<PAGE> 1
Filed Pursuant to Rule 485(b)
Registration No. 2-71299
811-3153
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. -----
Post-Effective Amendment No. 32 X
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
---
Amendment No. 32
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FRANK RUSSELL INVESTMENT COMPANY
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(Exact Name of Registrant as Specified in Charter)
909 A Street, Tacoma, Washington 98402
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(Address of Principal Executive Office) (ZIP Code)
Registrant's Telephone Number, including area code: 206/627-7001
Gregory J. Lyons, Associate General Counsel
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402 206/596-2406
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(Name and Address of Agent for Service)
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, PA 19103 215/564-8074
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Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective (check
appropriate box)
(x) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(i)
( ) on (date) pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) 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.
DECLARATION PURSUANT TO RULE 24f-2
Registrant has declared its intention to register an indefinite number of
shares of beneficial interest, par value of $.01, of Frank Russell Investment
Company pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940,
as amended. The Registrant filed its Rule 24f-2 notice for the fiscal year ended
December 31, 1995 on February 28, 1996.
<PAGE> 2
Frank Russell Investment Company
File No. 2-71299
P/E Amd. #32
FORM N-1A
Cross-Reference Sheet Required By
Rule 481(a) under Securities Act of 1933
<TABLE>
<CAPTION>
FORM N-1A
ITEM No. ITEM CAPTION LOCATION
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Prospectus Caption
[applies for the External Fee Funds (EF)
Information Required and the Internal Fee Funds (IF)
Part A in a Prospectus unless otherwise noted]
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<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis
(a) Annual Fund Operating Expenses
(b) Highlights and Table of Contents
3 Condensed Financial
Information
(a) Financial Highlights
(b) Not Applicable
(c) Investment Objectives, Restrictions and Policies
(i) EF -- Money Market Fund
(ii) IF -- US Government Money Market, and Tax Free Money Market Funds
(d) Annual reports to be filed.
4 General Description of
Registrant
(a)(i) IF -- Cover page; Additional Information - Organization,
Capitalization and Voting
EF -- Cover page; Additional Information - Organization,
Capitalization and Voting
(ii) Investment Objectives, Restrictions, Policies and Risks
(b) Investment Objectives, Restrictions, Policies and Risks
(c) Investment Objectives, Restrictions, Policies and Risks
5 Management of the Funds
(a) General Management of the Funds
(b) Money Manager Profiles; General Management of the Funds
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Prospectus Caption
[applies for the External Fee Funds (EF)
Information Required and the Internal Fee Funds (IF)
Part A in a Prospectus unless otherwise noted]
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<S> <C> <C>
(c) General Management of the Funds
(d) General Management of the Funds; Additional Information -
Distributor, Custodian, Accountants and Reports
(e) General Management of the Funds
(f) Expenses of the Funds
(g) Portfolio Transaction Policies
5A Management's Discussion of Fund Annual Report to be filed.
Performance
6 Capital Stock and Other
Securities
(a) Eligible Investors; Additional Information - Organization,
Capitalization and Voting
(b) Additional Information - Organization, Capitalization and Voting
(c) Not Applicable
(d) Not Applicable
(e) Back Cover
(f) Dividends and Distributions
(g) Taxes
(h) Not Applicable
7 Purchase of Securities Being
Offered
(a) Additional Information - Distributor, Custodian, Accountants and
Reports
(b) Eligible Investors; Valuation of Fund Shares; Purchase of Fund
Shares
(c) Not Applicable
(d) Eligible Investors
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
8 Redemption or Repurchase
(a) Redemption of Fund Shares
(b) Not Applicable
(c) Eligible Investors
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Prospectus Caption
[applies for the External Fee Funds (EF)
Information Required and the Internal Fee Funds (IF)
Part A in a Prospectus unless otherwise noted]
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<S> <C> <C>
(d) Redemption of Fund Shares
9 Pending Legal Proceedings Not Applicable
<CAPTION>
Information Required in a
Statement of Additional
Part B Information Statement Caption
- ------ ------------------------- -----------------
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and History Not Applicable
13 Investment Objectives and
Policies
(a) Investment Restrictions, Policies and Certain Investments
(b) Investment Restrictions, Policies and Certain Investments
(c) Investment Restrictions, Policies and Certain Investments
(d) Operation of Investment Company - Portfolio Turnover Rate
14 Management of the Fund
(a) Structure and Governance - Trustees and Officers
(b) Structure and Governance - Trustees and Officers
(c) Not applicable
15 Control Persons and Principal
Holders of Securities
(a) Structure and Governance - Controlling Shareholders
(b) Structure and Governance - Controlling Shareholders
(c) Structure and Governance - Controlling Shareholders
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Information Required in a
Statement of Additional
Part B Information Statement Caption
- ------ ------------------------- -----------------
<S> <C> <C>
16 Investment Advisory and Other
Services
(a) Operation of Investment Company - Consultant, Manager; (Prospectus)
- General Management of the Funds; Money Manager Profiles
(b) Operation of Investment Company - Consultant, Manager; (Prospectus)
- General Management of the Funds; The Money Managers
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
(h) Operation of Investment Company - Custodian; (Prospectus)
Additional Information - Custodian, Accountants and Reports
(i) Operation of Investment Company - Custodian, Transfer Agent;
(Prospectus) Additional Information - Custodian, Accountants and
Reports
17 Brokerage Allocation and Other
Practices
(a) Operation of Investment Company - Brokerage Allocations, Brokerage
Commissions
(b) Operation of Investment Company - Brokerage Commissions
(c) Operation of Investment Company - Brokerage Allocations
(d) Operation of Investment Company - Brokerage Commissions
(e) Operation of Investment Company - Brokerage Commissions
18 Capital Stock and Other
Securities
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Information Required in a
Statement of Additional
Part B Information Statement Caption
- ------ ------------------------- -----------------
<S> <C> <C>
(a) Structure and Governance - Organization and Business History
(b) Not Applicable
19 Purchase, Redemption and Pricing
of Securities Being Offered
(a)-(c) Operation of Investment Company - Valuation of Fund Shares; Annual
Report to Shareholders; Financial Statements; (Prospectus) Eligible
Investors; Valuation of Fund Shares; Redemption of Shares
20 Tax Status Taxes
21 Underwriters
(a) Operation of Investment Company - Distributor
(b) Not Applicable
(c) Not Applicable
22 Calculations of Performance Data
(a) Money Market Funds Yield and Total Return Quotations
(b) Other Registrations Yield and Total Return Quotations
23 Financial Statements Annual Report to Shareholders; Financial Statements
</TABLE>
<PAGE> 7
PROSPECTUS
[EXTERNAL FEE FUNDS]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, WA 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series mutual
fund" with 23 different investment portfolios referred to as the "Funds." This
Prospectus describes and offers shares of beneficial interest in the nine Funds
listed below, except for the Money Market Fund, which is not currently offered
for direct investment.
Frank Russell Investment Management Company (the "Management Company") operates
and administers all of the Funds which comprise the Investment Company, and
manages the portfolio of the Money Market Fund. The Management Company is a
wholly owned subsidiary of Frank Russell Company, which researches and
recommends to the Management Company, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each of the
other Funds. There is no sales charge for investing in the Funds.
Equity I Fund Fixed Income I Fund
Equity II Fund Fixed Income II Fund
Equity III Fund Fixed Income III Fund
Equity Q Fund Money Market Fund
International Fund
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT OBLIGATIONS
OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED; AND MAY
FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE OR LESS
THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
INVESTMENTS IN MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Frank Russell Investment Company is organized as a Massachusetts business trust
under an amended Master Trust Agreement dated July 26, 1984. The Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment Funds. The Investment Company is a
diversified open-end management investment company, commonly known as a "mutual
fund."
This Prospectus sets forth concisely information about the Investment Company
and nine of its Funds that a prospective investor ought to know before
investing. The Investment Company has filed a Statement of Additional
Information dated May 1, 1996, with the Securities and Exchange Commission. The
Statement of Additional Information is incorporated herein by reference and may
be obtained without charge by writing to the Secretary, Frank Russell
Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.
PROSPECTUS DATED MAY 1, 1996
PROSPECTUS 1
<PAGE> 8
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
EQUITY I FUND--Income and capital growth by investing principally in equity
securities.
EQUITY II FUND--Maximum total return, primarily through capital appreciation
and by assuming a higher level of volatility than is ordinarily expected from
Equity I Fund, by investing in equity securities.
EQUITY III FUND--A high level of current income, while maintaining the
potential for capital appreciation by investing in income-producing equity
securities.
EQUITY Q FUND--Total return greater than the total return of the US stock
market as measured by the Russell 1000(R) Index over a market cycle of four to
six years, while maintaining volatility and diversification similar to the
Index by investing in equity securities.
INTERNATIONAL FUND--Favorable total return and additional diversification for
US investors by investing primarily in equity and fixed-income securities of
non-US companies, and securities issued by non-US governments.
FIXED INCOME I FUND--Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.
FIXED INCOME II FUND--Preservation of capital and generation of current income
consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
FIXED INCOME III FUND--Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in
fixed-income securities.
MONEY MARKET FUND--Maximum current income to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00
per share net asset value by investing exclusively in short-term money market
instruments.
This Prospectus describes and offers shares of nine External Fee Funds, except
the Money Market Fund, which is not currently offered for direct investment.
Another prospectus describes and offers shares of eight Internal Fee Funds,
while a third prospectus describes and offers shares in four Internal Fee Funds
and two External Fee Funds. The principal distinction between the External and
the Internal Fee Funds is that a shareholder of an External Fee Fund may pay a
quarterly shareholder investment services fee directly to the Management
Company for shareholder services. The shareholder fee is computed on the amount
the shareholder has invested in an External Fee Fund. Each Shareholder of the
Internal Fee Funds pays no such fees. The Investment Company's Funds had
aggregate net assets of $8.1 billion on April 4, 1996. The net assets of these
nine Funds on April 4, 1996, were:
<TABLE>
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<S> <C> <C> <C>
Equity I $851,310,468 Fixed Income I $676,047,840
Equity II 320,627,315 Fixed Income II 192,425,038
Equity III 236,446,623 Fixed Income III 251,337,404
Equity Q 703,640,777 Money Market 579,456,000
International 851,886,263
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</TABLE>
PROSPECTUS 2
<PAGE> 9
HIGHLIGHTS AND TABLE OF CONTENTS
ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE ___.
FINANCIAL HIGHLIGHTS summarizes significant financial information concerning
the Funds for the period stated herein. PAGE ___.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
Frank Russell Company's "multi-style, multi-manager diversification" techniques
and money manager evaluation services on an economical and efficient basis.
PAGE ___.
FRANK RUSSELL COMPANY--CONSULTANT TO THE FUNDS has been primarily engaged since
1969 in providing asset management consulting services to large corporate
employee benefit funds. Major components of its consulting services are: (i)
quantitative and qualitative research and evaluation aimed at identifying the
most appropriate investment management firms to invest large pools of assets in
accord with specific investment objectives and styles; and (ii) the development
of strategies for investing assets using "multi-style, multi-manager
diversification." PAGE ___.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing large
pools of assets by dividing the assets into segments to be invested using
different investment styles, and selecting money managers for each segment
based upon their expertise in that style of investment. PAGE ___.
ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity with investment
authority, and which have entered into an Asset Management Services Agreement
with the Management Company; and institutions or individuals who have acquired
shares through such institutions. PAGE ___.
GENERAL MANAGEMENT OF THE FUNDS is provided by the Management Company, which
employs the officers and staff required to manage and administer the Funds on a
day-to-day basis. Frank Russell Company provides to the Funds and the
Management Company comprehensive consulting and money manager evaluation
services. PAGE ___.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee
to the Management Company, its expenses and its portion of the general expenses
of the Investment Company. The Management Company, as agent for the Fund, pays
from its fees, the investment advisory fees of the Money Managers of the Fund;
the remainder of the fee is retained by the Management Company, for conducting
the Fund's general operations and for providing investment supervision for the
Fund. Each Eligible Investor may pay to the Management Company directly a fee
for other services provided to that Eligible Investor. PAGE ___.
THE MONEY MANAGERS are evaluated and recommended by Frank Russell Company. The
money managers have complete discretion to purchase and sell portfolio
securities for their segment of a Fund consistent with the Fund's investment
objectives, policies and restrictions, and the specific strategies developed by
Frank Russell Company and the Management Company. PAGE ___.
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS apply to each Fund.
Those objectives, restrictions and policies designated "fundamental" may not be
changed without the approval of a majority of the Fund's shareholders. Risks
associated with certain Fund investment policies, such as market volatility
risk, political risk, and credit risk, are discussed in the context of policies
giving rise to such risks. PAGE ___.
PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE ___.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Daily, by the Money
Market Fund; Annually, by the International Fund; and Quarterly by all other
Funds. All Funds declare distributions from net realized capital gains, if any,
at least annually. PAGE ___.
INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of the
Funds will be subject to federal tax on dividends and capital gains
distributions and may also be subject to state or local taxes. PAGE ___.
FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE ___.
VALUATION OF FUND SHARES occurs each business day (twice a day for the Money
Market Fund). The value of a share purchased or redeemed is based upon the next
computed current market value of the assets, less liabilities, of each Fund.
The Money Market Fund utilizes amortized cost pricing procedures to attempt to
maintain a stable $1.00 per share net asset value. PAGE ___.
PROSPECTUS 3
<PAGE> 10
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and orders
to purchase are accepted on each business day. PAGE ___.
REDEMPTION OF FUND SHARES may be requested on any business day. There is no
redemption charge. The redemption price is determined by the net asset value
next computed after receipt of the redemption request. The Funds reserve the
right to redeem in kind that portion of a redemption request which is in excess
of $250,000. PAGE ___.
ADDITIONAL INFORMATION is also included in this Prospectus concerning:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE ___.
PROSPECTUS 4
<PAGE> 11
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY I FUND*
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
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<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .60%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .07%
Transfer Agent Fees...................................... .03
Other Fees............................................... .02
----
Total Other Expenses............................................... .12
----
Total Fund Operating Expenses**........................................ .72%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 7 $ 23 $ 40 $ 89
</TABLE>
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* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Fund. This annual shareholder investment services
fee may range from .00% to .30% under the asset management services
agreements entered into by shareholders of the Equity I Fund. In
addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 5
<PAGE> 12
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY II FUND*
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
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<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .75%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .14%
Transfer Agent Fees...................................... .06
Other Fees............................................... .04
-----
Total Other Expenses............................................... .24
----
Total Fund Operating Expenses**........................................ .99%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 10 $ 32 $ 55 $121
===== ===== ===== =====
</TABLE>
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* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Fund. This annual shareholder investment services
fee may range from .00% to .25% under the asset management services
agreements entered into by shareholders of the Equity II Fund. In
addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 6
<PAGE> 13
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY III FUND*
The purpose of the following tables is to assist the investor in
understanding the various costs and expenses that an investor in each Fund will
bear directly or indirectly. The Examples provided in the tables should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .60%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .09%
Transfer Agent Fees...................................... .06
Other Fees............................................... .03
----
Total Other Expenses............................................... .18
----
Total Fund Operating Expenses**........................................ .78%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 8 $ 25 $ 43 $ 97
===== ===== ===== =====
</TABLE>
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* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management Company,
and agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Fund. This annual shareholder investment services fee may
range from .00% to .30% under the asset management services agreements
entered into by shareholders of the Equity III Fund. In addition, a
shareholder may pay additional fees, expressed as fixed dollar amounts
for the other services or reports provided by the Management Company to
the shareholder. Accordingly, the expense information does not reflect
an amount for fees paid directly by an investor to the Management
Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 7
<PAGE> 14
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY Q FUND*
The purpose of the following tables is to assist the investor in
understanding the various costs and expenses that an investor in each Fund will
bear directly or indirectly. The Examples provided in the tables should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .60%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .06%
Transfer Agent Fees...................................... .03
Other Fees............................................... .02
----
Total Other Expenses............................................... .11
----
Total Fund Operating Expenses**........................................ .71%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 7 $ 23 $ 40 $ 88
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Fund. This annual shareholder investment services
fee may range from .00% to .30% under the asset management services
agreements entered into by shareholders of the Equity Q Fund. In
addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 8
<PAGE> 15
ANNUAL FUND OPERATING EXPENSES OF THE INTERNATIONAL FUND*
The purpose of the following tables is to assist the investor in
understanding the various costs and expenses that an investor in each Fund will
bear directly or indirectly. The Examples provided in the tables should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .75%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .24%
Transfer Agent Fees...................................... .02
Other Fees............................................... .05
----
Total Other Expenses.............................................. .31
----
Total Fund Operating Expenses**....................................... 1.06%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 11 $ 34 $ 58 $129
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management Company,
and agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Funds. This annual shareholder investment services fee
may range from .00% to .40% under the asset management services
agreements entered into by shareholders of the International Fund. In
addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 9
<PAGE> 16
ANNUAL FUND OPERATING EXPENSES OF THE FIXED INCOME I FUND*
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .30%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .05%
Transfer Agent Fees...................................... .03
Other Fees............................................... .03
----
Total Other Expenses............................................... .11
----
Total Fund Operating Expenses**........................................ .41%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 4 $ 13 $ 23 $ 52
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management Company,
and agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Funds. This annual shareholder investment services fee
may range from .00% to .40% under the asset management services
agreements entered into by shareholders of the Fixed Income I Fund. In
addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 10
<PAGE> 17
ANNUAL FUND OPERATING EXPENSES OF THE FIXED INCOME II FUND*
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee........................................................ .50%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .09%
Transfer Agent Fees...................................... .06
Other Fees............................................... .05
---
Total Other Expenses............................................... .20
---
Total Fund Operating Expenses**........................................ .70%
===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 7 $ 22 $ 39 $ 87
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Fund. This annual shareholder investment services
fee may range from .00% to .40% under the asset management services
agreement entered into by shareholders of the Fixed Income II Fund.
