price of a security when
the Fund is purchasing or selling a security denominated in a foreign currency,
the Fund would be able to enter into a forward contract to do so; or
(2) When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund would be able
to enter into a forward contract to sell foreign currency for a fixed U.S.
dollar amount approximating the value of some or all of its portfolio securities
either denominated in, or whose value is tied to, such foreign currency.
In the first circumstance, when the Fund enters into a trade for the purchase or
sale of a security denominated in a foreign currency, it may be desirable to
establish (lock in) the U.S. dollar cost or proceeds. By entering into forward
contracts in U.S. dollars for the purchase or sale of a foreign currency
involved in an underlying security transaction, the Fund will be able to protect
itself against a possible loss between trade and settlement dates resulting from
the adverse change in the relationship between the U.S. dollar and the subject
foreign currency.
Under the second circumstance, when the Adviser believes that the currency of a
particular country may suffer a substantial decline relative to the U.S. dollar,
the Fund could enter into a foreign contract to sell for a fixed dollar amount
the amount in foreign currencies approximating the value of some or all of its
portfolio securities either denominated in, or whose value is tied to, such
foreign currency. The Fund will segregate on its records cash or securities in
an amount sufficient to cover its obligations under the contract.
11
<PAGE>
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible because the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Adviser does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the Adviser
believes that it is important to have flexibility to enter into such forward
contracts when they determine that the Fund's best interests may be served.
At the maturity of the forward contract, the Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate the obligation to deliver the foreign currency by
purchasing an offsetting forward contract with the same currency trader
obligating the Fund to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the following restrictions apply at the time transactions are entered
into. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in the Fund's net assets will not be
considered in determining whether it has complied with its investment
restrictions.
FUNDAMENTAL INVESTMENT POLICIES
The Fund is subject to the following investment restrictions that are
fundamental and may not be changed without approval of a majority of the
outstanding votes of shareholders of the Fund, as determined in accordance with
the Investment Company Act.
Senior Securities. The Fund may not issue senior securities, except as permitted
under the Investment Company Act.
Borrowing. The Fund may not borrow money, except for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 33 1/3%
of the Fund's total assets.
Lending. The Fund may not lend any security or make any other loan if, as a
result, more than 33 1/3% of the Fund's total assets would be lent to other
parties, except (i) through the purchase
12
<PAGE>
of debt securities in accordance with its investment objectives, policies and
limitations, or (ii) by engaging in repurchase agreements with respect to
portfolio securities.
Real Estate. The Fund may not purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments. This policy shall not
prevent the Fund from investing in securities or other instruments backed by
real estate or securities of companies that deal in real estate or are engaged
in the real estate business.
Underwriting. The Fund may not act as an underwriter of securities issued by
others, except to the extent that the Fund may be considered an underwriter
within the meaning of the Securities Act of 1933 in the disposition of
restricted securities.
Commodities. The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments, provided
that this limitation shall not prohibit the Fund from purchasing or selling
options and futures contracts or from investing in securities or other
instruments backed by physical commodities.
Control. The Fund may not invest for purposes of exercising control over
management.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the Fund is subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Trustees.
Borrowings. The Fund may not purchase additional investment securities at any
time during which outstanding borrowings exceed 5% of the total assets of the
Fund.
Liquidity. The Fund may not purchase any security or enter into a repurchase
agreement if, as a result, more than 15% of its net assets would be invested in
repurchase agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by virtue of
legal or contractual restrictions on resale or the absence of a readily
available market.
Short Sales. The Fund may not sell securities short unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in futures contracts and options are not
deemed to constitute selling securities short.
Margin. The Fund may not purchase securities on margin, except to obtain such
short-term credits as are necessary for the clearance of transactions and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
Futures and Options. The Fund may enter into futures contracts, and write and
buy put and call options relating to futures contracts. The Fund may not,
however, enter into leveraged futures transactions if it would be possible for
the Fund to lose more money than it invested.
Issuers with Limited Operating Histories. The Fund may invest up to 5% of its
assets in the securities of issuers with limited operating histories. An issuer
is considered to have a limited
13
<PAGE>
operating history if that issuer has a record of less than three years of
continuous operation. Periods of capital formation, incubation, consolidations,
and research and development may be considered in determining whether a
particular issuer has a record of three years of continuous operation.
Concentration. The Fund may not invest 25% or more of its total assets in
securities of companies principally engaged in any one industry, except that the
Fund may invest without limitation in securities of companies engaged
principally in the real estate industry.
The Investment Company Act imposes certain additional restrictions upon
acquisition by the Fund of securities issued by insurance companies, broker-
dealers, underwriters or investment advisers, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership. Neither the SEC nor any other agency of the
federal or state government participates in or supervises the management of the
funds or their investment practices or policies.
For purposes of determining industry groups in connection with this restriction,
the SEC ordinarily uses the Standard Industry Classification codes developed by
the U.S. Office of Management and Budget. In the interest of ensuring adequate
diversification, the funds monitor industry concentration using a more
restrictive list of industry groups than that recommended by the SEC. The
Adviser believes that these classifications are reasonable and are not so broad
that the primary economic characteristics of the companies in a single class are
materially different. The use of these restrictive industry classifications may,
however, cause the Fund to forego investment possibilities that may otherwise
be available to it under the Investment Company Act.
PORTFOLIO TURNOVER
The Adviser will purchase and sell securities without regard to the length of
time the security has been held. Accordingly, the Fund's rate of portfolio
turnover may be substantial.
