<PAGE>
As filed with the Securities and Exchange Commission on
December 29, 2000
Registration Nos. 333-92415
811-9721
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 1 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY |X|
ACT OF 1940
Amendment No. 4 |X|
(Check appropriate box or boxes)
Fixed Income SHares
(Exact name of registrant as specified in charter)
c/o PIMCO Advisory Services, 1345 Avenue of the Americas,
New York, New York 10105
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code
(212) 739-3502
----------------------------------------
Stephen J. Treadway
PIMCO Funds Distributors LLC
2187 Atlantic Street
Stamford, Connecticut 06902
(Name and address of agent for service)
----------------------------------------
Copy to:
J. B. Kittredge, Jr., Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
----------------------------------------
It is proposed that this filing will become effective:
____ Immediately upon filing pursuant to paragraph (b),
____ On ________________ pursuant to paragraph (b),
____ 60 days after filing pursuant to paragraph (a)(1),
X On March 1, 2001 pursuant to paragraph (a)(1),
____
____ 75 days after filing pursuant to paragraph (a)(2), or
____ On ________________ pursuant to paragraph (a)(2), of Rule 485.
If appropriate, check the following box:
____ This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Fixed Income SHares ("FISH") Prospectus
FISH: Series C This Prospectus explains what you should know about each
and FISH: Portfolio before you invest. Please read it carefully.
Series M
(each a The Securities and Exchange Commission has not approved or
"Portfolio") disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to
March 1, 2001 the contrary is a criminal offense.
<PAGE>
Risk/Return Summary
The following summaries identify the investment objective,
principal investments and strategies, principal risks,
performance information and fees and expenses of each
Portfolio. A more detailed "Summary of Principal Risks"
describing principal risks of investing in a Portfolio
begins on p. 7.
It is possible to lose money on investments in a Portfolio.
An investment in a Portfolio is not a deposit of a bank and
is not guaranteed or insured by the Federal Deposit
Insurance Corporation or any other government agency.
-2-
<PAGE>
FISH: Series C
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Principal Investment Objective Portfolio Focus
Investments and Seeks maximum total return, Intermediate maturity fixed
Strategies consistent with preservation of income securities
capital and prudent investment
management Average Portfolio Duration
0-8 years
Credit Quality
B to Aaa; maximum 50% below Baa
Dividend Frequency
Declared daily and distributed monthly
The FISH: Series C seeks to achieve its investment objective
by investing in a portfolio of U.S. and foreign fixed income
instruments of the following types:
o corporate debt securities, including convertible
securities and corporate commercial paper;
o inflation-indexed bonds issued by corporations;
o structured notes, including hybrid or "indexed"
securities, catastrophe bonds and loan participations;
o delayed funding loans and revolving credit facilities;
o bank certificates of deposit, fixed time deposits and
bankers' acceptances;
o repurchase agreements and reverse repurchase agreements;
o debt securities issued by states or local governments and
their agencies, authorities and other instrumentalities;
o obligations of foreign governments and their subdivisions,
agencies and instrumentalities;
o obligations of international agencies or supranational
entities;
o obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, and;
o mortgage-related and other asset-backed securities.
The Portfolio may invest up to 50% of its assets
in high yield securities (commonly known as "junk bonds")
rated B or higher by Standard & Poor's Rating Service or
Moody's Investors Service, Inc. or, if unrated, determined
by the Portfolio's investment adviser or sub-adviser to be
of comparable quality. The Portfolio may invest its assets
in securities denominated in foreign currencies; however,
the Portfolio will normally hedge at least 75% of its
exposure to foreign currency to reduce the risk of loss due
to fluctuations in currency exchange rates through forward
foreign currency exchange contracts, foreign currency
futures contracts and options on foreign currencies and
foreign currency futures contracts.
The Portfolio may invest up to 55% of its assets in
securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Mortgage-related and other
asset-backed securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities are not
subject to this limitation, but are subject to the 30%
limitation set forth below.
The Portfolio may invest up to 30% of its assets in
mortgage-related and other asset-backed securities,
including securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
The Portfolio may invest in instruments of any
maturity, and the average portfolio duration of this
Portfolio varies, and will not normally exceed eight years,
based on the adviser's or sub-adviser's forecast for
interest rates. Duration is a measure of the expected life
of a fixed income security that is used to determine the
sensitivity of a security's price to changes in interest
rates. The longer a security's duration, the more sensitive
it will be to changes in interest rates. Similarly, a
portfolio with a longer average portfolio duration will be
more sensitive to changes in interest rates than a
portfolio with a shorter average portfolio duration.
The Portfolio may invest all of its assets in
derivative instruments, such as options, futures contracts
or swap agreements. The Portfolio may lend its portfolio
securities to brokers, dealers and other financial
institutions to earn income. Rather than investing directly
in the securities in which it primarily invests, the
Portfolio may use other investment techniques to gain
exposure to market movements related to such securities,
such as entering into a series of contracts to buy or sell
such securities. The "total return" sought by the Portfolio
consists of income earned on its investments, plus capital
appreciation, if any, which generally arises from decreases
in interest rates or improving credit fundamentals for a
particular sector or security.
-3-
<PAGE>
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Principal Risks Among the principal risks of investing in the Portfolio,
which could adversely affect its net asset value, yield and
total return, are:
o Interest Rate Risk o Derivatives Risk
o Credit Risk o Liquidity Risk
o Market Risk o Management Risk
o Foreign Investment Risk o Mortgage Risk
o Emerging Market Risk o Non-diversification Risk
o Currency Risk
o Leveraging Risk
o Issuer Risk
o High Yield Risk
Please see "Summary of Principal Risks" for a description of
these and other principal risks of investing in the
Portfolio.
http://www.pimcoadvisoryservices.com
--------------------------------------------------------------------------------
Performance No performance information is available for the Portfolio
Information because it has not yet been in operation for a full calendar
year. In the future, the Portfolio will disclose performance
information in a bar chart and performance table. Such
disclosure will give some indication of the risks of an
investment in the Portfolio by comparing the Portfolio's
performance with a broad measure of market performance and
by showing changes in the Portfolio's performance from year
to year.
--------------------------------------------------------------------------------
Fees and Expenses These tables describe the fees and expenses you may pay
Portfolio of the if you buy and hold shares of the Portfolio(1):
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Maximum Sales Charge (Load) Maximum Contingent Deferred Sales Charge
Imposed on Purchases (as (Load) (as a percentage of original
a percentage of offering price) purchase price)
=============================================================================================
<S> <C> <C>
FISH: Series C 0% 0%
=============================================================================================
</TABLE>
Annual Portfolio Operating Expenses (expenses that are
deducted from Portfolio assets)
<TABLE>
<CAPTION>
Total
Annual
Portfolio
Distribution and/or Operating
Advisory Fees Service (12b-1) Fees Other Expenses Expenses
=============================================================================================
<S> <C> <C> <C> <C>
FISH: Series C 0% 0% 0% 0%
=============================================================================================
</TABLE>
Examples: The examples are intended to help you compare the
cost of investing in shares of the FISH: Series C with the
costs of investing in other mutual funds. The Examples
assume that you invest $10,000 in the shares of the
Portfolio for the time periods indicated, that your
investment has a 5% return each year, the reinvestment of
all dividends and distributions, and that the Portfolio's
operating expenses remain the same. Although your actual
costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Example: With or without redemption at the end of each period
Year 1 Year 3 Year 5 Year 10
===========================================================================================
<S> <C> <C> <C> <C>
FISH: Series C $0 $0 $0 $0
===========================================================================================
</TABLE>
(1) The tables show fees and expenses of the Portfolio as 0%, reflecting the
fact that no fees or expenses are charged by the Portfolio. You should be
aware, however, that the Portfolio is an integral part of "wrap-fee" programs
sponsored by investment advisers unaffiliated with the Portfolio or PIMCO.
Typically, participants in these programs pay a "wrap" fee to their investment
adviser. You should read carefully the wrap-fee brochure provided to you by
your investment adviser. The brochure is required to include information about
the fees charged by your adviser and the fees paid by your adviser to PIMCO.
You pay no additional fees or expenses to purchase shares of the Portfolio.
-4-
<PAGE>
FISH: Series M
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Principal Investment Objective Portfolio Focus
Investments and Seeks maximum total return, Intermediate maturity fixed
Strategies consistent with preservation of income securities
capital and prudent investment
management Average Portfolio Duration
0-8 years
Credit Quality
B to Aaa; maximum 50% below Baa
Dividend Frequency
Declared daily and distributed monthly
The FISH: Series M seeks to achieve its investment objective
by investing primarily in a portfolio of mortgage and other
asset-backed securities, including:
o mortgage pass-through securities;
o collateralized mortgage obligations;
o commercial mortgage-backed securities;
o mortgage dollar rolls;
o stripped mortgage-backed securities;
o debt securities issued by states or local governments
and their agencies, authorities and other instrumen-
talities;
o bank certificates of deposit, fixed time deposits and
bankers' acceptances; and
o other securities that directly or indirectly represent a
participation in, or are secured by and payable from,
mortgage loans on real property.
The Portfolio may invest its assets in securities
issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
The Portfolio may invest in instruments of any
maturity, and the average portfolio duration of this
Portfolio varies, and will not normally exceed eight
years, based on the investment adviser's or sub-adviser's
forecast for interest rates.
The Portfolio may invest up to 50% of its assets in
high yield mortgage-backed securities (commonly known as
"junk bonds"), including commercial mortgage-backed
securities, rated B or higher by Standard & Poor's Rating
Service or Moody's Investors Service, Inc. or, if unrated,
determined by the Portfolio's investment adviser or
sub-adviser to be of comparable quality.
The Portfolio may invest all of its assets in
derivative instruments, such as options, futures contracts
or swap agreements. The Portfolio may lend its portfolio
securities to brokers, dealers and other financial
institutions to earn income. Rather than investing directly
in the securities in which it primarily invests, the
Portfolio may use other investment techniques to gain
exposure to market movements related to such securities,
such as entering into a series of contracts to buy or sell
such securities. The "total return" sought by the Portfolio
consists of income earned on its investments, plus capital
appreciation, if any, which generally arises from decreases
in interest rates or improving credit fundamentals for a
particular sector or security.
--------------------------------------------------------------------------------
Principal Risks Among the principal risks of investing in the Portfolio,
which could adversely affect its net asset value, yield and
total return, are:
o Mortgage Risk o Derivatives Risk
o Interest Rate Risk o Liquidity Risk
o Credit Risk o Management Risk
o Market Risk o Non-diversification Risk
o Currency Risk
o Leveraging Risk
o Issuer Risk
o High Yield Risk
Please see "Summary of Principal Risks" for a description of
these and other principal risks of investing in the
Portfolio.
--------------------------------------------------------------------------------
-5-
<PAGE>
Performance No performance information is available for the Portfolio
Information because it has not yet been in operation for a full calendar
year. In the future, the Portfolio will disclose performance
information in a bar chart and performance table. Such
disclosure will give some indication of the risks of an
investment in the Portfolio by comparing the Portfolio's
performance with a broad measure of market performance and
by showing changes in the Portfolio's performance from year
to year.
Fees and Expenses These tables describe the fees and expenses you may pay if
of the Portfolio you buy and hold shares of the Portfolio(2):
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Maximum Contingent Deferred
Maximum Sales Charge (Load) Sales Charge (Load)
Imposed on Purchases (as (as a percentage of original
a percentage of offering price) purchase price)
=============================================================================================
<S> <C> <C>
FISH: Series M 0% 0%
=============================================================================================
</TABLE>
Annual Portfolio Operating Expenses (expenses that are
deducted from Portfolio assets)
<TABLE>
<CAPTION>
Total
Annual
Portfolio
Distribution and/or Operating
Advisory Fees Service (12b-1) Fees Other Expenses Expenses
=============================================================================================================
<S> <C> <C> <C> <C>
FISH: Series M 0% 0% 0% 0%
=============================================================================================================
</TABLE>
Examples: The examples are intended to help you compare the
cost of investing in shares of the FISH: Series C with the
costs of investing in other mutual funds. The Examples
assume that you invest $10,000 in the shares of the
Portfolio for the time periods indicated, that your
investment has a 5% return each year, the reinvestment of
all dividends and distributions, and that the Portfolio's
operating expenses remain the same. Although your actual
costs may be higher or lower, the Examples show what your
costs would be based on these assumptions.
<TABLE>
<CAPTION>
Example: With or without redemption at the end of each period
Year 1 Year 3 Year 5 Year 10
=========================================================================================================
<S> <C> <C> <C> <C>
FISH: Series M $0 $0 $0 $0
=========================================================================================================
</TABLE>
(2) The tables show fees and expenses of the Portfolio as 0%, reflecting the
fact that no fees or expenses are charged by the Portfolio. You should be
aware, however, that the Portfolio is an integral part of "wrap-fee" programs
sponsored by investment advisers unaffiliated with the Portfolio or PIMCO.
Typically, participants in these programs pay a "wrap" fee to their investment
adviser. You should read carefully the wrap-fee brochure provided to you by
your investment adviser. The brochure is required to include information about
the fees charged by your adviser and the fees paid by your adviser to PIMCO.
You pay no additional fees or expenses to purchase shares of the Portfolio.
-6-
<PAGE>
Summary of Principal Risks
The value of your investment in a Portfolio changes with
the values of that Portfolio's investments. Many factors
can affect those values. The factors that are most likely
to have a material effect on a particular Portfolio's
portfolio as a whole are called "principal risks." The
principal risks of each Portfolio are identified in the
Portfolio Summaries and are summarized in this section.
Each Portfolio may be subject to additional principal risks
and risks other than those described below because the
types of investments made by a Portfolio can change over
time. Securities and investment techniques mentioned in
this summary and described in greater detail under
"Characteristics and Risks of Securities and Investment
Techniques" appear in bold type. That section and
"Investment Objectives and Policies" in the Statement of
Additional Information also include more information about
the Portfolios, their investments and the related risks.
There is no guarantee that a Portfolio will be able to
achieve its investment objective.
Interest Rate Risk As interest rates rise, the value of fixed income
securities in a Portfolio's portfolio are likely to
decrease. Securities with longer durations tend to be more
sensitive to changes in interest rates, usually making them
more volatile than securities with shorter durations.
Some investments give the issuer the option to call,
or redeem, these investments before their maturity date. If
an issuer "calls" its security during a time of declining
interest rates, a Portfolio might have to reinvest the
proceeds in an investment offering a lower yield, and
therefore might not benefit from any increase in value as a
result of declining interest rates.
Credit Risk A Portfolio could lose money if the issuer or guarantor of
a fixed income security, or the counterparty to a
derivatives contract, repurchase agreement or loan of
portfolio securities, is unable or unwilling to make timely
principal and/or interest payments, or to otherwise honor
its obligations. Securities are subject to varying degrees
of credit risk, which are often reflected in credit
ratings. Municipal bonds are subject to the risk that
litigation, legislation or other political events, local
business or economic conditions, or the bankruptcy of the
issuer could have a significant effect on an issuer's
ability to make payments of principal and/or interest.
High Yield Risk Each Portfolio, through its investments in high yield
securities and unrated securities of similar credit quality
(commonly known as "junk bonds"), may be subject to greater
levels of interest rate, credit and liquidity risk than
portfolios that do not invest in such securities. High
yield securities are considered predominantly speculative
with respect to the issuer's continuing ability to make
principal and interest payments. An economic downturn or
period of rising interest rates could adversely affect the
market for high yield securities and reduce the Portfolio's
ability to sell its high yield securities (liquidity risk).
Market Risk The market price of securities owned by a Portfolio may go
up or down, sometimes rapidly or unpredictably. Securities
may decline in value due to factors affecting securities
markets generally or particular industries represented in
the securities markets. The value of a security may decline
due to general market conditions which are not specifically
related to a particular company, such as real or perceived
adverse economic conditions, changes in the general outlook
for corporate earnings, changes in interest or currency
rates or adverse investor sentiment generally. They may
also decline due to factors which affect a particular
industry or industries, such as labor shortages or
increased production costs and competitive conditions
within an industry.
Issuer Risk The value of a security may decline for a number of reasons
which directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the
issuer's goods and services.
Liquidity Risk Liquidity risk exists when particular investments are
difficult to purchase or sell. A Portfolio's investments
in illiquid securities may reduce the return of the
Portfolio because it may be unable to sell such illiquid
securities at an advantageous time or price. The FISH:
Series C's investments in foreign securities, and each of
the Portfolio's investments in derivatives or securities
with substantial market and/or credit risk, tend to have
the greatest exposure to liquidity risk.
Derivatives Risk Each Portfolio may use derivatives, which are financial
contracts whose value depends on, or is derived from, the
value of an underlying asset, reference rate or index. The
various derivative instruments that the Portfolios may use
are referenced under "Characteristics and Risks of
Securities and Investment Techniques--Derivatives" in this
Prospectus and described in more detail under "Investment
Objectives
-7-
<PAGE>
and Policies" in the Statement of Additional Information.
The Portfolios may sometimes use derivatives as part of a
strategy designed to reduce exposure to other risks, such
as interest rate or currency risk. The Portfolios may also
use derivatives for leverage, in which case their use would
involve leveraging risk. A Portfolio's use of derivative
instruments may involve risks different from, or greater
than, the risks associated with investing directly in
securities and other traditional investments. Derivatives
are subject to a number of risks described elsewhere in
this section, such as liquidity risk, interest rate risk,
market risk, credit risk and management risk. They also
involve the risk of mispricing or improper valuation and
the risk that changes in the value of the derivative may
not correlate perfectly with the underlying asset, rate or
index. A Portfolio investing in a derivative instrument
could lose more than the principal amount invested. Also,
suitable derivative transactions may not be available in
all circumstances and there can be no assurance that a
Portfolio will engage in these transactions to reduce
exposure to other risks when that would be beneficial. In
addition, a Portfolio's use of derivatives may increase the
taxes payable by shareholders.
Mortgage Risk Because the Portfolios purchase mortgage-related and
other asset-backed securities, they are subject to certain
additional risks. Rising interest rates tend to extend the
duration of mortgage-related and other asset-backed
securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest
rates, a Portfolio that holds mortgage-related and other
asset-backed securities may exhibit additional volatility.
This is known as extension risk. In addition,
mortgage-related securities are subject to prepayment risk.
When interest rates decline, borrowers may pay off their
mortgages sooner than expected. This can reduce the returns
of the Portfolio because it will have to reinvest that
money at the lower prevailing interest rates.
Foreign (Non-U.S.) The FISH: Series C, which invests in part in foreign fixed
Investment Risk income securities, may experience more rapid and extreme
changes in value than a portfolio that invests exclusively
in fixed income securities of U.S. companies. The
securities markets of many foreign countries are relatively
small, with a limited number of companies representing a
small number of industries. Additionally, issuers of
foreign securities are usually not subject to the same
degree of regulation as U.S. issuers. Reporting, accounting
and auditing standards of foreign countries differ, in some
cases significantly, from U.S. standards. Also,
nationalization, expropriation or confiscatory taxation,
currency blockage, political changes or diplomatic
developments could adversely affect the Portfolio's
investments in a foreign country. In the event of
nationalization, expropriation or other confiscation, the
Portfolio could lose its entire investment in foreign
securities. Adverse conditions in a certain region can
adversely affect securities of other countries whose
economies appear to be unrelated. To the extent that the
Portfolio invests a significant portion of its assets in a
concentrated geographic area like Eastern Europe or Asia,
the Portfolio will generally have more exposure to regional
economic risks associated with foreign investments.
Emerging Markets Because the FISH: Series C may invest to a limited
Risk extent in emerging market fixed income securities of
issuers based in countries with developing economies,
foreign investment risk may be particularly high.
These securities may present market, credit, currency,
liquidity, legal, political and other risks different
from, or greater than, the risks of investing in
developed foreign countries.
Currency Risk Because the FISH: Series C invests directly in foreign
currencies or in securities that trade in, and receive
revenues in, foreign (non-U.S.) currencies, it is subject
to the risk that those currencies will decline in value
relative to the U.S. Dollar, or, in the case of hedging
positions, that the U.S. Dollar will decline in value
relative to the currency being hedged. Currency rates
in foreign countries may fluctuate significantly over
short periods of time for a number of reasons, including
changes in interest rates, intervention (or the failure
to intervene) by U.S. or foreign governments, central
banks or supranational entities such as the International
Monetary Fund, and by the imposition of currency controls
or other political developments in the U.S. or abroad.
As a result, the Portfolio's investments in foreign
currency-denominated securities may reduce the return of
the Portfolio.
Non-diversification Focusing investments in a small number of issuers
Risk increases risk. Each Portfolio is "non-diversified,"
which means that it may invest a greater percentage
of its assets in the securities of a single issuer
than "diversified" funds. Portfolios that invest in a
relatively small number of issuers are more susceptible
to risks associated with a single economic, political
or regulatory occurrence than a more diversified portfolio
might be. Some of those issuers also may present
substantial credit or other risks.
Leveraging Risk Each of the Portfolios may engage in transactions that give
rise to a form of leverage. Such transactions may include,
among others, reverse repurchase agreements, loans of
portfolio securities, and the use of when-issued, delayed
delivery or forward commitment transactions. The use of
derivatives may
-8-
<PAGE>
also create leveraging risk. To mitigate leveraging risk,
PIMCO will segregate liquid assets or otherwise cover the
transactions that may give rise to such risk. The use of
leverage may cause a Portfolio to liquidate portfolio
positions when it may not be advantageous to do so to
satisfy its obligations or to meet segregation
requirements. Leverage, including borrowing, will cause a
Portfolio to be more volatile than if the Portfolio had not
been leveraged. This is because leverage tends to
exaggerate the effect of any increase or decrease in the
value of a Portfolio's securities.
Smaller Company The general risks associated with fixed income securities
Risk are particularly pronounced for securities issued by
companies with smaller market capitalizations. These
companies may have limited product lines, markets or
financial resources or may depend on a few key
employees. As a result, they may be subject to greater
levels of credit, market and issuer risk. Securities of
smaller companies may trade less frequently and in lesser
volumes than more widely held securities, and their values
may fluctuate more sharply than other securities. Companies
with medium-sized market capitalizations may have risks
similar to those of smaller companies.
Management Risk Each Portfolio is subject to management risk because it is
an actively managed investment portfolio. Each Portfolio's
sub-adviser and each individual portfolio manager will
apply investment techniques and risk analyses in making
investment decisions for the Portfolios, but there can be
no guarantee that these will produce the desired results.
Management of the Portfolios
Investment Adviser, PIMCO Advisors L.P. serves as the investment adviser for
Sub-adviser and the Portfolios. Pacific Investment Management Company
Administrator ("PIMCO") serves as the sub-adviser for the Portfolios.
PIMCO Advisory Services serves as the administrator and
sole trading desk for purchases and redemptions of
Portfolio shares. Subject to the supervision of the Board
of Trustees, PIMCO is responsible for managing the
investment activities of the Portfolios, PIMCO Advisors
L.P. is responsible for managing the Portfolios' business
affairs, and PIMCO Advisory Services, in its role as the
administrator, is responsible for other administrative
matters.
PIMCO Advisors L.P. is located at 800 Newport Center
Drive, Newport Beach, California 92660. Organized in 1987,
PIMCO Advisors L.P. provides investment management and
advisory services to private accounts of institutional and
individual clients and to mutual funds. As of June 30,
2000, PIMCO Advisors L.P. and its subsidiary partnerships
had approximately $264 billion in assets under management.
PIMCO is located at 840 Newport Center Drive, Newport
Beach, California 92660. Organized in 1971, PIMCO provides
investment management and advisory services to private
accounts of institutional and individual clients and to
mutual funds. As of June 30, 2000, PIMCO had
approximately $199.3 billion in assets under management.
PIMCO Advisory Services is located at 1345 Avenue of
the Americas, New York, New York 10105.
Advisory Fees Neither Portfolio pays any advisory or other fees.
Individual A team of investment professionals, led by William H.
Portfolio Managers Gross, a founding partner of PIMCO, has had primary
responsibility for managing the Portfolios since their
inception. For the past five years, Mr. Gross has been
Managing Director and Chief Investment Officer of PIMCO.
Distributor The Portfolios' Distributor is PIMCO Funds Distributors
LLC, a wholly owned subsidiary of PIMCO Advisors. The
Distributor, located at 2187 Atlantic Street, Stamford,
Connecticut 06902, is a broker-dealer registered with the
SEC.
Purchases and Redemptions
Purchasing Shares Investors may purchase Portfolio shares at the relevant net
asset value of that Portfolio without a sales
-9-
<PAGE>
charge or other fee.
Shares of the Portfolios are offered exclusively to
registered investment advisers approved by PIMCO Advisory
Services.
o Timing of Purchase Orders and Share Price Calculations. A
purchase order initiated by PIMCO Advisory Services, in its
role as the trading desk, prior to 4:00 p.m., Eastern
Time, on a day the Portfolios are open for business, will
be effected at that day's net asset value. An order
received after 4:00 p.m., Eastern Time will be effected at
the net asset value determined on the next business day.
The Portfolios are "open for business" on each day the
New York Stock Exchange is open for trading. Purchase
orders will be accepted only on days on which the
Portfolios are open for business.
o Initial Investment. Registered investment advisers may
open an account by submitting an executed Client Agreement,
a copy of which is mailed to PIMCO Advisory Services at
1345 Avenue of the Americas, New York, New York 10105.
There are no maximum or minimum initial investment
requirements.
o Additional Investments. Additional shares can be
purchased only through PIMCO Advisory Services, and
payment must be wired in federal funds to the transfer
agent.
o Other Purchase Information. Purchases of a Portfolio's
shares will be made only in full shares. Certificates for
shares will not be issued. The payment for shares to be
purchased shall be wired to the Portfolio's transfer agent.
Each of the Portfolios, acting through PIMCO Advisory
Services, in its role as the administrator, reserves the
right, in its sole discretion, to suspend the offering of
shares of the Portfolios or to reject any purchase order,
in whole or in part, when, in the judgment of management,
such suspension or rejection is in the best interests of
the Portfolios.