In addition, a shareholder may pay additional fees, expressed as fixed
dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 11
<PAGE> 18
ANNUAL FUND OPERATING EXPENSES OF THE FIXED INCOME III FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. The example provided in the table should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee(1)..................................................... .55%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .07%
Transfer Agent Fees...................................... .05
Other Fees............................................... .05
---
Total Other Expenses............................................... .17
---
Total Fund Operating Expenses(1)**..................................... .72%
===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 7 $ 23 $ 40 $ 89
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
1 Effective May 1, 1996, the Manager has determined to discontinue
its agreement to reimburse all expenses of the Fund that exceed the
annual rate of 0.75% of average daily net assets. Also effective May 1,
1996, the Manager has voluntarily agreed to waive a portion of its 0.55%
management fee, up to the full amount of that fee, equal to the amount
by which the Fund's total operating expenses exceed 0.75% of the Fund's
average net assets on an annual basis. This waiver is intended to be in
effect for the current year, but may be revised or eliminated at
any time without notice to shareholders.
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management Company,
and agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Fund. This may range from .00% to .15% for shareholders
of the Fixed Income III Fund. In addition, a shareholder may pay
additional fees, expressed as fixed dollar amounts for the other
services or reports provided by the Management Company to the
shareholder. Accordingly, the expense information does not reflect an
amount for fees paid directly by an investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 12
<PAGE> 19
ANNUAL FUND OPERATING EXPENSES OF THE MONEY MARKET FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. The example provided in the table should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases...................................... None
Sales Load Imposed on Reinvested Dividends........................... None
Deferred Sales Load.................................................. None
Redemption Fees...................................................... None
Exchange Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (After Fee Waiver)(1)................................. .00%
12b-1 Fees............................................................ None
Other Expenses:
Custodian Fees........................................... .04%
Transfer Agent Fees...................................... .01
Other Fees............................................... .01
---
Total Other Expenses............................................... .06
---
Total Fund Operating Expenses (After Fee Waiver)(1)**.................. .06%
===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period $ 1 $ 2 $ 3 $ 8
===== ===== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
(1) The Manager has voluntarily agreed to waive its .25% management fee for
the Money Market Fund. The total operating expenses of the Fund absent
the fee waiver would be .31% of average net assets on an annual basis.
This waiver is intended to be in effect for the current year, but may
be revised or eliminated at any time without notice to shareholders.
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management Company,
and agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Fund. Currently, the Manager does not intend to impose a
shareholder investment services fee with respect to the Money Market
Fund. In addition, a shareholder may pay additional fees, expressed as
fixed dollar amounts for the other services or reports provided by the
Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
PROSPECTUS 13
<PAGE> 20
FINANCIAL HIGHLIGHTS OF THE EQUITY I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
EQUITY I FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.............. $23.32 $24.91 $25.00 $25.17 $21.13 $25.39 $22.20 $20.18 $28.53 $28.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .52 .62 .60 .61 .75 .91 .88 .81 1.12 .99
Net realized and unrealized
gain (loss) on investments... 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46 1.50 3.25
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations................... 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27 2.62 4.24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income......... (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77) (1.26) (1.14)
Net realized gain on
investments.................. (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48) (9.71) (2.76)
In excess of net realized
gain on investments.......... -- (.24) (.16) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........... (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25) (10.97) (3.90)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR................... $28.00 $23.32 $24.91 $25.00 $25.17 $21.13 $25.39 $22.20 $20.18 $28.53
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(A).............. 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42 5.97 16.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)............... .59 .12 .14 .15 .19 .23 .18 .17 .14 .12
Net investment income to
average net assets (a)....... 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68 3.11 3.49
Portfolio turnover............ 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59 86.22 70.22
Net assets, end of year
($000 omitted)................ 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691 266,371 282,890
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 14
<PAGE> 21
FINANCIAL HIGHLIGHTS OF THE EQUITY II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
EQUITY II FUND
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $25.00 $26.58 $27.71 $26.32 $19.24 $23.32 $22.50 $19.99 $23.54 $25.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .27 .36 .32 .30 .41 .51 .61 .52 .50 .52
Net realized and unrealized
gain (loss) on investments..... 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51 2.17 1.78
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations..................... 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03 2.67 2.30
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income............ (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52) (.61) (.53)
Net realized gain on
investments.................... (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) -- (5.61) (3.24)
In excess of net realized
gain on investments............ -- (.56) (.39) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.............. (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52) (6.22) (3.77)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR...................... $28.88 $25.00 $26.58 $27.71 $26.32 $19.24 $23.32 $22.50 $19.99 $23.54
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(A).................. 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22 10.32 10.17
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)................. .83 .23 .34 .32 .37 .48 .41 .35 .29 .35
Net investment income to
average net assets (a)......... .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40 1.94 2.23
Portfolio turnover............... 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38 130.36 113.46
Net assets, end of year
($000 omitted)................... 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903 68,968 63,972
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 15
<PAGE> 22
FINANCIAL HIGHLIGHTS OF THE EQUITY III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
EQUITY III FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03 $ 20.74
-------- -------- -------- -------- -------- ------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... .82 .93 .89 .98 1.08 1.33 1.26 1.15
Net realized and unrealized
gain (loss) on investments 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40
-------- -------- -------- -------- -------- ------- -------- --------
Total From Investment
Operations ................ 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55
-------- -------- -------- -------- -------- ------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14)
In excess of net investment
income .................... -- -- (.00) -- -- -- -- --
Net realized gain on
investments ............... (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12)
In excess of net realized
gain on investments ....... -- (.10) -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------- --------
Total Distributions ......... (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26)
-------- -------- -------- -------- -------- ------- -------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03
======== ======== ======== ======== ======== ======= ======== ========
TOTAL RETURN (%)(a) ............. 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a) ............ .65 .17 .16 .20 .25 .27 .23 .20
Net investment income to
average net assets (a) .... 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96
Portfolio turnover .......... 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28
Net assets, end of year
($000 omitted) .............. 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695
<CAPTION>
- -----------------------------------------------------------
1987 1986
-------------------
<C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 31.27 $ 32.36
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.21 1.45
Net realized and unrealized
gain (loss) on investments (.74) 2.90
-------- --------
Total From Investment
Operations ................ .47 4.35
-------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (1.61) (1.65)
In excess of net investment . -- --
income
Net realized gain on
investments ............... (9.39) (3.79)
In excess of net realized
gain on investments ....... -- --
-------- --------
Total Distributions ......... (11.00) (5.44)
-------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 20.74 $ 31.27
======== ========
TOTAL RETURN (%)(a) ............. (1.48) 14.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a) ............ .17 .16
Net investment income to
average net assets (a) .... 4.11 4.55
Portfolio turnover .......... 97.54 70.73
Net assets, end of year
($000 omitted) .............. 102,716 126,206
- ------------------------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating
expenses, and net investment income do not include any management fees
paid to the Manager or money managers. For periods thereafter, they are
reported net of investment management fees but gross of any investment
services fees. Management fees and investment services fees reduce
performance; for example, an investment services fee of 0.2% of average
managed assets will reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 16
<PAGE> 23
FINANCIAL HIGHLIGHTS OF THE EQUITY Q FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The table appears
in the Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
<TABLE>
<CAPTION>
EQUITY Q FUND
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987++
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR..................... $ 24.43 $26.03 $25.23 $24.90 $20.20 $22.45 $18.85 $16.67 $20.00
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income................. .59 .69 .66 .67 .75 .81 .78 .69 .39
Net realized and unrealized
gain (loss) on investments.......... 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15 (3.39)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment Operations...... 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84 (3.00)
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income................. (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66) (.28)
Net realized gain on investments...... (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) -- (.05)
In excess of net realized
gain on investments................. -- (.22) (.06) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions................... (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66) (.33)
------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR........................... $ 30.40 $24.43 $26.03 $25.23 $24.90 $20.20 $22.45 $18.85 $16.67
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(A)(B).................... 37.91 .99 13.80 9.97 32.14 (4.81) 27.10 17.16 (15.14)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets (b)(c)....................... .58 .11 .15 .18 .23 .31 .33 .33 .24
Net investment income to average net
assets (b)(c)....................... 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82 3.56
Portfolio turnover(c)................. 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21 46.10
Net assets, end of year ($000 omitted) 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320 66,618
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ For the period May 29, 1987 (commencement of operations) to
December 31, 1987.
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. for periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 17
<PAGE> 24
FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
INTERNATIONAL FUND
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .48 .61 .58 .67 .73 1.23 .85
Net realized and unrealized
gain (loss) on investments(a)... 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46
-------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations...................... 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income............ (.64) (.36) (.57) (.67) (.80) (1.19) (1.02)
In excess of net investment
income.......................... (.08) -- (.16) -- -- -- --
Net realized gain on
investments..................... (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21)
In excess of net realized
gain on investments............. -- (.23) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions.............. (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR...................... $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (%)(B)................ 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average net assets(b).......... .88 .32 .39 .45 .48 .50 .44
Operating expenses, gross, to
average net assets(b)......... .89 .34 .41 .46 .46 .50 .44
Net investment income to
average net assets (b)......... 1.41 1.63 1.83 2.46 2.61 3.14 2.38
Portfolio turnover.............. 36.78 71.09 62.04 48.99 53.13 78.30 53.49
Net assets, end of year
($000 omitted)................. 796,777 674,180 562,497 348,869 348,869 171,613 186,742
Per share amount of fees waived,
($000 omitted) ................ .0041 .0093 .0091 .0030 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL FUND
- ---------------------------------------------------------------------------
1988 1987 1986
-------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $ 35.50 $ 50.23 $ 35.53
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .95 .93 .77
Net realized and unrealized
gain (loss) on investments(a)... 5.77 5.49 18.34
-------- -------- --------
Total From Investment
Operations...................... 6.72 6.42 19.11
-------- -------- --------
LESS DISTRIBUTIONS:
Net investment income............ (1.11) (1.39) (.25)
In excess of net investment
income.......................... -- -- --
Net realized gain on
investments..................... (5.67) (19.76) (4.16)
In excess of net realized
gain on investments............. -- -- --
--------- -------- --------
Total Distributions.............. (6.78) (21.15) (4.41)
-------- -------- --------
NET ASSET VALUE,
END OF YEAR...................... $ 35.44 $ 35.50 $ 50.23
======== ======== ========
TOTAL RETURN (%)(B)................ 20.13 14.42 60.05
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average net assets(b).......... .45 .43 .46
Operating expenses, gross, to
average net assets (b)......... .45 .43 .46
Net investment income to
average net assets (b)......... 2.52 1.83 1.79
Portfolio turnover.............. 51.17 96.31 42.71
Net assets, end of year
($000 omitted)................. 149,064 160,975 169,227
Per share amount of fees waived
($000 omitted)................. -- -- --
---------------------------------------------------------------------------
</TABLE>
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 18
<PAGE> 25
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
FIXED INCOME I FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73
Net realized and unrealized
gain (loss) on investments. 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ................ 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72)
In excess of net investment
income .................... -- -- (.01) -- -- -- -- --
Net realized gain on
investments ............... -- -- (.58) (.62) (.08) -- (.31) --
In excess of net realized
gain on investments ....... -- (.11) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions ......... (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (%)(A) ............. 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a) ............ .35 .10 .09 .10 .10 .11 .12 .13
Net investment income to
average net assets (a) .... 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28
Portfolio turnover .......... 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54
Net assets, end of year
($000 omitted) .............. 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216
<CAPTION>
- --------------------------------------------------------
1987 1986
-------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 24.26 $ 23.82
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.71 2.01
Net realized and unrealized
gain (loss) on investments (1.40) 1.65
-------- --------
Total From Investment
Operations ................ .31 3.66
-------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (2.08) (2.03)
In excess of net investment . -- --
income
Net realized gain on
investments ............... (2.01) (1.19)
In excess of net realized
gain on investments ....... -- --
-------- --------
Total Distributions ......... (4.09) (3.22)
-------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 20.48 $ 24.26
======== ========
TOTAL RETURN (%)(A) ............. 1.49 16.94
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a) ............ .11 .13
Net investment income to
average net assets (a) .... 8.00 8.41
Portfolio turnover .......... 211.26 221.11
Net assets, end of year
($000 omitted) .............. 250,606 220,089
- --------------------------------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating
expenses, and net investment income do not include any management fees
paid to the Manager or money managers. For periods thereafter, they are
reported net of investment management fees but gross of any investment
services fees. Management fees and investment services fees reduce
performance; for example, an investment services fee of 0.2% of average
managed assets will reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 19
<PAGE> 26
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
FIXED INCOME II FUND
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $17.98 $18.99 $18.56 $19.68 $18.94 $18.69 $18.51 $18.63 $19.80 $20.38
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61 1.57 1.71
Net realized and unrealized
gain (loss) on investments.... .59 (1.07) .44 (.83) .72 .23 .27 (.12) (.60) .04
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations.................... 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49 .97 1.75
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income............ (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61) (1.91) (1.68)
Net realized gain on
investments................... -- -- -- (.28) -- -- -- -- (.23) (.65)
Tax return of capital............ -- -- (.14) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions................. (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61) (2.14) (2.33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR...................... $18.55 $17.98 $18.99 $18.56 $19.68 $18.94 $18.69 $18.51 $18.63 $19.80
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(A)................. 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20 5.21 9.34
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)................ .58 .19 .16 .19 .13 .15 .17 .13 .12 .14
Net investment income to
average net assets (a)........ 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56 8.22 8.55
Portfolio turnover............... 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58 197.77 173.51
Net assets, end of year
($000 omitted)................... 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052 93,896 91,887
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 20
<PAGE> 27
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
FIXED INCOME III FUND
- ---------------------------------------------------------------------------------------------
1995 1994 1993++
--------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............................. $ 9.37 $10.44 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ .67 .66 .49
Net realized and unrealized gain (loss) on investments....... .97 (1.07) .52
----- ----- ------
Total From Investment Operations............................. 1.64 (.41) 1.01
----- ----- ------
LESS DISTRIBUTIONS:
Net investment income........................................ (.67) (.66) (.48)
Net realized gain on investments............................. -- -- (.08)
In excess of net realized gain on investments................ -- (.00) (.01)
----- ----- ------
Total Distributions.......................................... (.67) (.66) (.57)
----- ----- ------
NET ASSET VALUE, END OF YEAR.................................... $10.34 $9.37 $10.44
====== ===== ======
TOTAL RETURN (%)(a)(c).......................................... 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets(b)(c)......... .61 .20 .20
Operating expenses, gross, to average net assets(b)(c)....... .61 .20 .40
Net investment income to average net assets(b)............... 6.83 7.02 6.30
Portfolio turnover(b)........................................ 141.37 134.11 181.86
Net assets, end of year ($000 omitted)....................... 252,465 166,620 124,234
Per share amount of fees waived ($ omitted).................. -- -- .0003
Per share amount of fees reimbursed($ omitted)............... -- -- .0154
- ---------------------------------------------------------------------------------------------
</TABLE>
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 21
<PAGE> 28
FINANCIAL HIGHLIGHTS OF THE MONEY MARKET FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
MONEY MARKET FUND
- -------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .0601 .0447 .0342 .0403 .0618 .0823 .0922 .0759
------ ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income............... (.0601) (.0447) (.0342) (.0403) (.0618) (.0823) (.0922) (.0759)
------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
BEGINNING OF YEAR................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ====== ======= ======= ======= =======
TOTAL RETURN (%)(A)................. 6.19 4.57 3.48 4.11 6.38 8.55 9.61 7.86
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net assets (a).. .06 .05 .07 .08 .07 .07 .06 .06
Operating expenses, gross, to
average daily net assets (a).. .26 .05 -- -- -- -- -- --
Net investment income to
average net assets (a)........ 6.01 4.49 3.38 4.04 6.13 8.29 9.31 7.59
Net assets, end of year
($000 omitted)................... 533,643 502,302 415,998 347,464 316,426 226,339 145,550 116,369
Per share amount of fees waived
($ omitted)...................... .0020 -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
MONEY MARKET FUND
- ---------------------------------------------------------
1987 1986
-------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $1.0000 $1.0000
------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .0663 .0685
------- -------
LESS DISTRIBUTIONS:
Net investment income............... (.0663) (.0685)
------- -------
NET ASSET VALUE,
BEGINNING OF YEAR................ $1.0000 $1.0000
======= =======
TOTAL RETURN (%)(A)................. 6.84 7.07
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net assets (a).. .05 .05
Operating expenses, gross, to
average daily net assets (a).. -- --
Net investment income to
average net assets (a)........ 6.63 6.90
Net assets, end of year
($000 omitted)................... 144,344 198,183
Per share amount of fees waived
($ omitted)...................... -- --
- ---------------------------------------------------------
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
PROSPECTUS 22
<PAGE> 29
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use Frank Russell Company's "multi-style, multi-manager
diversification" method of investment, and to obtain Frank Russell Company's
money manager evaluation services, on a pooled and cost-effective basis.
FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS
Frank Russell Company, founded in 1936, has been providing comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. The
Company and its affiliates have offices in Tacoma, New York, Toronto, London,
Zurich, Paris, Sydney, Auckland and Tokyo, and have approximately 1,100
associates.
Three functions are at the core of Frank Russell Company's consulting service:
Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.
Asset Allocation: Allocating a client's assets among different asset
classes--such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate--in the manner most
likely to achieve the client's objectives.