The Adviser intends to purchase a given security whenever it believes it
will contribute to the stated objective of the Fund. In order to achieve the
Fund's investment objectives, the Adviser may sell a given security, no matter
how long or how short a period it has been held in the portfolio, and no matter
whether the sale is at a gain or at a loss, if the Adviser believes that the
security is not fulfilling its purpose, either because, among other things, it
did not live up to the Adviser's expectations, or because it may be replaced
with another security holding greater promise, or because it has reached its
optimum potential, or because of a change in the circumstances of a particular
company or industry or in general economic conditions, or because of some
combination of such reasons.
Because investment decisions are based on the anticipated contribution of the
security in question to the Fund's objectives, the Adviser believes that the
rate of portfolio turnover is irrelevant when it believes a change is in order
to achieve the objectives. As a result, the Fund's annual portfolio turnover
rate cannot be anticipated and may be higher than other mutual funds with
similar investment objectives. Higher turnover would generate correspondingly
greater brokerage commissions, which is a cost the Fund pays directly. Portfolio
turnover also may affect the character of capital gains realized and distributed
by the Fund, if any, because short-term capital gains are taxable as ordinary
income. This disclosure regarding portfolio turnover is a statement of
fundamental policy and may be changed only by a vote of the shareholders.
14
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust's Board of Trustees has general supervisory responsibilities of the
Fund and supervises the Adviser's activities.
The names of the Trustees and executive officers of the Trust are shown below.
Each Trustee who is an "interested person" of the Trust, as defined in the
Investment Company Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Address and Principal Occupation(s)
Name Fund Position Age During Past 5 Years**
- ---- ------------- --- ---------------------
<S> <C> <C> <C>
Kim G. Redding* Chairman of the 44 875 N. Michigan Avenue, 41st Floor,
Board, President, Chicago, IL 60611
Chief Executive
Officer and Trustee Mr. Redding joined the Adviser in 1993. He
is currently a principal of RREEF America
L.L.C., in charge of the real estate
securities adviser, operations, and
co-manager of the Fund. Prior to joining
RREEF, Mr. Redding was the Principal for
K.G. Redding & Associates and President of
Redding, Melchor & Company, both real
estate investment advisers in California.
Peter J. Broccolo* Trustee, Vice 43 875 N. Michigan Avenue, 41st floor,
President and Chicago, Illinois 60611.
Assistant
Secretary Mr. Broccolo joined the Adviser in 1993.
He currently is a principal of RREEF America
L.L.C. Prior to joining RREEF, he was a Vice
President with LaSalle Partners from 1985
to 1993 and a Vice President of First
Chicago Corp., in Real Estate Lending from
1978 to 1985.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Address and Principal Occupation(s)
Name Fund Position Age During Past 5 Years**
- ---- ------------- --- ---------------------
<S> <C> <C> <C>
Karen J. Knudson* Vice President 42 875 N. Michigan Avenue, 41st floor,
Chicago, Illinois 60611.
Ms. Knudson joined RREEF in 1995. She is
currently a principal of RREEF America L.L.C.
Prior to joining RREEF, Ms. Knudson was Senior
Vice President and CFO of Security Capital Group
and an adviser to two NYSE listed REITS,
from January 1993 to January 1995. She
also acted as Real Estate Investment
Manager, Senior Vice President/Chief
Financial Officer of Bailard, Biehl and
Kaiser from November 1983 to January 1993.
Paula M. Ferkull* Secretary and 49 875 N. Michigan Avenue, 41st floor,
Treasurer Chicago, Illinois 60611.
Ms. Ferkull joined RREEF in 1979. She is
currently a principal of RREEF America L.L.C.
Nicholas C. Babson Trustee 53 875 N. Michigan Avenue, 41st floor, Chicago, Illinois 60611.
Prior to March 1, 1999, Mr. Babson was the Chairman and CEO
of Babson Bros. Co., a private, family owned business.
The Company was sold on March 1, 1999, at which time
Mr. Babson became President and CEO of Babson Holdings,
Inc., a holding company that manages the Babson family's assets.
Richard W. Burke Trustee 66 875 N. Michigan Avenue, 41st floor, Chicago,
Illinois 60611.
Mr. Burke is an attorney with Burke, Warren,
Mackay & Seritella, P.C., a law firm. He
also serves as Chairman of the Management
Committee for the firm.
Robert L. Stovall Trustee 67 875 N. Michigan Avenue, 41st floor, Chicago, Illinois 60611.
From 1994 to 1997, Mr. Stovall was CEO of CenterPoint Properties Trust
(CNT). Since 1997, he has been President of Four Columns, Ltd., an
Illinois Corporation.
</TABLE>
The Fund does not pay any direct remuneration to any Trustee who is an
"interested person" of the Fund, or any officer employed by the Adviser or its
affiliates. Trustees of the Fund who are not "interested persons" are paid an
annual retainer of $6,000, a fee of $1,000 per meeting attended and a fee of
$200 for each telephone conference meeting, plus expenses, with a maximum annual
fee of $10,000 per Trustee.
COMPENSATION OF TRUSTEES
During the first fiscal year from December 1, 1999 to November 30, 2000, it is
anticipated that the Fund will pay each of the Trustees who are not interested
persons of the Trust or Adviser the following estimate of total compensation:
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Annual Benefits From Fund
Compensation Accrued As Upon Paid To
Name From Fund Part of Fund Retirement Trustees
Expenses
<S> <C> <C> <C> <C>
Nicholas C. Babson $10,000 0 0 $10,000
Richard W. Burke $10,000 0 0 $10,000
Robert L. Stovall $10,000 0 0 $10,000
</TABLE>
16
<PAGE>
THE FUND'S PRINCIPAL SHAREHOLDERS
The following table lists the holders of five percent or more of the Fund's
Class A shares at February 2, 2000. No Class B shares were outstanding on that
date.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of Shares
of Owner Owned Outstanding
- ------------------------- ---------------------- -----------------------
<S> <C> <C>
Arntz Builders Profit 77,428.013 11.1%
Sharing Trust
19 Pamaron Way
Novato, CA 94949
Eugene S. Arntz Foundation 59,769.256 8.5%
19 Pamaron Way
Novato, CA 94949
Karen J. Knudson 82,437.576 11.8%
2237 N. Wayne
Chicago, IL 60614
Kim G. Redding 43,269.269 6.2%
1951 N. Kenmore Ave.
Chicago, IL 60614
UMB Bank Trust 381,467.399 54.5%
RREEF Management Company
Tax Deferred Savings Plan
P.O. Box 419602
Kansas City, MO 64141-6692
</TABLE>
At February 2, 2000, the trustees and officers of the Fund owned 18.0% of the
Fund's outstanding Class A shares.