An investor should invest in the Portfolios for
long-term investment purposes only. The Portfolios, acting
through PIMCO Advisory Services, in its role as the
administrator, each reserve the right to restrict purchases
of Portfolio shares when a pattern of frequent purchases
and sales made in response to short-term fluctuations in
share price appears evident. Notice of any such
restrictions, if any, will vary according to the particular
circumstances.
o Redemption by Electronic Transmission. Shares can be
redeemed only through PIMCO Advisory Services, in its role
as the trading desk.
o Other Redemption Information. Redemption requests for
Portfolio shares are effected at the net asset value per
share next determined after receipt of a redemption request
by PIMCO Advisory Services, in its role as the trading
desk. A redemption request received by the transfer agent
prior to 4:00 p.m., Eastern Time, on a day the Portfolios
are open for business, is effected on that day. A
redemption request received after that time is effected on
the next business day.
Redemption proceeds will be wired to the registered
investment adviser within one business day after the
redemption request, but may take up to three business days.
Redemption proceeds will be sent by wire only. The
Portfolios may suspend the right of redemption or postpone
the payment date at times when the New York Stock Exchange
is closed, or during certain other periods as permitted
under the federal securities laws.
Each Portfolio reserves the right to redeem shares
of any registered investment adviser at the then-current
value of such shares (which will be paid promptly to the
registered investment adviser) if the registered investment
adviser is no longer approved by PIMCO Advisory Services. A
registered investment adviser will receive advance notice
of any such mandatory redemption.
It is highly unlikely that shares would ever be
redeemed in kind. However, in consideration of the best
interests of the remaining investors, each Portfolio
reserves the right to pay any redemption proceeds exceeding
this amount in whole or in part by a distribution in kind
of securities held by the Portfolio in lieu of cash. Each
Portfolio agrees to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the Portfolio's net assets
during any 90-day period for any one registered investment
adviser. When
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shares are redeemed in kind, the redeeming registered
investment adviser should expect to incur transaction
costs upon the disposition of the securities received
in the distribution.
How Portfolio Shares Are Priced
The net asset value of a Portfolio's shares is determined
by dividing the total value of a Portfolio's investments
and other assets attributable to that Portfolio, less any
liabilities, by the total number of shares outstanding of
that Portfolio.
For purposes of calculating net asset value,
portfolio securities and other assets for which market
quotes are available are stated at market value. Market
value is generally determined on the basis of last reported
sales prices or, if no sales are reported, based on quotes
obtained from a quotation reporting system, established
market makers, or pricing services. Certain securities or
investments for which daily market quotations are not
readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to
other securities or indices. Short-term investments having
a maturity of 60 days or less are generally valued at
amortized cost. Exchange traded options, futures and
options on futures are valued at the settlement price
determined by the exchange. Other securities for which
market quotes are not readily available are valued at fair
value as determined in good faith by the Board of Trustees
or persons acting at their direction.
Investments initially valued in foreign currencies
are converted to U.S. dollars using foreign exchange rates
obtained from pricing services. As a result, the net asset
value of a Portfolio's shares may be affected by changes in
the value of foreign currencies in relation to the U.S.
dollar. The value of securities traded in foreign markets
or denominated in foreign currencies may be affected
significantly on a day that the New York Stock Exchange is
closed and an investor is not able to buy or redeem shares.
Portfolio shares are valued at 4:00 p.m., Eastern
Time on each day that the New York Stock Exchange and the
Portfolios are open. For purposes of calculating the net
asset value, information that becomes known to the
Portfolios or their agents after the net asset value has
been calculated on a particular day will not generally be
used to retroactively adjust the price of a security or the
net asset value determined earlier that day.
In unusual circumstances, instead of valuing
securities in the usual manner, the Portfolios may value
securities at fair value or estimate their value as
determined in good faith by the Board of Trustees,
generally based upon recommendations provided by PIMCO.
Fair valuation may also be used if extraordinary events
occur after the close of the relevant market but prior to
4:00 p.m. Eastern Time.
Portfolio Distributions
Each Portfolio distributes substantially all of its net
investment income to shareholders investing in the
Portfolio in the form of dividends. An investment in
Portfolio shares begins earning dividends on the
shares the day after the Portfolio receives the related
purchase payment. Dividends are paid monthly on the last
business day of the month.
In addition, each Portfolio distributes any net
capital gains it earns from the sale of portfolio
securities to shareholders investing in the Portfolio no
less frequently than annually. Net short-term capital gains
may be paid more frequently.
A Portfolio's dividend and capital gain distributions
will be paid only in cash. Dividends will not reinvest.
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Tax Consequences(3)
o Taxes on Portfolio Distributions. A shareholder subject
to U.S. federal income tax will be subject to tax on
Portfolio distributions. For federal income tax purposes,
Portfolio distributions will be taxable to the shareholder
as either ordinary income or capital gains.
Portfolio dividends (i.e., distributions of investment
income) are taxable to shareholders investing in the
Portfolio as ordinary income. Federal taxes on Portfolio
distributions of gains are determined by how long the
Portfolio owned the investments that generated the gains,
rather than how long a shareholder has owned the shares.
Distributions of gains from investments that a Portfolio
owned for more than 12 months will generally be taxable to
shareholders as capital gains. Distributions of gains from
investments that the Portfolio owned for 12 months or less
will generally be taxable as ordinary income.
Portfolio distributions are taxable to shareholders
even if they are paid from income or gains earned by a
Portfolio prior to the shareholder's investment and thus
were included in the price paid for the shares. For
example, a shareholder who purchases shares on or just
before the record date of a Portfolio distribution will pay
full price for the shares and may receive a portion of his
or her investment back as a taxable distribution.
A Portfolio's investment in certain debt obligations
(including obligations issued with market discount,
zero-coupon bonds, pay-in-kind securities, catastrophe
bonds, and metal-indexed notes) may cause the Portfolio to
recognize taxable income in excess of the cash generated by
such obligations. Thus, the Portfolio could be required at
times to liquidate other investments in order to distribute
all of its net income and gain annually.
The FISH: Series C's investment in foreign securities
may be subject to foreign withholding taxes. In that case,
the Portfolio's yield on these securities would be
decreased. Shareholders generally will not be entitled to
claim a credit or deduction with respect to foreign taxes.
In addition, the Portfolio's investment in foreign
securities or foreign currencies may increase or accelerate
the Portfolio's recognition of ordinary income and may
affect the timing or amount of the Portfolio's
distributions.
o Taxes on Redemption of Shares. Any gain resulting from
the sale of Portfolio shares will generally be subject to
federal income tax.
Characteristics and Risks of
Securities and Investment Techniques
This section provides additional information about some of
the principal investments and related risks of the
Portfolios described under "Summary Information" above. It
also describes characteristics and risks of additional
securities and investment techniques that may be used by
the Portfolios from time to time. Most of these securities
and investment techniques are discretionary, which means
that PIMCO can decide whether to use them or not. This
Prospectus does not attempt to disclose all of the various
types of securities and investment techniques that may be
used by the Portfolios. As with any portfolio, investors in
the Portfolios rely on the professional investment judgment
and skill of PIMCO and the individual portfolio managers.
Please see "Investment Objectives and Policies" in the
Statement of Additional Information for more detailed
information about the securities and investment techniques
described in this section and about other strategies and
techniques that may be used by the Portfolios.
(3) This section relates only to federal income tax; the
consequences under other tax laws may differ. Shareholders
should consult their tax advisors as to the possible
application of foreign, state and local income tax laws to
Portfolio dividends and capital distributions. Please see
the Statement of Additional Information for additional
information regarding the tax aspects of investing in the
Portfolios.
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Securities The total return sought by a Portfolio consists of both
Selection income earned on a Portfolio's investments and capital
appreciation, if any, arising from increases in the market
value of a Portfolio's holdings. Capital appreciation of
fixed income securities generally results from decreases in
market interest rates or improving credit fundamentals for
a particular market sector or security.
In determining what securities to buy or sell for a
Portfolio, PIMCO develops an outlook for interest rates,
foreign currency exchange rates and the economy, analyzes
credit and call risks, and uses other security selection
techniques. The proportion of a Portfolio's assets
committed to investment in securities with particular
characteristics (such as quality, sector, interest rate or
maturity) varies based on PIMCO's outlook for the U.S. and
foreign economies, the financial markets and other factors.
A Portfolio will sell a security when PIMCO believes the
Portfolio is more likely to achieve its objective by
investing the proceeds elsewhere.
PIMCO attempts to identify areas of the bond market
that are undervalued relative to the rest of the market.
PIMCO identifies these areas by grouping bonds into the
following sectors: money markets, governments, corporates,
mortgages, asset-backed and international. Sophisticated
proprietary software then assists in evaluating sectors and
pricing specific securities. Once investment opportunities
are identified, PIMCO will shift assets among sectors
depending upon changes in relative valuations and credit
spreads. There is no guarantee that PIMCO's security
selection techniques will produce the desired results.
U.S. Government U.S. Government securities are obligations of, or
Securities guaranteed by, the U.S. Government, its agencies or
instrumentalities. U.S. Government securities are subject
to market and interest rate risk, and may be subject to
varying degrees of credit risk. U.S. Government securities
include zero coupon securities, which tend to be subject to
greater market risk than interest-paying securities of
similar maturities.
Corporate Debt Corporate debt securities are subject to the risk of the
Securities issuer's inability to meet principal and interest payments
on the obligation and may also be subject to price
volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of
the issuer and general market liquidity. When interest
rates rise, the value of corporate debt securities can be
expected to decline. Debt securities with longer maturities
tend to be more sensitive to interest rate movements than
those with shorter maturities.
Variable and Variable and floating rate securities provide for a
Floating Rate periodic adjustment in the interest rate paid on the
Securities obligations. Each Portfolio may invest in floating rate
debt instruments and engage in credit spread trades. While
floating rate debt instruments provide a certain degree of
protection against rises in interest rates, a Portfolio
will participate in any declines in interest rates as well.
Each Portfolio may also invest in inverse floating rate
debt instruments. An inverse floating rate debt instrument
may exhibit greater price volatility than a fixed rate
obligation of similar credit quality. A Portfolio may not
invest more than 40% of its net assets in any combination
of inverse floating rate debt instruments, interest-only,
or principal-only securities.
Foreign (Non-U.S.) Investing in foreign securities involves special risks and
Securities considerations not typically associated with investing in
U.S. securities. Registered investment advisers should
consider carefully the substantial risks involved for the
FISH: Series C, which invests in securities issued by
foreign companies and governments of foreign countries.
These risks include: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or
exchange control regulations; and political instability.
Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rates of inflation,
capital reinvestment, resources, self-sufficiency and
balance of payments position. The securities markets,
values of securities, yields and risks associated with
foreign securities markets may change independently of each
other. Also, foreign securities and dividends and interest
payable on those securities may be subject to foreign
taxes, including taxes withheld from payments on those
securities. Foreign securities often trade with less
frequency and volume than domestic securities and therefore
may exhibit greater price volatility. Investments in
foreign securities may also involve higher custodial costs
than domestic investments and additional transaction costs
with respect to foreign currency conversions. Changes in
foreign exchange rates also will affect the value of
securities denominated or quoted in foreign currencies.
The FISH: Series C also may invest in sovereign debt
issued by governments, their agencies or
instrumentalities, or other government-related entities.
Holders of sovereign debt may be requested to participate
in the rescheduling of such debt and to extend further
loans to governmental entities. In addition, there is no
bankruptcy proceeding by which defaulted sovereign debt
may be collected.
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<PAGE>
Emerging Market Securities. The FISH: Series C may
invest up to 15% of its assets in securities of issuers
based in developing (or "emerging market") countries.
Investing in emerging market securities imposes risks
different from, or greater than, risks of investing in
domestic securities or in foreign, developed countries.
These risks include: smaller market capitalization of
securities markets, which may suffer periods of relative
illiquidity; significant price volatility; restrictions on
foreign investment and possible repatriation of investment
income and capital. In addition, foreign investors may be
required to register the proceeds of sales; future economic
or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure,
nationalization, or creation of government monopolies. The
currencies of emerging market countries may experience
significant declines against the U.S. dollar, and
devaluation may occur subsequent to investments in these
currencies by a Portfolio. Inflation and rapid fluctuations
in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of
certain emerging market countries.
Additional risks of emerging markets securities may
include: greater social, economic and political uncertainty
and instability; more substantial governmental involvement
in the economy; less governmental supervision and
regulation; unavailability of currency hedging techniques;
companies that are newly organized and small; differences
in auditing and financial reporting standards, which may
result in unavailability of material information about
issuers; and less developed legal systems. In addition,
emerging securities markets may have different clearance
and settlement procedures, which may be unable to keep pace
with the volume of securities transactions or otherwise
make it difficult to engage in such transactions.
Settlement problems may cause a Portfolio to miss
attractive investment opportunities, hold a portion of its
assets in cash pending investment, or be delayed in
disposing of a portfolio security. Such a delay could
result in possible liability to a purchaser of the
security.
The FISH: Series C may invest in Brady Bonds, which
are securities created through the exchange of existing
commercial bank loans to sovereign entities for new
obligations in connection with a debt restructuring.
Investments in Brady Bonds may be viewed as speculative.
Brady Bonds acquired by the Portfolio may be subject to
restructuring arrangements or to requests for new credit,
which may cause the Portfolio to suffer a loss of interest
or principal on any of its holdings.
Foreign (Non-U.S.) The FISH: Series C, which may invest directly in foreign
Currencies currencies or in securities that trade in, or receive
revenues in, foreign currencies, is subject to currency
risk. Foreign currency exchange rates may fluctuate
significantly over short periods of time. They generally
are determined by supply and demand in the foreign exchange
markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates
and other complex factors. Currency exchange rates also can
be affected unpredictably by intervention (or the failure
to intervene) by U.S. or foreign governments or central
banks, or by currency controls or political developments.
For example, significant uncertainty surrounds the recent
introduction of the euro (a common currency unit for the
European Union) and the effect it may have on the value of
securities denominated in local European currencies. These
and other currencies in which the Portfolio's assets are
denominated may be devalued against the U.S. dollar,
resulting in a loss to the Portfolio.
Foreign Currency Transactions. The FISH: Series C may
enter into forward foreign currency exchange contracts and
invest in foreign currency futures contracts and options on
foreign currencies and futures. A forward foreign currency
exchange contract, which involves an obligation to purchase
or sell a specific currency at a future date at a price set
at the time of the contract, reduces the Portfolio's
exposure to changes in the value of the currency it will
deliver and increases its exposure to changes in the value
of the currency it will receive for the duration of the
contract. The effect on the value of the Portfolio is
similar to selling securities denominated in one currency
and purchasing securities denominated in another currency.
A contract to sell foreign currency may result in losses
if the value of the sold currency increases. The Portfolio
may enter into these contracts to hedge against foreign
exchange risk, to increase exposure to a foreign currency
or to shift exposure to foreign currency fluctuations from
one currency to another. Suitable transactions may not be
available in all circumstances, and there can be no
assurance that the Portfolio will engage in such
transactions at any given time or from time to time.
Also, such transactions may not be successful and may
eliminate any chance for a Portfolio to benefit from
favorable fluctuations in relevant foreign currencies. The
Portfolio may use one currency (or a basket of currencies)
to hedge against adverse changes in the value of another
currency (or basket of currencies) when exchange rates
between the two currencies are positively correlated. The
Portfolio will segregate assets determined to be liquid by
PIMCO in accordance with procedures established by the
Board of Trustees to cover its obligations under
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<PAGE>
forward foreign currency exchange contracts entered into
for non-hedging purposes.
High Yield Securities rated lower than Baa by Moody's Investors
Securities Service, Inc. or lower than BBB by Standard & Poor's
Ratings Services are sometimes referred to as "high yield"
or "junk" bonds. Investing in high yield securities
involves special risks in addition to the risks associated
with investments in higher-rated fixed income securities.
While offering a greater potential opportunity for capital
appreciation and higher yields, high yield securities
typically entail greater potential price volatility and may
be less liquid than higher-rated securities. High yield
securities may be regarded as predominantly speculative
with respect to the issuer's continuing ability to meet
principal and interest payments. They may also be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher-rated
securities.
Credit Ratings and Unrated Securities. Rating agencies
are private services that provide ratings of the credit
quality of fixed income securities, including convertible
securities. Appendix A to this Prospectus describes the
various ratings assigned to fixed income securities by
Moody's and S&P. Ratings assigned by a rating agency are
not absolute standards of credit quality and do not
evaluate market risks. Rating agencies may fail to make
timely changes in credit ratings, and an issuer's current
financial condition may be better or worse than a rating
indicates. A Portfolio will not necessarily sell a security
when its rating is reduced below its rating at the time of
purchase. PIMCO does not rely solely on credit ratings, and
develops its own analysis of issuer credit quality.
A Portfolio may purchase unrated securities (which are
not rated by a rating agency) if its portfolio manager
determines that the security is of comparable quality to a
rated security that the Portfolio may purchase. Unrated
securities may be less liquid than comparable rated
securities and involve the risk that the portfolio manager
may not accurately evaluate the security's comparative
credit rating. Analysis of the creditworthiness of issuers
of high yield securities may be more complex than for
issuers of higher-quality fixed income securities. To the
extent that a Portfolio invests in high yield and/or
unrated securities, the Portfolio's success in achieving
its investment objective may depend more heavily on the
portfolio manager's creditworthiness analysis than if the
Portfolio invested exclusively in higher-quality and rated
securities.
Inflation-Indexed Inflation-indexed bonds are fixed income securities whose
Bonds principal value is periodically adjusted according to the
rate of inflation. If the index measuring inflation falls,
the principal value of inflation-indexed bonds will be
adjusted downward, and consequently the interest payable on
these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds. For bonds that do not provide a
similar guarantee, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change
in response to changes in real interest rates. Real
interest rates are tied to the relationship between nominal
interest rates and the rate of inflation. If nominal
interest rates increase at a faster rate than inflation,
real interest rates may rise, leading to a decrease in
value of inflation-indexed bonds. Short-term increases in
inflation may lead to a decline in value. Any increase in
the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors
do not receive their principal until maturity.
Derivatives Each Portfolio may, but is not required to, use derivative
instruments for risk management purposes or as part of its
investment strategies. Generally, derivatives are financial
contracts whose value depends upon or is derived from, the
value of an underlying asset, reference rate or index, and
may relate to stocks, bonds, interest rates, currencies or
currency exchange rates, commodities, and related indexes.
Examples of derivative instruments include options
contracts, futures contracts, options on futures contracts
and swap agreements. Each Portfolio may invest some or
all of its assets in derivative instruments, subject to
the Portfolio's objectives and policies. A portfolio
manager may decide not to employ any of these strategies,
and there is no assurance that any derivatives strategy
used by a Portfolio will succeed. A description of these
and other derivative instruments that the Portfolios may
use are described under "Investment Objectives and
Policies" in the Statement of Additional Information.
A Portfolio's use of derivative instruments involves
risks different from, or greater than, the risks associated
with investing directly in securities and other more
traditional investments. A description of various risks
associated with particular derivative instruments is
included in "Investment Objectives and Policies" in the
Statement of Additional Information. The following provides
a more general discussion
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of important risk factors relating to all derivative
instruments that may be used by the Portfolios.
Management Risk. Derivative products are highly
specialized instruments that require investment techniques
and risk analyses different from those associated with
stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but
also of the derivative itself, without the benefit of
observing the performance of the derivative under all
possible market conditions.
Credit Risk. The use of a derivative instrument
involves the risk that a loss may be sustained as a result
of the failure of another party to the contract (usually
referred to as a "counterparty") to make required payments
or otherwise comply with the contract's terms.
Liquidity Risk. Liquidity risk exists when a
particular derivative instrument is difficult to purchase
or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with
many privately negotiated derivatives), it may not be
possible to initiate a transaction or liquidate a position
at an advantageous time or price.
Leverage Risk. Because many derivatives have a
leverage component, adverse changes in the value or level
of the underlying asset, reference rate or index can result
in a loss substantially greater than the amount invested in
the derivative itself. Certain derivatives have the
potential for unlimited loss, regardless of the size of the
initial investment. When a Portfolio uses derivatives for
leverage, investments in that Portfolio will tend to be
more volatile, resulting in larger gains or losses in
response to market changes. To limit leverage risk, each
Portfolio will segregate assets determined to be liquid by
PIMCO in accordance with procedures established by the
Board of Trustees (or, as permitted by applicable
regulation, enter into certain offsetting positions) to
cover its obligations under derivative instruments.
Lack of Availability. Because the markets for certain
derivative instruments (including markets located in
foreign countries) are relatively new and still developing,
suitable derivatives transactions may not be available in
all circumstances for risk management or other purposes.
There is no assurance that a Portfolio will engage in
derivatives transactions at any time or from time to time.
A Portfolio's ability to use derivatives may also be
limited by certain regulatory and tax considerations.
Market and Other Risks. Like most other investments,
derivative instruments are subject to the risk that the
market value of the instrument will change in a way
detrimental to a Portfolio's interest. If a portfolio
manager incorrectly forecasts the values of securities,
currencies or interest rates or other economic factors in
using derivatives for a Portfolio, the Portfolio might have
been in a better position if it had not entered into the
transaction at all. While some strategies involving
derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in
losses by offsetting favorable price movements in other
Portfolio investments. A Portfolio may also have to buy or
sell a security at a disadvantageous time or price because
the Portfolio is legally required to maintain offsetting
positions or asset coverage in connection with certain
derivatives transactions.
Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the
inability of derivatives to correlate perfectly with
underlying assets, rates and indexes. Many derivatives, in
particular privately negotiated derivatives, are complex
and often valued subjectively. Improper valuations can
result in increased cash payment requirements to
counterparties or a loss of value to a Portfolio. Also, the
value of derivatives may not correlate perfectly, or at
all, with the value of the assets, reference rates or
indexes they are designed to closely track. In addition, a
Portfolio's use of derivatives may cause the Portfolio to
realize higher amounts of short-term capital gains (taxed
at ordinary income tax rates when distributed) than if the
Portfolio had not used such instruments.
Convertible Each Portfolio may invest in convertible securities.
Securities Convertible securities are generally preferred stocks and
other securities, including fixed income securities and
warrants, that are convertible into or exercisable for
common stock at a stated price or rate. The price of a
convertible security will normally vary in some proportion
to changes in the price of the underlying common stock
because of this conversion or exercise feature. However,
the value of a convertible security may not increase or
decrease as rapidly as the underlying common stock. A
convertible security will normally also provide income and
is subject to interest rate risk. Convertible securities
may be lower-rated securities subject to greater levels of
credit risk. A Portfolio may be forced to convert a
security before it would otherwise choose,
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which may have an adverse effect on the Portfolio's ability
to achieve its investment objective.
While the Portfolios intend to invest primarily in
fixed income securities, each may invest in convertible
securities or equity securities. While some countries or
companies may be regarded as favorable investments, pure
fixed income opportunities may be unattractive or limited
due to insufficient supply, or legal or technical
restrictions. In such cases, a Portfolio may consider
equity securities or convertible securities to gain
exposure to such investments.
Equity securities generally have greater price
volatility than fixed income securities. The market price
of equity securities owned by a Portfolio may go up or
down, sometimes rapidly or unpredictably.
Equity securities may decline in value due to factors
affecting equity securities markets generally or
particular industries represented in those markets. The
value of an equity security may also decline for a number
of reasons that directly relate to the issuer, such as
management performance, financial leverage, and reduced
demand for the issuer's goods or services.
Mortgage-Related The FISH: Series M invests primarily, and the FISH: Series
and Other C may invest up to 30% of its assets, in mortgage-related
Asset-Backed and other asset-backed securities. Mortgage-related
Securities securities include mortgage pass-through securities,
collateralized mortgage obligations, commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals,
stripped mortgage-backed securities and other securities
that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans on real
property.
The value of some mortgage-related and other asset-
backed securities may be particularly sensitive to changes
in prevailing interest rates. Early repayment of principal
on some mortgage-related securities may expose a
Portfolio to a lower rate of return upon reinvestment of
principal. When interest rates rise, the value of a
mortgage-related security generally will decline; however,
when interest rates are declining, the value of mortgage-
related securities with prepayment features may not
increase as much as other fixed income securities. The rate
of prepayments on underlying mortgages will affect the
price and volatility of a mortgage-related security, and
may shorten or extend the effective maturity of the
security beyond what was anticipated at the time of
purchase. If unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a
mortgage-related security, the volatility of the security
can be expected to increase. The value of these securities
may fluctuate in response to the market's perception of
the creditworthiness of the issuers. Additionally, although
mortgages and mortgage-related securities are generally
supported by some form of government or private guarantee
and/or insurance, there is no assurance that private
guarantors or insurers will meet their obligations.
One type of stripped mortgage-backed security has one
class receiving all of the interest from the mortgage
assets (the interest-only class), while the other class
will receive all of the principal (the principal-only
class). The yield to maturity on an interest-only class is
extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets,
and a rapid rate of principal payments may have a material
adverse effect on a Portfolio's yield to maturity from
these securities. The FISH: Series M may not invest more
than 40% of its net assets in any combination of interest-
only, principal-only, or inverse floating rate securities.
Each Portfolio may invest in other asset-backed securities
that have been offered to investors.
Municipal Bonds Municipal bonds are generally issued by state and local
governments and their agencies, authorities and other
instrumentalities. Municipal bonds are subject to interest
rate, credit and market risk. The ability of an issuer to
make payments could be affected by litigation, legislation
or other political events or the bankruptcy of the issuer.
Lower rated municipal bonds are subject to greater credit
and market risk than higher quality municipal bonds.