Money Manager Research: Evaluating and recommending professional investment
advisory and management organizations to make specific portfolio investments
for each asset class in accord with the specified objectives, investment styles
and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above-average total return
results, either on an absolute or relative basis, over extended periods of
time. For example, there are periods of time when equity securities outperform
fixed-income securities, and vice versa. Similarly, there are periods when
securities selected for particular characteristics, or using particular
investment styles, outperform other types of securities. For example, there are
periods of time when equity securities with growth characteristics outperform
equities with income characteristics, and vice versa. While these performance
cycles tend to repeat themselves, they do so with no regularity. The blending
of asset classes and investment styles on a complementary basis can obtain more
consistent returns over longer time periods with a reduction of risk
(volatility), although a particular asset class or investment style--or a
particular Fund investing in one asset class or using a particular style--may
not achieve above-average performance at any given point in the market.
Similarly, Frank Russell Company believes financial markets generally are
efficient, and few money managers have shown the ability to time the major
highs and lows in the securities markets with any high degree of consistency.
However, some money managers have shown a consistent ability to achieve
superior results within selected asset classes and styles and have demonstrated
expertise in particular areas. Thus, by combining a mix of investment styles
within each asset class and then selecting money managers for their ability to
invest in a particular style, the investor may seek to achieve increased
returns.
Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By
pooling the assets of institutions and individuals with smaller to medium-sized
accounts in a series of Funds with different objectives and policies, Frank
Russell Company believes that it is able to provide its multi-style,
multi-manager diversification techniques and money manager evaluation services
to Eligible Investors on a basis which is efficient and cost effective for the
investor and Frank Russell Company.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are
PROSPECTUS 23
<PAGE> 30
principally institutional investors which invest for their own account or in a
fiduciary or agency capacity with investment authority and which have entered
into Asset Management Services Agreements (collectively, the "Agreements," and
each, an "Agreement") with the Management Company, and institutions or
individuals who have acquired shares through such institutions. There is no
specified minimum amount which must be invested. Institutions which may have a
particular interest in the Funds include:
- Bank trust departments managing discretionary institutional or personal
trust accounts
- Registered investment advisers
- Endowment funds and charitable foundations
- Broker-dealers
- Employee welfare plans
- Pension or profit sharing plans
- Insurance companies
The Agreement provides, in general, for the officers and staff of the
Management Company, using the facilities and resources of Frank Russell
Company, to assist the client to define its investment objectives, desired
returns and tolerance for risk, and to develop a plan for the allocation of
assets among different asset classes. Once these decisions have been made by a
client, the client's assets are then invested in one or more of the Funds. A
client may change the allocation of its assets among the Funds, or withdraw
some or all of its assets from the Funds at any time by redeeming Fund shares.
Shares of the Funds generally are not offered or "retailed" to individual
investors, although the Management Company may enter into Agreements with
individual investors. Bank trust departments, registered investment advisers,
broker-dealers and other eligible investors ("Financial Intermediaries") which
have entered into Agreements with the Management Company may acquire shares of
the Funds for the benefit of individual customers for which they exercise
discretionary investment authority. The Management Company provides
objective-setting and asset-allocation assistance to such Financial
Intermediaries, which in turn provide the objective-setting and
asset-allocation services to their customers. These Financial Intermediaries
receive no compensation from the Management Company or the Funds; they may
charge their customers a fee for providing these and possibly other trust or
investment-related services. [A SHAREHOLDER MAY PAY A FIXED DOLLAR FEE TO THE
MANAGEMENT COMPANY FOR OTHER SERVICES OR REPORTS PROVIDED BY THE MANAGEMENT
COMPANY TO THE SHAREHOLDER.]
The Agreement sets forth the shareholder investment services fees to be paid to
the Management Company and is ordinarily expressed as a percentage of assets
invested in the Funds. The shareholder investment services fee may include a
fixed-dollar fee for certain specified services. The shareholder investment
services fee is agreed upon by the client and the Management Company and is at
a rate which reflects the amount of assets expected to be invested in the
Funds, the nature and extent of individualized services to be provided by the
Management Company to the client with respect to the assets, and other factors.
Either the client or the Management Company may terminate the Agreement upon
written notice as provided in the Agreement. The Management Company does not
expect to exercise its right to terminate the Agreement unless a client does
not (i) promptly pay fees due to the Management Company; or (ii) invest
sufficient assets in the Funds to compensate the Management Company for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or the Management Company, the
Management Company will no longer provide asset-allocation, objective-setting
or other services.
GENERAL MANAGEMENT OF THE FUNDS
The Investment Company's Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with the Management Company, Frank Russell Company and the
money managers. The Investment Company's officers, all of whom are employed by
and are officers of the Management Company or its affiliates, are responsible
for the day-to-day management and administration of the Funds' operations. The
money managers are responsible for selection of individual portfolio securities
for the assets assigned to them.
The Management Company: (i) provides or oversees the provision of all general
management and administration, investment advisory and portfolio management,
and distribution services for the Funds; (ii) provides
PROSPECTUS 24
<PAGE> 31
the Funds with office space, equipment and personnel necessary to operate and
administer the Funds' business, and to supervise the provision of services by
third parties such as the money managers and Custodian; (iii) develops the
investment programs, selects money managers, allocates assets among money
managers and monitors the money managers' investment programs and results; (iv)
is authorized to select or hire a money manager to select individual portfolio
securities held in the Funds' Liquidity Portfolios (see, "Investment
Policies-Liquidity Portfolios"); and (v) provides the Funds with transfer
agent, dividend disbursing and shareholder recordkeeping services. The
Management Company bears the expenses it incurs in providing these services
(other than transfer agent, dividend disbursing and shareholder recordkeeping)
as well as the costs of preparing and distributing explanatory materials
concerning the Funds.
The responsibility of overseeing the money managers rests upon the officers and
employees of the Management Company. These officers and employees, including
their business experience for the past five years, are identified below:
-. Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.
-. Loran M. Kaufman, who has been Director - Fund Development, Frank
Russell Investment Management Company since 1990. From 1986 to 1990, Ms.
Kaufman was employed as a Senior Research Analyst with the Frank Russell
Company.
-. Jean E. Carter, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since 1994. From 1990 to 1994, Ms.
Carter was a Client Executive in the Investment Group of the Frank
Russell Company.
-. James M. Imhof, Investment Officer, Frank Russell Investment Management
Company, who has managed the day to day management of the Frank Russell
Investment Management Company Funds and ongoing analysis and monitoring
of Fund money managers since 1989.
-. Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.
-. James A. Jornlin, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since April 1995. From 1991 to
March 1995, Mr. Jornlin was employed as a Senior Research Analyst with
Frank Russell Company.
-. Randal C. Burge, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since June 1995. Mr. Burge was a
Senior Investment Officer of the Frank Russell Trust Company from 1990
to 1995. Mr. Burge was a Client Executive for Frank Russell Company
Australia.
-. Madelyn Smith, who has been a Senior Investment Strategist for the Frank
Russell Investment Management Company since January 1996. From 1993 to
1995, Ms. Smith was a member of a research investment strategist for
Frank Russell Company. From 1987 to 1993, Ms. Smith was director of
Investment Equity Manager Research of Frank Russell Company.
-. Dennis J. Trittin, who has been a Senior Portfolio Manager of Frank
Russell Investment Management Company since January 1996. From 1988 to
1996, Mr. Trittin was director of US Equity Manager Research Department
with Frank Russell Company.
-. C. Nola Williams, who has been a Senior Investment Strategist of Frank
Russell Investment Management Company since January 1996. From 1994 to
1995, Ms. Williams became a member of the Alpha Strategy Group. From
1988 to 1994, Ms. Williams was Senior Research Analyst with Frank
Russell Company.
Frank Russell Company provides to the Funds and the Management Company the
asset management consulting services--including the objective-setting and
asset-allocation technology, and the money manager research and evaluation
assistance--which Frank Russell Company provides to its other consulting
clients. Frank Russell Company receives no compensation from the Funds or the
Management Company for its consulting services. Frank Russell Company and the
Management Company as affiliated companies may establish certain intercompany
cost allocations for budgeting and product
PROSPECTUS 25
<PAGE> 32
profitability purposes which may reflect Frank Russell Company's consulting
services supplied to the Management Company.
George F. Russell, Jr., Chairman of the Board of the Trustees of the Investment
Company, is the Chairman of the Board and controlling shareholder of Frank
Russell Company. The Management Company is a wholly owned subsidiary of Frank
Russell Company.
The Investment Company has received an exemptive order from the U.S. Securities
and Exchange Commission (the "SEC") which permits the Investment Company, with
the approval of its Board of Trustees, to engage and terminate money managers
without a shareholder vote and to disclose, on an aggregate basis, the fees
paid to the money managers of each Investment Company Fund. The Investment
Company received shareholder approval to operate under the order at a Special
meeting of the Shareholders on January 22, 1996.
For its services, the Management Company receives a management fee from each
Fund. From this fee, the Management Company, acting as agent for the Investment
Company, is responsible for paying the money managers for their investment
selection services. The remainder is retained by the Management Company as
compensation for the services described above and to pay expenses. The annual
rate of the management fees, payable to the Management Company monthly on a pro
rata basis, are the following percentages of the average daily net assets of
each Fund: Equity I Fund, .60%; Equity II Fund, .75%; Equity III Fund, .60%;
Equity Q Fund, .60%; International Fund, .75%; Fixed Income I Fund, .30%; Fixed
Income II Fund, .50%; Fixed Income III Fund, .55%; and Money Market Fund, .25%.
The management company is currently voluntarily waiving its fee with respect
to the money market fund. This waiver will continue until further notice. The
fees of some of the Funds may be higher than the fees charged by some mutual
funds with similar objectives which use only a single money manager.
The Management Company has voluntarily agreed to waive all or a portion of its
Management Fee with respect to certain funds. In addition to these "voluntary
limits," the Management Company has agreed to reimburse each Fund the amount, if
any, by which a Fund's expenses exceed state law expense limitations. Currently,
California has an expense limitation of 2.5% of a Fund's first $30 million in
average net assets, 2.0% of the next $70 million in average net assets, and 1.5%
of the remaining average net assets for any fiscal year as determined under the
state's regulation. This arrangement is not part of the Management Agreement
with the Investment Company and may be changed or rescinded at any time.
Frank Russell Company provides its Portfolio Verification System ("PVS") to all
the Funds, except the Money Market Fund, pursuant to a written Service
Agreement. The PVS computerized data base system records detailed transaction
data for each of the Funds necessary to prepare various financial and Internal
Revenue Service accounting reports. [FOR THESE SERVICES, THE FUNDS PAY THE
FOLLOWING ANNUAL FEES:]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ANALYSIS OF
TRANSACTION INTERNATIONAL
BASE FEE CHARGE HOLDING CHARGE MANAGEMENT REPORT
-------- ------ -------------- -----------------
<S> <C> <C> <C> <C>
Equity Manager Portfolios $1,500 $ 0.10 $ 1.80 ----
Fixed Income Manager Portfolios 2,500 2.00 12.00 ----
Master Holding Portfolios 500 0.10 - 3.00 1.80 - 24.00 ----
Multi-Currency Portfolios 14,000 3.00 24.00 $2,500
- ----------------------------------------------------------------------------------------------------
</TABLE>
Annual minimum charges are: Equity I - $25,000; Equity II - $15,000; Equity III
- - $12,000; Equity Q - $23,000; Fixed Income I - $31,000; Fixed Income II -
$22,000; Fixed Income III - $25,000; and $290,000 in the aggregate for all
international portfolios. Any additional domestic equity or fixed-income funds
will be billed using the same fee schedule, with an annual minimum fee of
$20,000 and $25,000, respectively.
PROSPECTUS 26
<PAGE> 33
EXPENSES OF THE FUNDS
The Funds will pay all their expenses other than those expressly assumed by the
Management Company. The Funds' expenses for the year ended December 31, 1995,
as a percentage of average net assets, are shown in the Financial Highlights
tables. The Funds' principal expenses are: the management, transfer agency and
recordkeeping fees payable to the Management Company; fees for custodial and
portfolio accounting services payable to State Street Bank and Trust Company;
bookkeeping service fees for preparing tax records payable to Frank Russell
Company; fees for independent auditing and legal services; and fees for filing
reports and registering shares with regulatory bodies.
THE MONEY MANAGERS
The assets of each Fund are allocated currently among the money managers listed
in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S ASSETS
AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT COMPANY. THE
MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME
BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES OF THE
INVESTMENT COMPANY. The Funds will notify shareholders of the Fund concerned
within 60 days of when a money manager begins or stops providing services.
From its management fees, the Management Company, as agent for the Investment
Company, pays all fees to the money managers for their investment selection
services. Quarterly, each money manager is paid the pro rata portion of an
annual fee, based on the quarterly average of all the assets allocated to the
money manager. For the period, management fees paid to the money managers were
equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Equity I Fund, .24%; Equity II Fund,
.41%; Equity III Fund, .20%; Equity Q Fund, .21%; International Fund, .44%;
Fixed Income I Fund, .09%; Fixed Income II Fund, .19%; Fixed Income III Fund,
.22%; and Money Market Fund, .02%. Fees paid to the money managers are not
affected by any voluntary or statutory expense limitations. Some money managers
may receive investment research prepared by Frank Russell Company as additional
compensation, or may receive brokerage commissions for executing portfolio
transactions for the Funds through broker-dealer affiliates.
Each money manager has agreed that once the Investment Company has advanced
fees to the Management Company as agent to make payment of the money manager's
fee, that money manager will look only to the Management Company as agent to
make the payment of its fee.
The money managers are selected for the Funds based primarily upon the research
and recommendations of Frank Russell Company, which evaluates quantitatively
and qualitatively the money manager's skills and results in managing assets for
specific asset classes, investment styles and strategies. Short-term investment
performance, by itself, is not a controlling factor in selecting or terminating
a money manager.
The Money Market Fund is managed by Frank Russell Investment Management
Company. The individual responsible for the management of the Fund, including
his occupation for the past five years, is as follows: Peter F. Apanovitch, who
has been Manager of the Short-Term Investment Funds for the Frank Russell
Investment Management Company and the Frank Russell Trust Company since 1991.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY (EXCEPT WITH RESPECT TO THE MONEY MARKET FUND) NOR FRANK
RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY MANAGERS'
INDIVIDUAL SECURITY SELECTIONS.
PROSPECTUS 27
<PAGE> 34
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS
Each Fund has certain "fundamental" investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the
Fund's shareholders. If there is a change in a fundamental investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial position and needs. Other
policies reflect current practices of the Funds, and may be changed by the
Funds without the approval of shareholders. This section of the Prospectus
describes the Funds' principal objectives, restrictions, policies and risks. A
more detailed discussion appears in the Statement of Additional Information.
INVESTMENT OBJECTIVES.
Each Fund's objective is "fundamental," as are the types of securities in which
it will invest. Ordinarily, each Fund will invest more than 65% of its net
assets in the types of securities identified in its statement of objectives.
However, the Funds may hold assets as cash reserves for temporary and defensive
purposes when their money managers deem that a more conservative approach is
desirable or when suitable purchase opportunities do not exist. (See,
"Investment Policies - Cash Reserves.")
EQUITY I FUND
The Equity I Fund's objective is to provide income and capital growth by
investing principally in equity securities.
The Fund may invest in common and preferred stocks, securities convertible into
common stocks, rights and warrants.
EQUITY II FUND
The Equity II Fund's objective is to maximize total return primarily through
capital appreciation and by assuming a higher level of volatility than is
ordinarily expected from Equity I Fund, by investing in equity securities.
Current income is a secondary consideration in selecting securities. The Fund
may invest in common and preferred stock, convertible securities, rights and
warrants. The Fund's investments may include companies whose securities are
publicly traded for less than five years and smaller companies, such as
companies not listed in the Russell 1000(R) Index. A substantial portion of the
Fund's portfolio will generally consist of equity securities of "emerging
growth-type" companies which tend to reinvest most of their earnings, rather
than pay significant cash dividends, or companies characterized as "special
situations," where the money manager believes that cyclical developments in the
securities markets, the industry or the issuer itself present opportunities for
capital growth.
EQUITY III FUND
The Equity III Fund's objective is to achieve a high level of current income,
while maintaining the potential for capital appreciation by investing primarily
in income-producing equity securities.
The income objective of the Fund is to exceed the yield on the S&P 500 Index.
The Index yield will change from year to year due to changes in prices and
dividends of stocks in the Index. Income streams will be considered in light of
their current level and the opportunity for future growth. Capital appreciation
may not be comparable to that achieved by Funds such as Equity II Fund whose
major objective is appreciation, although the Management Company believes that
a high and growing stream of income is conducive to higher capital values. The
Fund may also invest in preferred stocks, convertible securities, rights and
warrants.
EQUITY Q FUND
The Equity Q Fund's objective is to provide a total return greater than the
total return of the US stock market as measured by the Russell 1000(R) Index
over a market cycle of four to six years, while maintaining volatility and
diversification similar to the Index by investing in equity securities.
The Fund will maintain industry weights and economic sector weights near those
of the Index. Over time, the Fund's average price/earnings ratio, yield, and
other fundamental characteristics are expected to be near the averages for the
Index. However, the money managers may tactically, temporarily deviate from
Index characteristics based upon the managers' investment judgment that this
will increase the Fund's total return. The money managers of the Fund generally
make stock selections from the set of stocks comprising the Russell 1000(R)
Index.
PROSPECTUS 28
<PAGE> 35
The Fund's portfolio characteristics and holdings are expected to be similar to
the Russell 1000(R) Index. However, a money manager may purchase securities
that are not included in the Index or sell securities still included in the
Index in order for the Fund to meet its investment objective.