INVESTMENT ADVISER
The Adviser has provided real estate investment management services to
institutional investors since 1975, and has been an investment adviser of real
estate securities since 1993. A description of the responsibilities of the
Adviser appears in the Prospectus under the heading "Management."
For the services provided to the Fund, the Adviser receives an annual fee based
on 1.00% of the average net assets of the Fund, payable monthly.
Each month, the Fund pays the Adviser for the previous month at the specified
rate. The fee for the previous month is calculated by multiplying the applicable
fee for the Fund by the aggregate average daily closing value of the Fund's net
assets during the previous month. This number is then multiplied by a fraction,
the numerator of which is the number of days in the previous month and the
denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution, and for as long
thereafter as its continuance is specifically approved, at least annually by (1)
the Trust's Board of Trustees, or by the vote of a majority of outstanding votes
(as defined in the Investment Company Act) and (2) the vote of a majority of the
Trustees of the Fund who are not parties to the agreement or interested persons
of the Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
The management agreement provides that it may be terminated at any time without
payment of any penalty by the Trust's Board of Trustees, or by a vote of a
majority of outstanding votes, on 60 days' written notice to the Adviser, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the Adviser shall not be liable to the
Fund or its shareholders for anything other than willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and duties. The
management agreement also provides that the Adviser and its officers, directors
and employees may engage in other business, devote time and attention to any
other business whether of a similar or dissimilar nature, and render services to
others.
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Certain investments may be appropriate for the Fund and also for other clients
advised by the Adviser. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or the Fund, or in different amounts
and at different times for more than one but less than all clients or the Fund.
In addition, purchases or sales of the same security may be made for two or more
clients or the Fund on the same date. Such transactions will be allocated among
clients in a manner believed by the Adviser to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by the Fund.
OTHER ADVISORY RELATIONSHIPS
In addition to managing the Fund, the Adviser also served as an investment
adviser to the American Century Real Estate Fund (through December 31, 1999) and
currently serves as investment adviser to various institutional accounts
investing in real estate securities. As of December 31, 1999, the Adviser had
net assets under management of $12.4 billion (including assets in non-securities
real estate accounts), of which $1.6 billion represented assets in real estate
securities accounts.
OTHER SERVICE PROVIDERS
TRANSFER AGENT AND ADMINISTRATOR
Sunstone Financial Group, Inc., serves as Transfer Agent and, dividend-paying
agent for the Fund, and Administrator. It provides physical facilities, computer
hardware and software and personnel, for the day-to-day administration of the
Fund and of the Adviser. The Adviser pays the Transfer Agent and Administrator
for such services.
DISTRIBUTOR
The Fund's shares are distributed by Sunstone Distribution Services, LLC, a
registered broker-dealer and affiliate of Sunstone Financial Group, Inc., the
Fund's Transfer Agent and Administrator.
The distributor is the principal underwriter of the Fund's shares. The
distributor makes a continuous, best-efforts underwriting of the Fund's shares.
This means that the distributor has no liability for unsold shares.
CUSTODIAN BANK
UMB Bank, N.A., 928 Grand Boulevard, 10th floor, Kansas City, Missouri
64106, serves as custodian of the assets of the Fund. The custodian takes no
part in determining the investment policies of the Fund or in deciding which
securities are purchased or sold by the Fund. The
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Fund, however, may invest in certain obligations of the custodian and may
purchase or sell certain securities from or to the custodian.
INDEPENDENT AUDITORS
Deloitte & Touche LLP are the independent auditors of the Fund. The address of
Deloitte & Touche LLP is Two Prudential Plaza, 180 North Stetson Avenue,
Chicago, Illinois 60601. As the independent auditors of the Fund, Deloitte &
Touche provide services including (1) audit of the annual financial statements
for the Fund, (2) assistance and consultation in connection with SEC filings,
and (3) review of the annual federal income tax return filed for the Fund.
LEGAL COUNSEL
The firm of D'Ancona & Pflaum LLC, 111 East Wacker Drive, Suite 2800, Chicago,
Illinois 60601, acts as legal counsel to the Fund.
OTHER INFORMATION ABOUT THE FUND
BROKERAGE ALLOCATION
Subject to policies established by the Board of Trustees of the Trust, the
Adviser is responsible for the Trust's portfolio decisions and the placing of
the Trust's portfolio transactions. In placing portfolio transactions, the
Adviser seeks the best qualitative execution for the Trust, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. The Adviser generally seeks favorable prices and commission
rates that are reasonable in relation to the benefits received.