Loan Participations The FISH: Series C may invest in fixed-rate and floating-
and Assignments rate loans, which investments generally will be in the form
of loan participations and assignments of portions of such
loans. Participations and assignments involve special types
of risk, including credit risk, interest rate risk,
liquidity risk, and the risks of being a lender. If the
Portfolio purchases a participation, it may only be able to
enforce its rights through the lender, and may assume the
credit risk of the lender in addition to the borrower.
Delayed Funding The FISH: Series C may also enter into, or acquire
Loans and Revolving participations in, delayed funding loans and revolving
Credit Facilities credit facilities, in which a lender agrees to make loans
up to a maximum amount upon demand by the borrower during a
specified term. These commitments may have the effect of
requiring the Portfolio to increase its investment in a
company at a time when it might not otherwise decide to do
so (including at a time when the company's financial
condition makes it unlikely that such amounts will be
repaid). To the extent that the Portfolio is committed to
advance additional funds, it will segregate assets
determined to be liquid by PIMCO in accordance with
procedures established by the Board of Trustees in an
amount sufficient to meet such commitments. Delayed funding
loans and revolving credit facilities are subject to
credit, interest rate and liquidity risk and the risks of
being a lender.
-17-
<PAGE>
Loans of Portfolio For the purpose of achieving income, each Portfolio may
Securities lend its portfolio securities to brokers, dealers, and
other financial institutions, provided that a number of
conditions are satisfied, including that the loan be fully
collateralized. Please see "Investment Objectives and
Policies" in the Statement of Additional Information for
details. When a Portfolio lends portfolio securities, its
investment performance will continue to reflect changes in
the value of the securities loaned, and the Portfolio will
also receive a fee or interest on the collateral.
Securities lending involves the risk of loss of rights in
the collateral or delay in recovery of the collateral if
the borrower fails to return the security loaned or becomes
insolvent. A Portfolio may pay lending fees to a party
arranging the loan.
Short Sales Each Portfolio may make short sales as part of its overall
portfolio management strategies or to offset a potential
decline in value of a security. A short sale involves the
sale of a security that is borrowed from a broker or other
institution to complete the sale. Short sales expose a
Portfolio to the risk that it will be required to
acquire, convert or exchange securities to replace the
borrowed securities (also known as "covering" the short
position) at a time when the securities sold short have
appreciated in value, thus resulting in a loss to the
Portfolio. A Portfolio making a short sale (other than a
"short sale against the box") must segregate assets
determined to be liquid by PIMCO in accordance with
procedures established by the Board of Trustees or
otherwise cover its position in a permissible manner.
When-Issued, Each Portfolio may purchase securities which it is eligible
Delayed Delivery to purchase on a when-issued basis, may purchase and sell
and Forward such securities for delayed delivery and may make contracts
Commitment to purchase such securities for a fixed price at a future
Transactions date beyond normal settlement time (forward commitments).
When-issued transactions, delayed delivery purchases and
forward commitments involve a risk of loss if the value of
the securities declines prior to the settlement date. This
risk is in addition to the risk that the Portfolio's other
assets will decline in value. Therefore, these transactions
may result in a form of leverage and increase a Portfolio's
overall investment exposure. Typically, no income accrues
on securities a Portfolio has committed to purchase prior
to the time delivery of the securities is made, although a
Portfolio may earn income on securities it has segregated
to cover these positions.
Repurchase Each Portfolio may enter into repurchase agreements, in
Agreements which the Portfolio purchases a security from a bank or
broker-dealer that agrees to repurchase the security at the
Portfolio's cost plus interest within a specified time. If
the party agreeing to repurchase should default, the
Portfolio will seek to sell the securities which it holds.
This could involve procedural costs or delays in addition
to a loss on the securities if their value should fall
below their repurchase price. Repurchase agreements
maturing in more than seven days are considered illiquid
securities.
Reverse Repurchase Each Portfolio may enter into reverse repurchase agreements
Agreements, Dollar and dollar rolls, subject to the Portfolio's limitations on
Rolls and Other borrowings. A reverse repurchase agreement or dollar roll
Borrowings involves the sale of a security by a Portfolio and its
agreement to repurchase the instrument at a specified time
and price, and may be considered a form of borrowing for
some purposes. A Portfolio will segregate assets determined
to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees or otherwise cover
its obligations under reverse repurchase agreements,
dollar rolls and other borrowings. A Portfolio also may
borrow money for investment purposes subject to any
policies of the Portfolio currently described in this
Prospectus or in the Statement of Additional Information.
Reverse repurchase agreements, dollar rolls and other
forms of borrowings may create leveraging risk for
a Portfolio.
Event-Linked Bonds Each Portfolio may invest in "event-linked bonds," which
are fixed income securities for which the return of
principal and payment of interest is contingent on the
non-occurrence of a specific "trigger" catastrophic event,
such as a hurricane, earthquake or some other physical or
weather-related phenomenon. Some event-related bonds are
commonly referred to as "catastrophe bonds." If a
trigger event occurs, a Portfolio may lose a portion or
all of its principal invested in the bond. Event-related
bonds often provide for an extension of maturity to
process and audit loss claims where a trigger event has,
or possibly has, occurred. An extension of maturity may
increase volatility. Event-related bonds may also expose
the Portfolio to certain unanticipated risks including
credit risk, adverse regulatory or jurisdictional
interpretations, and adverse tax consequences.
Event-related bonds may also be subject to
liquidity risk.
Portfolio Turnover The length of time a Portfolio has held a particular
security is not generally a consideration in investment
decisions. A change in the securities held by a Portfolio
is known as "portfolio turnover." Each Portfolio may engage
in frequent and active trading of portfolio securities to
achieve its investment objective, particularly during
periods of volatile market movements. High portfolio
turnover (e.g., over 100%)
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<PAGE>
involves correspondingly greater expenses to a Portfolio,
including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestments in other securities. Such sales may also
result in realization of taxable capital gains, including
short-term capital gains (which are generally taxed at
ordinary income tax rates when distributed). The trading
costs and tax effects associated with portfolio turnover
may adversely affect a Portfolio's performance.
Illiquid Securities Each Portfolio may invest up to 15% of its net assets in
illiquid securities. Certain illiquid securities may
require pricing at fair value as determined in good faith
under the supervision of the Board of Trustees. A portfolio
manager may be subject to significant delays in disposing
of illiquid securities, and transactions in illiquid
securities may entail registration expenses and other
transaction costs that are higher than those for
transactions in liquid securities. The term "illiquid
securities" for this purpose means securities that cannot
be disposed of within seven days in the ordinary course of
business at approximately the amount at which a Portfolio
has valued the securities. Restricted securities, i.e.,
securities subject to legal or contractual restrictions on
resale, may be illiquid. However, some restricted
securities (such as securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial
paper) may be treated as liquid, although they may be less
liquid than registered securities traded on established
secondary markets.
Investment in Other Each Portfolio may invest up to 10% of its assets in
Investment securities of other investment companies, such as
Companies closed-end management investment companies, or in pooled
accounts or other investment vehicles which invest in
foreign markets. As a shareholder of an investment company,
a Portfolio may indirectly bear service and other fees
which are in addition to the fees the Portfolio pays its
service providers.
Temporary Defensive For temporary or defensive purposes, each Portfolio may
Strategies invest without limit in U.S. debt securities, including
short-term money market securities, when PIMCO deems it
appropriate to do so. When a Portfolio engages in such
strategies, it may not achieve its investment objective.
Changes in The investment objective of each Portfolio may be changed
Investment by the Board of Trustees without the approval of the
Objectives and registered investment advisers investing in the Portfolio.
Policies Unless otherwise stated, all other investment policies of
the Portfolios may be changed by the Board of Trustees
without the approval of the registered investment advisers
investing in the Portfolios.
Percentage Unless otherwise stated, all percentage limitations on
Investment Portfolio investments listed in this Prospectus will apply
Limitations at the time of investment. A Portfolio would not violate
these limitations unless an excess or deficiency were to
occur or exist immediately after and as a result of an
investment.
Other Investments The Portfolios may invest in other types of securities and
and Techniques use a variety of investment techniques and strategies which
are not described in this Prospectus. These securities and
techniques may subject the Portfolios to additional risks.
Please see the Statement of Additional Information for
additional information about the securities and investment
techniques described in this Prospectus and about
additional securities and techniques that may be used by
the Portfolios.
Financial The financial highlights table is intended to help you
Highlights understand the financial performance of each Portfolio
since it was first offered. Certain information reflects
financial results for a single Portfolio share. The total
returns in the table represent the rate that an investor
would have earned or lost on an investment in a particular
Portfolio, assuming reinvestment of all dividends. This
information has been audited by PricewaterhouseCoopers LLP,
whose report, along with each Portfolio's financial
statements, are included in the annual report to
shareholders. The annual report is incorporated by
reference in the Statement of Additional Information and
is available free of charge upon request from PIMCO
Advisory Services.
For a share of beneficial interest outstanding for the
period March 17, 2000* through October 31, 2000.
<TABLE>
<CAPTION>
Series C Series M
-------- --------
<S> <C> <C>
Net asset value, beginning of period $10.00 $10.00
Income from Investment Operations:
Net investment income 0.45 0.45
Net realized and unrealized gain on investments 0.12 0.45
Total income from investment operations 0.57 0.90
Dividends to Shareholders from:
Net investment income (0.45) (0.45)
Net asset value, end of period $10.12 $10.45
Total Return (1) 5.79% 9.16%
Ratios/Supplemental data:
Net assets, end of period (000's) $10,396 $10,597
Ratio of expenses to average net assets (2) 0.00% 0.00%
Ratio of net investment income to average
net assets (2) 7.04% 7.00%
Portfolio Turnover 547% 930%
</TABLE>
* Commencement of operations
(1) Assumes reinvestment of all dividends. Total return for a period of less
than one year is not annualized.
(2) Annualized
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<PAGE>
Appendix A A Portfolio's investments may range in quality from
Description of securities in the lowest category in which the Portfolio is
Securities Ratings permitted to invest to securities rated in the highest
category (as rated by Moody's or S&P or, if unrated,
determined by PIMCO to be of comparable quality). The
percentage of a Portfolio's assets invested in securities
in a particular rating category will vary. The following
terms are generally used to describe the credit quality of
fixed income securities.
High Quality Debt Securities are those rated in one of the
two highest rating categories (the highest category for
commercial paper) or, if unrated, deemed comparable by
PIMCO.
Investment Grade Debt Securities are those rated in one of
the four highest rating categories or, if unrated, deemed
comparable by PIMCO.
Below Investment Grade, High Yield Securities are those
rated lower than Baa by Moody's or BBB by S&P and
comparable securities. They are deemed predominately
speculative with respect to the issuer's ability to repay
principal and interest.
Following is a description of Moody's and S&P's rating
categories applicable to fixed income securities.
Moody's Investors Corporate and Municipal Bond Ratings
Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make
the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable
investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements
may be present that suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as
well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics
of a desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
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<PAGE>
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classified from Aa through B in its
corporate bond rating system. The modifier 1 indicates that
the security ranks in the higher end of its generic rating
category; the modifier 2 indicated a mid-range raking; and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Corporate Short- Moody's short-term debt ratings are opinions of the ability
Term Debt Ratings of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year.
Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless
explicitly rated.
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics: leading
market positions in well-established industries, high rates
of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and
well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term
debt obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior
short-term obligations. The effect of industry
characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection
measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any
of the Prime rating categories.
Standard & Poor's Corporate Municipal Bond Ratings
Ratings Services Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the highest
rated issues only in small degree.
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 that debt in higher rated categories.
BBB: Debt rated BBB 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.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates
the least degree of speculation and C the highest. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
-21-
<PAGE>
BB: Debt rated BB 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 which could
lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for
debt subordinated to senior debt that is assigned an actual
or implied BBB-rating.
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 or
BB-rating.
CCC: Debt rated CCC 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 rating category is
also used for debt subordinated to senior debt that is
assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to debt subordinated
to senior debt that is assigned an actual or implied CCC
rating.
C: The rating C is typically applied to debt subordinated
to senior debt that is assigned an actual or implied
CCC-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: 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 will also be used upon the filing of a
bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the
debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the
successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience
high volatility or high variability in expected returns due
to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and
options; and interest-only and principal-only mortgage
securities.
The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or
variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and
its territories are rated on the same basis as domestic
corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Commercial Paper An S&P commercial paper rating is a current assessment of
Rating Definitions the likelihood of timely payment of debt having an original
maturity of no more than 365 days. Ratings are graded into
several categories, ranging from A for the highest quality
obligations to D for the lowest. These categories are as
follows:
A-1: This highest category indicates that the degree of
safety regarding timely payment is strong. Those
-22-
<PAGE>
issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree
of safety is not as high as for issues designated A-1.
A-3: Issues carrying this designation have adequate
capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B: Issues rated B are regarded as having only speculative
capacity for timely payment.
C: This rating is assigned to a short-term debt obligations
with a doubtful capacity for payment.
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.
A commercial paper rating is not a recommendation to
purchase, sell or hold a security inasmuch as it does not
comment as to market price or suitability for a particular
investor. The ratings are based on current information
furnished to S&P by the issuer or obtained from other
sources it considers reliable. S&P does not perform an
audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in
or unavailability of such information.
-23-
<PAGE>
FISH: Series C and INVESTMENT ADVISER
FISH: Series M PIMCO Advisors L.P., 800 Newport Center Drive, Newport
Beach, CA 92660
INVESTMENT SUB-ADVISER
Pacific Investment Management Company, 840 Newport Center
Drive, Suite 300, Newport Beach, CA 92660
ADMINISTRATOR/TRADING DESK
PIMCO Advisory Services, 1345 Avenue of the Americas, New
York, NY 10105
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02110
TRANSFER AGENT
National Financial Data Services, Inc., 330 West 9th
Street, Kansas City, MO 64105
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO
64105
LEGAL COUNSEL
Ropes & Gray, One International Place, Boston, MA 02110
TRUSTEES & OFFICERS
Stephen J. Treadway Chairman
Paul Belica Trustee
Robert E. Connor Trustee
Newton B. Schott, Jr. Secretary
Elliot M. Weiss Assistant Secretary
Brian S. Shlissel Treasurer
Susan A. Murphy President, Chief Executive
Officer
Angie Clark Executive Vice President
Robert B. Beel Senior Vice President
Jonathan C. Hart Senior Vice President
Sharon Highland Senior Vice President
Leslie Kravetzky Senior Vice President
Joni H. Rheingold Senior Vice President
Richard P. Triolo Senior Vice President
Jay M. Kirkorsky Vice President,
Senior Portfolio Trader
Christopher Casenhiser Vice President
Raymond Harvier Vice President
Jessica McInnis Hill Vice President
Matthew Saunders Vice President
The Portfolios' Statement of Additional Information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Portfolios. The SAI and the financial statements included in the Portfolios'
most recent annual report to shareholders are incorporated by reference into
this Prospectus, which means they are part of this Prospectus for legal
purposes.
You may get free copies of the SAI and the annual report, request other
information about a Portfolio, or make inquiries by calling PIMCO Advisory
Services at 1-212-739-3535.
You may review and copy information about the Portfolios, including their SAI,
at the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. You may call the Commission at 1-202-942-8090 for information about the
operation of the Public Reference Room. You may also access reports and other
information about the Portfolios on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov. You may get copies of this information,
with payment of a duplication fee, by electronic request at the following E-mail
address: [email protected], or by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009. You may need to refer to the
Portfolios' file number under the Investment Company Act, which is 811-9721.
-24-
<PAGE>
Fixed Income SHares
STATEMENT OF ADDITIONAL INFORMATION
March 1, 2001
This Statement of Additional Information is not a prospectus, and should
be read in conjunction with the prospectus of Fixed Income SHares (the "Trust"),
as supplemented from time to time. Through one Prospectus, dated March 17,
2000, the Trust offers two series of shares: FISH: Series C and FISH: Series M
(each a "Portfolio").
Audited financial statements for the Trust, as of October 31, 2000,
including notes thereto, and the reports of PricewaterhouseCoopers LLP thereon
are incorporated by reference from the Trust's Annual Report. Copies of the
Prospectus and Annual Report, which are incorporated by reference (legally a
part of) into this Statement of Additional Information, may be obtained free of
charge at the following address and telephone number:
PIMCO Advisory Services
1345 Avenue of the Americas
New York, New York 10105
1-212-739-3535
<PAGE>
TABLE OF CONTENTS
PAGE
----
THE TRUST....................................................................1
INVESTMENT OBJECTIVES AND POLICIES...........................................1
U.S. Government Securities.............................................1
Borrowing..............................................................1
Preferred Stock........................................................2
Corporate Debt Securities..............................................2
High Yield Securities ("Junk Bonds")...................................3
Loan Participations and Assignments....................................4
Participation on Creditors Committees..................................4
Variable and Floating Rate Securities..................................5
Mortgage-Related and Asset-Backed Securities...........................5
Convertible Securities.................................................9
Equity-Linked Securities...............................................9
Foreign Securities....................................................10
Foreign Currencies....................................................12
Bank Obligations......................................................12
Commercial Paper......................................................13
Money Market Instruments..............................................14
Derivative Instruments................................................14
When-Issued, Delayed Delivery and Forward Commitment Transactions.....21
Warrants to Purchase Securities.......................................22
Repurchase Agreements.................................................22
Securities Loans......................................................22
Stocks of Small and Medium Capitalization Companies...................23
Illiquid Securities...................................................23
Inflation-Indexed Bonds...............................................24
Delayed Funding Loans and Revolving Credit Facilities.................25
Catastrophe Bonds.....................................................25
Hybrid Instruments....................................................25
Precious Metals and Metal-Indexed Notes...............................26
INVESTMENT RESTRICTIONS.....................................................27
Fundamental Investment Restrictions...................................27
Non-Fundamental Investment Restrictions...............................28
MANAGEMENT OF THE TRUST.....................................................29
Trustees and Officers.................................................29
Trustees' Compensation................................................31
Investment Adviser....................................................32
Portfolio Management Agreements.......................................33
Portfolio Administrator...............................................33
DISTRIBUTION OF TRUST SHARES................................................34
Distributor...........................................................34
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................34
Investment Decisions and Portfolio Transactions.......................34
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<PAGE>
PAGE
Brokerage and Research Services.......................................34
Portfolio Turnover....................................................35
NET ASSET VALUE.............................................................36
TAXATION....................................................................37
Distributions.........................................................37
Sales of Shares.......................................................38
Backup Withholding....................................................38
Options, Futures, Forward Contracts and Swap Agreements...............39
Foreign Currency Transactions.........................................39
Foreign Taxation......................................................39
Original Issue Discount and Pay-In-Kind Securities....................39
Other Taxation........................................................40
OTHER INFORMATION...........................................................40
Capitalization........................................................40
Performance Information...............................................40
Calculation of Yield..................................................41
Calculation of Total Return...........................................42
Potential College Cost Table..........................................48
Year 2000 Readiness Disclosure........................................50
Compliance Efforts Related to the Euro................................51
Voting Rights ........................................................51
Certain Ownership of Trust Shares.....................................51
Custodian.............................................................52
Independent Accountants...............................................52
Transfer Agent........................................................52
Legal Counsel.........................................................52
Registration Statement................................................52
Financial Statements and Report of Independent Accountants............52
Miscellaneous.........................................................54
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<PAGE>
THE TRUST
Fixed Income SHares (the "Trust"), is an open-end management investment
company ("mutual fund") that currently consists of two separate non-diversified
investment portfolios, the FISH: Series C and the FISH: Series M.
The Trust was organized as a Massachusetts business trust on November 3,
1999.
INVESTMENT OBJECTIVES AND POLICIES
In addition to the principal investment strategies and the principal risks
of the Portfolios described in the Prospectus, each Portfolio may employ other
investment practices and may be subject to additional risks which are described
below. Certain strategies and/or risks described below may not apply to each
Portfolio. Unless a strategy or policy described below is specifically
prohibited by the investment restrictions listed in the Prospectus, by the
investment restrictions under "Investment Restrictions" in this Statement of
Additional Information, or by applicable law, a Portfolio may engage in each of
the practices described below.
The Portfolios' sub-adviser, which is responsible for making investment
decisions for the Portfolios, is referred to in this section and the remainder
of this Statement of Additional Information as the "Sub-Adviser."
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Portfolios' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts issued
in connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(e.g., STRIPs and CUBEs) are direct obligations of the U.S. Government.
Borrowing
Subject to the limitations described under "Investment Restrictions"
below, each Portfolio may be permitted to borrow for temporary purposes and/or
for investment purposes. Such a practice will result in leveraging of a
Portfolio's assets and may cause a Portfolio to liquidate positions when it
would not be advantageous to do so. This borrowing may be unsecured. Provisions
of the Investment Company Act of 1940, as amended ("1940 Act"), require a
Portfolio to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed, with an exception for borrowings not in excess of 5% of the
Portfolio's total assets made for temporary administrative purposes. As noted
under "Investment Restrictions," the Portfolios are subject to limitations on
borrowings which are more strict than those imposed by the 1940 Act. Any
borrowings for temporary administrative purposes in excess of 5% of the
Portfolio's total assets will require the Portfolio to maintain continuous asset
coverage. If the 300% asset coverage should decline as a result of market
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fluctuations or other reasons, a Portfolio may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of a Portfolio.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. A Portfolio also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
From time to time, the Trust may enter into, and make borrowings for
temporary purposes related to the redemption of shares under, a credit agreement
with third-party lenders. Borrowings made under such a credit agreement will be
allocated between the Portfolios pursuant to guidelines approved by the Board of
Trustees.
In addition to borrowing for temporary purposes, a Portfolio may enter
into reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a
portfolio-eligible security by a Portfolio, coupled with its agreement to
repurchase the instrument at a specified time and price. The Portfolio will
segregate assets determined to be liquid by the Adviser or the Portfolio's
Sub-Adviser in accordance with procedures established by the Board of Trustees
and equal (on a daily mark-to-market basis) to its obligations under reverse
repurchase agreements with broker-dealers (but not banks). However, reverse
repurchase agreements involve the risk that the market value of securities
retained by the Portfolio may decline below the repurchase price of the
securities sold by the Portfolio which it is obligated to repurchase. Reverse
repurchase agreements will be subject to the Portfolios' limitations on
borrowings as specified under "Investment Restrictions" below.
Preferred Stock
Each Portfolio may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a fixed
payment which the corporation is not legally bound to pay. Certain classes of
preferred stock are convertible, meaning the preferred stock is convertible into
shares of common stock of the issuer. By holding convertible preferred stock, a
Portfolio can receive a steady stream of dividends and still have the option to
convert the preferred stock to common stock.
Corporate Debt Securities
Each Portfolio may invest in corporate debt securities and/or hold their
assets in these securities for cash management purposes. The investment return
of corporate debt securities reflects interest earnings and changes in the
market value of the security. The market value of a corporate debt obligation
may be expected to rise and fall inversely with interest rates generally. There
also exists the risk that the issuers of the securities may not be able to meet
their obligations on interest or principal payments at the time called for by an
instrument.
A Portfolio's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Portfolio, or, if unrated, are deemed
to be comparable in quality to corporate debt securities in which the Portfolio
may invest. The rate of return or return of principal on some debt obligations
may be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
Among the corporate debt securities in which the Portfolios may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
non-convertible debt securities. Convertible
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securities rank senior to common stock in a corporation's capital structure and,
therefore, generally entail less risk than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Portfolio
is called for redemption, the Portfolio would be required to permit the issuer
to redeem the security and convert it to underlying common stock, or would sell
the convertible security to a third party.
High Yield Securities ("Junk Bonds")
Each of the Portfolios may invest in debt/fixed income securities of
domestic or foreign issuers that meet minimum ratings criteria set forth for a
Portfolio, or, if unrated, are of comparable quality in the opinion of the
Portfolio's Sub-Adviser. A description of the ratings categories used is set
forth in the Prospectus.
A security is considered to be below "investment grade" quality if it is
either (1) not rated in one of the four highest rating categories by one of the
Nationally Recognized Statistical Rating Organizations ("NRSROs") (i.e., rated
Ba or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by
Standard & Poor's Ratings Services ("S&P")) or (2) if unrated, determined by the
Sub-Adviser to be of comparable quality to obligations so rated.
Investment in high yield securities generally provides greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but it also typically entails greater price volatility as
well as principal and income risk. High yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The market for these securities is
relatively new, and many of the outstanding high yield securities have not
endured a major business recession. A long-term track record on default rates,
such as that for investment grade corporate bonds, does not exist for this
market. Analysis of the creditworthiness of issuers of high yield securities may
be more complex than for issuers of higher quality debt/fixed income securities.
Each Portfolio of the Trust may continue to hold such securities following a
decline in their rating if in the opinion of the Adviser or the Sub-Adviser, as
the case may be, it would be advantageous to do so. Investments in high yield
securities that are eligible for purchase by the Portfolios are described as
"speculative" by both Moody's and S&P.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
While offering a greater potential opportunity for capital appreciation and
higher yields than investments in higher rated debt securities, high yield
securities typically entail greater potential price volatility and may be less
liquid than investment grade debt. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and achievement of a Portfolio's investment objective
may, to the extent of its investments in high yield securities, depend more
heavily on the Sub-Adviser's creditworthiness analysis than would be the case if
the Portfolio were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities are likely to be sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt/fixed income securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Portfolios investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash. Even
though such securities do not pay current interest in cash, a Portfolio
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nonetheless is required to accrue interest income on these investments and to
distribute the interest income on a current basis. Thus, a Portfolio could be
required at times to liquidate other investments in order to satisfy its
distribution requirements.