The Fund will seek to achieve its investment objective by using various
quantitative management techniques. The Management Company believes
quantitative management over a market cycle should provide a portfolio with
consistent performance, diversification, market-like volatility, and limited
market underperformance. However, there is no guarantee the Fund will have such
characteristics at any one time.
A quantitative manager bases its investment decisions primarily on quantitative
investment models. These models are used by the money manager to determine the
investment potential of a stock within a particular portfolio and to rank
securities most favorable to having a total return surpassing the total return
of the Russell 1000(R) Index. Once the money manager has ranked the securities,
it then selects the securities most likely to have the characteristics needed
to construct a portfolio that has superior return prospects with risks similar
to the Russell 1000(R) Index.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.
INTERNATIONAL FUND
The International Fund's objectives are to provide favorable total return and
additional diversification for US investors by investing primarily in equity
and fixed-income securities of non-US companies, and securities issued by
non-US governments.
The Fund invests primarily in equity securities issued by companies domiciled
outside of the United States. The Fund may also invest in fixed-income
securities, including instruments issued by non-US governments and their
agencies, and in US companies which derive, or are expected to derive, a
substantial portion of their revenues from operations outside the United
States.
The Fund may invest in equity and debt securities denominated in other than US
dollars and gold-related equity investments, including gold mining stocks and
gold-backed debt instruments. However, as a matter of fundamental policy, the
Fund will not invest more than 20% of its net assets in gold-related
investments.
FIXED INCOME I FUND
The Fixed Income I Fund's objectives are to provide effective diversification
against equities and a stable level of cash flow by investing in fixed-income
securities.
The Fund's portfolio will consist primarily of conventional debt instruments,
including bonds, debentures, US government and US government agency securities,
preferred and convertible preferred stocks and variable amount demand master
notes. (These notes represent a borrowing arrangement under a letter agreement
between a commercial paper issuer and an institutional lender, such as the
Fund.) Investment selections will be based on fundamental economic, market and
other factors leading to valuation by sector, maturity, quality and such other
criteria as are appropriate to meet the stated objectives. The Fund will
ordinarily invest at least 65% of its net assets in securities rated no less
than A or A-2 by S&P or A or Prime-2 by Moody's, or judged by the money manager
to be of at least equal credit quality to those designations.
FIXED INCOME II FUND
The Fixed Income II Fund's objectives are the preservation of capital and the
generation of current income consistent with the preservation of capital by
investing in fixed-income securities with low-volatility characteristics.
The Fund will invest primarily in fixed-income securities, emphasizing those
which mature in two years or less from the date of acquisition or which have
similar volatility characteristics. To minimize credit risk and fluctuations in
net asset value per share, the Fund intends to maintain an average portfolio
maturity of less than five years. The Fund's money managers will seek to
identify and invest in a managed portfolio of high-quality debt securities
denominated in the US dollar and a range of foreign currencies. Under normal
circumstances, the Fund will invest in securities of issuers domiciled in at
least three different countries.
PROSPECTUS 29
<PAGE> 36
Although the Fund will invest primarily in debt securities denominated in the
US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments
among securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities within each such country, among different types of debt
securities. The money managers which invest in foreign denominated securities
will maintain a substantially neutral currency exposure relative to the US
dollar, and will establish and adjust cross currency hedges based on their
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with a money
manager's assessment of the relative yield of such securities and the
relationship of a country's currency to the US dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by the money managers in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector
within the Fund's investment portfolio. The Fund will not invest more than 10%
of its total assets in debt securities denominated in a single currency other
than the US dollar. At this time, the Management Company intends to limit total
non-US dollar investments to no more than 25% of total Fund assets.
The Fund may invest in debt securities denominated in currencies of countries
whose governments are considered by it to be stable (or, when the Fund invests
in countries considered unstable or undeveloped, it will only do so when it
believes to be able to hedge substantially the risk of a decline in the
currency in which the Fund's portfolio securities are denominated). In addition
to the US dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, Belgian Franc, British Pound Sterling, Canadian Dollar,
Danish Krone, Dutch Guilder, European Currency Unit ("ECU"), French Franc,
Irish Punt, Italian Lira, Japanese Yen, New Zealand Dollar, Norwegian Krone,
Spanish Peseta, Swedish Krona, Swiss Franc and German Mark. An issuer of debt
securities purchased by the Fund may be domiciled in a country other than a
country in whose currency the instrument is denominated.
In selecting particular investments for the Fund, the money managers will seek
to minimize investment risk by limiting their portfolio investments to debt
securities of high-quality. Accordingly, the Fund's portfolio will consist only
of: (a) debt securities issued or guaranteed by the US government, its agencies
or instrumentalities ("US Government Securities"); (b) obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational entities, all
of which are rated AAA or AA by S&P or Aaa or Aa by Moody's or, if unrated,
determined by the money managers to be of equivalent quality; (c) investment
grade corporate debt securities or, if unrated, determined by the money
managers to be of equivalent quality; (d) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks
(including foreign branches of US banks or US or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the
money managers to be of high-quality; and (e) commercial paper rated A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch Investors
Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1 or TBW-2 by
Thomson BankWatch, Inc., or, if not rated, issued by US or foreign companies
having outstanding debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A
by Moody's and determined by the money managers to be of high-quality.
As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative
economic activities; the European Coal and Steel Community, which is an
economic union of various European nations' steel and coal industries; and the
Asian Development Bank, which is an international development bank established
to lend funds, promote investment and provide technical assistance to member
nations in the Asian and Pacific regions.
The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specific amounts of currency of member states of the
European Community. These specific amounts of currency comprising the ECU may
be adjusted by the Counsel of
PROSPECTUS 30
<PAGE> 37
Ministers of the European Community to reflect changes in the relative values
of the underlying currencies. The money managers investing in such securities
do not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranationals, in particular, issue ECU-denominated obligations.
The Fund may enter into interest rate swaps, which involve the exchange by the
Fund with another party of its respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Fund intends to use these transactions as a
hedge and not as a speculative investment.
FIXED INCOME III FUND
The Fixed Income III Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios, by investing in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: US Government Securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities
of international agencies or supranational agencies; corporate debt securities;
loan participations; corporate commercial paper; indexed commercial paper;
variable, floating and zero coupon rate securities; mortgage and other
asset-backed securities; municipal obligations; variable amount demand master
notes (these notes represent a borrowing arrangement between a commercial paper
issuer and an institutional lender, such as the Fund); bank certificates of
deposit, fixed time deposits and bankers' acceptances; repurchase agreements
and reverse repurchase agreements; and foreign currency exchange related
securities.
The Fund may also invest in convertible securities and derivatives, including
warrants and interest rate swaps. Interest rate swaps are described under
"Fixed Income II Fund." The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
As described above, the Fund may invest in debt securities issued by
supranational organizations. Supranational organizations are described under
"Fixed Income II Fund."
Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit ("ECD"), which are
issued by foreign branches of US or foreign banks; Eurodollar Time Deposits
("ETD"), which are issued by foreign branches of US or foreign banks; and
Yankee Certificates of Deposit ("Yankee CDs"), which are issued by US branches
of foreign banks. These instruments may be US dollar or foreign currency
denominated and are subject to the risks of non-US issuers described under
"Investment Policies - Investment in Foreign Securities."
The variable and floating rate securities the Fund may invest in 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 some appropriate 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 on a change in the prime
rate. The Fund may also invest in zero coupon US Treasury, foreign government
and US and foreign corporate debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt obligations and
coupons. A zero coupon security pays no interest to its holder prior to
maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.
The Fund's portfolio may include debt securities issued by domestic or foreign
entities, and denominated in US dollars or foreign currencies. It is
anticipated that no more than
PROSPECTUS 31
<PAGE> 38
25% of the Fund's net assets will be denominated in foreign currencies. Foreign
currency exchange transactions (options on foreign currencies, foreign currency
futures contracts and forward foreign currency exchange contracts) will only be
used by the Fund for the purpose of hedging against foreign currency exchange
risk arising from the Fund's investment, or anticipated investment, in
securities denominated in foreign currencies. Foreign investment may include
emerging market debt. The risks associated with investment in securities issued
by foreign governments and companies, and the countries considered to be
emerging markets, are described under "Investment Policies - Investment in
Foreign Securities." Emerging Markets consist of countries determined by the
money managers of the Fund to have developing or emerging economies and
markets. These countries generally include every country in the world except
the United States, Canada, Japan, Australia and most countries located in
Western Europe. The emerging market debt in which the Fund may invest includes
bonds, notes and debentures of emerging market governments and debt and other
fixed income securities issued or guaranteed by such governments' agencies,
instrumentalities or central banks, or by banks or other companies in emerging
markets determined by the money managers to be suitable investments for the
Fund. Under current market conditions, it is expected that emerging market debt
will consist predominantly of Brady Bonds and other sovereign debt. Brady Bonds
are products of the "Brady Plan," under which bonds are issued in exchange for
cash and certain of a country's outstanding commercial bank loans.
The Fund may invest up to 25% of its net assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by S&P or Baa by
Moody's) or in unrated securities judged by the money managers of the Fund to be
of comparable quality. Debt rated BB, B, CCC, CC and C and debt rated Ba, B,
Caa, Ca and C is regarded by S&P and Moody's, respectively, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For S&P, BB indicates
the lowest degree of speculation and C the highest. For Moody's, Ba indicates
the lowest degree of speculation and C the highest. These lower rated debt
securities may include obligations that are in default or that face the risk of
default with respect to principal or interest. Such securities are sometimes
referred to as "junk bonds." For additional information on the ratings used by
S&P and Moody's and a description of lower rated debt securities, please refer
to the Funds' Statement of Additional Information.
MONEY MARKET FUND
The Money Market Fund's objectives are to maximize current income to the extent
consistent with the preservation of capital and liquidity, and the maintenance
of a stable $1.00 per share net asset value, by investing in short-term,
high-grade money market instruments. [THE MONEY MARKET FUND IS NOT AVAILABLE
FOR DIRECT SHAREHOLDER INVESTMENT UNTIL FURTHER NOTICE.]
The instruments in which the Fund invests include (1) securities issued or
guaranteed by the US government or any of its agencies and instrumentalities,
including securities of the US Treasury, the Federal National Mortgage
Association, the Federal Housing Administration, and the Tennessee Valley
Authority; (2) instruments of US and foreign banks and branches, including
certificates of deposit, bankers' acceptances and time deposits, and may
include ECDs, Yankee CDs and ETDs; (3) commercial paper of US and foreign
companies; (4) corporate obligations; (5) variable amount master demand notes
and (6) securities listed in (1) which are subject to repurchase agreements,
provided that the Fund will not invest in repurchase agreements maturing in
more than seven days if, as a result thereof, such repurchase agreements,
together with all other illiquid securities, equal more than 10% of the Fund's
total assets taken at the current market value.
ECDs, ETDs and Yankee CDs are subject to somewhat different risks from the
obligations of domestic banks. ECDs are dollar denominated certificates of
deposit issued by foreign branches of US and foreign banks; ETDs are US dollar
denominated time deposits in a foreign branch of a US bank or a foreign bank;
and Yankee CDs are certificates of deposit issued by a US branch of a foreign
bank denominated in US dollars and held in the United States. Examples of these
risks are described under "Investment Policies - Investment in Foreign
Securities." Different risks may also exist for ECDs, ETDs and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements,
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loan limitations, examinations, accounting, auditing and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the money manager when evaluating credit risk in the selection of
investments for the Fund.
The Fund expects to maintain, but does not guarantee, a net asset value of $1
per share by valuing its portfolio securities at amortized cost. In order to
use the amortized cost method, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less and invest only in US dollar denominated
securities with remaining maturities of 397 days or less that the money manager
determines are of high-quality with minimal credit risk in accordance with
procedures adopted by the Board of Trustees. The procedures require that the
money manager consider a number of factors in determining whether a security is
of high-quality and of minimal credit risk, including that the security (i) if
rated by more than one nationally recognized statistical rating organization
("NRSRO") is rated in the highest rating category of any two NRSROs, (ii) if
rated by only one NRSRO, is rated in that NRSRO's highest rating category, and
(iii) if unrated is determined by the money manager to be of comparable quality
to a security rated in the highest rating category of an NRSRO. (See, the
Statement of Additional Information for a description of the NRSROs.) These
procedures are reasonably designed to assure that the prices determined by the
amortized cost valuation will approximate the current market value.
INVESTMENT RESTRICTIONS.
The Funds have fundamental investment restrictions which cannot be changed
without shareholder approval. The principal restrictions are the following,
which, unless otherwise noted, apply on a Fund-by-Fund basis at the time an
investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less than 75%
of its assets would be represented by cash; cash items; securities of the
US government, its agencies, or instrumentalities; securities of other
investment companies; and other securities limited in respect of each
issuer to an amount not greater in value than 5% of the total assets of
such Fund. A Fund's investment in "cash reserves" (see the next section)
in shares of the Investment Company's Money Market Fund is not subject to
this restriction or to restrictions 2 or 3.
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other than
the US government, its agencies and instrumentalities).
3. Acquire more than 5% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer.
4. Borrow amounts in excess of 5% of its total assets taken at cost or at
market value, whichever is lower, and then only for temporary purposes;
invest more than 5% of its assets in securities of issuers which,
together with any predecessor, have been in operation for less than three
years; or invest more than 5% of its assets in warrants. (Currently no
Fund intends to borrow in excess of 5% of its net assets.)
INVESTMENT POLICIES.
The Funds use certain investment instruments and techniques commonly used by
institutional investors. The principal policies are the following:
Cash Reserves. Each Fund, other than the Money Market Fund, is authorized to
invest its cash reserves (i.e., funds awaiting investment in the specific types
of securities to be acquired by a Fund) in money market instruments and in debt
securities which are at least comparable in quality to the Fund's permitted
investments. In lieu of having each of these Funds make separate, direct
investments in money market instruments, each Fund and its money managers may
elect to invest the Fund's cash reserves in the Money Market Fund. The
Management Company currently does not collect a management or advisory fee from
the Money Market Fund, thereby eliminating any duplication of fees. The Funds
will use this procedure only so long as doing so does not adversely affect the
portfolio management and operations of the Money Market Fund and the Investment
Company's other Funds.
Russell 1000(R) Index. The Russell 1000(R) Index consists of the 1,000 largest
US companies by capitalization (i.e., market price per share times the number
of shares outstanding). The smallest company in the Index at the time of
selection has a capitalization of approximately $457
PROSPECTUS 33
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million. The Index does not include cross-corporate holdings in a company's
capitalization. For example, when IBM owned approximately 20% of Intel, only
80% of the total shares outstanding of Intel were used to determine Intel's
capitalization. Also not included in the Index are closed-end investment
companies, companies that do not file a Form 10-K report with the SEC, foreign
securities and American Depository Receipts.
The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. These changes are expected to
represent less than 1% of the total market capitalization of the Index. Changes
for mergers and acquisitions are made when trading ceases in the acquiree's
shares. The 1,001st largest US company by capitalization is then added to the
Index to replace the acquired stock.
The Russell 1000(R) Index is used as the basis for the Equity Q Fund's
performance because it, in the Management Company's opinion, represents the
universe of stocks in which most active money managers invest and is
representative of the performance of publicly traded common stocks most
institutional investors purchase.
Frank Russell Company chooses the stocks to be included in the Index solely on
a statistical basis and it is not an indication that Frank Russell Company or
the Management Company believes that the particular security is an attractive
investment.
Repurchase Agreements. Each Fund may enter into repurchase agreements with a
bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Polices - Illiquid Securities," no Fund
will invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Money Market Fund
will not invest more than 10% of its net assets (taken at current market value)
in repurchase agreements and other illiquid securities maturing in more than
seven days.
Forward Commitments. Each Fund may contract to purchase securities for a fixed
price at a future date beyond customary settlement time (a "forward commitment"
or "when-issued" transaction), so long as such transactions are consistent with
each Fund's ability to manage its investment portfolio and honor redemption
requests. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund of a dollar amount sufficient to make payment for the
portfolio securities to be purchased will be segregated on the Fund's records
at the trade date and maintained until the transaction is settled.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by a money manager to be inconvenient or disadvantageous.
A reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value. The Fund retains record
ownership of the security involved, including the right to receive interest and
principal payments. At an agreed upon future date, the Fund repurchases the
security by paying an agreed upon purchase price plus interest. Cash or liquid
high-grade debt obligations of the Fund equal in value to the repurchase price,
including any accrued interest, will be segregated on the Fund's records while
a reverse repurchase agreement is in effect, subject to the limitations
described in "Investment Policies - Illiquid Securities."
Lending Portfolio Securities. Each Fund may lend portfolio securities with a
value of up to 50% of its total assets. Such loans may be terminated at any
time. A Fund will receive either cash (and agree to pay a "rebate" interest
rate), US government or US government agency securities as collateral in an
amount equal to at least 100% of the current market value of the loaned
securities plus accrued interest. The collateral is "marked-to-market" on a
daily basis, and the borrower will furnish additional collateral in the event
that the value of the collateral drops below 100% of the market value of the
loaned securities.
Cash collateral is invested in high-quality short-term instruments, short-term
bank collective investment and money market mutual funds (including funds
advised by State Street Bank and Trust Company, the Funds' Custodian, for which
it may receive an asset-based fee) and
PROSPECTUS 34
<PAGE> 41
other investments meeting certain quality and maturity requirements established
by the Funds. Income generated from the investment of the cash collateral is
first used to pay the rebate interest cost to the borrower of the securities
and the remainder is then divided between the Fund and the Fund's Custodian.
Each Fund will retain most rights of beneficial ownership, including dividends,
interest or other distributions on the loaned securities. Voting rights may
pass with the lending. The Fund will call loans to vote proxies if a material
issue affecting the investment is to be voted upon.
Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral.