Ongoing portfolio brokerage decisions for the Fund are made or recommended by
the Adviser, including the commission rates at which transactions for the Fund
will be effected, with the objective of obtaining the most favorable price and
market for the execution of each transaction. In seeking the most favorable
price and market for execution, the Adviser evaluates a wide range of criteria,
including the broker's commission rate, execution, capability, positioning and
distribution capabilities, back office efficiency, ability to handle difficult
trades, financial stability and prior performance. When circumstances relating
to a proposed transaction indicate that a particular broker or dealer is in a
position to obtain the best execution, the order generally is placed with that
broker or dealer. This may or may not be a broker or dealer which has provided
investment information and research services to the Adviser. The Adviser may not
always place brokerage transactions on the basis of the lowest commission rate
available for a particular transaction.
Research information received from brokers or dealers covers a wide range of
topics, including the economic outlook, the political environment, demographic
and social trends, and individual company and industry analysis. Subject to the
requirement of seeking the best available prices and execution, the Adviser may,
in circumstances in which two or more broker-dealers are in a position to offer
comparable prices and execution, give preference to broker-dealers which have
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provided research, statistical, and other related services to the Adviser for
the benefit of the Fund.
Since the Adviser may be managing accounts with similar investment objectives,
the Adviser may aggregate orders for securities for such accounts. In such
event, allocation of the securities so purchased or sold, as well as expenses
incurred in the transaction, are made by the Adviser in the manner it considers
to be the most equitable and consistent with its fiduciary obligations to such
accounts.
The Adviser reserves the right, without notice, to enter into arrangements to
receive brokerage and research products and services in exchange for the
direction of brokerage business to a particular broker or brokers. Such products
and services may include research materials, or equipment and software allowing
access to research-related computer services, such as quotation services, and
may be used for both research and other purposes, including administration and
marketing. The Adviser makes a good faith effort to determine the relative
proportions of such products or services which may be attributed to research.
The portion attributable to research may be paid through client brokerage
commissions and the non-research portion will be paid in cash by the Adviser.
The Adviser uses such arrangements to enhance the advice provided to clients.
Because all clients are managed in the same manner, no one client receives more
benefit than any other from these arrangements with the broker. The research
provided by broker-dealers may be used in servicing any or all of the Adviser's
clients and may be used in connection with accounts other than those which pay
commissions to the broker-dealer providing the research.
Over-the-counter transactions will be placed either directly with principal
market makers or with broker-dealers, if the same or a better price, including
commissions and executions, is available. Fixed income securities are normally
purchased directly from the issuer, an underwriter or a market maker. Purchases
include a concession paid by the issuer to the underwriter and the purchase
price paid to market makers may include the spread between the bid and asked
prices.
The Adviser uses such arrangements to enhance the advice provided to the Fund.
Of course, in directing brokerage transactions, the Adviser acts in accordance
with its duty to seek best price and execution and will not continue any
arrangements if the Adviser determines that such arrangements are no longer in
the best interest of the Fund.
CODE OF ETHICS
The Fund has a Code of Ethics designed to ensure that the interests of the
Fund's shareholders come before the interests of the people who manage the Fund.
Among other provisions, the Code of Ethics prohibits portfolio managers and
other investment personnel from buying securities or any securities sold in
private placements in which the person has, or by reason of the transaction
acquires, any direct or indirect beneficial ownership without the prior
approval of the Fund's compliance officer.
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DISTRIBUTION PLANS
The Board of Trustees and initial shareholder of the Fund have entered into a
separate Distribution Plan under Investment Company Act Rule 12b-1 for each
class of shares of the Fund. Under the unified management fee, the Adviser pays
all distribution costs. The Fund does not directly pay for any distribution
costs, except for those provided for in the 12b-1 Distribution Plan for Class B
shares. The Plans are described below.
In adopting the Plans, the Board of Trustees (including a majority of
independent trustees) determined that there was a reasonable likelihood that the
Plans would benefit the Fund and the shareholders of the affected class.
Pursuant to Rule 12b-1, information with respect to revenues and expenses under
the Plans is presented to and is reviewed by the Board of Trustees quarterly.
Continuance of the Plans must be approved by the Board of Trustees (including a
majority of the independent trustees) annually. The Plans may be amended by a
vote of the Board of Trustees (including a majority of the independent
trustees), except that a Plan may not be amended to require the Fund to make any
payment of expenses without majority approval of the shareholders. The Plans
terminate automatically in the event of an assignment and may be terminated upon
a vote of a majority of the independent trustees or by vote of a majority of the
outstanding voting securities. The Plan for Class B shares differs from the Plan
for Class A shares only to the extent that it permits the Fund to pay fees of
0.25% of average annual net assets for distribution and other fees relating to
the distribution of Class B shares through broker-dealers, financial advisers,
and other financial intermediaries other than the Distributor.
All fees paid under the Plan will be made in accordance with Conduct Rule 2830
of the National Association of Securities Dealers (the "NASD").
The Fund is made available to participants in employer-sponsored retirement or
savings plans and to persons purchasing through financial intermediaries such as
banks, broker-dealers and insurance companies. The Fund's Distributor enters
into contracts with various banks, broker-dealers, insurance companies and other
financial intermediaries, with respect to the sale of the Fund's shares and/or
the use of the Fund's shares in various investment products or in connection
with various financial services. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Certain recordkeeping and administrative services that are provided by the
Fund's Transfer Agent may be performed by a plan sponsor (or its agents) or by a
financial intermediary for shareholders. In addition to such services, the
financial intermediaries provide various distribution services.