Prices of high yield/high risk securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to economic downturns or individual corporate developments. The
secondary market on which high yield securities are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading market could adversely affect the price at which the Portfolios could
sell a high yield security, and could adversely affect the daily net asset value
of the shares. Lower liquidity in secondary markets could adversely affect the
value of high yield/high risk securities held by the Portfolios. While lower
rated securities typically are less sensitive to interest rate changes than
higher rated securities, the market prices of high yield/high risk securities
structured as "zero coupon" or "pay-in-kind" securities may be affected to a
greater extent by interest rate changes. See the Prospectus for further
information regarding high yield/high risk securities. For instance, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market. When secondary markets for high yield
securities are less liquid than the market for higher grade securities, it may
be more difficult to value the securities because such valuation may require
more research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability of
new investment opportunities at higher relative yields, and current evaluations
of an issuer's continuing ability to meet its obligations in the future. The
average maturity or duration of the debt/fixed income securities in a
Portfolio's portfolio may vary in response to anticipated changes in interest
rates and to other economic factors. Securities may be bought and sold in
anticipation of a decline or a rise in market interest rates. In addition, a
Portfolio may sell a security and purchase another of comparable quality and
maturity (usually, but not always, of a different issuer) at approximately the
same time to take advantage of what are believed to be short-term differentials
in values or yields.
Loan Participations and Assignments
Each Portfolio may invest in fixed- and floating-rate loans arranged
through private negotiations between an issuer of debt instruments and one or
more financial institutions ("lenders"). Generally, a Portfolio's investments in
loans are expected to take the form of loan participations and assignments of
portions of loans from third parties.
Large loans to corporations or governments may be shared or syndicated
among several lenders, usually banks. A Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including liquidity risk and the
risks of being a lender. If a Portfolio purchases a participation, it may only
be able to enforce its rights through the lender, and may assume the credit risk
of the lender in addition to the borrower. In assignments, a Portfolio's rights
against the borrower may be more limited than those held by the original lender.
Participation on Creditors Committees
A Portfolio may from time to time participate on committees formed by
creditors to negotiate with the management of financially troubled issuers of
securities held by the Portfolio. Such participation may subject a Portfolio to
expenses such as legal fees and may make the Portfolio an "insider" of the
issuer for purposes of the federal securities laws, and therefore may restrict
the Portfolio's ability to trade in or acquire additional positions in a
particular security when it might otherwise desire to do so. Participation by a
Portfolio on such committees also may expose the Portfolio to potential
liabilities under the federal bankruptcy laws or other laws governing the rights
of creditors and debtors. A Portfolio would participate on such committees only
when the Adviser and the Sub-
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Adviser believe that such participation is necessary or desirable to enforce the
Portfolio's rights as a creditor or to protect the value of securities held by
the Portfolio.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Portfolios may invest in floating rate debt instruments ("floaters").
The interest rate on a floater is a variable rate which is tied to another
interest rate, such as a money-market index or U.S. Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
Because of the interest rate reset feature, floaters provide a Portfolio with a
certain degree of protection against rises in interest rates, but generally do
not allow the Portfolio to participate fully in appreciation resulting from any
general decline in interest rates.
Each Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security generally will exhibit greater
price volatility than a fixed rate obligation of similar credit quality. See
"Mortgage-Related and Asset-Backed Securities" below.
Mortgage-Related and Asset-Backed Securities
The Portfolios may invest in mortgage-related securities, and in other
asset-backed securities (unrelated to mortgage loans) that are offered to
investors currently or in the future. Mortgage-related securities are interests
in pools of residential or commercial mortgage loans, including mortgage loans
made by savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
The value of some mortgage- related or asset-backed securities in which the
Portfolios invest may be particularly sensitive to changes in prevailing
interest rates, and, like other fixed income investments, the ability of a
Portfolio to successfully utilize these instruments may depending part upon the
ability of the Sub-Adviser to forecast interest rates and other economic factors
correctly. See "Mortgage Pass-Through Securities" below. Certain debt securities
are also secured with collateral consisting of mortgage-related securities. See
"Collateralized Mortgage Obligations" below.
Mortgage Pass-Through Securities. Mortgage Pass-Through Securities are
securities representing interests in "pools" of mortgage loans secured by
residential or commercial real property. Interests in pools of mortgage- related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass- through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association ("GNMA")) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. Early repayment of principal on some mortgage-related
securities (arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose a Portfolio to a lower rate of return upon reinvestment of
principal. Also, if a
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security subject to prepayment has been purchased at a premium, the value of the
premium would be lost in the event of prepayment. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income securities. To the extent that unanticipated rates of
prepayment on underlying mortgages increase the effective maturity of a
mortgage-related security, the volatility of such security can be expected to
increase.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the GNMA) or guaranteed by agencies or instrumentalities of the
U.S. Government (in the case of securities guaranteed by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). The principal governmental guarantor of mortgage-related securities
is the GNMA. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Administration
(the "FHA"), or guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/services which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. Instead, they are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government. Instead, they are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or services of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees, and the creditworthiness of the
issuers thereof, will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. A Portfolio may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-Adviser determines that the securities meet the Portfolio's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. A Portfolio will not purchase mortgage-related securities
or any other assets which in the Sub-Adviser's opinion are illiquid if, as a
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result, more than 15% of the value of the Portfolio's net assets (taken at
market value at the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instru mentalities, are not subject to a Portfolio's
industry concentration restrictions, see "Investment Restrictions," by virtue of
the exclusion from that test available to all U.S. Government securities. In the
case of privately issued mortgage-related securities, the Portfolios take the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi- annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begin to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government securities by a
Portfolio, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Portfolio's diversification tests.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semi- annually, as opposed to monthly. The amount of principal payable on each
semi-annual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are
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allocated to the retirement of the individual classes of bonds in the order of
their stated maturities. Payment of principal on the mortgage loans in the
collateral pool in excess of the amount of FHLMC's minimum sinking fund
obligation for any payment date are paid to the holders of the CMOs as
additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities. Commercial Mortgage-Backed
Securities include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property. The market for commercial
mortgage-backed securities developed more recently and in terms of total
outstanding principal amount of issues is relatively small compared to the
market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including stripped mortgage-backed securities. Other
mortgage-related securities may be equity or debt securities issued by agencies
or instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities of the foregoing.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi- class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Portfolio's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Portfolio may
fail to recoup some or all of its initial investment in these securities even if
the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were developed fairly recently. As a result, established trading markets have
not yet developed and, accordingly, these securities may be deemed "illiquid"
and subject to a Portfolio's limitations on investment in illiquid securities.
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Other Asset-Backed Securities. Similarly, the Adviser and Sub-Adviser
expect that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future and may be purchased by the Portfolios.
Several types of asset-backed securities have already been offered to investors,
including Certificates for Automobile ReceivablesSM ("CARSSM"). CARSSM represent
undivided fractional interests in a trust whose assets consist of a pool of
motor vehicle retail installment sales contracts and security interests in the
vehicles securing the contracts. Payments of principal and interest on CARSSM
are passed through monthly to certificate holders, and are guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
An investor's return on CARSSM may be affected by early prepayment of principal
on the underlying vehicle sales contracts. If the letter of credit is exhausted,
the trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with a Portfolio's investment objectives and policies, the
Adviser and Sub-Adviser also may invest in other types of asset-backed
securities.
Convertible Securities
Each Portfolio may invest in convertible securities. The Portfolios'
Sub-Adviser will select convertible securities to be purchased by the Portfolio
based primarily upon its evaluation of the fundamental investment
characteristics and growth prospects of the issuer of the security. As a fixed
income security, a convertible security tends to increase in market value when
interest rates decline and to decrease in value when interest rates rise. While
convertible securities generally offer lower interest or dividend yields than
non-convertible fixed income securities of similar quality, their value tends to
increase as the market value of the underlying stock increases and to decrease
when the value of the underlying stock decreases.
The Portfolios may invest in so-called "synthetic convertible securities,"
which are composed of two or more different securities whose investment
characteristics, taken together, resemble those of convertible securities. For
example, the Portfolios may purchase a non-convertible debt security and a
warrant or option. The synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible security, which is a
single security having a unitary market value, a synthetic convertible comprises
two or more separate securities, each with its own market value. Therefore, the
"market value" of a synthetic convertible is the sum of the values of its fixed
income component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations.
Equity-Linked Securities
Each Portfolio may invest up to 5% of its net assets in equity-linked
securities. Equity-linked securities are privately issued securities whose
investment results are designed to correspond generally to the performance of a
specified stock index or "basket" of stocks, or sometimes a single stock. To the
extent that a Portfolio invests in an equity-linked security whose return
corresponds to the performance of a foreign securities index or one or more
foreign stocks, investing in equity-linked securities will involve risks similar
to the risks of investing in foreign equity securities. See "Foreign Securities"
in this Statement of Additional Information. In addition, the Portfolios bear
the risk that the issuer of an equity-linked security may default on its
obligations under the security. Equity-linked securities may be considered
illiquid and thus subject to the Portfolios' restrictions on investments in
illiquid securities.
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Foreign Securities
The FISH: Series C may invest in U.S. dollar or foreign
currency-denominated corporate debt securities of foreign issuers; foreign
equity securities, including preferred securities of foreign issuers; certain
foreign bank obligations; and U.S. dollar- or foreign currency-denominated
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies and supranational entities.
The FISH: Series C may invest in American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") or Global Depository Receipts ("GDRs").
ADRs are dollar-denominated receipts issued generally by domestic banks and
represent the deposit with the bank of a security of a foreign issuer. EDRs are
foreign currency-denominated receipts similar to ADRs and are issued and traded
in Europe, and are publicly traded on exchanges or over-the-counter in the
United States. GDRs may be offered privately in the United States and also trade
in public or private markets in other countries. ADRs, EDRs and GDRs may be
issued as sponsored or unsponsored programs. In sponsored programs, an issuer
has made arrangements to have its securities trade in the form of ADRs, EDRs or
GDRs. In unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, in some cases it may
be easier to obtain financial information from an issuer that has participated
in the creation of a sponsored program.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Changes in foreign exchange rates will affect
the value of those securities which are denominated or quoted in currencies
other than the U.S. dollar.
The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or "emerging market") countries are
involved. Investing in emerging market countries involves certain risks not
typically associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: greater risks of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; less government supervision
and regulation of the securities markets and participants in those markets;
controls on foreign investment and limitations on repatriation of invested
capital and on the Portfolio's ability to exchange local currencies for U.S.
dollars; unavailability of currency hedging techniques in certain emerging
market countries; the fact that companies in emerging market countries may be
smaller, less seasoned and newly organized companies; the difference in, or lack
of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets. In addition,
a number of emerging market countries restrict, to various degrees, foreign
investment in securities, and high rates of inflation and rapid fluctuations in
inflation rates have had, and may continue to have, negative effects on the
economies and securities markets of certain emerging market countries. Also, any
change in the leadership or politics of emerging market countries, or the
countries that exercise a significant influence over those countries, may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring and adversely affect existing investment opportunities.
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The FISH: Series C's investments in foreign currency denominated debt
obligations and hedging activities will likely produce a difference between its
book income and its taxable income. This difference may cause a portion of the
Portfolio's income distributions to constitute returns of capital for tax
purposes or require the Portfolio to make distributions exceeding book income to
qualify as a regulated investment company for federal tax purposes.
Special Risks of Investing in Russian and Other Eastern European
Securities. The FISH: Series C may invest its assets in securities of issuers
located in Russia and in other Eastern European countries. The political, legal
and operational risks of investing in the securities of Russian and other
Eastern European issuers, and of having assets custodied within these countries,
may be particularly acute. Investments in Eastern European countries may involve
acute risks of nationalization, expropriation and confiscatory taxation. The
communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. Also, certain Eastern European countries, which do not have
market economies, are characterized by an absence of developed legal structures
governing private and foreign investments and private property.
In addition, governments in certain Eastern European countries may require
that a governmental or quasi-governmental authority act as custodian of a
Portfolio's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Portfolio's cash and securities, the
Portfolio's investment in such countries may be limited or may be required to be
effected through intermediaries. The risk of loss through governmental
confiscation may be increased in such circumstances.
Investments in securities of Russian issuers may involve a particularly
high degree of risk and special considerations not typically associated with
investing in U.S. and other more developed markets, many of which stem from
Russia's continuing political and economic instability and the slow-paced
development of its market economy. Investments in Russian securities should be
considered highly speculative. Such risks and special considerations include:
(a) delays in settling portfolio transactions and the risk of loss arising out
of Russia's system of share registration and custody (see below); (b)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (c) difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information; (d) the general financial condition of Russian companies,
which may involve particularly large amounts of inter-company debt; and (e) the
risk that the Russian tax system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation or, in the alternative, the risk that a
reformed tax system may result in the inconsistent and unpredictable enforcement
of the new tax laws. Also, there is the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies to the
detriment of investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or investors, a
return to the centrally planned economy that existed prior to the dissolution of
the Soviet Union, or the nationalization of privatized enterprises.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of companies is normally
recorded. Ownership of shares (except where shares are held through depositories
that meet the requirements of the 1940 Act) is defined according to entries in
the company's share register and normally evidenced by "share extracts" from the
register or, in certain limited circumstances, by formal share certificates.
However, there is no central registration system for shareholders and these
services are carried out by the companies themselves or by registrars located
throughout Russia. The share registrars are controlled by the issuer of the
securities, and investors are provided with few legal rights against such
registrars. These registrars are not necessarily subject to effective state
supervision nor are they licensed with any governmental entity. It is possible
for the Portfolio to lose its registration through fraud, negligence or even
mere oversight. While the Portfolio will endeavor to ensure that its interest
continues to be appropriately recorded, which may involve a custodian or other
agent inspecting the share register and obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other
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fraudulent act may deprive the Portfolio of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for the Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration.
Also, although a Russian public enterprise with more than 500 shareholders
is required by law to contract out the maintenance of its shareholder register
to an independent entity that meets certain criteria, this regulation has not
always been strictly enforced in practice. Because of this lack of independence,
management of a company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions in the share register. In addition, so-called
"financial-industrial groups" have emerged in recent years that seek to deter
outside investors from interfering in the management of companies they control.
These practices may prevent the Portfolio from investing in the securities of
certain Russian companies deemed suitable by the Portfolio's Sub-Adviser.
Further, this also could cause a delay in the sale of Russian securities held by
the Portfolio if a potential purchaser is deemed unsuitable, which may expose
the Portfolio to potential loss on the investment.
Foreign Currencies
The FISH: Series C may enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. In
addition, the Portfolio may buy and sell foreign currency futures contracts and
options on foreign currencies and foreign currency futures.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency exchange contract, the Portfolio "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the duration
of the contract. As a result, the Portfolio reduces its exposure to changes in
the value of the currency it will deliver and increases its exposure to changes
in the value of the currency it will exchange into. Contracts to sell foreign
currencies would limit any potential gain which might be realized by the
Portfolio if the value of the hedged currency increases. The Portfolio may enter
into these contracts for the purpose of hedging against foreign exchange risks
arising from the Portfolios' investment or anticipated investment in securities
denominated in foreign currencies. Suitable hedging transactions may not be
available in all circumstances. Also, such hedging transactions may not be
successful and may eliminate any chance for the Portfolio to benefit from
favorable fluctuations in relevant foreign currencies.
The FISH: Series C may also enter into forward foreign currency exchange
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one currency to another. To the
extent that it does so, the Portfolio will be subject to the additional risk
that the relative value of currencies will be different than anticipated by the
Portfolio's Sub-Adviser. The Portfolio may use one currency (or a basket of
currencies) to hedge against adverse changes in the value of another currency
(or a basket of currencies) when exchange rates between the two currencies are
positively correlated. The Portfolio will segregate assets determined to be
liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees to cover forward currency contracts entered
into for non-hedging purposes. The Portfolio may also use foreign currency
futures contracts and related options on currencies for the same reasons for
which forward foreign currency exchange contracts are used.
Bank Obligations
Bank obligations in which the Portfolios may invest include certificates
of deposit, bankers' acceptances, and fixed time deposits. Certificates of
deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by
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a bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Portfolio will not
invest in fixed time deposits which (1) are not subject to prepayment or (2)
provide for withdrawal penalties upon prepayment (other than overnight deposits)
if, in the aggregate, more than 15% of its net assets (taken at market value at
the time of investment) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets. Each
Portfolio may also hold funds on deposit with its sub-custodian bank in an
interest-bearing account for temporary purposes.
Each Portfolio limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A
Portfolio also may invest in certificates of deposit of savings and loan
associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
The Portfolios limit their investments in foreign bank obligations to
obligations of foreign banks (including United States branches of foreign banks)
which at the time of investment (i) have more than $10 billion, or the
equivalent in other currencies, in total assets; (ii) are among the 75 largest
foreign banks in the world in terms of total assets; (iii) have branches or
agencies (limited purpose offices which do not offer all banking services) in
the United States; and (iv) in the opinion of the Sub-Adviser, are of an
investment quality comparable to obligations of United States banks in which the
Portfolios may invest. Subject to each Portfolio's limitation on concentration
of no more than 25% of its assets in the securities of issuers in a particular
industry, there is no limitation on the amount of a Portfolio's assets which may
be invested in obligations of foreign banks which meet the conditions set forth
above.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" above,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Commercial Paper
Each Portfolio may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Portfolios consists of U.S. dollar-denominated obligations of
domestic issuers, or foreign currency-denominated obligations of domestic or
foreign issuers which, at the time of investment, are (i) rated "P-1" or "P-2"
by Moody's or "A-1" or "A-2" or better by S&P, (ii) issued or guaranteed as to
principal and interest by issuers or guarantors having an existing debt security
rating of "A" or better by Moody's or "A" or better by S&P, or (iii) securities
which, if not rated, are, in the opinion of the Sub-Adviser, of an investment
quality comparable to rated commercial paper in which the Portfolio may invest.
The rate of return on commercial paper may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
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Money Market Instruments
Each of the Portfolios may invest at least a portion of its assets in the
following kinds of money market instruments: (1) short-term U.S. Government
securities; (2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two NRSROs,
or, if rated by only one NRSRO, in such agency's two highest grades, or, if
unrated, determined to be of comparable quality by the Adviser or the
Sub-Adviser. Bank obligations must be those of a bank that has deposits in
excess of $2 billion or that is a member of the Federal Deposit Insurance
Corporation. A Portfolio may invest in obligations of U.S. branches or
subsidiaries of foreign banks ("Yankee dollar obligations") or foreign branches
of U.S. banks ("Eurodollar obligations"); (3) commercial paper rated in the two
highest rating categories by at least two NRSROs, or, if rated by only one
NRSRO, in such agency's two highest grades, or, if unrated, determined to be of
comparable quality by the Adviser or the Sub-Adviser; (4) corporate obligations
with a remaining maturity of 397 days or less whose issuers have outstanding
short-term debt obligations rated in the highest rating category by at least two
NRSROs, or, if rated by only one NRSRO, in such agency's highest grade, or, if
unrated, determined to be of comparable quality by the Adviser or the
Sub-Adviser; and (5) repurchase agreements with domestic commercial banks or
registered broker- dealers.
Derivative Instruments
The following describes certain derivative instruments and products in
which certain Portfolios may invest and risks associated therewith.
The Portfolios might not employ any of the strategies described below, and
no assurance can be given that any strategy used will succeed. Also, suitable
derivative and/or hedging transactions may not be available in all circumstances
and there can be no assurance that a Portfolio will be able to identify or
employ a desirable derivative and/or hedging transaction at any time or from
time to time.
Options on Securities and Indexes. As described under "Characteristics and
Risks of Securities and Investment Techniques--Derivatives" in the Prospectus,
the Portfolios may purchase and sell both put and call options on equity, fixed
income or other securities or indexes in standardized contracts traded on
foreign or domestic securi ties exchanges, boards of trade, or similar entities,
or quoted on National Association of Securities Dealers Automated Quotations
("NASDAQ") or on a regulated foreign over-the-counter market, and agreements,
sometimes called cash puts, which may accompany the purchase of a new issue of
bonds from a dealer. Among other reasons, a Portfolio may purchase put options
to protect holdings in an underlying or related security against a decline in
market value, and may purchase call options to protect against increases in the
prices of securities it intends to purchase pending its ability to invest in
such securities in an orderly manner.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or other assets
determined to be liquid by the Sub-Adviser in accordance with procedures
established by the Board of Trustees in such amount are segregated) upon
conversion or exchange of other securities held by the
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Portfolio. For a call option on an index, the option is covered if the Portfolio
segregates assets determined to be liquid by the Adviser or the Sub-Adviser in
accordance with procedures established by the Board of Trustees in an amount
equal to the contract value of the index. A call option is also covered if the
Portfolio holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written, provided the difference is segregated by the Portfolio in assets
determined to be liquid by the Adviser or the Sub-Adviser in accordance with
procedures established by the Board of Trustees. A put option on a security or
an index is "covered" if the Portfolio segregates assets determined to be liquid
by the Sub-Adviser in accordance with procedures established by the Board of
Trustees equal to the exercise price. A put option is also covered if the
Portfolio holds a put on the same security or index as the put written where the
exercise price of the put held is (i) equal to or greater than the exercise
price of the put written, or (ii) less than the exercise price of the put
written, provided the difference is segregated by the Portfolio in assets
determined to be liquid by the Adviser or the Sub-Adviser in accordance with
procedures established by the Board of Trustees.
If an option written by a Portfolio expires unexercised, the Portfolio
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Portfolio expires unexercised, the
Portfolio realizes a capital loss equal to the premium paid. Prior to the
earlier of exercise or expiration, an exchange-traded option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). In
addition, a Portfolio may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
OTC Options. The Portfolios may enter into over-the-counter ("OTC")
options transactions only with primary dealers in U.S. Government securities and
only pursuant to agreements that will assure that the relevant Portfolio will at
all times have the right to repurchase the option written by it from the dealer
at a specified formula price. Over-the-counter options in which the Portfolios
may invest differ from traded options in that they are two- party contracts,
with price and other terms negotiated between buyer and seller, and generally do
not have as much market liquidity as exchange-traded options. The Portfolios may
be required to treat as illiquid over-the-counter options purchased and
securities being used to cover certain written over-the-counter options, and
they will treat the amount by which such formula price exceeds the intrinsic
value of the option (i.e., the amount, if any, by which the market price of the
underlying security exceeds the exercise price of the option) as an illiquid
investment.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise
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of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless. If a
Portfolio were unable to close out a covered call option that it had written on
a security, it would not be able to sell the underlying security unless the
option expired without exercise. As the writer of a covered call option, a
Portfolio forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call but, as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. If a put
or call option purchased by the Portfolio is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price (in the case of a put), or remains less than or
equal to the exercise price (in the case of a call), the Portfolio will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Portfolio may be unable to
close out a position. Similarly, if restrictions on exercise were imposed, the
Portfolio might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Portfolio is covered by an
option on the same index purchased by the Portfolio, movements in the index may
result in a loss to the Portfolio; however, such losses may be mitigated by
changes in the value of the Portfolio's securities during the period the option
was outstanding.
In the case of a written call option on a securities index, the Portfolio
will own corresponding securities whose historic volatility correlates with that
of the index.
Foreign Currency Options. The Portfolios may buy or sell put and call
options on foreign currencies as a hedge against changes in the value of the
U.S. dollar (or another currency) in relation to a foreign currency in which a
Portfolio's securities may be denominated. In addition, each of the Portfolios
may buy or sell put and call options on foreign currencies either on exchanges
or in the over-the-counter market. A put option on a foreign currency gives the
purchaser of the option the right to sell a foreign currency at the exercise
price until the option expires. A call option on a foreign currency gives the
purchaser of the option the right to purchase the currency at the exercise price
until the option expires. Currency options traded on U.S. or other exchanges may
be subject to position limits which may limit the ability of a Portfolio to
reduce foreign currency risk using such options.
Futures Contracts and Options on Futures Contracts. Each Portfolio may use
interest rate, foreign currency or index futures contracts. The Portfolios may
invest in foreign exchange futures contracts and options thereon ("futures
options") that are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system as an adjunct to
their securities activities. In addition, each Portfolio may purchase and sell
futures contracts on various securities indexes ("Index Futures") and related
options for hedging purposes and for investment purposes. A Portfolio's purchase
and sale of Index Futures is limited to contracts and exchanges which have been
approved by the Commodity Futures Trading Commission ("CFTC"). Through the use
of Index Futures and related options, a Portfolio may diversify risk in its
portfolio without incurring the substantial brokerage costs which may be
associated with investment in the securities of multiple issuers. A Portfolio
may also avoid potential market and liquidity problems which may result from
increases in positions already held by the Portfolio.
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An interest rate, foreign currency or index futures contract provides for
the future sale by one party and purchase by another party of a specified
quantity of a financial instrument, foreign currency or the cash value of an
index at a specified price and time. An Index Future is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
the difference between the value of a securities index ("Index") at the close of
the last trading day of the contract and the price at which the index contract
was originally written. Although the value of an Index might be a function of
the value of certain specified securities, no physical delivery of these
securities is made. A unit is the value of the relevant Index from time to time.
Entering into a contract to buy units is commonly referred to as buying or
purchasing a contract or holding a long position in an Index. Index Futures
contracts can be traded through all major commodity brokers. A Portfolio's
purchase and sale of Index Futures is limited to contracts and exchanges which
have been approved by the CFTC. A Portfolio will ordinarily be able to close
open positions on the futures exchange on which Index Futures are then traded at
any time up to and including the expiration day. As described below, a Portfolio
will be required to segregate initial margin in the name of the futures broker
upon entering into an Index Future. Variation margin will be paid to and
received from the broker on a daily basis as the contracts are marked to market.
For example, when a Portfolio has purchased an Index Future and the price of the
relevant Index has risen, that position will have increased in value and the
Portfolio will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when a Portfolio has purchased an Index Future
and the price of the relevant Index has declined, the position would be less
valuable and the Portfolio would be required to make a variation margin payment
to the broker.
A Portfolio may close open positions on the futures exchanges on which
Index Futures are traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day), with settlement made with
the appropriate clearing house. Because the specific procedures for trading
foreign stock Index Futures on futures exchanges are still under development,
additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time a Portfolio purchases
such instruments. Positions in Index Futures may be closed out by a Portfolio
only on the futures exchanges upon which the Index Futures are then traded.