Consequently, loans are made only to borrowers which are deemed to be of good
financial standing. The Investment Company may incur costs or possible losses
in excess of the interest and fees received in connection with securities
lending transactions. Some securities purchased with cash collateral are
subject to market fluctuations while a loan is outstanding. To the extent that
the value of the cash collateral as invested is insufficient to return the full
amount of the collateral plus rebate interest to the borrower upon termination
of the loan, the Fund must immediately pay the amount of the shortfall to the
borrower.
Illiquid Securities. The Funds, other than the Money Market Fund, will not
purchase or otherwise acquire any security if, as a result, more than 15% of a
Fund's net assets (taken at current value) would be invested in securities,
including repurchase agreements of more than seven days' duration, that are
illiquid by virtue of the absence of a readily available market or because of
legal or contractual restrictions on resale. In the case of the Money Market
Fund, this restriction is 10% of net assets. In addition, the Funds will not
invest more than 10% of their respective net assets (taken at current value) in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). These policies do not
include (1) commercial paper issued under Section 4(2) of the 1933 Act, or (2)
restricted securities eligible for resale to qualified institutional purchasers
pursuant to Rule 144A under the 1933 Act that are determined to be liquid by
the money managers in accordance with Board approved guidelines. Such
guidelines take into account trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is
a lack of trading interest in a particular Rule 144A security, a Fund's holding
of that security may be illiquid. There may be undesirable delays in selling
illiquid securities at prices representing their fair value.
Liquidity Portfolios. The Management Company will exercise investment
discretion or select a money manager to exercise investment discretion, for
approximately 5%-15% of the Equity I, Equity II, Equity III, Equity Q and
International Funds' assets assigned to a "Liquidity Portfolio." The Liquidity
Portfolio will be used to create temporarily an equity exposure for cash
balances until those balances are invested in equities or used for Fund
transactions.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on US or foreign exchanges or in the over-the-counter market. Investing
in securities issued by foreign governments and corporations involves
considerations and possible risks not typically associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax
laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in the United States or abroad) or changed
circumstances in dealings between nations. Costs are incurred in connection
with conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including nationalization, expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods or restrictions affecting the prompt return of capital to the United
States.
PROSPECTUS 35
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The risks associated with investing in foreign securities are often heightened
for investments in developing or emerging markets. For purposes of the
International and Fixed Income III Funds' policy of investing in securities of
issuers located in emerging markets, the Funds will consider emerging markets
to be countries with developing economies and markets. These countries
generally include every country in the world except the United States, Canada,
Japan, Australia and most countries located in Western Europe. Investments in
emerging or developing markets involve exposure to economic structures that are
generally less diverse and mature, and to political systems which can be
expected to have less stability, than those of more developed countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the Funds'
securities will generally be denominated in foreign currencies, the value of
such securities to the Funds will be affected by changes in currency exchange
rates and in exchange control regulations. A change in the value of a foreign
currency against the US dollar will result in a corresponding change in the US
dollar value of the Funds' foreign securities. In addition, some emerging
market countries may have fixed or managed currencies which are not
free-floating against the US dollar. Further, certain emerging market
countries' currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the US dollar.
Many emerging market countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. 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.
Forward Foreign Currency Exchange Contracts ("forward currency contracts"). The
International, Fixed Income I, Fixed Income II and Fixed Income III Funds may
enter into forward currency contracts, which are agreements to exchange one
currency for another--for example, to exchange a certain amount of US dollars
for a certain amount of Japanese Yen--at a future date. The date (which may be
any agreed upon fixed number of days in the future), the amount of currency to
be exchanged and the price at which the exchange will take place will be
negotiated and fixed for the term of the contract at the time that a Fund
enters into a contract. The Funds may engage in forward currency contracts that
involve a currency whose changes in value are considered to be linked (a proxy)
to a currency or currencies in which some or all of the Funds' portfolio
securities are denominated. Forward currency contracts are (a) traded in an
interbank market conducted directly between currency traders (typically,
commercial banks or other financial institutions) and their customers, (b)
generally have no deposit requirements and (c) are consummated without payment
of any commissions. The Funds may, however, enter into forward currency
contracts containing either or both deposit requirements and commissions. In
order to assure that the Funds' forward currency contracts are not used to
achieve investment leverage, the Funds will segregate cash or readily
marketable high-quality securities in an amount at all times equal to or
exceeding the Funds' commitments with respect to these contracts.
Upon maturity of a forward currency contract, the Funds may (a) pay for and
receive, or deliver and be paid for, the underlying currency, (b) negotiate
with the dealer to roll over the contract into a new forward currency contract
with a new future settlement date or (c) negotiate with the dealer to terminate
the forward contract by entering into an offset with the currency trader
whereby the parties agree to pay for and receive the difference between the
exchange rate fixed in the contract and the then current exchange rate. A Fund
also may be able to negotiate such an offset prior to maturity of the original
forward contract. There can be no assurance that new forward contracts or
offsets will always be available to the Funds.
Forward currency contracts will be used only to hedge against anticipated
future changes in exchange rates which otherwise might either adversely affect
the value of a Fund's portfolio securities or adversely affect the price of
securities which the Funds intend to purchase at a later date. The amount the
Funds may invest in forward currency contracts is limited to the amount of the
Funds' aggregate investments in foreign currencies.
The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict a Fund's ability to hedge
against the risk of devaluation of currencies in which the Fund holds a
substantial
PROSPECTUS 36
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quantity of securities and are unrelated to the qualitative rating that may be
assigned to any particular portfolio security. Where available, the successful
use of forward currency contracts draws upon a money manager's special skills
and experience with respect to such instruments and usually depends on the
money manager's ability to forecast interest rate and currency exchange rate
movements correctly. Should interest or exchange rates move in an unexpected
manner, a Fund may not achieve the anticipated benefits of forward currency
contracts or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts and
options on futures contracts, there are no daily price fluctuation limits with
respect to forward currency contracts, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the prices of such instruments and
movements in the price of the securities and currencies hedged or used for
cover will not be perfect. In the case of proxy hedging, there is also a risk
that the perceived linkage between various currencies may not be present or may
not be present during the particular time the Funds are engaged in that
strategy.
A Fund's ability to dispose of its positions in forward currency contracts will
depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward currency contracts. Forward currency contracts may be closed
out only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that a Fund will be able to utilize these instruments
effectively for the purposes set forth above.
Options. The Funds, other than the Money Market Fund, may purchase and sell
(write) call and put options on securities and securities indexes provided such
options are traded on a national securities exchange or in an over-the-counter
market. The Funds, other than the Money Market Fund, may also purchase and sell
put and call options on foreign currencies.
A Fund may invest up to 5% of its net assets, represented by the premium paid,
in call and put options. A Fund may write a call or put option to the extent
that the aggregate value of all securities or other assets used to cover all
such outstanding options does not exceed 25% of the value of its net assets.
Call and Put Options on Securities. A call option on a specific security gives
the purchaser of the option the right to buy, and obligates the writer to sell,
the underlying security at the exercise price at any time during the option
period. Conversely, a put option on a specific security gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period.
A Fund may purchase a call option on securities to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability or desire to purchase such securities in an orderly manner. A Fund may
purchase a put option on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
A Fund may write a call or a put option only if the option is covered by the
Fund holding a position in the underlying securities or by other means which
would permit immediate satisfaction of the Fund's obligations as the writer of
the option.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which
it previously wrote on the security. To close out a position as a purchaser of
an option, a Fund may make a "closing sale transaction," which involves
liquidating the Fund's position by selling the option previously purchased. The
Fund will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof.
The Funds intend to treat options in respect of specific securities that are
not traded on a national securities exchange and the securities underlying
covered call options as not readily marketable and therefore subject to the
limitations on the Funds' ability to hold illiquid securities.
The Funds intend to purchase and write call and put options on specific
securities. The Funds will purchase and write options only to
PROSPECTUS 37
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the extent permitted by the policies of state securities authorities in states
where the shares of the Funds are qualified for offer and sale.
Securities Index Options. An option on a securities index is a contract
which gives the purchaser of the option, in return for the premium paid, the
right to receive from the writer of the option cash equal to the difference
between the closing price of the index and the exercise price of the option
times a multiplier established by the exchange on which the stock index is
traded. It is similar to an option on a specific security except that
settlement is in cash and gains and losses depend on price movements in the
stock market generally (or in a particular industry or segment of the
market) rather than price movements in the specific security. None of the
Funds, other than the Equity I, Equity II, Equity III, Equity Q and
International Funds, currently intends to purchase and write call and put
options on securities indexes.
Options on Foreign Currency. The Funds may purchase and write call and put
options on foreign currencies for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires. Put options convey the
right to sell the underlying currency at a price which is anticipated to be
higher than the spot price of the currency at the time the option expires.
Currency options traded on US or other exchanges may be subject to position
limits which may limit the ability of a Fund to reduce foreign currency risk
using such options. Over-the-counter options 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. (See also "Call and Put Options on Securities"
above.) None of the Funds, other than the Fixed Income III Fund, currently
intends to write or purchase such options.
Risk Factors. The purchase and writing of options involves certain risks. If
a put or call option purchased by a Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a
put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, the Fund will lose
its entire investment (i.e., the premium paid) on 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.
Where a Fund writes a call option, it has, in return for the premium it
receives, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. Where a Fund writes a put option, it is exposed
during the term of the option to a decline in the price of the underlying
security.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Furthermore, if trading restrictions
or suspensions are imposed on the options markets, a Fund may be unable to
close out a position.
Futures Contracts and Options on Futures Contracts. The Funds, other than the
Money Market Fund, may invest in interest rate futures contracts, stock index
futures contracts and foreign currency futures contracts and options thereon
that are traded on a United States or foreign exchange or board of trade.
An interest rate or foreign currency futures contract is an agreement between
two parties (buyer and seller) to take or make delivery of a specified quantity
of financial instruments (such as GNMA certificates or Treasury bonds) or
foreign currency at a specified price at a future date. A futures contract on
an index (such as the S&P 500) is an agreement between two parties (buyer and
seller) to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. In
the case of futures contracts traded on US exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out
by delivery or purchase, as the case may be, of the financial instrument or by
payment of the change in the cash value of the index. Frequently, using
PROSPECTUS 38
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futures to effect a particular strategy instead of using the underlying or
related security or index will result in lower transaction costs being
incurred.
Each Fund may also purchase and write call options and put options on futures
contracts. An option on a futures contract gives the holder the right, in
return for the premium paid, to assume a long position (in the case of a call)
or a short position (in the case of a put) in a futures contract at a specified
exercise price prior to the expiration 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 opposite is true. An option on a futures contract may be closed out (before
exercise or expiration) by an offsetting purchase or sale of an option on a
futures contract of the same series.
There are several risks associated with the use of futures and options on
futures contracts for hedging purposes. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position and the Fund would remain obligated to meet margin requirements until
the position is closed.
A Fund will only enter into futures contracts or options on futures contracts
which are standardized and traded on a US or foreign exchange or board of
trade, or similar entity, or quoted on an automated quotation system. A Fund
will enter into a futures contract only if the contract is "covered" or if the
Fund at all times maintains with its Custodian cash or cash equivalents equal
to or greater than the fluctuating value of the contract (less any margin or
deposit). A Fund will write a call or put option on a futures contract only if
the option is "covered." For a discussion of how to cover a written call or put
option, see "Options" above.
A Fund may enter into contracts and options on futures contracts for "bona fide
hedging" purposes, as defined under the rules of the Commodity Futures Trading
Commission. A Fund may also enter into futures contracts and options on futures
contracts for non hedging purposes provided the aggregate initial margin and
premiums required to establish these positions will not exceed 5% of the Fund's
net assets.
High Risk Bonds. The Funds, other than the Fixed Income III Fund, do not invest
assets in securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the money managers to be of a lesser credit
quality than those designations. Securities rated BBB by S&P or Baa by Moody's
and above are considered by those rating agencies to be "investment grade"
securities, although Moody's considers securities rated Baa, and S&P considers
securities rated BBB, to have some speculative characteristics. The Funds,
other than the Fixed Income III Fund, will dispose of, in a prudent and orderly
fashion, securities whose ratings drop below these minimum ratings. The market
value of debt securities generally varies inversely in relation to interest
rates.
The Fixed Income III Fund will invest in "investment grade" securities and may
invest up to 25% of its total assets in debt securities rated less than BBB by
S&P or Baa by Moody's, or in unrated securities judged by the money managers of
the Fund to be of comparable quality. Lower rated debt securities generally
offer a higher yield than that available from higher grade issues. However,
lower rated debt securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress which could adversely affect their
ability to make payments of principal and interest and increase the possibility
of default. In addition, the market for lower rated debt securities has
expanded
PROSPECTUS 39
<PAGE> 46
rapidly in recent years, and its growth paralleled a long economic expansion.
The market for lower rated debt securities is generally thinner and less active
than that for higher quality securities, which would limit the Fund's ability
to sell such securities at fair value in response to changes in the economy or
the financial markets. While such debt may have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions. The money managers of the Fund will seek to
reduce the risks associated with investing in such securities by limiting the
Fund's holdings in such securities and by the depth of their own credit
analysis. For additional information, please refer to the Statement of
Additional Information.
PORTFOLIO TRANSACTION POLICIES
Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company or the money manager for
the Liquidity Portfolios. THE FUNDS DO NOT GIVE SIGNIFICANT WEIGHT TO
ATTEMPTING TO REALIZE LONG-TERM, RATHER THAN SHORT-TERM, CAPITAL GAINS WHEN
MAKING PORTFOLIO INVESTMENT DECISIONS. The money managers make decisions to buy
or sell securities independently from other money managers. Thus, one money
manager could be selling a security when another money manager for the same
Fund (or for another series of the Investment Company) is purchasing the same
security. In addition, when a money manager's services are terminated and
another retained, the new money manager may significantly restructure the
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
based costs. The annual portfolio turnover rates for each of the Funds (other
than the Money Market Fund) are shown in the Financial Highlights tables.
The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money
manager determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of
the commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. This
arrangement is used by the Equity I, Equity II, Equity III, Equity Q and
International Funds. All Funds may also effect portfolio transactions through
and pay brokerage commissions to the money managers (or their affiliates).
INCOME DIVIDENDS.
The Board of Trustees presently intends to declare dividends from net
investment income and (for the Money Market Fund only) net short-term capital
gains, if any, for payment on the following schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
DECLARED PAYABLE
- -------- -------
<S> <C> <C>
Daily 1st business day of following month Money Market Fund
Quarterly Mid: April, July, October and December Equity I, Equity II, Equity III,
Equity Q, Fixed Income I, Fixed
Income II and Fixed Income III Funds
Annually Mid-December International Fund
- ----------------------------------------------------------------------------------------------------
</TABLE>
DIVIDENDS AND DISTRIBUTIONS
The Money Market Fund determines net investment income immediately prior to the
determination of the net asset value per share as of the close of the New York
Stock Exchange (currently 4:00 p.m. Eastern time) on each business day. Net
investment income will be credited daily to the accounts of shareholders of
record prior to the net asset value calculation and paid monthly.
CAPITAL GAINS DISTRIBUTIONS.
The Board intends to declare distributions from net capital gains through
October 31 (excess of net long-term capital gain over net short-term capital
losses) annually, generally in mid-December. In addition, in order to satisfy
certain distribution requirements, a Fund may declare special year-end dividend
and capital gains distributions during October, November or December to
shareholders of record in such month. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by a Fund and received
by
PROSPECTUS 40
<PAGE> 47
shareholders on December 31 of the prior year. Net capital gains realized
during November and December will be distributed during the month of February
of the following year.
Investors should be aware that by purchasing shares shortly before the record
date of a dividend or capital gains distribution, they will pay the full price
for the shares and then receive some portion of the price back as a taxable
dividend or capital gains distribution. Investors should also be aware that all
shareholders will share in and be taxed on distributions of gain realized by a
Fund on the sale of securities that have increased in value.
AUTOMATIC REINVESTMENT.
All dividends and distributions will be automatically reinvested, at the net
asset value per share at the close of business on the record date, in
additional shares of the Fund paying the dividend or making the distribution,
unless a shareholder elects to have dividends or distributions paid in cash or
invested in another Fund. Any election may be changed by delivering written
notice no later than ten days prior to the payment date to Frank Russell
Investment Management Company, the Investment Company's transfer and dividend
paying agent (the "Transfer Agent"), at Operations Department, P.O. Box 1591,
Tacoma, WA 98401.
TAXES.
Each Fund intends to qualify for taxation as a "regulated investment company"
under the Internal Revenue Code (the "Code"). By distributing substantially all
of its net investment income and capital gains to shareholders and meeting
certain other requirements, a Fund will generally not be liable for federal
income or excise taxes. The Funds may be subject to nominal, if any, state and
local taxes.
For taxable shareholders: Dividends from net investment income and short-term
capital gains will be taxable as ordinary dividends, whether paid in cash or
reinvested in additional shares. However, depending upon the state tax rules
pertaining to a shareholder, a portion of the dividends paid by the Fixed Income
I, Fixed Income II, Fixed Income III and Money Market Funds attributable to
direct US Treasury and agency obligations may be exempt from state and local
taxes. Long-term capital gains distributions declared by the Investment
Company's Board are taxed as long-term gains regardless of the length of time a
shareholder has held such shares. Distributions paid in excess of a Fund's
earnings will be treated as a non-taxable return of capital. Dividends and
distributions may otherwise also be subject to state or local taxes.
For corporate investors, dividends from net investment income paid by the Equity
I, Equity II, Equity III and Equity Q Funds will generally qualify in part for
the corporate dividends received deduction. However, the portion of the
dividends so qualified depends on the aggregate qualifying dividend income
received by such a Fund from domestic (US) sources. Certain holding period and
debt financing restrictions may apply to corporate investors seeking to claim
the deduction.