Payments may be made by the Adviser for a variety of shareholder services,
including, but not limited to (a) receiving, aggregating and processing
purchase, exchange and redemption requests from beneficial owners (including
contract owners of insurance products that utilize the funds as underlying
investment media) of shares and placing purchase, exchange and redemption orders
with the Fund's Distributor; (b) providing shareholders with a service that
invests the assets of their accounts in shares pursuant to specific or pre-
authorized instructions; (c) processing dividend payments from the Fund on
behalf of shareholders and assisting shareholders in changing dividend options,
account designations and addresses; (d) acting as shareholder of record and
nominee for beneficial owners; (e) maintaining account records for shareholders
and/or other beneficial owners; (f) issuing confirmations of transactions; (g)
providing subaccounting with respect to shares beneficially owned by customers
of third parties or
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providing the information to the Fund as necessary for such subaccounting; (h)
preparing and forwarding shareholder communications from the Fund (such as
proxies, shareholder reports, annual and semiannual financial statements, and
dividend, distribution and tax notices) to shareholders and/or other beneficial
owners; and (i) providing other similar administrative and sub-transfer agency
services. Shareholder services do not include those activities and expenses that
are primarily intended to result in the sale of additional shares of the Fund.
Distribution services may include any activity undertaken or expense incurred
that is primarily intended to result in the sale of shares, which services may
include but are not limited to, (a) the payment of sales commissions, ongoing
commissions and other payments to brokers, dealers, financial institutions or
others who sell shares pursuant to Selling Agreements; (b) compensation to
registered representatives or other employees of distributor who engage in or
support distribution of the Fund's shares; (c) compensation to, and expenses
(including overhead and telephone expenses) of the distributor; (d) the printing
of prospectuses, statements of additional information and reports for other-
than-existing shareholders; (e) the preparation, printing and distribution of
sales literature and advertising materials provided to the Fund's shareholders
and prospective shareholders; (f) receiving and answering correspondence from
prospective shareholders, including distributing prospectuses, statements of
additional information and shareholder reports; (g) the providing of facilities
to answer questions from prospective investors about Fund shares; (h) complying
with federal and state securities laws pertaining to the sale of Fund shares;
(i) assisting investors in completing application forms and selecting dividend
and other account options; (j) the providing of other reasonable assistance in
connection with the distribution of Fund shares; (k) the organizing and
conducting of sales seminars and payments in the form of transactional and
compensation or promotional incentives; (l) profit on the foregoing; (m) the
payment of "service fees" for the provision of personal, continuing services to
investors, as contemplated by the Rules of Fair Practice of the NASD; and (n)
such other distribution and services activities as the Adviser determines may be
paid for by the funds pursuant to the terms of the Plan and in accordance with
Rule 12b-1 of the Investment Company Act.
INFORMATION ABOUT FUND SHARES
THE SHARES OF THE TRUST
The Trust Agreement permits the Trustees to issue an unlimited number of shares
of beneficial interest of separate series without par value. In addition, the
Trust Agreement permits the Trustees to authorize multiple series. Shares of one
non-diversified series have been authorized by the Trustees, which shares
constitute the interests in the Fund. The series consists of two classes of
shares.
Each share, when issued and paid for in accordance with the terms of the
offering, is fully paid and non-assessable. Shares have no preemptive or
subscription rights and are freely transferable. Each of the Fund's shares
represents an interest in the assets of the Fund issuing the share and has
identical voting, dividend, liquidation and other rights, and the same terms and
conditions as any other shares except that if the Fund is authorized to issue
additional series or classes (1) each dollar of net asset value per share is
entitled to one vote, (2) the expenses related to a particular class, such as
those related to the distribution of each class and the transfer agency expenses
of each class are borne solely by each such class, and (3) each class of shares
votes separately with
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respect to provisions of the Rule 12b-1 Distribution Plan applicable to that
class, which pertains to a particular class, and other matters for which
separate class voting is appropriate under applicable law. Each fractional share
has the same rights, in proportion, as a full share. Shares do not have
cumulative voting rights; therefore, the holders of more than 50% of the voting
power of the Trust can elect all of the Trustees of the Trust.
Rule 18f-2 of the Investment Company Act, provides that any matter required to
be submitted under the provisions of the Act or applicable state law or
otherwise to the shareholders of the outstanding voting securities of an
investment company, such as the Trust, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless it is
clear that the interests of each series in the matter are identical, or that the
matter does not affect any interest of such series. Rule 18f-2 exempts the
selection of independent accountants and the election of Board members from the
separate voting requirements of the Rule.
The Trust does not hold annual shareholder meetings, but does hold special
shareholder meetings when the Board of Trustees believes it is necessary or when
required by law. The Trust will hold a special meeting when requested in writing
by the holders of at least 10% of the shares eligible to vote at a meeting. In
addition, subject to certain conditions, shareholders of the Fund may apply to
the Fund to communicate with other shareholders to request a shareholders'
meeting to vote upon the removal of a Trustee or Trustees.
Under Delaware law, the shareholders of the Fund are not personally liable for
the obligations of the Fund; a shareholder is entitled to the same limitation of
personal liability extended to shareholders of corporations.
Upon 60 days' prior written notice to shareholders, the Fund may make redemption
payments in whole or in part in securities or other property if the Trustees
determine that existing conditions make cash payments undesirable.
MULTIPLE CLASS STRUCTURE
The Board of Trustees has adopted a multiple class plan pursuant to Investment
Company Act Rule 18f-3. The plan permits the Fund to issue two classes of
shares, Class A and Class B. Class A shares are sold directly by the Fund's
Distributor. Class B shares are sold by the Distributer to broker-dealers,
financial advisers, and other financial intermediaries. Both classes are subject
to a management fee of 1.00%, and Class B shares are subject to a distribution
fee of 0.25% pursuant to the Rule 12b-1 Plan adopted for the Class B shares.
RULE 12b-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's board of directors and approved by its shareholders. Pursuant to the
rule, the Board of Trustees and the initial shareholder of each of the Fund's
two classes have approved a separate 1b-1 Plan for each of the Fund's two
classes.