The following example illustrates generally the manner in which Index
Futures operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The Index Future specifies that no delivery
of the actual stocks making up the Index will take place. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the Index at
the expiration of the contract. For example, if a Portfolio enters into a
futures contract to buy 100 units of the S&P 100 Index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $184 on that future
date, the Portfolio will gain $400 (100 units x gain of $4). If the Portfolio
enters into a futures contract to sell 100 units of the Index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on that
future date, the Portfolio will lose $200 (100 units x loss of $2).
A public market exists in futures contracts covering a number of Indexes
as well as financial instruments and foreign currencies, including but not
limited to: the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite;
U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar;
the British pound; the German mark; the Japanese yen; the French franc; the
Swiss franc; the Mexican peso; and certain multinational currencies, such as the
European Currency Unit ("ECU"). It is expected that other futures contracts in
which the Portfolios may invest will be developed and traded in the future.
Each of the Portfolios may purchase and write call and put futures
options. Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder
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the right, in return for the premium paid, to assume a long position (call) or
short position (put) in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the holder acquires a
short position and the writer is assigned the opposite long position.
A Portfolio will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or in the case of futures options, for which an established
over-the-counter market exists.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to segregate a specified amount of assets determined to be
liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees ("initial margin"). The margin required for
a futures contract is set by the exchange on which the contract is traded and
may be modified during the term of the contract. Margin requirements on foreign
exchanges may be different than U.S. exchanges. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract which
is returned to the Portfolio upon termination of the contract, assuming all
contractual obligations have been satisfied. Each Portfolio expects to earn
interest income on its initial margin deposits. A futures contract held by a
Portfolio is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead a settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.
A Portfolio is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (i.e.,
with the same exchange, underlying security or index, and delivery month). If an
offsetting purchase price is less than the original sale price, the Portfolio
realizes a capital gain, or if it is more, the Portfolio realizes a capital
loss. Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. Any transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. The Portfolios may only
enter into futures contracts or futures options which are standardized and
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system. The Portfolios may enter into positions
in futures contracts and related options for "bona fide hedging" purposes (as
such term is defined in applicable regulations of the CFTC), for example, to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices. In addition, the Portfolios may utilize futures contracts for
investment purposes. With respect to positions in futures and related options
that do not constitute bona fide hedging positions, a Portfolio will not enter
into a futures contract or futures option contract if, immediately thereafter,
the aggregate initial margin deposits relating to such positions plus premiums
paid by it for open futures option positions, less the amount by which any such
options are "in-the- money," would exceed 5% of the Portfolio's net assets. A
call option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-money"
if the exercise price exceeds the value of the futures contract that is the
subject of the option.
When purchasing a futures contract, a Portfolio will segregate (and
mark-to-market on a daily basis) assets determined to be liquid by the Adviser
or the Sub-Adviser in accordance with procedures established by the Board of
Trustees that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the total market value of the futures contract.
Alternatively, the Portfolio may "cover" its position by purchasing a
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put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Portfolio.
When selling a futures contract, a Portfolio will segregate (and
mark-to-market on a daily basis) assets determined to be liquid by the Adviser
or the Sub-Adviser in accordance with procedures established by the Board of
Trustees that are equal to the market value of the instruments underlying the
contract. Alternatively, the Portfolio may "cover" its position by owning the
instruments underlying the contract (or, in the case of an Index Future, a
portfolio with a volatility substantially similar to that of the Index on which
the futures contract is based), or by holding a call option permitting the
Portfolio to purchase the same futures contract at a price no higher than the
price of the contract written by the Portfolio (or at a higher price if the
difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Portfolio will
segregate (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser or the Sub-Adviser in accordance with procedures established by
the Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, a Portfolio will
segregate (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser or the Sub-Adviser in accordance with procedures established by
the Board of Trustees that equal the purchase price of the futures contract,
less any margin on deposit. Alternatively, the Portfolio may cover the position
either by entering into a short position in the same futures contract, or by
owning a separate put option permitting it to sell the same futures contract so
long as the strike price of the purchased put option is the same or higher than
the strike price of the put option sold by the Portfolio.
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. Some of the risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation.
Also, an incorrect correlation could result in a loss on both the hedged
securities in a Portfolio and the hedging vehicle, so that the portfolio return
might have been greater had hedging not been attempted. For example, if the
price of the futures contract moves more than the price of the hedged security,
a Portfolio would experience either a loss or gain on the future which is not
completely offset by movements in the price of the hedged securities. In
addition, there are significant differences between the securities and futures
markets that could result in an imperfect correlation between the markets,
causing a given hedge not to achieve its objectives. The degree of imperfection
of correlation depends on circumstances such as variations in speculative market
demand for futures and futures options on securities, including technical
influences in futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. To compensate for imperfect
correlations, a Portfolio may purchase or sell futures contracts in a greater
dollar amount than the hedged securities if the volatility of the hedged
securities is historically greater than the volatility of the futures contracts.
Conversely, a Portfolio may purchase or sell fewer contracts if the volatility
of the price of the hedged securities is historically less than that of the
futures contracts. The risk of imperfect correlation generally tends to diminish
as the maturity date of the futures contract approaches. A decision as to
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends. Also, suitable hedging transactions
may not be available in all circumstances.
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Additionally, the price of Index Futures may not correlate perfectly with
movement in the relevant index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the index and futures markets.
Second, the deposit requirements in the futures market are less onerous than
margin requirements in the securities market, and as a result, the futures
market may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
Futures exchanges may limit the amount of fluctuation permitted in certain
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 current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts and Forward Currency Exchange Contracts and Options thereon.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees; and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. The value of such positions also could be adversely
affected by (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Trust's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lesser
trading volume. In addition, unless a Portfolio hedges against fluctuations in
the exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that a Portfolio might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Portfolio
could incur losses as a result of those changes. The value of some derivative
instruments in which the Portfolios may invest may be particularly sensitive to
changes in prevailing interest rates, and, like the other investments of the
Portfolios, the ability of a Portfolio to successfully utilize these instruments
may depend in part upon the ability of the Sub-Adviser to forecast interest
rates and other economic factors correctly. If the Sub-Adviser incorrectly
forecasts such factors and has taken positions in derivative instruments
contrary to prevailing market trends, the Portfolios could be exposed to risk of
loss. In addition, a Portfolio's use of such instruments may cause the Portfolio
to realize higher amounts of short-term capital gains (generally taxed to
shareholders at ordinary income tax rates) than if the Portfolio had not used
such instruments.
Swap Agreements. The Portfolios may enter into equity index swap
agreements for purposes of attempting to gain exposure to the stocks making up
an index of securities in a market without actually purchasing those stocks.
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Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, or in a
"basket" of securities representing a particular index.
Most swap agreements entered into by the Portfolios will calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Portfolio's current obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Portfolio's current obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counter party
will be covered by segregating assets determined to be liquid by the Adviser or
the Sub-Adviser in accordance with procedures established by the Board of
Trustees, to avoid any potential leveraging of the Portfolio's portfolio.
Obligations under swap agreements so covered will not be construed to be "senior
securities" for purposes of a Portfolio's investment restriction concerning
senior securities. A Portfolio will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Portfolio's assets.
Whether a Portfolio's use of swap agreements will be successful in
furthering its investment objective will depend on the Sub-Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Portfolios will
enter into swap agreements only with counter parties that meet certain standards
of creditworthiness (generally, such counter parties would have to be eligible
counter parties under the terms of the Portfolios' repurchase agreement
guidelines). The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a Portfolio's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
When-Issued, Delayed Delivery and Forward Commitment Transactions
A Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities for a predetermined price or yield, with payment and
delivery taking place more than seven days in the future, or after a period
longer than the customary settlement period for that type of security. When
delayed delivery purchases are outstanding, the Portfolio will segregate until
the settlement date assets determined to be liquid by the Adviser or the
Sub-Adviser in accordance with procedures established by the Board of Trustees
in an amount sufficient to meet the purchase price. Typically, no income accrues
on securities purchased on a delayed delivery basis prior to the time delivery
of the securities is made, although a Portfolio may earn income on segregated
securities. When purchasing a security on a delayed delivery basis, the
Portfolio assumes the rights and risks of ownership of the security, including
the risk of price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because a Portfolio is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio remains substantially fully invested at a time when delayed delivery
purchases are outstanding, the delayed delivery purchases may result in a form
of leverage. When the Portfolio has sold a security on a delayed delivery basis,
the Portfolio does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Portfolio could miss a favorable price or yield
opportunity or could suffer a loss. A Portfolio may dispose of or renegotiate a
delayed delivery transaction after it is entered into, and may sell when-issued
securities before they are delivered, which may result in a capital gain or
loss. There is no percentage limitation on the extent to which the Portfolios
may purchase or sell securities on a delayed delivery basis.
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Each Portfolio may make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Portfolio either (i) segregates until the settlement date assets determined to
be liquid by the Adviser or the Sub-Adviser in accordance with procedures
established by the Board of Trustees in an amount sufficient to meet the
purchase price or (ii) enters into an offsetting contract for the forward sale
of securities of equal value that it owns. Each Portfolio may enter into forward
commitments for the purchase or sale of foreign currencies. Forward commitments
may be considered securities in themselves. They involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the Portfolio's
other assets. A Portfolio may dispose of a commitment prior to settlement and
may realize short-term profits or losses upon such disposition.
Warrants to Purchase Securities
Each of the Portfolios may invest in warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Portfolio to
buy additional bonds at the favorable rate or to sell the warrants at a profit.
If interest rates rise, the warrants would generally expire with no value.
Repurchase Agreements
For the purposes of maintaining liquidity and achieving income, each
Portfolio may enter into repurchase agreements with domestic commercial banks or
registered broker-dealers. A repurchase agreement is a contract under which a
Portfolio would acquire a security for a relatively short period (usually not
more than one week) subject to the obligation of the seller to repurchase and
the Portfolio to resell such security at a fixed time and price (representing
the Portfolio's cost plus interest). In the case of repurchase agreements with
broker-dealers, the value of the underlying securities (or collateral) will be
at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities. This risk includes the risk of procedural costs or
delays in addition to a loss on the securities if their value should fall below
their repurchase price. The Adviser and the Sub-Adviser, as appropriate, will
monitor the creditworthiness of the counter parties.
Securities Loans
Subject to certain conditions described in the Prospectus and below, each
Portfolio may make secured loans of its portfolio securities to brokers, dealers
and other financial institutions amounting to no more than 331/3% of its total
assets. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. However, such
loans will be made only to broker-dealers that are believed by the Adviser or
the Sub-Adviser to be of relatively high credit standing. Securities loans are
made to broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral consisting of U.S. Government securities,
cash or cash equivalents (negotiable certificates of deposit, bankers'
acceptances or letters of credit) maintained on a daily mark-to-market basis in
an amount at least equal at all times to the market value of the securities
lent. The borrower pays to the lending Portfolio an amount equal to any
dividends or interest received on the securities lent. The Portfolio may invest
only the cash collateral received in interest-bearing, short-term securities or
receive a fee from the borrower. In the case of cash collateral, the Portfolio
typically pays a rebate to the lender. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the
Portfolio retains the right to call the loans and obtain the return of the
securities loaned at any time on reasonable notice, and it will do so in order
that the securities may be voted by the Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities involved. Each Portfolio's performance will continue to reflect
changes in the value of the securities loaned and will also reflect the
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receipt of either interest, through investment of cash collateral by the
Portfolio in permissible investments, or a fee, if the collateral is U.S.
Government securities.
Stocks of Small and Medium Capitalization Companies
Each of the Portfolios may invest in common stock of companies with market
capitalizations that are small compared to those of other publicly traded
companies. Generally, small market capitalization is considered to be less than
$1.5 billion and large market capitalization is considered to be more than $5
billion. Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive research
and development, manufacturing, marketing and service capabilities, and more
stability and greater depth of management and technical personnel. Investments
in smaller, less seasoned companies may present greater opportunities for growth
but also may involve greater risks than customarily are associated with more
established companies. The securities of smaller companies may be subject to
more abrupt or erratic market movements than larger, more established companies.
These companies may have limited product lines, markets or financial resources,
or they may be dependent upon a limited management group. Their securities may
be traded in the over-the-counter market or on a regional exchange, or may
otherwise have limited liquidity. As a result of owning large positions in this
type of security, a Portfolio is subject to the additional risk of possibly
having to sell portfolio securities at disadvantageous times and prices if
redemptions require the Portfolio to liquidate its securities positions. In
addition, it may be prudent for a Portfolio with a relatively large asset size
to limit the number of relatively small positions it holds in securities having
limited liquidity in order to minimize its exposure to such risks, to minimize
transaction costs, and to maximize the benefits of research. As a consequence,
as a Portfolio's asset size increases, the Portfolio may reduce its exposure to
illiquid small capitalization securities, which could adversely affect
performance.
Each Portfolio may also invest in stocks of companies with medium market
capitalizations. Whether a U.S. issuer's market capitalization is medium is
determined by reference to the capitalization for all issuers whose equity
securities are listed on a United States national securities exchange or which
are reported on NASDAQ. Issuers with market capitalizations within the range of
capitalization of companies included in the S&P Mid Cap 400 Index may be
regarded as being issuers with medium market capitalizations. Such investments
share some of the risk characteristics of investments in stocks of companies
with small market capitalizations described above, although such companies tend
to have longer operating histories, broader product lines and greater financial
resources, and their stocks tend to be more liquid and less volatile than those
of smaller capitalization issuers.
Illiquid Securities
Each Portfolio may invest in securities that are illiquid so long as no
more than 15% of the net assets of the Portfolio (taken at market value at the
time of investment) would be invested in such securities. Certain illiquid
securities may require pricing at fair value as determined in good faith under
the supervision of the Board of Trustees. The Sub-Adviser may be subject to
significant delays in disposing of illiquid securities, and transactions in
illiquid securities may entail registration expenses and other transaction costs
that are higher than those for transactions in liquid securities.
The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale (such as privately placed debt securities), and other
securities which legally or in the Adviser's or the Sub-Adviser's opinion may be
deemed illiquid (not including securities issued pursuant to Rule 144A under the
Securities Act of 1933 and certain commercial paper that the Adviser or the
Sub-Adviser has determined to be liquid under procedures approved by the Board
of Trustees).
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<PAGE>
Inflation-Indexed Bonds
The Portfolios may invest in inflation-indexed bonds, which are fixed
income securities whose value is periodically adjusted according to the rate of
inflation. Two structures are common. The U.S. Treasury and some other issuers
utilize a structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the Consumer Price Index ("CPI") accruals as part of
a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities
of approximately five, ten or thirty years, although it is possible that
securities with other maturities will be issued in the future. The U.S. Treasury
securities pay interest on a semi-annual basis equal to a fixed percentage of
the inflation-adjusted principal amount. For example, if a Portfolio purchased
an inflation-indexed bond with a par value of $1,000 and a 3% real rate of
return coupon (payable 1.5% semi-annually), and the rate of inflation over the
first six months was 1%, the mid-year par value of the bond would be $1,010 and
the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If
inflation during the second half of the year resulted in the whole year's
inflation equaling 3%, the end-of- year par value of the bond would be $1,030
and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed and will fluctuate. A Portfolio may
also invest in other inflation- related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal amount.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if the rate of inflation rises at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increase at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
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<PAGE>
Delayed Funding Loans and Revolving Credit Facilities
The Portfolios may also enter into, or acquire participations in, delayed
funding loans and revolving credit facilities. Delayed funding loans and
revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. A revolving credit facility differs from a delayed funding loan
in that as the borrower repays the loan, an amount equal to the repayment may be
borrowed again during the term of the revolving credit facility. These
commitments may have the effect of requiring a Portfolio to increase its
investment in a company at a time when it might not otherwise decide to do so
(including a time when the company's financial condition makes it unlikely that
such amounts will be repaid).
The Portfolios may acquire a participation interest in delayed funding
loans or revolving credit facilities from a bank or other financial institution.
See "Loan Participations and Assignments." The terms of the participation
require a Portfolio to make a pro rata share of all loans extended to the
borrower and entitle a Portfolio to a pro rata share of all payments made by
the borrower. Delayed funding loans and revolving credit facilities usually
provide for floating or variable rates of interest. To the extent that a
Portfolio is committed to advance additional funds, it will at all times
segregate assets, determined to be liquid by the Adviser or the Sub-Adviser in
accordance with procedures established by the Board of Trustees, in an amount
sufficient to meet such commitments.
Catastrophe Bonds
The Portfolios may invest in "catastrophe bonds." Catastrophe bonds are
fixed income securities, for which the return of principal and payment of
interest is contingent on the non-occurrence of a specific "trigger"
catastrophic event, such as a hurricane or an earthquake. They may be issued by
government agencies, insurance companies, reinsurers, special purpose
corporations or other on-shore or off-shore entities. If a trigger event causes
losses exceeding a specific amount in the geographic region and time period
specified in a bond, a Portfolio investing in the bond may lose a portion or all
of its principal invested in the bond. If no trigger event occurs, the Portfolio
will recover its principal plus interest. For some catastrophe bonds, the
trigger event or losses may be based on company wide losses, index-portfolio
losses, industry indices or readings of scientific instruments rather than
specified actual losses. Often the catastrophe bonds provide for extensions of
maturity that are mandatory, or optional at the discretion of the issuer, in
order to process and audit loss claims in those cases where a trigger event has,
or possibly has, occurred. In addition to the specified trigger events,
catastrophe bonds may also expose a Portfolio to certain unanticipated risks
including but not limited to issuer (credit) default, adverse regulatory or
jurisdictional interpretations and adverse tax consequences.
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Characteristics and Risks of Securities and Investment Techniques--Illiquid
Securities" in the Prospectus. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Portfolio may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and the Portfolio will only invest in catastrophe
bonds that meet the credit quality requirements for the Portfolio.
Hybrid Instruments
The Portfolios may invest in "hybrid" or indexed securities. A hybrid
instrument can combine the characteristics of securities, futures, and options.
For example, the principal amount or interest rate of a hybrid could be tied
(positively or negatively) to the price of some commodity, currency or
securities index or another interest rate (each a "benchmark"). The interest
rate or (unlike most fixed income securities) the principal amount payable at
maturity of a hybrid security may be increased or decreased, depending on
changes in the value of the benchmark.
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<PAGE>
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and increased
total return. Hybrids may not bear interest or pay dividends. The value of a
hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the
benchmark. These benchmarks may be sensitive to economic and political events,
such as commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the redemption
value of a hybrid could be zero. Thus, an investment in a hybrid may entail
significant market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount and
pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes a Portfolio to the credit risk of the issuer of the hybrids. These risks
may cause significant fluctuations in the net asset value of a Portfolio.
Accordingly, no Portfolio will invest more than 5% of its assets (taken at
market value at the time of investment) in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, a
Portfolio's investments in these products will be subject to limits applicable
to investments in investment companies and may be subject to restrictions
contained in the 1940 Act.
Precious Metals and Metal-Indexed Notes
The Portfolios may invest in notes, the principal amount or redemption
price of which is indexed to, and thus varies directly with, changes in the
market price of gold bullion or other precious metals ("Metal-Indexed Notes").
It is expected that the value of Metal-Indexed Notes will be as volatile as the
price of the underlying metal.
The Portfolios will only purchase Metal-Indexed Notes which are rated
investment grade or are issued by issuers that have outstanding debt obligations
rated investment grade or commercial paper rated in the top rating category by
any NRSRO, or Metal-Indexed Notes issued by issuers that the Sub-Adviser has
determined to be of similar creditworthiness. Debt obligations rated in the
fourth highest rating category by an NRSRO are considered to have some
speculative characteristics. The Metal-Indexed Notes might be backed by a bank
letter of credit, performance bond or might be otherwise secured, and any such
security, which would be held by the Portfolio's custodian, would be taken into
account in determining the creditworthiness of the securities. The Portfolios
might purchase unsecured Metal-Indexed Notes if the issuer thereof met the
Portfolio's credit standards without any such security. While the principal
amount or redemption price of Metal-Indexed Notes would vary with the price of
the resource, such securities would not be secured by a pledge of the resource
or any other security interest in or claim on the resource. In the case of
Metal-Indexed Notes not backed by a performance bond, letter of credit or
similar security, it is expected that such securities generally would not be
secured by any other specific assets.
The Portfolios anticipate that if Metal-Indexed senior securities were to
be purchased, such securities would be issued by precious metals or commodity
brokers or dealers, by mining companies, by commercial banks or by other
financial institutions. Such issuers would issue notes to hedge their
inventories and reserves of the resource, or to borrow money at a relatively low
cost (which would include the nominal rate of interest paid on Metal-Indexed
Notes, described below, and the cost of hedging the issuer's metals exposure).
The Portfolios would not purchase a Metal-Indexed Note issued by a broker or
dealer if as a result of such purchase more than 5% of the value of the
Portfolio's total assets would be invested in securities of such issuer. The
Portfolios might purchase Metal-Indexed Notes from brokers or dealers which are
not also securities brokers or dealers. Precious metals or commodity brokers or
dealers are not subject to supervision or regulation by any governmental
authority or self-regulatory organization in connection with the issuance of
Metal-Indexed Notes.
Until fairly recently, there were no Metal-Indexed Notes outstanding and
consequently there is no secondary trading market for such securities. Although
a limited secondary market might develop among institutional traders, there is
no assurance that such a market will develop. No public market is expected to
develop, since the Portfolios expect that Metal-Indexed Notes will not be
registered under the 1933 Act, and therefore disposition of such securities,
other than to the issuer thereof (as described below), would be dependent upon
the availability of an exemption from such registration.
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<PAGE>
Any Metal-Indexed Notes which the Portfolios might purchase generally will
have maturities of one year or less. Such notes, however, will be subject to
being called for redemption by the issuer on relatively short notice. In
addition, it is expected that the Metal-Indexed Notes will be subject to being
put by the Portfolios to the issuer or to a stand-by broker meeting the credit
standards set forth above, with payments being received by the Portfolios on no
more than seven days' notice. A stand-by broker might be a securities
broker-dealer, in which case the Portfolios' investment will be limited by
applicable regulations of the Securities and Exchange Commission (the "SEC").
The put feature of the Metal-Indexed Notes will ensure liquidity even in the
absence of a secondary trading market. The securities will be repurchased upon
exercise of the holder's put at the specified exercise price, less repurchase
fees, if any, which are not expected to exceed 1% of the redemption or
repurchase proceeds. Depending upon the terms of particular Metal-Indexed Notes,
there might be a period as long as five days between the date upon which a
Portfolio notifies the issuer of the exercise of the put and determination of
the sale price.
It is expected that any Metal-Indexed Notes which the Portfolios might
purchase will bear interest or pay preferred dividends at relatively nominal
rates under 2% per annum. A Portfolio's holdings of such senior securities
therefore would not generate appreciable current income, and the return from
such senior securities would be primarily from any profit on the sale or
maturity thereof at a time when the price of the relevant precious metal is
higher than it was when the senior securities were purchased.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The investment restrictions set forth below are fundamental policies of
each of the Portfolios and may not be changed with respect to either Portfolio
without shareholder approval by vote of a majority of the outstanding voting
securities of that Portfolio. Under these restrictions, neither of the
Portfolios may:
(1) borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of such Portfolio's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will be
repaid before any additional investments are purchased;
(2) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(3) with respect to 50% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(4) with respect to 50% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(5) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
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<PAGE>
(6) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Portfolio
may engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(7) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed not
to constitute a margin purchase for purposes of this restriction;
(8) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Portfolio may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectus
and in this Statement of Additional Information (the deposit of assets in escrow
in connection with the writing of covered put and call options and the purchase
of securities on a when-issued or delayed delivery basis and collateral
arrangements with respect to initial or variation margin deposits for futures
contracts, options on futures contracts, and forward foreign currency contracts
will not be deemed to be pledges of such Portfolio's assets);
(9) issue senior securities, except insofar as such Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
accordance with the Portfolio's borrowing policies (for purposes of this
investment restriction, collateral, escrow, or margin or other deposits with
respect to the making of short sales, the purchase or sale of futures contracts
or related options, purchase or sale of forward foreign currency contracts, and
the writing of options on securities are not deemed to be an issuance of a
senior security);
(10) lend any funds or other assets, except that such Portfolio may,
consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures, or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans, (b) enter into repurchase agreements
and reverse repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed one-third of the value of its total assets, provided such
loans are made in accordance with applicable guidelines established by the SEC
and the Trustees of the Trust; or
(11) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Non-Fundamental Investment Restrictions
Each Portfolio is also subject to the following non-fundamental
restriction (which may be changed without shareholder approval) and, unless
otherwise indicated, may not:
(1) invest more than 15% of the net assets of a Portfolio (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment (other
than overnight deposits), or other securities which legally or in the Adviser's
or Sub-Adviser's opinion may be deemed illiquid (other than securities issued
pursuant to Rule 144A under the 1933 Act and certain commercial paper that the
Adviser or Sub-Adviser has determined to be liquid under procedures approved by
the Board of Trustees).
Unless otherwise indicated, all limitations applicable to a Portfolio's
investments apply only at the time a transaction is entered into. Any subsequent
change in a rating assigned by any rating service to a security, or change in
the percentage of a Portfolio's assets invested in certain securities or other
instruments resulting from market
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<PAGE>
fluctuations or other changes in a Portfolio's total assets, will not require
the Portfolio to dispose of an investment. In the event that ratings services
assign different ratings to the same security, the Adviser or Sub-Adviser will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings.
The phrase "shareholder approval," as used in the Prospectus and this
Statement of Additional Information, and the phrase a "vote of a majority of the
outstanding voting securities," as used herein, mean the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Portfolio or the
Trust, as the case may be, or (2) 67% or more of the shares of the Portfolio or
the Trust, as the case may be, present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
MANAGEMENT OF THE TRUST
Trustees and Officers
The business of the Trust is managed under the direction of the Trust's
Board of Trustees. Subject to the provisions of the Trust's Declaration of
Trust, its By-Laws and Massachusetts law, the Trustees have all powers necessary
and convenient to carry out this responsibility, including the election and
removal of the Trust's officers.