The sale of shares of a Fund is a taxable event and may result in capital gain
or loss. A capital gain or loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Any loss incurred on sale or exchange of a Fund's
shares, held for six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
The International, Fixed Income I, Fixed Income II and Fixed Income III Funds
will receive dividends and interest paid by non-US issuers which will
frequently be subject to withholding taxes by non-US governments. The
Management Company expects the International Fund to invest more than 50% of
its total assets in non-US securities and to file specified elections with the
Internal Revenue Service which will permit its shareholders either to deduct
(as an itemized deduction in the case of an individual) such foreign taxes in
computing taxable income, or to use these withheld foreign taxes as credits
against US income taxes. The Fund's taxable shareholders must include their pro
rata portion of the taxes withheld on their gross income for federal income tax
purposes.
The International Fund may invest up to 10% of its total assets in the stock of
foreign investment companies that may be treated as "passive foreign investment
companies" ("PFICs") under the Internal Revenue Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy
the PFIC definition. A portion of the income and gains that the Fund derives
may be subject to a non-deductible federal income tax at the Fund level. In
some cases, the International Fund may be able to avoid this tax by electing to
be taxed currently on its share of PFIC's income, whether or not such income is
actually
PROSPECTUS 41
<PAGE> 48
distributed by the PFIC. The Fund will endeavor to limit its exposure to the
PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, the Fund may incur the PFIC tax in
some instances.
Shareholders of Funds holding non-US holdings should also be aware that for
federal income tax purposes, foreign exchange losses realized by the Fund are
treated as ordinary losses. This treatment may have the effect of reducing the
Fund's income available for distribution to shareholders.
The Fixed Income I, Fixed Income II and Fixed Income III Funds may acquire zero
coupon securities issued with original issue discount. As the holder of such a
security, the Funds will have to include in taxable income a portion of the
original issue discount that accrues on the security for the taxable year, even
if the Funds receive no payment on the security during the year. Because the
Funds annually must distribute substantially all of their net investment income,
the Funds may be required in a particular year to distribute as a dividend an
amount that is greater than the total amount of cash the Funds actually receive.
Those distributions will be made from a Fund's cash assets or from the proceeds
of sales of portfolio securities, if necessary. The Funds may realize capital
gains or losses from those sales, which could further increase or decrease the
Funds' dividends and distributions paid to shareholders.
Shareholders of the appropriate Funds will be notified after each calendar year
of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of
the prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of income which is a tax preference item
(if any) for alternative minimum tax purposes; of the International Fund's
foreign taxes withheld; and of the percentages of the Fixed Income I, Fixed
Income II, Fixed Income III and Money Market Funds' income attributable to US
government, Treasury and agency securities.
A Fund is required to withhold 31% of all taxable dividends, distributions and
redemption proceeds payable to any non-corporate shareholder which does not
provide the Fund with the shareholder's certified taxpayer identification
number or required certifications or which is subject to backup withholding.
Shareholders who are not US persons for purposes of federal income taxation
should consult with their financial or tax advisers regarding the applicability
of income, estate or other taxes (including income tax withholding) on their
investment in a Fund or on dividends and to distributions received by them from
a Fund and the application of foreign tax laws to these distributions.
Shareholders should consult their tax advisers with respect to the
applicability of any state and local intangible property or income taxes to
their shares of a Fund and distributions and redemption proceeds received from
a Fund.
Additional information on these and other tax matters relating to the Funds and
their shareholders is included in the section entitled "Taxes" in the Statement
of Additional Information.
CALCULATION OF FUND PERFORMANCE
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during the
relevant time period, and includes all recurring fees that are charged to all
shareholder accounts. The average annual total returns for each of the Funds
are as follows:
PROSPECTUS 42
<PAGE> 49
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 INCEPTION
DECEMBER 31, 1995 1995 1995 (ANNUALIZED) DATE
----------------- (ANNUALIZED) (ANNUALIZED) ------------ ---------
------------ ------------
<S> <C> <C> <C> <C> <C>
Equity I 35.94% 16.94% 14.49% 15.21% 10/15/81
Equity II 28.67 18.73 13.37 13.68 12/28/81
Equity III 35.96 17.81 14.23 16.67 11/27/81
Equity Q 37.91 18.15 -- 12.60 05/29/87
International 10.71 10.99 14.47 16.67 01/31/83
Fixed Income I 18.03 9.49 9.60 12.02 10/15/81
Fixed Income II 9.95 6.47 7.56 9.70 10/30/81
Fixed Income III 17.99 -- -- 7.94 01/29/93
Money Market 6.19 4.93 6.45 7.59 10/15/81
- -------------------------------------------------------------------------------------------------------
</TABLE>
Fund performance prior to April 1, 1995 is reported gross of investment
advisory fees. For periods thereafter, performance results are reported net of
investment advisory fees, but gross of any investment services, descriptions of
which can be obtained from the Management Company upon request.
The Fixed Income I, Fixed Income II and Fixed Income III Funds also may from
time to time advertise their yields. The yields are based on historical
earnings and are not intended to indicate future performance. Yield is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one month) period by the maximum offering price per
share on the last day of the month. This income is then annualized. That is,
the amount of income generated by the investment during that 30-day (or one
month) period is assumed to be generated each month over a 12-month period and
is shown as a percentage of the investment. For purposes of the yield
calculation, interest income is computed based on the yield to maturity of each
debt obligation and dividend income is computed based upon the stated dividend
rate of each security in a Fund's portfolio. The calculation includes all
recurring fees that are charged to all shareholder accounts. The 30-day yields
for the year ended December 31, 1995 for the Fixed Income I, Fixed Income II
and Fixed Income III Funds were, respectively, 6.09%, 5.68% and 6.15%.
The Money Market Fund may advertise its yield and effective yield. Both yield
figures are based on historical earnings and are not intended to indicate
future performance. The yield of the Money Market Fund refers to the income
generated by an investment in the Money Market Fund over a seven-day period
(which period will be stated in the advertisement). This yield is calculated by
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base return. This income is
then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the current yield because of the compounding effect of this assumed
reinvestment. The following are the current and effective yields for the Money
Market Fund during 1995 for the seven-day periods ended:
PROSPECTUS 43
<PAGE> 50
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund 6.19% 6.39% 6.14% 6.33% 5.95% 6.13% 5.83% 6.00%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund may also advertise non-standardized performance information which is
for periods in addition to those required to be presented.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE.
The net asset value per share is calculated for each Fund on each business day
on which shares are offered or orders to redeem are tendered. For all Funds
except the Money Market Fund, a business day is one on which the New York Stock
Exchange is open for trading. A business day for the Money Market Fund includes
any day on which the New York Stock Exchange is open for trading and the Boston
Federal Reserve Bank is open. Net asset value per share is computed for a Fund
by dividing the current value of the Fund's assets, less its liabilities, by
the number of shares of the Fund outstanding, and rounding to the nearest cent.
All Funds determine net asset value as of the close of the New York Stock
Exchange (currently 4:00 p.m. Eastern time). The Money Market Fund also
determines its net asset value as of 1:00 p.m. Eastern time.
VALUATION OF PORTFOLIO SECURITIES.
With the exceptions noted below, the Funds value portfolio securities at "fair
market value." This generally means that equity securities and fixed-income
securities listed and traded principally on any national securities exchange
are valued on the basis of the last sale price or, lacking any sale, at the
closing bid price, on the primary exchange on which the security is traded.
United States over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price, and futures contracts are
valued on the basis of last sale price.
Because many fixed-income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed-income securities therefore may be
valued using prices provided by a pricing service when such prices are believed
to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over the counter are valued on the basis of the mean of bid prices. In the
absence of a last sale or mean bid price, respectively, such securities may be
valued on the basis of prices provided by a pricing service if those prices are
believed to reflect the fair market value of such securities.
The Money Market Fund's portfolio investments are valued on the basis of
amortized cost, a method by which each portfolio instrument is initially valued
at cost, and thereafter a constant accretion/amortization to maturity of any
discount or premium is assumed. The Money Market Fund utilizes the amortized
cost valuation method in accordance with Rule 2a-7 of the Investment Company
Act of 1940, as amended (the "1940 Act"). Money market instruments maturing
within 60 days of the valuation date held by Funds other than the Money Market
Fund are also valued at "amortized cost," unless the Board determines that
amortized cost does not represent fair value. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.
PROSPECTUS 44
<PAGE> 51
PURCHASE OF FUND SHARES
Shares of the Funds are sold on each business day directly to Eligible
Investors at the net asset value next determined after an order is received in
proper form, and the order has been accepted. All purchases must be made in US
dollars. The Funds reserve the right to reject any purchase order.
ORDER PROCEDURES.
Orders by all investors (except for participants in the Three Day Settlement
Program described below) to purchase Investment Company Funds shares must be
received by the Transfer Agent, either by telephone, mail or entry into the
shareholder recordkeeping system on a day when shares of the Funds are offered
and orders in proper form accepted prior to:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------
Close of the New York Equity I, Equity II, Equity III, Equity Q, International, Fixed
Stock Exchange (currently 4:00 p.m. Income I, Fixed Income II and Fixed Income III Funds
Eastern time)
12:45 p.m. Eastern time Money Market Fund*
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Shares of the Money Market Fund are not available for direct investment until
further notice.
Orders for the Money Market Fund shares placed prior to the above time and in
proper form can be accepted for pricing and investment, and will begin to earn
income, on that day. Money Market Fund orders received after that time will not
be accepted for pricing and investment until the next business day. Orders for
shares of any Fund which are not accepted before the respective time for that
Fund can not be invested in the particular Fund nor begin to earn income until
the next day on which shares of that Fund are offered.
Payment Procedures: Payment for the purchase of Fund shares must be received by
the Funds' Custodian or Transfer Agent, depending on the method of payment, on
the day the order is accepted (except for participants in the Three Day
Settlement Program described below). There are several ways to pay for orders
received for the Funds:
Federal Funds Wire. Payment for orders may be made by wiring federal funds to
the Funds' Custodian, State Street Bank and Trust Company.
Automated Clearing House ("ACH"). Payment for orders may be made through the
ACH to the Funds' Custodian, State Street Bank and Trust Company. However,
funds transferred by ACH may or may not be converted into federal funds the
same day depending on the time the funds are received and the bank wiring the
funds. If the funds are not converted the same day, they will be converted the
next business day. Therefore, the order would be placed the next business day.
Check. Payment for orders may be made by check or other negotiable bank draft
payable to "Frank Russell Investment Company" and mailed to the Transfer Agent,
P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary, but
checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investment in the Money Market Fund
will be effected only when the check or draft is converted to federal funds.
The investment will not begin to earn dividend income until the receipt of
federal funds by the Money Market Fund. Investments in the non-Money Market
Funds will be effected upon receipt of the check or draft by the Transfer
Agent, when the check or draft is received prior to the close of the New York
Stock Exchange (currently 4:00 p.m.
PROSPECTUS 45
<PAGE> 52
Eastern Time). When the check or draft is received by the Transfer Agent after
the close of the New York Stock Exchange, the order will be effected on the
following business day.
IN-KIND EXCHANGE OF SECURITIES.
The Transfer Agent may, at its discretion, permit investors to purchase shares
through the exchange of securities they hold. Any securities exchanged must
meet the investment objective, policies and limitations of the particular Fund,
must have a readily ascertainable market value, must be liquid and must not be
subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled, which is usually within 15 days following the purchase by
exchange. A gain or loss for federal income tax purposes will generally be
realized by investors who are subject to federal taxation upon the exchange.
Investors interested in making an in-kind exchange are encouraged to consult
with their tax advisers.
The basis of the exchange will depend upon the relative net asset value of the
shares purchased and securities exchanged. Securities accepted by a Fund will
be valued in the same manner as the Fund values its assets. Any interest earned
on the securities following their delivery to the Transfer Agent and prior to
the exchange will be considered in valuing the securities. All interest,
dividends, subscription or other rights attached to the securities become the
property of the Fund, along with the securities.
THREE DAY SETTLEMENT PROGRAM.
The Investment Company will accept orders from financial institutions to
purchase shares of the Funds, other than the Money Market Fund, for settlement
on the third business day following the receipt of an order to be paid by a
federal wire if the investor has agreed in writing to indemnify the Funds
against any losses as a result of nonreceipt of payment. For further
information on this program, contact the Investment Company.
THIRD PARTY TRANSACTIONS.
Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment adviser or
others, may be required to pay additional fees by such Intermediary. Investors
should contact the Financial Intermediary for information concerning what
additional fees, if any, may be charged.
EXCHANGE PRIVILEGE.
Shareholders may exchange shares of any Fund offered by this Prospectus for
shares of another Fund offered by this Prospectus on the basis of current net
asset value per share at the time of the exchange. Shares of a Fund offered by
this Prospectus may only be exchanged for shares of a Fund offered by the
Investment Company through another prospectus under certain conditions and only
in states where the exchange may legally be made. For additional information,
including a prospectus of other Investment Company Funds, contact a financial
intermediary or the Investment Company. Exchanges may be made (i) by telephone
if the registration of the two accounts are identical; or (ii) in writing
addressed to the Investment Company.
An exchange is a redemption of the shares and is treated as a sale for income
tax purposes, and a short or long-term capital gain or loss may be realized.
The Fund shares to be acquired will be purchased when the proceeds from the
redemption become available (up to seven days from the receipt of the request).
Each investor is encouraged to talk with the investor's tax adviser.
REDEMPTION OF FUND SHARES
SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as
described below.
Payment will ordinarily be made in seven days. Generally, redemption proceeds
will be wire-transferred to the shareholder's account or to an alternate
account provided such request is given to the Transfer Agent in proper form, at
a domestic commercial bank which is a member of the Federal Reserve System.
Although the Funds currently do not charge such a fee, the Funds reserve the
right to charge a fee for the cost of wire-transferred redemptions of less than
$1,000. Payment for redemption requests of investments made by check may be
withheld for up to 15 days after the date of purchase to assure that checks in
payment for orders to purchase shares are collected by the Funds. Upon request,
redemption proceeds will be mailed to the shareholder's address of record or to
an alternate address provided such
PROSPECTUS 46
<PAGE> 53
request is sent to the Transfer Agent in proper form.
Request Procedures. Requests by all investors to redeem Investment Company
Fund shares must be received by the Funds' Transfer Agent, either by telephone,
mail, entry into the shareholder recordkeeping system, or through the
Systematic Withdrawal Payment Program on the days requests to redeem are
tendered, prior to:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------
Close of the New York Equity I, Equity II, Equity III, Equity Q, International, Fixed
Stock Exchange (currently Income I, Fixed Income II and Fixed Income III Funds
4:00 p.m. Eastern time)
12:45 p.m. Eastern time Money Market Fund
- ----------------------------------------------------------------------------------------------------
</TABLE>
Redemption requests placed for the Money Market Fund prior to the above time
will be tendered that day. Requests for that Fund after the above time
will be taken until 4:00 p.m. Eastern time, but will not be tendered until the
next business day.
Requests for redemption by telephone or entry into the shareholder
recordkeeping system must follow the procedures set forth in the Account
Registration and Investment Instruction Form, or alternate procedures may be
followed provided such requests are given to the Transfer Agent in proper form.
In the unexpected event telephone lines are unavailable, shareholders should
use the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. The redemption price
will be the net asset value next determined after receipt by the Management
Company of all required documents in good order. "Good order" means that the
request must include the following:
A. A letter of instruction or a stock assignment designating specifically
the number of shares or dollar amount to be redeemed, signed by all
owners of the shares in the exact names in which they appear on the
account; together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
B. Such other supporting legal documents, if required by applicable law, in
the case of estates, trusts, guardianships, custodianships, corporations,
and pension and profit sharing plans.
Systematic Withdrawal Payment. The Systematic Withdrawal Payment ("SWP")
program is an automated method for redeeming a predetermined dollar amount from
a Fund shareholder account to meet a standing request. The program can be used
to meet any request for periodic distributions of assets from Fund shareholder
accounts.
SWP Offering Date and Payment Procedures. SWP distributions occur once a month
and are paid by wire or check, according to the instructions provided on the
SWP form. If a client has more than one Fund from which a SWP is to be
received, the client will receive one wire or check for each SWP Fund. SWP
transactions are recorded on the twenty-fifth day of each month. If the
twenty-fifth day falls on a weekend or holiday, the transaction will be
recorded on the preceding business day. SWP payment dates are the first
business day after the trade date. If the SWP is coming out of the Money Market
Fund and the trade date falls on a Friday, or the day before a holiday, income
will be earned until the payment date.
Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.
SWP Distribution by Wire. Federal Funds Wire payments will be sent to the
designated bank on the payment date.
SWP Distribution by Check. Checks will be sent by US Postal Service first class
mail, from Boston, Massachusetts, to the requested address on the payment date.
A Systematic Withdrawal Payment form must be completed and mailed to Frank
Russell Investment Management Company, Attention: Frank Russell Investment
Company, Operations Department, P.O. Box 1591, Tacoma, WA 98401-1591. The
Systematic Withdrawal Payment form must be received by Frank Russell Investment
Management Company five business days before the initial distribution date.
PROSPECTUS 47
<PAGE> 54
Redemption in Kind. A Fund may pay any portion of the redemption amount in
excess of $250,000 by a distribution in kind of securities from the Fund's
portfolio, in lieu of cash. Investors will incur brokerage charges on the sale
of these portfolio securities. The Funds reserve the right to suspend the right
of redemption or postpone the date of payment if any unlikely emergency
conditions, as specified in the 1940 Act or determined by the SEC, should
develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS AND REPORTS.