In adopting the Plans the Board of Trustees (including a majority of trustees
who are not "interested persons" within the meaning of the Investment Company
Act (the "Independent Trustees")) determined that there was a reasonable
likelihood that the Plans would benefit the Fund and the shareholders of the
respective classes. Under Rule 12b-1 information concerning revenues and
expenses under the Class B Rule 12b-1 Plan is presented to the Board of Trustees
quarterly for its consideration in connection with its deliberations as to the
continuance of the Plan. Continuance of the Plans must be approved by the Board
of Trustees (including a majority of the Independent Trustees) annually. The
Plans may be amended by a vote of the Board of Trustees (including a majority of
the Independent Trustees), except that the Plans may not be amended to
materially increase the amount to be spent for distribution without majority
approval of the shareholders of the affected class. The Plans terminate
automatically in the event of an assignment and may be terminated upon a vote of
a majority of the Independent Trustees or by vote of a majority of the
outstanding voting securities of the affected class.
All fees paid under the Plans will be made in accordance with Section 26 of the
Rules of Fair Practice of the National Association of Securities Dealers (NASD).
VALUATION OF THE FUND'S SECURITIES
The Fund's net asset value per share ("NAV") is calculated as of the close of
business of the New York Stock Exchange (the "Exchange"), usually at 4 p.m.
Eastern time on each day the Exchange is open for business. The Exchange
typically observes the following holidays: New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Although the Fund expects the same
holidays to be observed in the future, the Exchange may modify its holiday
schedule at any time.
The Fund's NAV is calculated by adding the value of all portfolio securities and
other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
The portfolio securities of the Fund, except as otherwise noted, listed or
traded on a domestic securities exchange, are valued at the last sale price on
that exchange.
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If no sale is reported, or if local convention or regulation so provides, the
mean of the latest bid and asked prices is used. Depending on local convention
or regulation, securities traded over-the-counter are priced at the mean of the
latest bid and asked prices, or at the last sale price. When market quotations
are not readily available, securities and other assets are valued at fair value
as determined in accordance with procedures adopted by the Board of Trustees.
Debt securities not traded on a principal securities exchange are valued through
valuations obtained from a commercial pricing service or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
procedures established by the Board of Trustees.
Debt securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.
TAXES
FEDERAL INCOME TAXES
The Fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By
so qualifying, the Fund itself will be exempt from federal income taxes to the
extent that it distributes substantially all of its net investment income and
net realized capital gains (if any) to shareholders. If the Fund fails to
qualify as a regulated investment company, it will be liable for taxes,
significantly reducing its distributions to shareholders and eliminating
shareholders' ability to treat distributions of the Fund in the manner they were
realized by the Fund.
If Fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income. The dividends from net income may qualify for the 70%
dividends-received deduction for corporations to the extent that the Fund held
shares receiving the dividend for more than 45 days, and (2) the dividends were
not received from REITs.
Distributions from gains on assets held longer than 12 months are taxable as
long-term gains regardless of the length of time you have held the shares.
However, you should note that any loss realized upon the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gains to you with
respect to such shares.
If you have not complied with certain provisions of the Internal Revenue Code
and regulations, either the Fund or your financial intermediary is required by
federal law to withhold and remit 31% of reportable payments (which may include
dividends, capital gains distributions and
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redemptions) to the IRS. Those regulations require you to certify that the
Social Security number or tax identification number you provide is correct and
that you are not subject to 31% withholding for previous under-reporting to the
IRS.
You will be asked to make the appropriate certification on your application.
Redemption of shares of the Fund (including redemptions made in an exchange
transaction) will be a taxable transaction for federal income tax purposes, and
shareholders generally will recognize gain or loss in an amount equal to the
difference between the basis of the shares and the amount received. If a loss is
realized on the redemption of Fund shares, the reinvestment in additional Fund
shares within 30 days before or after the redemption may be subject to the "wash
sale" rules of the Code, resulting in a postponement of the recognition of such
loss for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions also may be subject to state and local taxes, even if all or a
substantial part of such distributions are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax exemption
to pass through to fund shareholders when the Fund pays distributions to its
shareholders. You should consult your tax adviser about the tax status of such
distributions in your own state.
TAXATION OF CERTAIN MORTGAGE REITS
The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits (REMICs). Under Treasury regulations that have not
yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an "excess inclusion") will be subject to federal
income tax in all events. These regulations are also expected to provide that
excess inclusion income of a regulated investment company, such as the Fund,
will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by them with the same consequences as if
these shareholders held the related REMIC residual interest directly. In
general, excess inclusion income allocated to shareholders (i) cannot be offset
by net operating losses (subject to a limited exception for certain thrift
institutions) and (ii) will constitute unrelated business taxable income to
entities (including a qualified pension plan, an individual retirement account,
a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on
unrelated business income, thereby potentially requiring such an entity that is
allocated excess inclusion income, and that otherwise might not be required to
file a tax return, to file a tax return and pay tax on some income. In addition,
if at any time during any taxable year a "disqualified organization" (as defined
in the Code) is a record holder of a share in a regulated investment company,
then the regulated investment company will be subject to a tax equal to that
portion of
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its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest federal income tax rate
imposed on corporations.
HOW PERFORMANCE IN THE FUND IS CALCULATED
"Average annual total return," as defined by the SEC, is computed by finding the
average annual compounded rates of return (over the one and five year periods
and the period from initial public offering through the end of the Fund's most
recent fiscal year) that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical $1,000 initial investment
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the applicable
period of the hypothetical $1,000 investment made at
the beginning of the applicable period.
The computation assumes that all dividends and distributions are reinvested at
the net asset value on the reinvestment dates and that a complete redemption
occurs at the end of the applicable period.
The Fund's investment performance will vary depending upon market conditions,
the composition of the Fund's portfolio and operating expenses of the Fund.