The Trustees and officers of the Trust, their ages, and a description of
their principal occupations during the past five years are listed below. Except
as shown, each Trustee's and officer's principal occupation and business
experience for the last five years have been with the employer(s) indicated,
although in some cases the Trustee may have held different positions with such
employer(s). Unless otherwise indicated, the business address of the persons
listed below is c/o PIMCO Advisory Services, 1345 Avenue of the Americas, New
York, New York 10105.
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
Name, Address and Age Trust Years
--------------------- ----- -----
<S> <C> <C
Stephen J. Treadway* Chairman Executive Vice President, PIMCO Advisors;
2187 Atlantic Street Chairman and President, PIMCO Funds
Stamford, CT 06902 Distributors LLC ("PFD"); Executive Vice
Age 52 President, Value Advisors LLC; Chairman,
Municipal Advantage Fund Inc.; President,
The Emerging Markets Income Fund, Inc.,
The Emerging Markets Income Fund II, Inc.,
The Emerging Markets Floating Rate Fund, Inc.,
Global Partners Income Fund, Inc.,
Municipal Partners Fund, Inc. and
Municipal Partners Fund II, Inc.
Formerly, Trustee, President and Chief Executive
Officer of CAT; Executive Vice President, Smith
Barney Inc.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C
Paul Belica Trustee Manager, Whistler Fund, L.L.C., Xanthus Fund,
Age 78 L.L.C. and Wynstone Fund, L.L.C.; Director,
Student Loan Finance Corporation, Education
Loans, Inc., Goal Funding, Inc. and Surety Loan
Funding Company; Advisor, Smith Barney Co.;
Former Director, Central European Value Fund,
Inc., Deck House, Inc., a manufacturing company,
The Czech Republic Fund, Inc.; Director, Senior
Vice President and Managing Director, Smith
Barney, Harris Upham and Co.; Director and
Treasurer, Isabela Home Inc., Isabela Housing
Company Inc., and Isabela Nursing Home Inc.;
Director, Dreyfus Tax Exempt Bond Fund, Inc.,
Dreyfus New York State Tax Exempt Bond Fund,
Inc., and Union Dime Savings Bank; Executive
Director, New York State Housing Finance
Agency, New York State Medical Care Facilities
Finance Agency, New York State Municipal Bond
Bank Agency, New York State Project Finance
Agency and Chairman, State of New York
Mortgage Agency; President, Paul Belica and
Company, Inc., a financial advisory business;
Project Manager, Walsh Construction Company;
Member, Ministry of Foreign Affairs of
Czechoslovakia in Prague and Czechoslovak
Embassy in Vienna.
Robert E. Connor Trustee Public Relations Specialist, Smith Barney Inc.;
Age 65 Director, Municipal Advantage Fund Inc.
Newton B. Schott, Jr. Secretary Executive Vice President, Chief Administrative
Age 57 Officer, Secretary and General Counsel, PIMCO
Funds Distributors LLC; Senior Vice President
-- Mutual Fund Division, PIMCO Advisors L.P.
Brian S. Shlissel Treasurer Vice President, PIMCO Advisors L.P.; Treasurer,
Age 36 OCC Cash Reserves, Inc., OCC Accumulation
Trust, Inc., and Municipal Advantage Fund Inc.
Robert B. Beel Senior Vice President Senior Vice President -- Marketing and Client
Age 50 Service, PIMCO Advisory Services.
Jonathan C. Hart Senior Vice President Senior Vice President -- Marketing and Client
Age 48 Service, PIMCO Advisory Services.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C
Sharon Highland Senior Vice President Director -- Separately Managed Account Group,
Age 38 PIMCO Advisory Services.
Joni H. Rheingold Senior Vice President Senior Vice President -- Marketing and Client
Age 32 Service, PIMCO Advisory Services.
Richard P. Triolo Senior Vice President Senior Vice President -- Marketing and Client
Age 51 Service, PIMCO Advisory Services.
Jay M. Kirkorsky** Vice President, Senior Vice President, Trading Supervisor -- Separately
Age 30 Portfolio Trader Managed Account Group, PIMCO Advisory Services.
Christopher Casenhiser Vice President Vice President -- West Coast Business Development
Age 27 Team, PIMCO Advisory Services; Marketing
Specialist, Calamos Asset Management.
Raymond Harvier Vice President Vice President -- Marketing and Client Service,
Age 39 PIMCO Advisory Services; Financial Advisor,
American Express Financial Advisors; Sales Desk
Manager, Van Eck Global Securities.
Jessica McInnis Hill Vice President Vice President -- West Coast Business
Age 25 Development Team, PIMCO Advisory Services;
Internal Sales Associate, The Endeavor Group.
Leslie Kravetzky Vice President Vice President -- Marketing and Client Service,
Age 32 PIMCO Advisory Services; Marketing
Representative, Oppenheimer Capital's Quest For
Value mutual funds.
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section 2(a)(19)
of the 1940 Act).
** Proposed to be elected as an officer at the meeting of the Board of
Directors to be held on July 31, 2000
Trustees' Compensation
Trustees, other than those affiliated with PIMCO Advisors, the
Sub-Adviser, or Pacific Investment Management, receive $500 for each Board of
Trustees meeting attended, whether attended in person or by telephone.
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<PAGE>
Trustees do not currently receive any pension or retirement benefits from the
Trust or the Fund Complex (see below).
The following table sets forth information regarding compensation paid
to those Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Trust for its first fiscal year by the Trust.
(1) (2) (3)
Total
Aggregate Compensation
Compensation from from Trust and
Name of Trustee Trust Fund Complex
--------------- ----- ---------------
Paul Belica $2,000 $2,000
Robert E. Connor $2,000 $8,550
Investment Adviser
PIMCO Advisors L.P. serves as investment adviser to each of the Portfolios
pursuant to an investment advisory agreement ("Advisory Agreement") between
PIMCO Advisors and the Trust. PIMCO Advisors was organized as a limited
partnership under Delaware law in 1987. PIMCO Advisors sole general partner
is Pacific-Allianz Partners LLC. Pacific-Allianz Partners LLC is a Delaware
limited liability company with two members, Allianz GP Sub LLC, a Delaware
limited liability company, and Pacific Asset Management LLC, a Delaware limited
liability company. Allianz GP Sub LLC is a wholly-owned subsidiary of Allianz
of America, Inc., which is a wholly-owned subsidiary of Allianz AG. Pacific
Asset Management LLC is a wholly-owned subsidiary of Pacific Life Insurance
Company, which is a wholly-owned subsidiary of Pacific Mutual Holding Company.
The general partner of PIMCO Advisors has substantially delegated its
management and control of PIMCO Advisors to an Executive Committee. The
Executive Committee of PIMCO Advisors is comprised of Joachim Faber, Udo Frank,
Kenneth M. Poovey, William S. Thompson, Jr., and Marcus Riess.
PIMCO Advisors is located at 800 Newport Center Drive, Newport Beach,
California 92660. PIMCO Advisors and its subsidiary partnerships had
approximately $272 billion of assets under management as of September 30, 2000.
Agreement with Allianz AG
On May 5, 2000 the general partners of PIMCO Advisors closed the
transactions contemplated by the Implementation and Merger Agreement dated as
of October 31, 1999 ("Implementation Agreement"), as amended March 3, 2000,
with Allianz of America, Inc., Pacific Asset Management LLC, PIMCO Partners,
LLC, PIMCO Holding LLC, PIMCO Partners, G.P., and other parties to the
Implementation Agreement. As a result of completing these transactions, PIMCO
Advisors is now majority-owned indirectly by Allianz AG, with subsidiaries of
Pacific Life Insurance Company retaining a significant minority interest.
Allianz AG is a German based insurer. Pacific Life Insurance Company is a
Newport Beach, California based insurer.
In connection with the closing, Allianz of America entered into a put/call
arrangement for the possible disposition of Pacific Life's indirect interest in
PIMCO Advisors. The put option held by Pacific Life will allow it to require
Allianz of America, on the last business day of each calendar quarter following
the closing, to purchase at a formula-based price all of the PIMCO Advisors'
units owned directly or indirectly by Pacific Life. The call option held by
Allianz of America will allow it, beginning January 31, 2003 or upon a change
in control of Pacific Life, to require Pacific Life to sell or cause to be sold
to Allianz of America, at the same formula-based price, all of the PIMCO
Advisors' units owned directly or indirectly by Pacific Life.
Allianz AG's address is Koniginstrasse 28, D-80802, Munich, Germany.
Pacific Life's address is 700 Newport Center Drive, Newport Beach, CA 92660.
Advisory Agreement
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Portfolios
and for managing, either directly or through others selected by the Adviser,
the investments of the Portfolios. PIMCO Advisors also furnishes to the Board
of Trustees periodic reports on the investment performance of each Portfolio.
As more fully discussed below, PIMCO Advisors has engaged an affiliate to serve
as Sub-Adviser.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Funds and the Portfolios in accordance with applicable laws and
regulations. The investment advisory services of PIMCO Advisors to the Trust
are not exclusive under the terms of the Advisory Agreement. PIMCO Advisors is
free to, and does, render investment advisory services to others.
The Advisory Agreement will continue in effect with respect to a Portfolio
for two years from its effective date, and thereafter on a yearly basis,
provided such continuance is approved annually (i) by the holders of a majority
of the outstanding voting securities of the Portfolio, or by the Board of
Trustees, and (ii) by a majority of the Trustees who are not "interested
persons" of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the Advisory Agreement. The Advisory Agreement
may be terminated without penalty by vote of the Trustees or the vote of a
majority of the outstanding voting shares of the Trust (or with respect to a
particular Portfolio, by the vote of a majority of the outstanding voting
shares of such Portfolio), or by the Adviser, on 60 days' written notice to the
other party and will terminate automatically in the event of its assignment.
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Portfolio Management Agreement
PIMCO Advisors serves as the investment adviser for the Portfolios. The
Adviser employs Pacific Investment Management Company ("PIMCO") as the
Sub-Adviser to provide investment advisory services to each Portfolio pursuant
to portfolio management agreements (each a "Portfolio Management Agreement")
between the Adviser and the Portfolio's Sub-Adviser.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California
92660. Organized in 1971, PIMCO provides investment management and advisory
services to private accounts of institutional and individual clients and to
mutual funds. As of December 31, 1999, PIMCO had approximately $186 billion in
assets under management.
Portfolio Administrator
PIMCO Advisory Services ("PAS") serves as administrator (and is referred
to in this capacity as the "Administrator") to the Portfolios pursuant to an
administration agreement (the "Administration Agreement") with the Trust. The
Administrator provides or procures administrative services to the Portfolios,
which include clerical help and accounting, bookkeeping, internal audit services
and certain other services they require, and preparation of reports to the
Trust's shareholders and regulatory filings. PAS may retain affiliates to
provide services as sub- administrators. In addition, the Administrator arranges
at its own expense for the provision of legal, audit, custody, transfer agency
and other services necessary for the ordinary operation of the Portfolios, and
is responsible for the costs of registration of the Trust's shares and the
printing of prospectuses and shareholder reports for current shareholders. Under
the Administration Agreement, the Administrator has agreed to provide or procure
these services, and to bear these expenses at no charge to the Portfolios.
The Administrator has also agreed to bear all costs of the Trust's
operations.
The Administration Agreement may be terminated by the Trust at any time by
vote of (1) a majority of the Trustees, (2) a majority of the outstanding voting
securities of the Trust, or (3) by a majority of the Trustees who are not
interested persons of the Trust or PIMCO Advisors, on 60 days' written notice to
PIMCO Advisors.
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DISTRIBUTION OF TRUST SHARES
Distributor
PIMCO Funds Distributors LLC (the "Distributor") serves as the principal
underwriter of each Portfolio of the Trust's shares pursuant to a distribution
contract with the Trust. The offering of the Trust's shares is continuous. The
Distributor is not obligated to sell any specific amount of the Trust's shares.
The Trust, on behalf of the Portfolios, pays the Distributor no fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions and Portfolio Transactions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser and the Sub- Adviser are made with a view to achieving
their respective investment objectives. Investment decisions are the product of
many factors in addition to basic suitability for the particular client involved
(including the Trust). Some securities considered for investment by the
Portfolios may also be appropriate for other clients served by the Adviser or
the Sub-Adviser. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. If a purchase or sale of securities consistent with the investment
policies of a Portfolio and one or more of these clients is considered at or
about the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Adviser or
Sub-Adviser. Particularly when investing in less liquid or illiquid securities
of smaller capitalization companies, such allocation may take into account the
asset size of a Portfolio in determining whether the allocation of an investment
is suitable. As a result, larger Portfolios may become more concentrated in more
liquid securities than smaller Portfolios or private accounts of the Adviser or
the Sub-Adviser pursuing a small capitalization investment strategy, which could
adversely affect performance. The Adviser or the Sub-Adviser may aggregate
orders for the Portfolios with simultaneous transactions entered into on behalf
of its other clients so long as price and transaction expenses are averaged
either for the portfolio transaction or for that day. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the Adviser's or the
Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
Brokerage and Research Services
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over- the-counter markets, but the price
paid by the Trust usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer. Transactions
on U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions in
foreign securities generally involve the payment of fixed brokerage commissions,
which are generally higher than those in the United States.
The Adviser and/or the Sub-Adviser places orders for the purchase and sale
of portfolio securities, options and futures contracts and buys and sells such
securities, options and futures for the Trust through a substantial number of
brokers and dealers. In so doing, the Adviser or Sub-Adviser uses its best
efforts to obtain for the Trust the most favorable price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions as described below. In seeking the most favorable price and
execution, the Adviser or Sub-Adviser, having in mind the Trust's best
interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
The Adviser or, pursuant to the portfolio management agreements, the
Sub-Adviser, places orders for the purchase and sale of portfolio investments
for a Portfolio's accounts with brokers or dealers selected by it in its
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discretion. In effecting purchases and sales of portfolio securities for the
accounts of the Portfolios, the Adviser and the Sub-Adviser will seek the best
price and execution of the Portfolios' orders. In doing so, a Portfolio may pay
higher commission rates than the lowest available when the Adviser or
Sub-Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction, as discussed below. The Adviser and the Sub-Adviser also may
consider sales of shares of the Trust as a factor in the selection of
broker-dealers to execute portfolio transactions for the Trust.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser and the Sub-Adviser receive research services from many
broker-dealers with which the Adviser and the Sub-Adviser place the Trust's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such matters as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser and the Sub-Adviser in advising various of
their clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The advisory fees paid by
the Trust are not reduced because the Adviser and the Sub-Adviser receive such
services.
In reliance on the "safe harbor" provided by Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the Adviser and
the Sub-Adviser may cause the Trust to pay broker-dealers which provide them
with "brokerage and research services" (as defined in the 1934 Act) an amount of
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser or the Sub-Adviser may also consider sales of shares
of the Trust as a factor in the selection of broker-dealers to execute portfolio
transactions for the Trust.
The Adviser or the Sub-Adviser may place orders for the purchase and sale
of exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Adviser or Sub-Adviser where, in the judgment of the Adviser or
Sub-Adviser, such firm will be able to obtain a price and execution at least as
favorable as other qualified broker-dealers.
Pursuant to rules of the SEC, a broker-dealer that is an affiliate of the
Adviser or the Sub-Adviser may receive and retain compensation for effecting
portfolio transactions for a Portfolio on a national securities exchange of
which the broker-dealer is a member if the transaction is "executed" on the
floor of the exchange by another broker which is not an "associated person" of
the affiliated broker-dealer, and if there is in effect a written contract
between the Adviser or Sub-Adviser and the Trust expressly permitting the
affiliated broker-dealer to receive and retain such compensation.
SEC rules further require that commissions paid to such an affiliated
broker-dealer, the Adviser, or Sub- Adviser by a Portfolio on exchange
transactions not exceed "usual and customary brokerage commissions." The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time."
Portfolio Turnover
A change in the securities held by a Portfolio is known as "portfolio
turnover." The Sub-Adviser manages the Portfolios without regard generally to
restrictions on portfolio turnover. The use of futures contracts and other
derivative instruments with relatively short maturities may tend to exaggerate
the portfolio turnover rate for some of the Portfolios. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. High
portfolio turnover (e.g., greater than 100%) involves correspondingly greater
expenses to a Portfolio, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestments in other
securities. The higher the rate of portfolio turnover of a Portfolio, the higher
these transaction costs borne by the Portfolio generally will be. Such sales may
result in realization of taxable capital gains (including short-term capital
gains which are taxed when distributed to shareholders who are individuals at
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ordinary income tax rates). See "Taxation."
The portfolio turnover rate of a Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by (b) the monthly average of the value of the portfolio securities
owned by the Portfolio during the particular fiscal year. In calculating the
rate of portfolio turnover, there is excluded from both (a) and (b) all
securities, including options, whose maturities or expiration dates at the time
of acquisition were one year or less. Proceeds from short sales and assets used
to cover short positions undertaken are included in the amounts of securities
sold and purchased, respectively, during the year.
NET ASSET VALUE
As indicated in the Prospectus under the heading "How Portfolio Shares are
Priced," the net asset value ("NAV") of a Portfolio's shares is determined by
dividing the total value of a Portfolio's portfolio investments and other assets
attributable to that Portfolio, less any liabilities, by the total number of
shares outstanding of that Portfolio.
For purposes of calculating the NAV, portfolio securities and other assets
for which market quotes are available are stated at market value. Market value
is generally determined on the basis of last reported sales prices, or if no
sales are reported, based on quotes obtained from a quotation reporting system,
established market makers, or pricing services. Certain securities or
investments for which daily market quotes are not readily available may be
valued, pursuant to guidelines established by the Board of Trustees, with
reference to other securities or indices. Short-term investments having a
maturity of 60 days or less are generally valued at amortized cost. Exchange
traded options, futures and options on futures are valued at the settlement
price determined by the exchange. Other securities for which market quotes are
not readily available are valued at fair value as determined in good faith by
the Board of Trustees or persons acting at their direction.
Investments initially valued in foreign currencies are converted to U.S.
dollars using foreign exchange rates obtained from pricing services. As a
result, the NAV of a Portfolio's shares may be affected by changes in the value
of foreign currencies in relation to the U.S. dollar. The value of securities
traded in foreign markets or denominated in foreign currencies may be affected
significantly on a day that the New York Stock Exchange is closed and an
investor is not able to buy, redeem or exchange shares. In particular,
calculation of the NAV may not take place contemporaneously with the
determination of the prices of foreign securities used in NAV calculations.
Portfolio shares are valued at 12:00 p.m., Eastern time ("Noon"), on each
day that the New York Stock Exchange is open. For purposes of calculating the
NAV, the Portfolios normally use pricing data for domestic equity securities
received shortly after Noon and do not normally take into account trading,
clearances or settlements that take place after Noon. Domestic fixed income and
foreign securities are normally priced using data reflecting the earlier closing
of the principal markets for those securities. Information that becomes known to
the Portfolios or their agents after the NAV has been calculated on a particular
day will not generally be used to retroactively adjust the price of the security
or the NAV determined earlier that day.
In unusual circumstances, instead of valuing securities in the usual
manner, the Portfolios may value securities at fair value or estimate their
value as determined in good faith by the Board of Trustees, generally based upon
recommendations provided by PIMCO Advisors or the Sub-Adviser. Fair valuation
may also be used by the Board of Trustees if extraordinary events occur after
the close of the relevant market but prior to Noon.
Each Portfolio's liabilities are allocated among its classes. The total of
such liabilities allocated to a class plus that class's distribution and/or
servicing fees and any other expenses specially allocated to that class are then
deducted from the class's proportionate interest in the Portfolio's assets, and
the resulting amount for each class is divided by the number of shares of that
class outstanding to produce the class's "net asset value" per share. Under
certain circumstances, the per share net asset value of classes of shares of the
Portfolios with higher service and/or distribution fees applicable to such
shares may be lower than the per share net asset value of the classes of shares
with lower or no service and/or distribution fees as a result of the higher
daily expense accruals of the service and/or distribution fees applicable to
such classes. Generally, for Portfolios that pay income dividends, those
dividends are expected to differ over time by approximately the amount of the
expense accrual differential between a particular Portfolio's classes.
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The Trust expects that the holidays upon which the Exchange will be closed
are as follows: New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
TAXATION
The following discussion is general in nature and should not be regarded
as an exhaustive presentation of all possible tax ramifications. You should
consult a qualified tax adviser regarding your investment in a Portfolio.
Each Portfolio intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company,
each Portfolio generally must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Qualifying Income Test") and (b) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the value of the
Portfolio's total assets is represented by cash, cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Portfolio's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer or of two or more issuers which the Portfolio controls and which are
engaged in the same, similar or related trades or businesses. In order to
qualify for the special tax treatment accorded regulated investment companies,
each Portfolio must distribute each taxable year an amount at least equal to the
sum of (i) 90% of its investment company taxable income (which includes
dividends, interest and net short-term capital gains in excess of any net
long-term capital losses) and (ii) 90% of its tax-exempt interest, net of
expenses allocable thereto. For purposes of the Qualifying Income Test, the
Treasury Department is authorized to promulgate regulations under which gains
from foreign currencies (and options, futures, and forward contracts on foreign
currency) would not constitute qualifying income if such gains are not directly
related to investing in securities (or options and futures with respect to stock
or securities). To date, such regulations have not been issued.
In years when a Portfolio distributes amounts in excess of its earnings
and profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares.
The proper tax treatment of income or loss realized by the retirement or
sale of certain Metal-Indexed Notes and catastrophe bonds is unclear. The
Portfolios will report such income or loss as capital or ordinary income or loss
in a manner consistent with any Internal Revenue Service position on the subject
following the publication of such a position. Gain or loss from the sale or
exchange of preferred stock indexed to the price of a natural resource is
expected to be capital gain or loss to the Portfolios.
Distributions
As a regulated investment company, each Portfolio generally will not be
subject to U.S. federal income tax on its investment company taxable income and
on its net capital gains (that is, any net long-term capital gains in excess of
the sum of net short-term capital losses and capital loss carryovers from prior
years) designated by the Portfolio as capital gain dividends, if any, that it
distributes to the shareholders on a timely basis. Each Portfolio intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and any net capital gains. In addition,
amounts not distributed by a Portfolio on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To avoid the tax, each Portfolio must distribute during each calendar year
an amount at least equal to the sum of (1) 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) 98%
of its capital gains in excess of its capital losses (and adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by a Portfolio in
October, November or December of that year to shareholders of record on a date
in such a month and paid by the Portfolio during January of the following year.
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Shareholders subject to U.S. federal income tax will be subject to tax on
dividends received from a Portfolio, regardless of whether received in cash or
reinvested in additional shares. Such distributions will be taxable to
Shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To avoid application of the excise
tax, each Portfolio intends to make its distributions in accordance with the
calendar year distribution requirement.
Distributions received by tax-exempt shareholders generally will not be
subject to federal income tax to the extent permitted under applicable tax law.
All shareholders must treat dividends, other than capital gain dividends,
exempt-interest dividends, if any, and dividends that represent a return of
capital to shareholders, as ordinary income. In particular, distributions
derived from short-term gains will be treated as ordinary income. Dividends, if
any, derived from interest on certain U.S. Government securities may be exempt
from state and local taxes, although interest on mortgage-backed U.S. Government
securities is generally not so exempt.
Dividends designated by a Portfolio as capital gain dividends derived from
the Portfolio's net capital gains are taxable to shareholders as long-term
capital gains except as provided by an applicable tax exemption. Any
distributions that are not from a Portfolio's net investment income or net
capital gains may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Each Portfolio will advise shareholders annually of
the amount and nature of the dividends paid to them.
The tax status of each Portfolio and the distributions which it may make
are summarized in the Prospectus under the captions "Portfolio Distributions"
and "Tax Consequences." All dividends and distributions of a Portfolio, whether
received in shares or cash, are taxable and must be reported on each
shareholder's federal income tax return.
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains, regardless of how long the
shareholder has held a Portfolio's shares and are not eligible for the dividends
received deduction. Any distributions that are not from a Portfolio's investment
company taxable income or net capital gains may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. The tax treatment of
dividends and distributions will be the same whether a shareholder reinvests
them in additional shares or elects to receive them in cash. In addition,
Portfolios that invest in other investment companies will not be able to offset
gains realized by one underlying investment company against losses realized by
another underlying investment company. A Portfolio's investment in other
investment companies could therefore affect the amount, timing and character of
distributions to its shareholders.
Taxable shareholders should note that the timing of their investment or
redemptions could have undesirable tax consequences. Dividends and distributions
on shares of a Portfolio are generally subject to federal income tax as
described herein to the extent they do not exceed the Portfolio's realized
income and gains, even though such dividends and distributions may economically
represent a return of a particular shareholder's investment. Such distributions
are likely to occur in respect of shares purchased at a time when the net asset
value of a Portfolio reflects gains that are either unrealized, or realized but
not distributed. Such realized gains may be required to be distributed even when
a Portfolio's net asset value also reflects unrealized losses.
Sales of Shares
Upon the disposition of shares of a Portfolio (whether by redemption, sale
or exchange), a shareholder will realize a gain or loss. Such gain or loss will
be capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Long-term capital gains will
generally be taxed at a federal income tax rate of 20% to shareholders who are
individuals. Any loss realized on a disposition will be disallowed to the extent
the shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
Backup Withholding
A Portfolio may be required to withhold 31% of all taxable distributions
payable to shareholders who fail to provide the Portfolio with their correct
taxpayer identification number or to make required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup
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withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal tax liability.