Russell Fund Distributors, Inc., a wholly owned subsidiary of the Management
Company, is the principal Distributor for Investment Company shares. The
Distributor receives no compensation from the Investment Company for its
services.
State Street Bank and Trust Company ("State Street"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Funds.
Coopers & Lybrand L.L.P., Boston, Massachusetts, are the Funds' independent
accountants. Shareholders will receive unaudited semiannual financial
statements and annual financial statements audited by Coopers & Lybrand L.L.P.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from the Management Company.
ORGANIZATION, CAPITALIZATION, AND VOTING.
The Investment Company was organized as a Maryland corporation on March 6,
1981, and commenced offering shares on October 15, 1981. On January 2, 1985,
the Investment Company reorganized by changing its domicile and legal status to
a Massachusetts business trust and now operates under an amended Master Trust
Agreement dated July 26, 1984. Frank Russell Company has the right to grant the
nonexclusive use of the name "Frank Russell" or any derivation thereof to any
other investment company or other business enterprise, and to withdraw from the
Investment Company the use of the name "Frank Russell."
The Investment Company issues a single class of shares divisible into an
unlimited number of funds, each of which is a separate trust under
Massachusetts law. Each fund share represents an equal proportionate interest
in that fund, has a par value of $.01 per share, and is entitled to such
dividends and distributions earned on the assets belonging to such fund as may
be declared by the Board of Trustees. Shares of a fund are fully paid and
nonassessable and have no preemptive or conversion rights.
Each Fund share has one vote; there are no cumulative voting rights. There is
no Annual Meeting of shareholders, but Special Meetings may be held. On any
matter which affects only a particular Fund, only shareholders of that Fund
vote, unless otherwise required by the 1940 Act or the amended Master Trust
Agreement. The Trustees hold office for the life of the Investment Company. A
Trustee may resign or retire, and a Trustee may be removed at any time by, in
substance, a vote of two-thirds of the Investment Company shares. A vacancy in
the Board of Trustees shall be filled by the vote of a majority of the
remaining Trustees so long as, in substance, two-thirds of the Trustees have
been elected by shareholders.
At April 4, 1996 the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their name because they own more than 25% of
the voting shares of the indicated Funds: U.S. National Bank of Oregon --
Equity I, Equity Q, International Fund and Fixed Income III Funds.
MONEY MANAGER PROFILES
The money managers, other than the Investment Manager for the Money Market
Fund, have no other affiliations with the Funds or with Frank Russell Company.
Each money manager has been in business for at least three years and is
principally engaged in managing institutional investment accounts. These
managers may also serve as managers or advisers to other Investment Company
Funds, or to other clients of Frank Russell Company, including its wholly owned
subsidiary, Frank Russell Trust Company.
EQUITY I FUND
Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000, Minneapolis,
MN 55402-4322, a limited partnership whose (i) general partner is a wholly
owned subsidiary of The Equitable Companies Incorporated ("The Equitable") and
(ii) majority unit holder is ACM, Inc., a wholly owned subsidiary of The
Equitable. As of March 1, 1995, 60.5% of The
PROSPECTUS 48
<PAGE> 55
Equitable was owned by Axa, a French insurance holding company.
BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San
Francisco, CA 94105, is an indirect, wholly owned subsidiary of Barclays
Bank PLC.
Columbus Circle Investors, Metro Center, One Station Place, 8th Floor,
Stamford, CT 06902, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO Managing Directors.
Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.
INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 300,
Atlanta, GA 30309, a corporation whose indirect parent is INVESCO PLC, a
London-based financial services holding company.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606. Lincoln Capital Management, Inc. is a division of Lincoln
Capital Management Company, and is a registered investment adviser with
majority ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and
Ray Zemon.
Suffolk Capital Management, Inc., 250 West 57th Street, Suite 420, New York, NY
10107. Suffolk Capital Management, Inc. is a registered investment adviser and
a wholly owned subsidiary of United Asset Management Company, a publicly traded
corporation.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116, is
a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.
Wellington Management Company, 75 State Street, Boston, MA 02109, is a private
Massachusetts general partnership, of which the following persons are managing
partners: Robert W. Doran, Duncan W. McFarland and John B. Neff.
EQUITY II FUND
Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is 100%
owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048, an
investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state chartered
bank.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA 92121,
is a California limited partnership and a SEC registered investment adviser.
Its general partners are Robert J. Anslow, Jr. and Marina L. Marrelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, a wholly owned subsidiary of United Asset Management
Company, a publicly traded corporation.
Wellington Management Company, See: Equity I Fund.
EQUITY III FUND
Brandywine Asset Management, Inc., Three Christina Centre, Suite 1200, 201 N.
Walnut Street, Wilmington, DE 19801, is a corporation controlled by its
president, W. Anthony Hitschler and six other principals.
Equinox Capital Management, Inc., See: Equity I Fund.
Trinity Investment Management Corporation, See: Equity I Fund.
EQUITY Q FUND
BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San
Francisco, CA 94105, is an indirect, wholly-owned subsidiary of Barclays
Bank PLC.
Franklin Portfolio Associates Trust, One Post Office Square, Suite 3660,
Boston, MA 02109, a Massachusetts business trust owned by Mellon Financial
Services Corporation, a holding company of Mellon Bank Corporation.
PROSPECTUS 49
<PAGE> 56
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New York,
NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a publicly
held bank holding company.
INTERNATIONAL FUND
Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110, whose
majority ownership is held by the four senior partners: Jeremy Grantham,
Richard Mayo, Eyk De Mol Van Otterloo, and Kingsley Durant.
J.P. Morgan Investment Management, Inc., See: Equity Q Fund.
Marathon Asset Management Limited, 115 Shaftesbury Ave., London, England WC2H
8AD, is a corporation 33.3% owned by each of the following: Jeremy Hosking,
William Arah and Neil Ostrer.
Oechsle International Advisors, One International Place, 44th Floor, Boston, MA
02110, is a limited partnership which is 100% controlled by its general
partners. The general partners are: S. Dewey Keesler, Stephen P. Langer, Walter
Oechsle, L. Sean Roche, Steven H. Schaefer and Tetsuo Shiozumi.
Rowe Price-Fleming International, Inc., 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R 7DR,
which is a joint venture of T. Rowe Price Associates, Inc., and The Fleming
Group, each of which owns 50% of the company. Ownership of The Fleming Group
holding is split equally between Copthall Overseas Limited, a subsidiary of
Robert Fleming Holdings, and Jardine Fleming International Holdings Limited, a
subsidiary of Jardine Fleming Holdings. Robert Fleming Holdings is a
London-based UK holding company with the majority of the shares distributed:
51% to public companies and 38% to the Fleming family. Jardine Fleming is a
Hong Kong-based holding company which is owned 50% by Robert Fleming Holdings
and 50% by Jardine Matheson & Co., the Hong Kong trading company, a wholly
owned subsidiary of Jardine Matheson Holdings Limited. The stock of T. Rowe
Price Associates, Inc., is publicly traded with a substantial percentage of
such stock owned by the company's active management.
FIXED INCOME I FUND
Lincoln Capital Management Company, See: Equity I Fund.
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO Managing Directors.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, whose
ownership is divided among seventeen directors, with no director having more
than a 25% ownership interest.
FIXED INCOME II FUND
BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY 10154,
a wholly-owned subsidiary of PNC Bank.
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton HM
LX, Bermuda, is a Bermuda exempted company. William H. Williams III is the sole
shareholder.
FIXED INCOME III FUND
BEA Associates, 153 East 53rd Street, New York, NY 10022, is a general
partnership of Credit Suisse Capital Corporation ("CS Capital") and Basic
Appraisals, Inc. ("Basic"). CS Capital is an 80% partner, and is a wholly-owned
subsidiary of Credit Suisse Investment Corporation, which is in turn a
wholly-owned subsidiary of Credit Suisse, a Swiss bank, which is in turn a
subsidiary of CS Holding, a Swiss corporation. No one person or entity
possesses a controlling interest in Basic, the 20% partner. BEA Associates is a
registered investment adviser.
Pacific Investment Management Company, See: Fixed Income I Fund.
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
MONEY MARKET FUND
PROSPECTUS 50
<PAGE> 57
Frank Russell Investment Management Company, 909 A Street, Tacoma, WA 98402, a
registered investment adviser wholly owned by Frank Russell Company.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUNDS OR
THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
PROSPECTUS 51
<PAGE> 58
Frank Russell Investment Company
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
MONEY MANAGERS
EQUITY I FUND
Alliance Capital Management L.P.
BZW Barclays Global Fund Advisors
Columbus Circle Investors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
Wellington Management Company
EQUITY II FUND
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company
EQUITY III FUND
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation
EQUITY Q FUND
BZW Barclays Global Fund Advisors
Franklin Portfolio Associates Trust
J.P. Morgan Investment Management, Inc.
INTERNATIONAL FUND
Grantham, Mayo, Van Otterloo & Co.
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Oechsle International Advisors
Rowe Price-Fleming International, Inc.
FIXED INCOME I FUND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
FIXED INCOME II FUND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.
FIXED INCOME III FUND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
MONEY MARKET FUND
Frank Russell Investment Management Co.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
Office of Shareholder Inquiries
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001
52
<PAGE> 59
PROSPECTUS
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, WA 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series mutual
fund" with 23 different investment portfolios referred to as the "Funds." This
Prospectus describes and offers shares of beneficial interest in the eight
Funds listed below.
Frank Russell Investment Management Company (the "Management Company") operates
and administers all of the Funds which comprise the Investment Company. The
Management Company is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to the Management Company, and to the Investment
Company, one or more investment management organizations to manage the
portfolio of each of the other Funds. There is no sales charge for investing
in the Funds.
Diversified Equity Fund International Securities Fund
Special Growth Fund Diversified Bond Fund
Equity Income Fund Volatility Constrained Bond Fund
Quantitative Equity Fund Multistrategy Bond Fund
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT
OBLIGATIONS OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED; AND MAY FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE
WORTH MORE OR LESS THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Frank Russell Investment Company is organized as a Massachusetts business trust
under an amended Master Trust Agreement dated July 26, 1984. The Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment Funds. The Investment Company is a
diversified open-end management investment company, commonly known as a "mutual
fund."
This Prospectus sets forth concisely information about the Investment Company
and eight of its Funds that a prospective investor ought to know before
investing. The Investment Company has filed a Statement of Additional
Information dated May 1, 1996, with the Securities and Exchange Commission. The
Statement of Additional Information is incorporated herein by reference and may
be obtained without charge by writing to the Secretary, Frank Russell
Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.
PROSPECTUS DATED MAY 1, 1996
<PAGE> 60
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
DIVERSIFIED EQUITY FUND--Income and capital growth by investing principally in
equity securities.
SPECIAL GROWTH FUND--Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from Diversified Equity Fund, by investing in equity securities.
EQUITY INCOME FUND--A high level of current income, while maintaining the
potential for capital appreciation by investing primarily in income-producing
equity securities.
QUANTITATIVE EQUITY FUND--Total return greater than the total return of the US
stock market as measured by the Russell 1000(R) Index over a market cycle of
four to six years, while maintaining volatility and diversification similar to
the Index by investing in equity securities.
INTERNATIONAL SECURITIES FUND--Favorable total return and additional
diversification for US investors by investing primarily in equity and
fixed-income securities of non-US companies, and securities issued by non-US
governments.
DIVERSIFIED BOND FUND--Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.
VOLATILITY CONSTRAINED BOND FUND--Preservation of capital and generation of
current income consistent with the preservation of capital by investing
primarily in fixed-income securities with low-volatility characteristics.
MULTISTRATEGY BOND FUND--Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in
fixed-income securities.
This Prospectus describes and offers shares of eight Internal Fee Funds. Another
prospectus describes and offers shares of nine External Fee Funds, while a third
prospectus describes and offers shares in four Internal Fee Funds and two
External Fee Funds. The principal distinction between the External and the
Internal Fee Funds is that a shareholder of an External Fee Fund may pay a
quarterly shareholder investment services fee directly to the Management Company
for shareholder services. The shareholder fee is computed on the amount the
shareholder has invested in an External Fee Fund. Each Shareholder of the
Internal Fee Funds pays no such fees. The Investment Company Funds had aggregate
net assets of $8.1 billion on April 4, 1996. The net assets of these eight Funds
on April 4, 1996, were:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Diversified Equity $573,147,286 International Securities $667,296,633
Special Growth 331,649,245 Diversified Bond 509,959,246
Equity Income 189,711,584 Volatility Constrained Bond 173,129,701
Quantitative Equity 535,165,620 Multistrategy Bond 238,252,957
</TABLE>
- --------------------------------------------------------------------------------
-2-
<PAGE> 61
HIGHLIGHTS AND TABLE OF CONTENTS
ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE ___.
FINANCIAL HIGHLIGHTS summarizes significant financial information concerning
the Funds for the period stated herein. PAGE ___.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
Frank Russell Company's "multi-style, multi-manager diversification" techniques
and money manager evaluation services on an economical and efficient basis.
PAGE ___.
FRANK RUSSELL COMPANY--CONSULTANT TO THE FUNDS has been primarily engaged since
1969 in providing asset management consulting services to large corporate
employee benefit funds. Major components of its consulting services are: (i)
quantitative and qualitative research and evaluation aimed at identifying the
most appropriate investment management firms to invest large pools of assets in
accord with specific investment objectives and styles; and (ii) the development
of strategies for investing assets using "multi-style, multi-manager
diversification." PAGE ___.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing large
pools of assets by dividing the assets into segments to be invested using
different investment styles, and selecting money managers for each segment
based upon their expertise in that style of investment. PAGE ___.
ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity with investment
authority, and which have entered into an Asset Management Services Agreement
with the Management Company; and institutions or individuals who have acquired
shares through such institutions. PAGE ___.
GENERAL MANAGEMENT OF THE FUNDS is provided by the Management Company, which
employs the officers and staff required to manage and administer the Funds on a
day-to-day basis. Frank Russell Company provides to the Funds and the
Management Company comprehensive consulting and money manager evaluation
services. PAGE ___.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee
to the Management Company, its expenses and its portion of the general expenses
of the Investment Company. The Management Company, as agent for the Fund, pays
from its fees, the investment advisory fees of the Money Managers of the Fund.
The remainder of the fee is retained by the Management Company, for conducting
the Fund's general operations and for providing investment supervision for the
Fund. Each Eligible Investor may pay to the Management Company directly a fee
for other services provided to that Eligible Investor. PAGE ___.
THE MONEY MANAGERS are evaluated and recommended by Frank Russell Company. The
money managers have complete discretion to purchase and sell portfolio
securities for their segment of a Fund consistent with the Fund's investment
objectives, policies and restrictions, and the specific strategies developed by
Frank Russell Company and the Management Company. PAGE ___.
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS apply to each Fund.
Those objectives, restrictions and policies designated "fundamental" may not
be changed without the approval of a majority of the Fund's shareholders.
Risks associated with certain Fund investment policies, such as market
volatility risk, political risk, and credit risk, are discussed in the context
of policies giving rise to such risks. PAGE ___.
PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE ___.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Monthly, by the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds;
Quarterly, by the Diversified Equity, Special Growth, Equity Income and
Quantitative Equity Funds; and Annually, by International Securities Fund. All
Funds declare distributions from net realized capital gains, if any, at least
annually. PAGE ___.
INCOME TAXES PAID BY THE FUNDS themselves should be nominal. Taxable
shareholders of the Funds will be subject to federal taxes on dividends.
Taxable shareholders of the Funds will be subject to federal taxes on capital
gains distributions and may also be subject to state or local taxes. PAGE ___.
-3-
<PAGE> 62
FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE ___.
VALUATION OF FUND SHARES occurs each business day. The value of a share
purchased or redeemed is based upon the next computed current market value of
the assets, less liabilities, of each Fund. PAGE ___.
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE ___.
REDEMPTION OF FUND SHARES may be requested on any business day. There is no
redemption charge. The redemption price is determined by the net asset value
next computed after receipt of the redemption request. The Funds reserve the
right to redeem in kind that portion of a redemption request which is in excess
of $250,000. PAGE ___.
ADDITIONAL INFORMATION is also included in this Prospectus concerning the:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE ___.