These factors and possible differences in the methods and time periods used in
calculating non-standardized investment performance should be considered when
comparing the Fund's performance to those of other investment companies or
investment vehicles. The risks associated with the Fund's investment objective,
policies and techniques should also be considered. At any time in the future,
investment performance may be higher or lower than past performance, and there
can be no assurance that any performance will continue.
The Fund performance may be compared with the performance of other mutual funds
tracked by mutual fund rating services or with other indices of market
performance. This may include comparisons with funds that, unlike the Fund, are
sold with a sales charge or deferred sales charge. Sources of economic data that
may be used for such comparisons may include, but are not limited to: U.S.
Treasury bill, note and bond yields, money market fund yields, U.S. government
debt and percentage held by foreigners, the U.S. money supply, not free
reserves, and yields on current-coupon GNMAs (source: Board of Governors of the
Federal Reserve System); the federal funds and discount rates (source: Federal
Reserve Bank of New York); yield curves for U.S. Treasury securities and AA/AAA-
rated corporate securities (source: Bloomberg Financial Markets); yield curves
for AAA-rated, tax-free municipal securities (source: Telerate); yield curves
for foreign government securities (sources: Bloomberg Financial Markets and Data
Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan Securities
Inc.); various U.S. and foreign government reports; the junk bond market
(source: Data Resources, Inc.); the CRB Futures Index (source: Commodity Index
Report); the price of gold (sources: London a.m./p.m. fixing and New York Comex
Spot Price); rankings of any
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mutual fund or mutual fund category tracked by Lipper, Inc. or Morningstar,
Inc.; mutual fund rankings published in major, nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indices of stock market
performance; and indices and historical data supplied by major securities
brokerage or investment advisory firms. The Fund also may utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance or to provide general information about the Fund.
PERMISSIBLE ADVERTISING INFORMATION
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant market or industry indices or other
appropriate benchmarks; (8) discussions of Fund rankings or ratings by
recognized rating organizations; and (9) testimonials describing the experience
of persons who have invested the Fund. The Fund also may include calculations,
such as hypothetical compounding examples, which describe hypothetical
investment results. Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of the Fund.
The Trust may issue additional classes of the existing Fund or introduce new
funds with multiple classes. To the extent a new class is added to an existing
fund, the Adviser may, in compliance with SEC and NASD rules, regulations, and
guidelines, market the new class of shares using the historical performance
information of the original class of shares. When quoting performance
information for the new class of shares for periods prior to the first full
quarter after inception, the performance of the original class will be restated
to reflect the expenses of the new class, and for periods after the first full
quarter following inception, actual performance of the new class will be
used.
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in the Prospectus, the Fund may invest in fixed-income securities.
Those investments, however, are subject to certain credit quality restrictions,
as noted in the Prospectus. The following is a summary of the rating categories
referenced in the prospectus disclosure.
CORPORATE BOND RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
S&P Moody's Description
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
AAA Aaa These are the highest ratings assigned by S&P and Moody's to a debt
obligation and indicate an extremely strong capacity to pay interest
and repay principal.
- --------------------------------------------------------------------------------------------------------
AA Aa Debt rated in this category is considered to have a very strong
capacity to pay interest and repay principal. It differs from AAA/Aaa
issues only in a small degree.
- --------------------------------------------------------------------------------------------------------
A A Debt rated A 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.
- --------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB Baa Debt rated BBB/Baa is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
- --------------------------------------------------------------------------------------------------------
BB Ba Debt rated BB/Ba has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or Economic
conditions that could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category also is used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
- --------------------------------------------------------------------------------------------------------
B B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB/Ba or BB-/Ba3 rating.
- --------------------------------------------------------------------------------------------------------
CCC Caa Debt rated CCC/Caa has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC/Caa rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B-/B3 rating.
- --------------------------------------------------------------------------------------------------------
CC Ca The rating CC/Ca typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC/Caa rating.
- --------------------------------------------------------------------------------------------------------
C C The rating C typically is applied to debt subordinated to senior
debt, which is assigned an actual or implied CCC-Caa3 debt
rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are
continued.
- --------------------------------------------------------------------------------------------------------
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
- --------------------------------------------------------------------------------------------------------
D D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
- --------------------------------------------------------------------------------------------------------
</TABLE>
To provide more detailed indications of credit quality, the Standard & Poor's
ratings from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within
28
<PAGE>
these major rating categories. Similarly, Moody's adds numerical modifiers (1,
2, 3) to designate relative standing within its major bond rating categories.
Fitch Investors Service, Inc. also rates bonds and uses a ratings system that is
substantially similar to that used by Standard & Poor's.
COMMERCIAL PAPER RATINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
S&P Moody's Description
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
A-1 Prime-1 This indicates that the degree of safety regarding timely payment is
strong. Standard & Poor's rates those issues determined
to possess extremely strong safety characteristics as A-1+.
- -------------------------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is satisfactory, but
the relative degree of safety is not as high as for issues designated
A-1. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriated, may be more affected by external conditions. Ample
alternate liquidity is maintained.
- -------------------------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment. Issues that carry this
rating are somewhat more vulnerable to the adverse changes in
circumstances than obligations carrying the higher designations.
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE RATINGS
<TABLE>
<CAPTION>
S&P Moody's Description
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong protection from
established cash flows of funds for their servicing or from
established and Broad-based access to the market for refinancing, or
both.
- -------------------------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
- -------------------------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be less
well-established
- -------------------------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific risk but having and
not distinctly or predominantly speculative.