Options, Futures, Forward Contracts and Swap Agreements
To the extent such investments are permissible for a Portfolio, the
Portfolio's transactions in options, futures contracts, hedging transactions,
forward contracts, straddles and foreign currencies will be subject to special
tax rules (including mark-to-market, constructive sale, straddle, wash sale and
short sale rules), the effect of which may be to accelerate income to the
Portfolio, defer losses to the Portfolio, cause adjustments in the holding
periods of the Portfolio's securities, convert long-term capital gains into
short-term capital gains and convert short-term capital losses into long-term
capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders, including the Portfolios.
Foreign Currency Transactions
A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts and forward contracts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
Foreign Taxation
Income received by the Portfolios from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and the Sub-Adviser intend to manage the
Portfolios with the intention of minimizing foreign taxation in cases where it
is deemed prudent to do so.
Original Issue Discount and Pay-In-Kind Securities
Current federal tax law requires the holder of a U.S. Treasury or other
fixed income zero coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives no
interest payment in cash on the security during the year. In addition,
pay-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Portfolio holding the security
receives no interest payment in cash on the security during the year.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Portfolio may be
treated as debt securities that are issued originally at a discount. Generally,
the amount of the original issue discount ("OID") is treated as interest income
and is included in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. A portion of the OID includable in income with respect to
certain high-yield corporate debt securities (including certain pay-in-kind
securities) may be treated as a dividend for U.S. federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Portfolio in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. A Portfolio may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing of recognition of income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Portfolio may be treated as
having acquisition discount, or OID in the case of certain types of debt
securities. Generally, the Portfolio will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. The Portfolio may make one or more of the elections applicable
to debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income.
Each Portfolio that holds the foregoing kinds of securities may be
required to pay out as an income distribution each year an amount which is
greater than the total amount of cash interest the Portfolio actually received.
Such distributions may be made from the cash assets of the Portfolio or by
liquidation of portfolio
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securities, if necessary. The Portfolio may realize gains or losses from such
liquidations. In the event the Portfolio realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution,
if any, than they would in the absence of such transactions.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations"). However,
some states may exempt all or a portion of such distributions from income tax to
the extent the shareholder is able to establish that the distribution is derived
from qualifying federal obligations. Moreover, for state income tax purposes,
interest on some federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on FNMA Certificates
and GNMA Certificates). Each Portfolio will provide information annually to
shareholders indicating the amount and percentage of its dividend distribution
which is attributable to interest on federal obligations, and will indicate to
the extent possible from what types of federal obligations such dividends are
derived. The Trust is organized as a Massachusetts business trust. Under current
law, so long as each Portfolio qualifies for the federal income tax treatment
described above, it is believed that neither the Trust nor any Portfolio will be
liable for any income or franchise tax imposed by Massachusetts. Shareholders,
in any event, are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Portfolio.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust dated November 3, 1999. The capitalization of the Trust
consists solely of an unlimited number of shares of beneficial interest. The
Board of Trustees may establish additional series (with different investment
objectives and fundamental policies) at any time in the future. Establishment
and offering of additional series will not alter the rights of the Trust's
shareholders. When issued, shares are fully paid, non-assessable, redeemable and
freely transferable. Shares do not have preemptive rights or subscription
rights. In liquidation of a Portfolio, each shareholder is entitled to receive
his pro rata share of the net assets of that Portfolio.
Shares begin earning dividends on Portfolio shares the day after the Trust
receives the purchase payment from the shareholder. Net investment income from
interest and dividends, if any, will be declared daily and distributed monthly
to shareholders of record by the Portfolio. Any net capital gains from the sale
of portfolio securities will be distributed no less frequently than once
annually. Net short-term capital gains may be paid more frequently. A
Portfolio's dividend and capital gain distributions will be paid only in cash.
Dividends will not reinvest.
Under Massachusetts law, shareholders could, under certain circumstances,
be held liable for the obligations of the Trust. However, the Agreement and
Declaration of Trust (the "Declaration of Trust") of the Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
also provides for indemnification out of a Portfolio's property for all loss and
expense of any shareholder investing in that Portfolio held liable on account of
being or having been such a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which such disclaimer is inoperative or the Portfolio of which
he or she is or was a shareholder is unable to meet its obligations, and thus
should be considered remote.
Performance Information
From time to time the Trust may make available certain information about
the performance of one or both of the Portfolios. Information about a
Portfolio's performance is based on that Portfolio's record to a recent date and
is not intended to indicate future performance.
The total return and yield of the shares of the Portfolios may be included
in advertisements or other written material. When a Portfolio's total return is
advertised, it will be calculated for the past year, the past five years, and
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the past ten years (or if the Portfolio has been offered for a period shorter
than one, five or ten years, that period will be substituted) since the
establishment of the Portfolio, as more fully described below. Total return for
each Portfolio is measured by comparing the value of an investment in the
Portfolio at the beginning of the relevant period to the redemption value of the
investment in the Portfolio at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions at net asset
value). Total return may be advertised using alternative methods that reflect
all elements of return, but that may be adjusted to reflect the cumulative
impact of alternative fee and expense structures.
The Portfolios may also provide current distribution information to the
shareholders in reports or other communications, or in certain types of sales
literature provided to prospective investors. Current distribution information
for a particular Portfolio will be based on distributions for a specified period
(i.e., total dividends from net investment income), divided by the relevant net
asset value per share on the last day of the period and annualized. The rate of
current distributions does not reflect deductions for unrealized losses from
transactions in derivative instruments such as options and futures, which may
reduce total return. Current distribution rates differ from standardized yield
rates in that they represent what a Portfolio has declared and paid to
shareholders as of the end of a specified period rather than the Portfolio's
actual net investment income for that period.
Performance information is computed separately for each Portfolio. Each
Portfolio may from time to time include in advertisements or in information
furnished to present or prospective shareholders the yield of its shares, the
total return of its shares, and the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by Lipper
Analytical Services as having the same investment objectives. Information
provided to any newspaper or similar listing of the Portfolio's net asset values
and public offering prices will separately present each class of shares. The
Portfolios also may compute current distribution rates and use this information
in their Prospectus and Statement of Additional Information, in reports to
current shareholders, or in certain types of sales literature provided to
prospective investors.
Investment results of the Portfolios will fluctuate over time, and any
representation of the Portfolio's total return or yield for any prior period
should not be considered as a representation of what an investor's total return
or yield may be in any future period. The Trust's Annual and Semi-Annual Reports
contain additional performance information for the Portfolios and are available
upon request, without charge, by calling the telephone numbers listed on the
cover of this Statement of Additional Information.
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Calculation of Total Return
Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over periods of one, five, and ten
years (up to the life of the Portfolio), calculated pursuant to the following
formula: P (1 + T)n = ERV (where P = a hypothetical initial payment of $1,000, T
= the average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). Except as noted below, all total return figures assume that all
dividends and distributions are reinvested when paid. Quotations of total return
may also be shown for other periods. The Portfolios may also, with respect to
certain periods of less than one year, provide total return information for that
period that is unannualized. Under applicable regulations, any such information
is required to be accompanied by standardized total return information.
For the period from March 17, 2000 (commencement of operations) through
October 31, 2000, the total return of FISH: Series C was 5.79%, and the total
return of FISH: Series M was 9.16%. Performance information for a Portfolio may
also be compared to: (i) the Standard & Poor's 500 Composite Stock Price Index,
the Dow Jones Industrial Average, the Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) Index, the Morgan Stanley Capital International
Emerging Markets Free Index, the International Finance Corporation Emerging
Markets Index, the Baring Emerging Markets Index, or other unmanaged indexes
that measure performance of a pertinent group of securities; (ii) other groups
of mutual funds tracked by Lipper Analytical Services ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Portfolios. Unmanaged indexes
(i.e., other than Lipper) generally do not reflect deductions for
administrative and management costs or expenses. The Adviser and the
Sub-Adviser may also report to shareholders or to the public in advertisements
concerning the performance of the Adviser and/or the Sub-Adviser as advisers to
clients other than the Trust, and on the comparative performance or standing of
the Adviser and/or the Sub-Adviser in relation to other money managers. Such
comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information, whether related
to the Portfolios, the Adviser or the Sub-Adviser, should be considered in
light of the Portfolios' investment objectives and policies, characteristics
and quality, and the market conditions during the time period indicated, and
should not be considered to be representative of what may be achieved in the
future.
The total return of each series may be used to compare the performance of
a Portfolio's shares against certain widely acknowledged standards or indexes
for stock and bond market performance, against interest rates on certificates of
deposit and bank accounts, against the yield on money market funds, against the
cost of living (inflation) index, and against hypothetical results based on a
fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 380 industrial, 10 transportation, 39 utilities and 71
financial services concerns. The S&P 500 represents about 73% of the market
value of all issues traded on the New York Stock Exchange.
The S&P's 400 Mid-Cap Index (the "S&P 400 Mid-Cap Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 400 stocks of companies whose capitalization range from $100 million to
over $5 billion and which represent a wide range of industries. As of February
26, 1999, approximately 25% of the 400 stocks were stocks listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") system, 73%
were stocks listed on the New York Stock Exchange and 2% were stocks listed on
the American Stock Exchange. The Standard & Poor's Midcap 400 Index P/TR
consists of 400 domestic stocks chosen for market size (median market
capitalization of $1.54 billion), liquidity and industry group representation.
It is a market value-weighted index (stock price times shares outstanding), with
each stock affecting the index in proportion to its market value. The index is
comprised of industrials, utilities, financials and transportation, in size
order.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-weighted
and unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks relative to the base measure of 100.00 on February 5,
1971. The NASDAQ Index is composed entirely of common stocks of companies traded
over-the-counter and often through the NASDAQ system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.
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The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest securities in the Russell 3000 Index, representing approximately 7% of
the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of
the U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which most active money managers
typically select. This large cap index is highly correlated with the S&P 500.
The Russell 1000 Value Index contains stocks from the Russell 1000 Index with a
less-than-average growth orientation. It represents the universe of stocks from
which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a measure
of the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL Government/Corporate
Index") is a measure of the market value of approximately 5,000 bonds. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the average
rate of return paid on 3-month certificates of deposit offered by major banks
and the average rate paid by major banks on bank money market funds. The
Donoghue Organization, Inc., a subsidiary of IBC USA Inc., publishes the Money
Fund Report which lists the 7-day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or information
furnished to present or prospective shareholders, data concerning the
performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December 31,
1998, the U.S. equity market capitalization represented approximately 40% of the
equity market capitalization of all the world's markets. This compares with 52%
in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Portfolios, data concerning the
performance of stocks relative to that of fixed income investments and relative
to the cost of living over various periods of time. The table below sets forth
the annual returns for each calendar year from 1973 through 1999 (as well as a
cumulative return and average annual return for this period) for the S&P 500 and
Treasury bills (using the formula set forth after the table) as well as the
rates of inflation (based on the Consumer Price Index) during such periods.
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Consumer Price
Period S&P 500 Treasury Bills Index
------ ------- -------------- --------------
1973 -14.7 6.9 8.8
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
1997 33.4 5.3 1.7
1998 28.6 4.9 1.6
1999 21.0 4.7 2.7
--------------------------------------------------------------------------------
Cumulative Return
1973-1999 3,839.47% 477.8% 264.0%
Average Annual Return
1973-1999 15.18% 7.0% 5.1%
------------------------------------------------------------------------------
The average returns for Treasury bills were computed using the following
method. For each month during a period, the Treasury bill having the shortest
remaining maturity (but not less than one month) was selected. (Only the
remaining maturity was considered; the bill's original maturity was not
considered). The return for the selected Treasury bill was computed based on the
price of the bill as of the last trading day of the previous month and the price
on the last trading day of the current month. The price of the bill (P) at each
time (t) is given by:
P(t) = [ 1- r]
--
[ 36]
where,
r = decimal yield on the bill at time t (the average of
bid and ask quotes); and
d = the number of days to maturity as of time t.
Advertisements and information relating to the Portfolios may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each year from
March 1981 (inception of Mid-Cap Index) through December 31, 1999 (as well as a
cumulative return and average annual return for this period) for stocks of
medium-sized companies (based on the Standard & Poor's Mid- Cap Index), stocks
of small companies (based on the Russell 2000 Index) and stocks of larger
companies (based on the S&P 500).
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Small Mid-Size Large
Period Companies Companies Companies
------ --------- --------- ---------
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
1997 22.8 32.3 33.4
1998 -2.6 19.1 28.6
1999 21.3 14.7 21.04
Cumulative Return
2/28/81-12/31/99 882.8% 2,061.9% 1,978.2%
Average Annual Return
2/28/81-12/31/99 12.9% 17.7% 17.5%
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From time to time, the Trust may use, in its advertisements and other
information, data concerning the average price-to-earnings ("P/E") ratios of
"Value Stocks" and "Growth Stocks." For these purposes, the P/E ratios of Value
Stocks are measured by the P/E ratios of the stocks comprising the Russell 1000
Value Index, and the P/E ratios of Growth Stocks are measured by the P/E ratios
of the stocks comprising the Russell 1000 Growth Index. Both the Russell 1000
Value Index and Russell 1000 Growth Index are unmanaged indexes, and it is not
possible to invest directly in either index. The table below sets forth the
average P/E ratio of Value Stocks and the Average P/E ratio of Growth Stocks for
the period beginning October 1, 1992 and ending June 30, 2000.
Average P/E ratio
Period
Ending Growth Stocks Value Stocks
------ ------------- ------------
12/31/92 21.76 21.40
3/31/93 21.59 22.36
6/30/93 20.86 21.41
9/30/93 20.25 21.05
12/31/93 18.33 17.84
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3/31/94 18.07 17.69
6/30/94 16.70 16.31
9/30/94 15.98 15.28
12/31/94 15.98 14.97
3/31/95 15.80 14.62
6/30/95 16.50 14.87
9/30/95 17.85 16.17
12/31/95 17.91 15.82
3/31/96 18.24 16.07
6/30/96 18.57 15.93
9/30/96 18.88 15.80
12/31/96 20.45 17.03
3/31/97 20.28 16.78
6/30/97 22.85 18.44
9/30/97 23.80 19.60
12/31/97 22.93 19.06
3/31/98 26.46 21.32
6/30/98 26.55 20.69
9/30/98 25.77 19.31
12/31/98 31.31 22.92
3/31/99 39.46 24.33
6/30/99 45.05 25.93
9/30/99 43.93 23.80
12/31/99 52.31 23.60
3/31/00 55.58 22.94
6/30/00 54.43 22.66
Advertisements and information relating to the Portfolios may use data
comparing the performance of a hypothetical investment in Growth Stocks, Value
Stocks, "Bonds" and "Savings Accounts." For these purposes, the performance of
an investment in "Bonds" is measured by the Lehman Aggregate Bond Index, an
unmanaged index representative of the U.S. taxable fixed income universe. It is
not possible to invest in this index. The performance of an investment in
"Savings Accounts" is measured by the return on 3-month U.S. Treasury bills.
Similarly, advertisements and information relating to the Portfolios may use
data comparing the performance of a hypothetical investment in "Stocks," Bonds
and Savings Accounts. For these purposes, the performance of the investment in
"Stocks" is measured by the S&P 500, while the performance of Bonds and Savings
Accounts is measured as discussed above. The table below sets forth the value at
June 30, 2000 of a hypothetical $10,000 investment in Stocks, Growth Stocks,
Value Stocks, Bonds and Savings Accounts made at June 30, 1980.
June 30, 2000 Value of $10,000
Asset Category Investment made at June 30, 1980
-------------- ---------------------------------
Growth Stocks $101,187
Value Stocks $163,456
Stocks $245,642
Bonds $ 64,948
Savings Accounts $ 37,268
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1997/1998 costs of college (using tuition and fees only) and an assumed rate of
increase for such costs. For example, the table below sets forth the projected
cost of four years of college at a public college and a private college assuming
a steady increase in both cases of 3% per year. In presenting this information,
the Trust is making no prediction regarding what will be the actual growth rate
in the cost of a college education, which may be greater or less than 3% per
year and may vary significantly from year to year. The Trust makes no
representation that an investment in any of the Portfolios will grow at or above
the rate of growth of the cost of a college education.
Potential College Cost Table
Start Public Private Start Public Private
Year College College Year College College
---- ------- ------- ---- ------- -------
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
Costs assume a steady increase in the annual cost of college of 3% per year from
a 1996-97 base year amount. Actual rates of increase may be more or less than 3%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each category* during the period from 1974 through 1999 was:
Stocks: 15.2%
Bonds: 9.2%
T-Bills: 6.9%
Inflation: 5.1%
* Returns of unmanaged indexes do not reflect past or future performance
of the Fixed Income SHares. Stocks are represented by Ibbotson's Large
Company Stock Total Return Index. Bonds are represented by Ibbotson's
Long-term Corporate Bond Index. Treasury bills are represented by
Ibbotson's Treasury Bill Index and Inflation is represented by the Cost of
Living Index. These are all unmanaged indexes, which can not be invested
in directly. While Treasury bills are insured and offer a fixed rate of
return, both the principal and yield of investment securities will
fluctuate with changes in market conditions. Source: Ibbotson, Roger G.,
and Rex A. Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989,
updated in Stocks, Bonds, Bills and Inflation 1999 Yearbook, Ibbotson
Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 20 years
from 1980 through 1999, the average annual return of stocks comprising the
Ibbotson's Large Company Stock Total Return Index ranged from -4.91% to 37.4%
while the annual return of a hypothetical portfolio comprised 40% of such common
stocks, 40% of bonds comprising the Ibbotson's Long-term Corporate bond Index
and 20% of Treasury bills comprising the Ibbottson's Treasury Bill Index (a
"mixed portfolio") would have ranged from -1.0% to 28.2% over the same period.
The average annual returns of each investment category* for each of the years
from 1980 through 1999 is set forth in the following table.
MIXED
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YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
----- ------ ----- ------- --------- ---------
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
1998 28.58% 10.76% 4.86% 1.61% 16.70%
1999 21.00% -7.40% 4.70% 2.70% 5.9%
* Returns of unmanaged indexes do not reflect past or future performance
of the Fixed Income SHares. Stocks are represented by Ibbotson's Large
Company Stock Total Return Index. Bonds are represented by Ibbotson's
Long-term Corporate Bond Index. Treasury bills are represented by
Ibbotson's Treasury Bill Index and Inflation is represented by the Cost of
Living Index. Treasury bills are all unmanaged indexes, which can not be
invested in directly. While Treasury bills are insured and offer a fixed
rate of return, both the principal and yield of investment securities will
fluctuate with changes in market conditions. Source: Ibbotson, Roger G.,
and Rex A. Sinquefiled, Stocks, Bonds, Bill and Inflation (SBBI), 1989,
updated in Stocks, Bonds, Bills and Inflation 1999 Yearbook, Ibbotson
Associates, Chicago. All rights reserved.
The Trust may use in its advertisements and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
This hypothetical example assumes a fixed 7% return compounded annually
and a guaranteed return of principal. The example is intended to show the
benefits of a long-term, regular investment program, and is in no way
representative of any past or future performance of the Fixed Income
SHares. There can be no guarantee that you will be able to find an
investment that would provide such a return at the times you invest and an
investor in the Fixed Income SHares should be aware that the Portfolios of
Fixed Income SHares may experience in the future periods of negative
growth.
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Articles or reports which include information relating to performance,
rankings and other characteristics of the Portfolios may appear in various
national publications and services including, but not limited to: The Wall
Street Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual
Fund Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the
Portfolios, and may provide information relating to the Adviser and the
Sub-Adviser, including descriptions of assets under management and client base,
and opinions of the author(s) regarding the skills of personnel and employees of
the Adviser or the Sub-Adviser who have portfolio management responsibility.
>From time to time, the Trust may include references to or reprints of such
publications or reports in its advertisements and other information relating to
the Portfolios.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Portfolios over a specified period of time and may use charts
and graphs to display that growth.
From time to time, the Trust may set forth in its advertisements and other
materials the names of and additional information regarding investment analysts
employed by the Sub-Adviser who assist with portfolio management and research
activities on behalf of the Portfolios.
Ibbotson Associates ("Ibbotson") may analyze the risk and returns of the
Portfolios and relevant benchmark market indexes in a variety of market
conditions. Based on its independent research and analysis, Ibbotson may
develop, from time to time, model portfolios of the Portfolios which indicate
how, in Ibbotson's opinion, a hypothetical investor with a 5+ year investment
horizon might allocate his or her assets among the Portfolios. Ibbotson bases
its model portfolios on five levels of investor risk tolerance which it
developed and defines as ranging from "Very Conservative" (low volatility;
emphasis on capital preservation, with some growth potential) to "Very
Aggressive" (high volatility; emphasis on long-term growth potential). However,
neither Ibbotson nor the Trust offers Ibbotson's model portfolios as
investments. Moreover, neither the Trust, the Adviser, the Sub-Adviser nor
Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
Compliance Efforts Related to the Euro
Another potential computer system problem may arise in conjunction with
the recent introduction of the euro. Whether introducing the euro to financial
companies' systems will be problematic is not fully known; however, the cost
associated with making systems recognize the euro is not currently expected to
be material.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. In the
event that such a request was made, the Trust has represented that it would
assist with any necessary shareholder communications. Shareholders of a class of
shares have different voting rights with respect to matters that affect only
that class.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). Each Portfolio has identical voting rights except
that each Portfolio has exclusive voting rights on any matter submitted to
shareholders that relates solely to that Portfolio, and has separate voting
rights on any matter submitted to shareholders in which the interests of one
Portfolio differ from the interests of any other Portfolio. Each Portfolio has
exclusive voting rights with respect to matters pertaining to any distribution
or servicing plan or agreement applicable to that Portfolio. These shares are
entitled to vote at meetings of shareholders. Matters submitted to shareholder
vote must be approved by each Portfolio separately except (i) when required by
the 1940 Act shares shall be voted together and (ii) when the Trustees have
determined that the matter does not affect Portfolios, then only shareholders of
the Portfolio(s) affected shall be entitled to vote on the matter. The shares of
the Portfolios will vote together except when the vote of a single Portfolio is
required as specified above or otherwise by the 1940 Act.
The Trust's shares do not have cumulative voting rights. Therefore, the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Certain Ownership of Trust Shares
-50-
<PAGE>
As of December 1, 2000, the Trust believes that the Trustees and
officers of the Trust, as a group, owned less than 1 percent of each class of
each Portfolio and of the Trust as a whole.
Custodian
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, serves as custodian of the assets of each Portfolio.
Independent Accountants
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, Missouri 64105,
serves as the independent public accountants for the Portfolios.
PricewaterhouseCoopers LLP provides audit services, accounting assistance, and
consultation in connection with SEC filings.
Transfer Agent
National Financial Data Services, 330 West 9th Street, Kansas City,
MO 64105
Legal Counsel
Ropes & Gray, One International Place, Boston, Massachusetts 02110 serves
as legal counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all of the information included in the Trust's registration statements filed
with the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statements, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the relevant registration statement, each such
statement being qualified in all respects by such reference.
Financial Statements
Audited financial statements for the Portfolios, as of October 31, 2000,
for the fiscal year then ended, including notes thereto, and the reports of
PricewaterhouseCoopers LLP thereon, each dated December 8, 2000, are
incorporated by reference to the Trust's October 31, 2000 Annual Report, filed
electronically with the SEC on December 19, 2000 (Accession No.0000930413-
00-001557).
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<PAGE>
Miscellaneous
Selected Advertising Material.
FISH - The PIMCO Difference
Except for large institutional portfolios ($75 million+), it has generally not
been feasible for separate accounts to effectively invest in more specialized
fixed income securities. PIMCO has now developed proprietary securities called
Fixed Income SHares (FISH). When combined with selected separate securities,
FISH enhance individually managed account portfolios' access to the Total
Return management of PIMCO.
Through FISH securities, PIMCO can give clients access to efficient investment
in specialized fixed income instruments and sectors. Using FISH in combination
with holdings of individual bonds, PIMCO can implement its sector allocation and
risk management strategy.
These are currently two series of FIxed Income SHares:
FISH Series M - Designed primarily to provide exposure to mortgage-backed and
collateralized mortgage securities, participation notes, state and local
government issues, U.S. Treasuries and agencies and money market instruments.
FISH Series C - Designed primarily to provide exposure to U.S. corporate and
international fixed income securities, inflation-indexed notes and bonds, U.S.
Treasuries, agencies and money market instruments.
-52-
<PAGE>
The Investment Significance of FISH Securities
For an individual account, many securities may be too difficult or costly to
trade, or not readily available in small increments. For example, each month
mortgage securities pay down a small amount of principal - too small to
effectively reinvest each individual account. In contrast, where mortgage
securities are maintained in FISH, this pay down is collectively large and can
be easily and efficiently reinvested.
Smaller issues of U.S. or foreign bonds may not be well-known, but can
represent great value. Through FISH, the investor can obtain additional sector
or market exposures without the burden of small, direct ownership.
Features of FISH
Allow PIMCO to implement the same portfolio management techniques used for
large institutional accounts.
Enable investment in specialized fixed income securities such as mortgage-
backed, international, and high yield bonds on a cost-effective basis.
Permit greater portfolio diversification and risk management
Available exclusively through authorized financial institutions.
Investor Advantages of FISH Securities
FISH securities permit greater diversification and embrace more portfolio
management tools than small separate accounts could otherwise achieve.
FISH securities have no embedded fees or hidden costs.
FISH securities are priced daily. This permits cash to be invested
quickly and easily.
FISH securities pay a montly dividend in cash which is swept into the
money market account held at the custodian.
FISH securities' monthly dividends accommodate clients with monthly income
payment needs. Most bonds pay interest only semi-annually.
FISH securities' small denominations permit full investment of fixed income
assets under management.
FISH securities are private - available exclusively to clients of
registered investment advisers.
FISH securities can be bought and sold only through PIMCO Advisory
Services' trading desk to assure that only authorized individual clients of
registered investment advisers may own FISH securities.
Appendix A
Certain Ownership of Portfolio Shares as of December 1, 2000
As of December 1, 2000, the following persons owned of record or
beneficially 5% or more of each portfolio.
PIMCO Advisors L.P. - 92%
Barbara Sinatra Children's Fund - 8%
-53-
PART C. OTHER INFORMATION
Item 23. Exhibits.
The letter of each exhibit relates to the exhibit designation in Form
N-1A:
(a) Amended and Restated Agreement and Declaration of Trust, dated
April 10, 2000, filed herewith.
(b) Amended and Restated By-Laws, filed herewith.
(c) Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Agreement and Declaration of Trust, filed herewith.
(d) (1) Investment Advisory Agreement between the Trust and PIMCO
Advisors L.P., dated March 16, 2000, to be filed by amendment.
(2) Portfolio Management Agreement between PIMCO Advisors L.P.
and Pacific Investment Management Company, dated as of
March 15, 2000, to be filed by amendment.
(e) Distribution Contract between the Trust and PIMCO Funds
Distributors LLC, dated as of March 15, 2000, to be filed by
amendment.
(f) Not applicable.
(g) Custody and Investment Accounting Agreement among the Trust, State
Street Bank and Trust Company and PIMCO Advisory Services, dated
as of March 10, 2000, to be filed by amendment.
(h)
(1) Administration Agreement between the Trust and PIMCO Advisory
Services, dated March 15, 2000, to be filed by amendment.
(2) Transfer Agency and Service Agreement between PIMCO Advisors
L.P. and State Street Bank and Trust Company, dated as of
September 15, 2000, to be filed by amendment.
(i) Opinion and Consent of Counsel -- incorporated by reference to
Pre-Effective Amendment No. 3 to the Registrant's Registration
Statement, filed with the SEC on March 17, 2000.
(j) Consent of Independent Accountants -- to be filed by amendment.
(k) Not applicable.
(l) Initial Capital Agreement, dated March 16, 2000, to be filed by
amendment.
(m) Not applicable.
(n) Not applicable.
(p) Not applicable.
(q) Power of Attorney for Paul Belica and Robert E. Connor --
incorporated by reference to Pre-Effective Amendment No. 3 to
the Registrant's Registration Statement, filed with the SEC on
March 17, 2000.
Item 24. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 25. Indemnification.
Reference is made to Article VIII, Section 1, of the Registrant's
Agreement and Declaration of Trust, which is incorporated by reference herein.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the Trust's
Agreement and Declaration of Trust, its By-Laws or otherwise, the Registrant is
aware that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and, therefore,
is unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by trustees, officers or controlling persons of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustees, officers or controlling persons in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser and Portfolio
Managers.
Unless otherwise stated, the principal business address of each
organization listed in 800 Newport Center Drive, Newport Beach, CA 92660.
PIMCO Advisors L.P.
Name Position with Adviser Other Affiliates
---- --------------------- ----------------
Walter E. Auch, Sr. Board Member of Management Management Consultant;
Director, Fort Dearborn
Fund, Shearson VIP Fund,
Shearson Advisors Fund,
Shearson TRAK Fund,
Banyan Land Trust, Banyan
Land Fund II, Banyan
Mortgage Fund, Allied
Healthcare Products,
Inc., First Western Inc.,
DHR Group and Geotech
Industries.
William R. Benz Member of Management Board See Pacific Investment
Management Company.
David B. Breen Member of Management Board Director, Managing
Director and Chief
Executive Officer,
Cadence Capital
Management, Inc.,;
Managing Director and
Chief Executive Officer,
Cadence Capital
Management.
Donald A. Chiboucas Member of Management Board Director, Columbus Circle
Investors Management,
Inc.; Managing Director,
Columbus Circle
Investors.
Kenneth W. Corba Member of Management Board. None.
Managing Director and Chief
Investment Officer of PIMCO
Equity Advisors.
William D. Cvengros Chief Executive Officer Trustee and Chairman of
and President, Member of the Trust; Director,
Management Board PIMCO Funds Distributors
LLC, Chief Executive
Officer and President,
Value Advisors LLC;
-2-
<PAGE>
Director, PIMCO Funds
Advertising Agency;
Director, President and
Chief Executive Officer,
Thomson Advisory Group,
Inc.
Walter B. Gerken Chairman and Member of Director and Managing
Management Board Director, PIMCO
Management, Inc.;
Managing Director,
Pacific Investment
Management Company;
Senior Vice President,
PIMCO Funds: Pacific
Investment Management
Series, PIMCO Variable
Insurance Trust; Director
and Vice President,
StocksPLUS Management,
Inc.; Member of PIMCO
Partners LLC.
Brent R. Harris Member of Management Board Director and Managing
Director, PIMCO
Management, Inc.;
Managing Director,
Pacific Investment
Management Company;
Director and Vice
President, StocksPLUS
Management, Inc.;
Chairman of the Board and
Trustee, PIMCO Funds:
Pacific Investment
Management Series, PIMCO
Variable Insurance Trust
and PIMCO Commercial
Mortgage Securities
Trust, Inc.; Member of
PIMCO Partners LLC.
Donald R. Kurtz Member of Management Board Donald R. Kurt Member of
Management Board.
Formerly, Vice President
of Internal Asset
Management, General
Motors Investment Corp.;
Director, Thomson
Advisory Group L.P.
George A. Long Member of Management Board Chairman and Chief
Executive Officer of
Oppenheimer Capital.
James McCaughan Member of Management Board Chief Executive Officer,
Oppenheimer Capital.
James F. McIntosh Member of Management Board Executive Director, Allen
Matkins, Leck, Gamble &
Mallory LLP. Formerly,
Director, Pacific
Investment Management
Company.
Kenneth H. Mortenson Member of Management Board Managing Director of
Oppenheimer Capital.
William F. Podlich, III Member of Management Board Director and Managing
Director, PIMCO
Management, Inc.;
Managing
-3-
<PAGE>
Director, Pacific
Investment Management
Company; Vice President,
PIMCO Commercial
Mortgage Securities
Trust, Inc.; Member of
PIMCO Partners LLC.
William C. Powers Member of Management Board See Pacific Investment
Management Company.
Glenn W. Schafer Member of Management Board Board President and
Director, Pacific Mutual
Holding Company, Pacific
LifeCorp, Pacific Life
Insurance Company,
Pacific Financial Asset
Management Corp.,
PMRealty Advisors, Inc.;
Director, Pacific Mutual
Distributors, Inc.,
Mutual Distributors,
Inc., Mutual Service
Corporation,
UnitedPlanners' Group,
Inc., Thomson Advisory
Group.
Thomas C. Sutton Member of Management Board Chairman, Chief
Executive Officer and
Director, Pacific
William S. Thomson, Jr.
Mutual Holding Company,
Pacific LifeCorp,
Pacific Life Insurance
Company, Pacific
Financial Asset
Management Corp.;
Director, Pacific Mutual
Distributors, Inc.,
Mutual Service
Corporation, United
Planners' Group, Inc.,
PMRealty Advisors, Inc.
William S. Thomson, Jr. Member of Management Board; Director, Managing
Chairman, Executive Committee Director and Chief
Executive Committee
Fitzgerald Officer,
PIMCO Management, Inc.;
Chief Executive Officer
and Managing Director,
Pacific Investment
Management Company;
Member, President and
Chief Executive Officer,
PIMCO Partners LLC;
Director and President,
StocksPLUS Management,
Inc.; Vice President,
PIMCO Variable Insurance
Trust, PIMCO Funds:
Pacific Investment
Management Series, and
PIMCO Commercial
Mortgage Securities
Trust, Inc.; Director,
Thomson Advisory Group,
Inc.
Robert M. Fitzgerald Senior Vice President and Chief Financial Officer
Chief Financial Officer and Treasurer, PIMCO
Funds Distributors, LLC,
Columbus Circle
Investors, Columbus
Circle Investors
Management, Inc.,
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<PAGE>
Cadence Capital
Management, Inc., NFJ
Investment Group, NFJ
Management, Inc.,
Parametric Portfolio
Associates, Parametric
Management, Inc., PIMCO
Management, Inc.,
Pacific Investment
Management Company, and
StocksPLUS Management,
Inc.; Chief Financial
Officer and Assistant
Treasurer, Cadence
Capital Management;
Senior Vice President
and Chief Financial
Officer, Value Advisors
LLC; Chief Financial
Officer, Columbus Circle
Trust Company; Chief
Financial Officer and
Treasurer, PIMCO Funds
Advertising Agency;
Senior Vice President,
Chief Financial Officer
and Treasurer, Thomson
Advisory Group, Inc.
Benjamin L. Trosky Member of Management Board Managing Director,
Pacific Investment
Management Company;
Director and Managing
Director, PIMCO
Management, Inc.; Senior
Vice President, PIMCO
Commercial Mortgage
Securities Trust, Inc.,;
Member of PIMCO Partners
LLC.
Bradley W. Paulson Vice President Vice President and
Secretary, PIMCO Global
Advisors (Europe)
Limited, PIMCO Global
Advisors (Japan)
Limited; Vice President,
Pacific Investment
Management Company.
Kenneth M. Poovey Chief Operating Officer Executive Vice President
and General Counsel and General Counsel,
Value Advisors LLC and
Thomson Advisory Group,
Inc.
Stephen J. Treadway Executive Vice President Chairman, President, and
Chief Executive Officer,
PIMCO Funds Advertising
Agency, Inc., PIMCO
Funds Distributors LLC,
and Trustee, President
and Chief Executive
Officer of the Trust;
Executive Vice
President, Value
Advisors LLC.
Robert S. Venable Vice President None.
James G. Ward Senior Vice President, Senior Vice President,
Human Resources Human Resources, Value
Advisors LLC; Senior
Vice President, Thomson
Advisory Group, Inc.
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<PAGE>
Richard M. Weil Senior Vice President - Senior Vice President,
Legal, Secretary Assistant Secretary,
PIMCO Management, Inc.;
Secretary , Cadence
Capital Management,
Inc., NFJ Investment
Group, NFJ Management,
Inc., Parametric
Portfolio Associates,
Parametric Management,
Inc., and StocksPLUS
Management, Inc.;
Assistant Secretary,
Columbus Circle
Investors, Columbus
Circle Investors
Management, Inc.;
Cadence Capital
Management, PIMCO Funds
Advertising Agency, Inc.
and Pacific Management
Investment Company;
Senior Vice President,
Legal, Secretary Value
Advisors LLC, Thomson
Advisors LLC, Thomson
Advisory Group, Inc.,
and Vice President of
the Trust.
Frank C. Poli Vice President, Director Compliance Officer,
of Compliance PIMCO Funds Distributors
LLC.
Vinh T. Nguyen Vice President, Controller Vice President,
Controller, Columbus
Circle Investors
Management, Inc.,
Cadence Capital
Management, Inc., NFJ
Management, Inc.,
Parametric Management,
Inc., StocksPLUS
Management, Inc., PIMCO
Funds Advertising
Agency, Inc., PIMCO
Funds Distributors LLC,
and Value Advisors LLC;
Controller, Pacific
Investment Management
Company and PIMCO
Management, Inc.
Timothy R. Clark Vice President, Mutual Senior Vice President,
Funds Division PIMCO Funds Distributors
LLC.
Newton B. Schott, Jr. Senior Vice President, Director, Executive Vice
Mutual Funds Division President, Chief
Administrative Officer,
General Counsel and
Secretary, PIMCO Funds
Distributors LLC and
PIMCO Funds Advertising
Agency, Inc.; Chief
Legal Officer and
Secretary, Columbus
Circle Investors,
Columbus Circle
Investors Management,
Inc.; Senior Vice
President, Mutual Fund
Division; General
Counsel and Secretary,
Columbus Circle Trust
Company; Vice President
and Secretary, the
Trust; Senior Vice
President, Value
Advisors LLC.
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<PAGE>
Diane P. Dubois Vice President, Finance None.
Ernest L. Schmider Senior Vice President See Pacific Investment
Management Company.
Pacific Investment Management Company ("PIMCO")
Name Position with Portfolio Manager Other Affiliations
---- ------------------------------- ------------------
George C. Allan Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Tamara J. Arnold Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Michael R. Assay Vice President Vice President, PIMCO
Management, Inc.
Leslie A. Barbi Senior Vice President Senior Vice President,
PIMCO Management, Inc.
William R. Benz, II Managing Director Director and Managing
Director, PIMCO
Management, Inc.;
Member of PIMCO
Partners LLC. Member
of Management Board,
PIMCO Advisors L.P.
Gregory A. Bishop Vice President None.
Andrew Brick Senior Vice President Senior Vice President,
PIMCO Management, Inc.
John B. Brynjolfsson Vice President Vice President, PIMCO
Management, Inc.
R. Wesley Burns Managing Director Executive Vice
President, PIMCO
Management, Inc. and
the Trust; President,
PIMCO Funds: Pacific
Investment Management
Series; President and
Director, PIMCO
Commercial Mortgage
Securities Trust,
Inc.; President and
Trustee, PIMCO
Variable Insurance
Trust; Director, PIMCO
Global Advisors
(Ireland) Limited and
PIMCO Advisors Funds
plc.
Carl J. Cohen Vice President Vice President, PIMCO
Management, Inc.
-7-
<PAGE>
Jerry L. Coleman Vice President Vice President, PIMCO
Management, Inc.
Doug Cummings Vice President Vice President, PIMCO
Management, Inc.
Wendy W. Cupps Vice President Vice President, PIMCO
Management, Inc.
Chris Dialynas Director Managing Director,
PIMCO Management, Inc.
David J. Dorff Vice President
Michael Dow Vice President Vice President, PIMCO
Management, Inc. and
PIMCO Funds: Pacific
Investment Management
Series.
Anita Dunn Vice President Senior Vice President,
PIMCO Management, Inc.
A. Benjamin Ehlert Executive Vice President Executive Vice
President, PIMCO
Management, Inc.
Robert A. Ettl Senior Vice President Vice President, PIMCO
and Chief Operations Officer Management, Inc.
Anthony L. Faillace Vice President Vice President, PIMCO
Management, Inc.
Robert M. Fitzgerald Chief Financial Officer See PIMCO Advisors
and Treasurer L.P.
Ursula T. Frisch Vice President Vice President, PIMCO
Management, Inc. and
PIMCO Funds: Pacific
Investment Management
Series.
William H. Gross Managing Director See PIMCO Advisors
L.P.
John L. Hague Managing Director Director, PIMCO
Management, Inc.,
Member of PIMCO
Partners LLC.
Gordon C. Hally Executive Vice President Executive Vice
President, PIMCO
Management, Inc.
Pasi M. Hamalainen Executive Vice President Executive Vice
President, PIMCO
Management, Inc.
John P. Hardaway Senior Vice President Vice President, PIMCO
Management, Inc.;
Treasurer of the
Trust, PIMCO Funds:
Pacific Investment
Management Series,
PIMCO Commercial
Mortgage Securities
-8-
<PAGE>
Trust, Inc., and PIMCO
Variable Insurance
Trust.
Brent R. Harris Managing Director See PIMCO Advisors
L.P.
Joseph Hattesohl Vice President and Manager Vice President, PIMCO
of Fund Taxation Management, Inc.;
Assistant Treasurer,
the Trust, PIMCO
Funds: Pacific
Investment Management
Series, PIMCO Variable
Insurance Trust, and
PIMCO Commercial
Mortgage Securities
Trust, Inc.
Raymond C. Hayes Vice President Vice President, PIMCO
Management, Inc.
Robert G. Herin Vice President Vice President, PIMCO
Management, Inc.
David C. Hinman Vice President Vice President, PIMCO
Management, Inc.
Liza Hocson Vice President Vice President, PIMCO
Management, Inc.
Douglas M. Hodge Executive Vice President Executive Vice
President, PIMCO
Management, Inc.
Brent L. Holden Executive Vice President Executive Vice
President, PIMCO
Management, Inc.
Dwight F. Holloway, Jr. Vice President Vice President, PIMCO
Management, Inc.
Jane T. Howe Vice President Vice President, PIMCO
Management, Inc.
Mark Hudoff Vice President Vice President, PIMCO
Management, Inc.
Margaret E. Isberg Executive Vice President Executive Vice
President, PIMCO
Management, Inc.;
Senior Vice President,
PIMCO Funds: Pacific
Investment Management
Series.
James M. Keller Vice President Vice President, PIMCO
Management, Inc.
Sharon K. Kilmer Executive Vice President None.
Thomas J. Kelleher Vice President Vice President, PIMCO
Management, Inc.
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<PAGE>
Raymond G. Kennedy Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Mark R. Kiesel Vice President Vice President, PIMCO
Management, Inc.
Steven P. Kirkbaumer Vice President None.
John S. Loftus Executive Vice President Executive Vice
President, PIMCO
Management, Inc.; Vice
President and
Assistant Secretary,
StocksPLUS Management,
Inc.
David Lown Vice President Vice President, PIMCO
Management, Inc.
Andre J. Mallegol Vice President Vice President, PIMCO
Management, Inc.
Michael E. Martini Vice President Vice President, PIMCO
Management, Inc.
Dean S. Meiling Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Vice
President, PIMCO
Funds: Pacific
Investment Management
Series and PIMCO
Commercial Mortgage
Securities Trust,
Inc.; Member of PIMCO
Partners LLC.
Joseph V. McDevitt Executive Vice President Vice President, PIMCO
Management, Inc.
James F. Muzzy Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Vice
President, PIMCO
Funds: Pacific
Investment Management
Series; Director and
Vice President,
StocksPLUS Management,
Inc.; Member of PIMCO
Partners LLC.
Doris S. Nakamura Vice President
Vinh T. Nguyen Controller See PIMCO Advisors
L.P.
Douglas J. Ongaro Vice President Vice President, PIMCO
Management, Inc. and
PIMCO Funds: Pacific
Investment Series.
Thomas J. Otterbein Vice President Vice President, PIMCO
Management, Inc.
-10-
<PAGE>
Victoria M. Paradis Vice President Vice President, PIMCO
Management, Inc.
Bradley W. Paulson Vice President Vice President and
Secretary, Vice
President PIMCO Global
Advisors (Europe)
Limited, PIMCO Global
Advisors (Japan)
Limited.
Elizabeth M. Philipp Vice President Vice President, PIMCO
Management, Inc.
David J. Pittman Vice President None.
William F. Podlich, III Managing Director See PIMCO Advisors
L.P.
William C. Powers Managing Director Director and Managing
Director, PIMCO
Management, Inc.;
Senior Vice President
PIMCO Commercial
Mortgage Securities
Trust, Inc.; Member of
PIMCO Partners LLC.
Member of Management
Board, PIMCO Advisors
L.P.
Edward P. Rennie Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Terry A. Randall Vice President
Scott L. Roney Vice President Vice President, PIMCO
Management, Inc.
Michael J. Rosborough Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Seth R. Ruthen Vice President Vice President, PIMCO
Management, Inc.
Jeffrey M. Sargent Vice President and Manager Vice President of the
Shareholder Services and Trust, PIMCO
Fund Administration Management, Inc.;
Senior Vice President,
PIMCO Funds: Pacific
Investment Management
Series, PIMCO Variable
Insurance Trust, and
PIMCO Commercial
Mortgage Securities
Trust, Inc.
Ernest L. Schmider Executive Vice President, Executive Vice
Secretary, Chief Administrative President, Secretary,
and Legal Officer Chief Administrative
and Legal Officer,
PIMCO Management,
Inc.; Director,
Assistant Secretary,
Assistant Treasurer,
StocksPLUS Management,
Inc.; Secretary, PIMCO
Partners LLC.
-11-
<PAGE>
Leland T. Scholey Senior Vice President Senior Vice President,
PIMCO Management,
Inc., and PIMCO Funds:
Pacific Investment
Management Series.
Richard W. Selby Senior Vice President and None.
Chief Technology Officer
Denise C. Seliga Vice President Vice President, PIMCO
Management, Inc.
Rita J. Seymour Vice President Vice President, PIMCO
Management, Inc.
Christopher Sullivan Vice President Vice President, PIMCO
Management, Inc.
Cheryl L. Sylwester Vice President Vice President, PIMCO
Management, Inc.
Lee R. Thomas, III Managing Director Director and Managing
Director, PIMCO
Management, Inc.;
Member of PIMCO
Partners LLC.
William S. Thomson, Jr. Director, Managing Director, See PIMCO Advisors
Chief Executive Officer L.P.
Benjamin L. Trosky Managing Director See PIMCO Advisors
L.P.
Richard E. Tyson Vice President Vice President, PIMCO
Management, Inc.
Peter A. Van de Zilver Vice President Vice President, PIMCO
Management, Inc.
Marilyn Wegener Vice President Vice President, PIMCO
Management, Inc.
Richard M. Weil Assistant Secretary See PIMCO Advisors
L.P.
Paul C. Westhead Vice President Vice President, PIMCO
Management, Inc.
Kristen M. Wilsey Vice President Vice President, PIMCO
Management, Inc. and
PIMCO Funds: Pacific
Investment Management
Series.
George H. Wood Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Michael A. Yetter Vice President Vice President, PIMCO
Management, Inc.
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David Young Vice President Vice President, PIMCO
Management, Inc.
Item 27. Principal Underwriters.
(a) PIMCO Funds Distributors LLC (the "Distributor") serves as
Distributor of shares for the Registrant and also of PIMCO Funds:
Multi-Manager Series and PIMCO Funds: Pacific Investment Management
Series. The Distributor is a wholly owned subsidiary of PIMCO
Advisors L.P., the Registrant's Adviser.
(b)
Name and Principal Positions and Officers with Positions and Offices
------------------ --------------------------- ---------------------
Business Address* Underwriter with Registrant
----------------- ----------- ---------------
Jeffrey L. Booth Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
James D. Bosch Regional Vice President None.
Deborah P. Brennan Vice President None.
Timothy R. Clark Senior Vice President None.
Jonathan P. Fessel Vice President None.
Robert M. Fitzgerald Chief Financial Officer None.
and Treasurer
Michael J. Gallagher Vice President None.
David S. Goldsmith Vice President None.
Ronald H. Gray Vice President None.
John B. Hussey Vice President None.
Edward W. Janeczek Senior Vice President None.
Stephen R. Jobe Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
Jonathan C. Jones Vice President None.
Raymond Lazcano Vice President None.
William E. Lynch Senior Vice President None.
Kevin D. Maloney Compliance Officer None.
Jacqueline A. McCarthy Vice President None.
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<PAGE>
Andrew J. Meyers Executive Vice President Executive Vice
President, PIMCO Funds
Advertising Agency,
Inc.
Fiora N. Moyer Regional Vice President None.
Philip J. Neugebauer Vice President Vice President,
Director of
Compliance, PIMCO
Advisors L.P.
Vinh T. Nguyen Vice President, Controller None.
Joffrey H. Pearlman Regional Vice President None.
Glynne P. Pisapia Regional Vice President None.
Francis C. Poli Compliance Officer Vice President,
Director of
Compliance, PIMCO
Advisors L.P.
Mark J. Porterfield Vice President, Vice President,
Compliance Officer Compliance Officer,
PIMCO Advisors L.P.
Newton B. Schott, Jr. Executive Vice President, Vice President and
Chief Administrative Secretary.
Officer, General
Counsel and Secretary
Robert M. Smith Vice President None.
Ellen Z. Spear Vice President Vice President, PIMCO
Funds Advertising
Agency, Inc.
Daniel W. Sullivan Vice President None.
William H. Thomas, Jr. Regional Vice President None.
Stephen J. Treadway Chairman, President and Chief Executive Vice
Executive Officer President, PIMCO
Advisors L.P. and
Trustee.
Paul H. Troyer Senior Vice President None.
Brian F. Trumbore Executive Vice President None.
Richard M. Weil Assistant Secretary None.
----------------------
The principal business address for all individuals listed is 2187 Atlantic
Street, Stamford, CT 06902, except for Messrs. Fitzgerald, Maloney, Nguyen, Poli
and Weil, for whom the address is 800 Newport Center Drive, Newport Beach, CA
92660.
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<PAGE>
(c) The Registrant has no principal underwriter that is not an
affiliated person of the Registrant or an affiliated person of such
an affiliated person.
Item 28. Location of Accounts and Records.
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of State Street Bank and
Trust Company, 801 Pennsylvania Avenue, Kansas City, Missouri 64105.
Item 29. Management Services.
Not Applicable.
Item 30. Undertakings.
Not Applicable.
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<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust of Fixed Income SHares
(the "Trust"), together with all amendments thereto, is on file with the
Secretary of State of The Commonwealth of Massachusetts and notice is hereby
given that this instrument is executed on behalf of the Trust by an officer of
the Trust as an officer and not individually and that the obligations of or
arising out of this instrument are not binding upon any of the Trustees of the
Trust or shareholders of any series of the Trust individually but are binding
only upon the assets and property of the Trust or the respective series.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York, and the State of New York on the 14th
day of December, 2000.
FIXED INCOME SHARES
By:/s/ SUSAN A. MURPHY
_____________________________________
Susan A. Murphy,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/ SUSAN A. MURPHY President and Chief Executive December 14, 2000
_______________________ Officer (principal executive
Susan A. Murphy officer)
/s/ BRIAN SHLISSEL Treasurer (principal financial December 14, 2000
_______________________ officer and principal accounting
Brian Shlissel officer)
/s/ PAUL BELICA* Trustee December 14, 2000
_______________________
Paul Belica
/s/ ROBERT E. CONNOR* Trustee December 14, 2000
_______________________
Robert E. Connor
/s/ STEPHEN J. TREADWAY Trustee December 14, 2000
_______________________
Stephen J. Treadway
*By Susan A. Murphy, pursuant to Power of Attorney previously filed.
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<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Name
----------- ------------
(a) Amended and Restated Agreement and Declaration of Trust.
(b) Amended and Restated By-Laws.
(c) Article III (Shares) and Article V (Shareholders' Voting
Powers and Meetings) of the Amended and Restated Agreement
and Declaration of Trust.
(d)(1) Investment Advisory Agreement.
(d)(2) Portfolio Management Agreement.
(e) Distribution Contract.
(g) Custody and Investment Accounting Agreement.
(h)(1) Administration Agreement.
(h)(2) Transfer Agency Agreement.
(l) Initial Capital Agreement.
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