- -------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
FINANCIAL INFORMATION
INDEPENDENT AUDITORS' REPORT
Board of Trustees and Shareholders of RREEF Securities Trust
We have audited the accompanying statement of assets and liabilities of RREEF
Securities Trust (the "Trust") as of November 24, 1999 and the statement of
operations for the period from September 15, 1999 (date of inception) to
November 24, 1999. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of RREEF Securities Trust at November 24, 1999,
and the results of their operations for the period from September 15, 1999 (date
of inception) to November 24, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
November 26, 1999
30
<PAGE>
RREEF Securities Trust
Statement of Assets and Liabilities
November 24, 1999
Assets
Cash $100,010
Receivable from investment adviser 54,000
Prepaid initial registration expenses 20,940
--------
Total Assets 174,950
--------
Liabilities and Net Assets
Payable to investment adviser 74,940
--------
Total Liabilities 74,940
--------
Net Assets $100,010
--------
Net Assets Consist of:
Capital shares outstanding, no par value, indefinite shares authorized 10,001
========
Net asset value, redemption price and offering price per share
(net assets/shares outstanding) $ 10.00
========
- -----------------------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
31
<PAGE>
RREEF Securities Trust
Statement of Operations
For the Period From September 15, 1999 (inception) to November 24, 1999
Investment Income
Dividends -
Expenses
Organization expenses $54,000
-------
Total expenses before reimbursements 54,000
Less: reimbursement of expenses by investment adviser (54,000)
-------
Net Investment Income $ -
=======
- -----------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
32
<PAGE>
RREEF SECURITIES TRUST
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (INCEPTION) TO NOVEMBER 24, 1999
Note 1 -- Organization and Registration
RREEF Securities Trust (the "Trust") was established on September 15, 1999, as a
Delaware business trust and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company.
The RREEF RReal Estate Securities Fund (the "Fund") is a separate,
non-diversified investment portfolio of the Trust. The Fund has had no
operations other than those relating to organizational matters, including the
sale of 10,001 shares of beneficial interest of the Fund to capitalize the Trust
("Original Shares"), which were sold to Kim G. Redding, Chairman of the Board,
President, Chief Executive Officer and Trustee of the Fund and a Principal and a
Member of RREEF America L.L.C (the "Adviser") and the Adviser on November 22,
1999 and November 24, 1999, respectively, for cash in the amount of $100,010.
Note 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP").
a. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported changes in net assets during
the reporting period. Actual results could differ from those estimates.
b. Organization and Prepaid Initial Registration Expenses
Expenses incurred by the Trust in connection with the organization and
the initial public offering of shares are expensed as incurred. These expenses
were advanced by the Adviser, and the Adviser has agreed to voluntarily
reimburse the Fund for these expenses. Prepaid initial registration expenses are
deferred and amortized over the period of benefit (not to exceed twelve months).
c. Federal Income Taxes
The Fund intends to qualify annually for treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended, and, if so qualified, will not be liable for federal income taxes to
the extent earnings are distributed to shareholders on a timely basis.
Note 3 -- Investment Advisory and Other Agreements
The Trust has entered into an investment advisory agreement with the Adviser. As
compensation for its services to the Fund, the Adviser receives an investment
advisory fee at an annual rate of 1.00% of the average daily net assets of the
Fund, which is accrued daily and paid monthly.
The Trust has entered into an administration and fund accounting agreement and
transfer agent agreement with Sunstone Financial Group, Inc. The administration
services agreement provides for an annual fee which decreases as the assets of
the Fund reach certain levels, subject to a minimum annual fee, plus out-of-
pocket expenses. The transfer agent agreement provides for an annual base fee
per shareholder account, with a minimum annual fee, as well as certain fees
related to set-up costs, processing and out-of-pocket expenses. The Adviser has
agreed to pay the administration, fund accounting and transfer agent fees out of
its 1% investment advisory fee.
33
<PAGE>
RREEF SECURITIES TRUST
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (INCEPTION) TO NOVEMBER 24, 1999
Note 3 -- Investment Advisory and Other Agreements (continued)
The Trust has entered into a distribution agreement with Sunstone Distribution
Services, LLC (the "Distributor"). Under the Distribution Agreement, the
Distributor will offer shares of the Fund on a continuous basis and may engage
in advertising and solicitation activities in connection therewith.
Note 4 -- Capital Stock
The Trust is authorized to issue an unlimited number of shares with no par
value. A total of 10,001 shares were initially sold to Kim G. Redding and RREEF
America L.L.C to capitalize the Trust.
34
<PAGE>
MORE INFORMATION ABOUT THE FUND
For more information about the RREEF RReal Estate Securities Fund, request a
free copy of the Statement of Additional Information or any existing Annual and
Semi-Annual Reports. The Statement of Additional Information provides more
detailed information about the Fund and its operations, investment restrictions,
policies and practices. Annual and Semi-Annual Reports to shareholders which
discuss the market conditions and investment strategies that significantly
affect the Fund's performance and provide additional information about the
Fund's investments.
The Fund's Statement of Additional Information has been filed electronically
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus.
YOU MAY REQUEST THESE DOCUMENTS
1 By Telephone. Call the Fund toll-free at 1-888-897-8480, Monday through
Friday, 7 a.m. to 7 p.m. Central Time. You may also call this number for
shareholder inquiries.
2 Via the Internet. Visit the SEC Web site at www.sec.gov.
-----------
3 From the SEC. You may obtain copies of the documents highlighted above, for
a duplicating fee, by writing the SEC's Public Reference Room, Washington
DC, 20549-6009. For more information call 1-800-SEC-0330.
4 By Mail. Specify the document you are requesting when writing to us:
RREEF RReal Estate Securities Fund
c/o Sunstone Financial Group, Inc.
P.O. Box 1147
Milwaukee, Wisconsin 53201-1147
Distributed by Sunstone Distributing Services, LLC.
35