-4-
<PAGE> 63
ANNUAL FUND OPERATING EXPENSES OF THE DIVERSIFIED EQUITY FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases................................... None
Sales Load Imposed on Reinvested Dividends........................ None
Deferred Sales Load............................................... None
Redemption Fees................................................... None
Exchange Fees..................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee.................................................... .78%
12b-1 Fees........................................................ None
Other Expenses:
Custodian Fees....................................... .08%
Transfer Agent Fees.................................. .06
Other Fees........................................... .03
---
Total Other Expenses.......................................... .17
----
Total Fund Operating Expenses** ................................ .95%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period.. $10 $30 $53 $117
=== === === ====
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
-5-
<PAGE> 64
ANNUAL FUND OPERATING EXPENSES OF THE SPECIAL GROWTH FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.................................. None
Sales Load Imposed on Reinvested Dividends....................... None
Deferred Sales Load.............................................. None
Redemption Fees.................................................. None
Exchange Fees.................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee................................................... .95%
12b-1 Fees....................................................... None
Other Expenses:
Custodian Fees...................................... .13%
Transfer Agent Fees................................. .10
Other Fees.......................................... .04
---
Total Other Expenses......................................... .27
----
Total Fund Operating Expenses**.................................. 1.22%
=====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period... $12 $39 $67 $148
=== === === ====
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
-6-
<PAGE> 65
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY INCOME FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases................................... None
Sales Load Imposed on Reinvested Dividends........................ None
Deferred Sales Load............................................... None
Redemption Fees................................................... None
Exchange Fees..................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee.................................................... .80%
12b-1 Fees........................................................ None
Other Expenses:
Custodian Fees....................................... .11%
Transfer Agent Fees.................................. .11
Other Fees........................................... .04
---
Total Other Expenses.......................................... .26
----
Total Fund Operating Expenses** .................................. 1.06%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period .. $11 $34 $58 $129
=== === === ====
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
-7-
<PAGE> 66
ANNUAL FUND OPERATING EXPENSES OF THE QUANTITATIVE EQUITY FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Deferred Sales Load.................................................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee......................................................... .78%
12b-1 Fees............................................................. None
Other Expenses:
Custodian Fees............................................ .06%
Transfer Agent Fees....................................... .06
Other Fees................................................ .03
---
Total Other Expenses............................................... .15
----
Total Fund Operating Expenses**........................................ .93%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period.. $9 $30 $51 $114
== === === ====
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
-8-
<PAGE> 67
ANNUAL FUND OPERATING EXPENSES OF THE INTERNATIONAL SECURITIES FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.................................... None
Sales Load Imposed on Reinvested Dividends......................... None
Deferred Sales Load................................................ None
Redemption Fees.................................................... None
Exchange Fees...................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee..................................................... .95%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees........................................ .25%
Transfer Agent Fees................................... .06
Other Fees............................................ .05
---
Total Other Expenses........................................... .36
----
Total Fund Operating Expenses**.................................... 1.31%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period... $13 $42 $72 $158
=== === === ====
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
-9-
<PAGE> 68
ANNUAL FUND OPERATING EXPENSES OF THE DIVERSIFIED BOND FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases................................... None
Sales Load Imposed on Reinvested Dividends........................ None
Deferred Sales Load............................................... None
Redemption Fees................................................... None
Exchange Fees..................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee.................................................... .45%
12b-1 Fees........................................................ None
Other Expenses:
Custodian Fees....................................... .06%
Transfer Agent Fees.................................. .05
Other Fees........................................... .03
---
Total Other Expenses.......................................... .14
----
Total Fund Operating Expenses**................................... .59%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period... $6 $19 $33 $74
== === === ===
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
-10-
<PAGE> 69
ANNUAL FUND OPERATING EXPENSES OF THE VOLATILITY CONSTRAINED BOND FUND
The purpose of the following tables is to assist the investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. The Examples provided in the tables should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.................................... None
Sales Load Imposed on Reinvested Dividends......................... None
Deferred Sales Load................................................ None
Redemption Fees.................................................... None
Exchange Fees...................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee..................................................... .50%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees............................................ .07%
Transfer Agent Fees....................................... .08
Other Fees................................................ .06
---
Total Other Expenses........................................... .21
----
Total Fund Operating Expenses**.................................... .71%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period.. $7 $23 $40 $88
== === === ===
</TABLE>
- --------------------------------------------------------------------------------
** Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
-11-
<PAGE> 70
ANNUAL FUND OPERATING EXPENSES OF THE MULTISTRATEGY BOND FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Example provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Deferred Sales Load.................................................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (After Fee Waiver)+..................................... .56%
12b-1 Fees............................................................. None
Other Expenses:
Custodian Fees.................................................. .08%
Transfer Agent Fees............................................. .09
Other Fees...................................................... .07
---
Total Other Expenses............................................... .24
----
Total Fund Operating Expenses (After Fee Waiver)+**..................... .80%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period.. $8 $26 $44 $99
== === === ====
</TABLE>
- ---------------------------------------------------------------------------
+ Effective May 1, 1996, the Manager has determined to discontinue its
agreement to reimburse all expenses of the Fund that exceed the annual
rate of 0.85% of average net assets. Also effective May 1, 1996, the
Manager has voluntarily agreed to waive a portion of its 0.65%
management fee, up to the full amount of that fee, equal to the amount
by which the Fund's total operating expenses exceed 0.80% of the
Fund's average net assets on an annual basis. The gross annual total
operating expenses absent the waiver would be .89% of average net
assets. This waiver is intended to be in effect for the current
year, but may be revised or eliminated at any time without notice to
shareholders.
** Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
-12-
<PAGE> 71
FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
DIVERSIFIED EQUITY FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46 $ 27.22
------ -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... .60 .58 .56 .60 .81 .99 .94 .89
Net realized and unrealized
gain (loss) on investments . 10.63 (.49) 3.03 2.30 8.36 (3.45) 7.68 3.57
----- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ................. 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46
----- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81)
Net realized gain on
investments ................ (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41)
In excess of net realized
gain on investments ........ -- (.26) -- -- -- -- -- --
----- -------- -------- -------- -------- -------- -------- --------
Total Distributions ......... (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22)
------ -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ................. $38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46
====== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (%) .............. 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets ................. .95 .95 .96 .98 .98 1.03 1.01 1.00
Net investment income to
average net assets ......... 1.56 1.73 1.54 1.69 2.28 2.97 2.65 2.92
Portfolio turnover .......... 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02
Net assets, end of year
($000 omitted) .............. 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948
- ------------------------------------------------------------------------------------------------------------------------------
--
<CAPTION>
- ----------------------------------------------------------
1987 1986
--------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 31.20 $ 27.85
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.37 .78
Net realized and unrealized
gain (loss) on investments . 1.05 3.28
-------- --------
Total From Investment
Operations ................. 2.42 4.06
-------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (.97) (.67)
Net realized gain on
investments ................ (5.43) (.04)
In excess of net realized
gain on investments ........ -- --
-------- --------
Total Distributions ......... (6.40) (.71)
-------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 27.22 $ 31.20
======== ========
TOTAL RETURN (%) .............. 6.94 14.63
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets ................. .97 .98
Net investment income to
average net assets ......... 2.27 2.87
Portfolio turnover .......... 87.69 80.50
Net assets, end of year
($000 omitted) .............. 198,902 214,325
- ----------------------------------------------------------
</TABLE>
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-13-
<PAGE> 72
FINANCIAL HIGHLIGHTS OF THE SPECIAL GROWTH FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
<TABLE>
<CAPTION>
SPECIAL GROWTH FUND
- -------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ..................... $ 33.47 $ 35.82 $ 36.63 $ 34.47 $ 24.71
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ................. .18 .16 .07 .05 .24
Net realized and unrealized
gain (loss) on investments ........... 9.25 (.71) 5.22 4.22 10.34
-------- -------- -------- -------- --------
Total From Investment
Operations ........................... 9.43 (.55) 5.29 4.27 10.58
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ................. (.21) (.10) (.07) (.06) (.24)
Net realized gain on
investments .......................... (3.52) (.85) (6.03) (2.05) (.58)
In excess of net realized
gain on investments .................. -- (.85) -- -- --
-------- -------- -------- -------- --------
Total Distributions ................... (3.73) (1.80) (6.10) (2.11) (.82)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ........................... $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47
======== ======== ======== ======== ========
TOTAL RETURN (%) ........................ 28.52 (3.71) 15.48 12.52 43.11
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net to average
net assets ........................... 1.22 1.20 1.31 1.33 1.36
Operating expenses, gross to average
net assets ........................... 1.22 1.20 1.31 1.33 1.36
Net investment income to
average net assets ................... .49 .50 .19 .14 .80
Portfolio turnover .................... 87.56 55.40 91.97 42.20 42.81
Net assets, end of year
($000 omitted) ....................... 313,678 229,077 188,891 134,913 105,245
Per share amount of fees reimbursed
($ omitted) .......................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SPECIAL GROWTH FUND
- ------------------------------------------------------------------------------------------
1990 1989 1988 1987 1986
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ..................... $ 29.35 $ 26.19 $ 23.58 $ 26.68 $ 25.10
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ................. .42 .42 .24 .30 .28
Net realized and unrealized
gain (loss) on investments ........... (4.57) 5.78 2.99 1.59 1.74
------- ------- ------- ------- -------
Total From Investment
Operations ........................... (4.15) 6.20 3.23 1.89 2.02
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income ................. (.42) (.48) (.21) (.35) (.25)
Net realized gain on
investments .......................... (.07) (2.56) (.41) (4.64) (.19)
In excess of net realized
gain on investments .................. -- -- -- -- --
------- ------- ------- ------- -------
Total Distributions ................... (.49) (3.04) (.62) (4.99) (.44)
------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR ........................... $ 24.71 $ 29.35 $ 26.19 $ 23.58 $ 26.68
======= ======= ======= ======= =======
TOTAL RETURN (%) ........................ (14.28) 23.92 13.82 6.54 8.07
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net to average
net assets ........................... 1.50 1.49 1.47 1.37 1.49
Operating expenses, gross to average
net assets ........................... 1.53 1.49 1.47 1.37 1.51
Net investment income to
average net assets ................... 1.57 1.42 .92 1.07 1.20
Portfolio turnover .................... 63.87 85.24 51.75 161.46 99.59
Net assets, end of year
($000 omitted) ....................... 62,116 60,146 47,405 45,460 41,523
Per share amount of fees reimbursed
($ omitted) .......................... .0093 -- -- -- .0026
- ------------------------------------------------------------------------------------------
</TABLE>
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-14-
<PAGE> 73
FINANCIAL HIGHLIGHTS OF THE EQUITY INCOME FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
EQUITY INCOME FUND
- ------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR............... $ 32.21 $ 35.90 $ 35.32 $ 36.54 $ 30.75
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... .94 .90 .83 .99 1.11
Net realized and unrealized
gain (loss) on investments..... 10.08 (.70) 3.69 3.08 7.15
-------- -------- -------- -------- --------
Total From Investment
Operations..................... 11.02 .20 4.52 4.07 8.26
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income........... (.97) (.89) (.83) (1.00) (1.10)
In excess of net investment
income......................... -- -- (.00) -- --
Net realized gain on
investments.................... (3.83) (3.00) (3.11) (4.29) (1.37)
-------- -------- -------- -------- --------
Total Distributions............. (4.80) (3.89) (3.94) (5.29) (2.47)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR..................... $ 38.43 $ 32.21 $ 35.90 $ 35.32 $ 36.54
======== ======== ======== ======== ========
TOTAL RETURN (%).................. 34.76 (.69) 13.23 11.51 27.52
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets..................... 1.06 1.04 1.05 1.08 1.11
Net investment income to
average net assets............. 2.51 2.56 2.23 2.68 3.11
Portfolio turnover.............. 92.40 89.91 78.72 95.07 61.73
Net assets, end of year
($000 omitted).................. 180,116 144,285 149,532 134,365 122,689
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND
- ----------------------------------------------------------------------------------------
1990 1989 1988 1987 1986
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR............... $ 34.91 $ 30.85 $ 26.92 $ 34.66 $ 31.98
------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 1.43 1.34 1.22 1.18 1.36
Net realized and unrealized
gain (loss) on investments..... (3.83) 6.47 3.96 (1.44) 2.89
------- -------- ------- ------- -------
Total From Investment
Operations..................... (2.40) 7.81 5.18 (.26) 4.25
------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income........... (1.37) (1.50) (1.25) (1.50) (1.25)
In excess of net investment
income......................... -- -- -- -- --
Net realized gain on
investments.................... (.39) (2.25) -- (5.98) (.32)
------- -------- ------- ------- -------
Total Distributions............. (1.76) (3.75) (1.25) (7.48) (1.57)
------- -------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR..................... $ 30.75 $ 34.91 $ 30.85 $ 26.92 $ 34.66
======= ======== ======= ======= =======
TOTAL RETURN (%).................. (6.90) 25.61 19.42 (2.44) 13.42
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets..................... 1.14 1.15 1.13 1.06 1.02
Net investment income to
average net assets............. 4.12 3.94 4.08 3.30 4.05
Portfolio turnover.............. 65.97 79.82 58.12 98.67 83.55
Net assets, end of year
($000 omitted).................. 99,575 101,589 68,998 61,300 75,032
- ----------------------------------------------------------------------------------------
</TABLE>
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-15-
<PAGE> 74
FINANCIAL HIGHLIGHTS OF THE QUANTITATIVE EQUITY FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987++
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR............ $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $ 20.21 $ 18.08 $ 20.00
-------- -------- -------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........ .50 .49 .45 .49 .58 .66 .68 .56 .32
Net realized and unrealized
gain (loss) on investments.. 8.72 (.19) 2.69 1.67 5.93 (1.99) 4.53 2.14 (1.86)
-------- -------- -------- -------- -------- -------- -------- ------- -------
Total From Investment
Operations.................. 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70 (1.54)
-------- -------- -------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Net investment income........ (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57) (.25)
Net realized gain on
investments................. (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) -- (.13)
-------- -------- -------- -------- -------- -------- -------- ------- -------
Total Distributions.......... (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57) (.38)
-------- -------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE,
END OF YEAR.................. $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $ 20.21 $ 18.08
======== ======== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN (%)(a)............ 37.69 .19 12.56 8.67 31.70 (5.60) 26.08 15.05 (7.74)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (b).............. .93 .94 .98 1.02 1.03 1.12 1.14 1.16 .97
Net investment income to
average net assets (b)...... 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00 3.38
Portfolio turnover (b)....... 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37 47.78
Net assets, end of year
($000 omitted)............... 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858 64,182
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ For the period May 15, 1987 (commencement of operations) to December 31,
1987.
(a) Periods of less than one year are not annualized.
(b) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-16-
<PAGE> 75
FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL SECURITIES FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUND
- -------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR..................... $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income................. .56 .44 .40 .61 .72 1.05
Net realized and unrealized
gain (loss) on investments (a)....... 4.89 1.23 14.53 (4.02) 4.60 (9.53)
-------- -------- -------- -------- -------- --------
Total From Investment
Operations........................... 5.45 1.67 14.93 (3.41) 5.32 (8.48)
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income................. (.88) (.04) (.38) (.68) (.76) (1.08)
In excess of net investment
income............................... (.23) (.02) (.23) -- -- --
Net realized gain on
investments.......................... (1.69) (5.60) (1.12) (.31) (.01) (1.65)
-------- -------- -------- --------- -------- -------
Total Distributions................... (2.80) (5.66) (1.73) (.99) (.77) (2.73)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR........................... $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $44.60
======== ======== ======== ======== ======== ========
TOTAL RETURN (%)........................ 10.20 4.86 33.48 (6.94) 11.99 (15.34)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets............................... 1.30 1.30 1.38 1.45 1.49 1.50
Operating expenses, gross, to
average assets....................... 1.31 1.33 1.42 1.47 1.49 1.50
Net investment income to
average net assets................... .97 .70 .82 1.37 1.68 2.28
Portfolio turnover.................... 42.96 72.23 60.22 48.93 52.46 68.89
Net assets, end of year
($000 omitted)....................... 623,389 563,333 454,482 262,886 243,065 169,818
Per share amount of fees reimbursed
($ omitted)........................... .0080 .0178 .0161 .0054 -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUND
- -------------------------------------------------------------------------------------
1989 1988 1987 1986
-----------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR..................... $ 50.49 45.26 $ 49.22 $ 34.16
-------- -------- ------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income................. .67 .86 .55 .19
Net realized and unrealized
gain (loss) on investments (a)....... 10.32 8.98 6.84 15.90
-------- -------- ------- --------
Total From Investment
Operations........................... 10.99 9.84 7.39 16.09
-------- -------- ------- --------
LESS DISTRIBUTIONS:
Net investment income................. (.89) (.95) (.45) (.02)
In excess of net investment
income............................... -- -- -- --
Net realized gain on
investments.......................... (4.78) (3.66) (10.90) (1.01)
-------- -------- ------- --------
Total Distributions................... (5.67) (4.61) (11.35) (1.03)
-------- -------- ------- --------
NET ASSET VALUE,
END OF YEAR........................... $ 55.81 $ 50.49 $ 45.26 $ 49.22
======== ======== ======= ========
TOTAL RETURN (%)........................ 22.24 22.05 15.89 48.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets............................... 1.50 1.50 1.50 1.50
Operating expenses, gross, to
average assets....................... 1.54 1.50 1.50 1.61
Net investment income to
average net assets................... 1.54 1.60 .91 .96
Portfolio turnover.................... 57.16 43.50 113.04 55.53
Net assets, end of year
($000 omitted)....................... 123,823 91,006 88,321 100,733
Per share amount of fees reimbursed
($ omitted)........................... .0169 -- -- .0347
- -------------------------------------------------------------------------------------
</TABLE>
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.03 per share.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-17-
<PAGE> 76
FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED BOND FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
<TABLE>
<CAPTION>
DIVERSIFIED BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ................. $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38 $ 22.38
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ............. 1.54 1.46 1.48 1.62 1.72 1.74 1.87 1.69
Net realized and unrealized
gain (loss) on investments ....... 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02)
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ....................... 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ............. (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67)
In excess of net investment income -- -- (.01) -- -- -- -- --
Net realized gain on investments .. -- -- (.58) (.69) (.16) -- (.26) --
In excess of net realized
gain on investments .............. -- (.02) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions ............... (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ....................... $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (%) .................... 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets ........................... .59 .56 .58 .62 .74 .88 .93 .93
Operating expenses, gross, to
average assets ................... .59 .56 .58 .67 .74 .88 .93 .93
Net investment income to
average net assets ............... 6.69 6.57 6.13 6.79 7.38 7.89 8.16 7.48
Portfolio turnover ................ 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15
Net assets, end of year
($000 omitted) ................... 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656
Per share amount of fees waived
($ omitted) ...................... -- -- -- .0115 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------
1987 1986
--------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ................. $ 25.00 $ 23.29
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ............. 1.55 1.73
Net realized and unrealized
gain (loss) on investments ....... (1.28) 1.76
-------- --------
Total From Investment
Operations ....................... .27 3.49
-------- --------
LESS DISTRIBUTIONS:
Net investment income ............. (1.65) (1.76)
In excess of net investment income -- --
Net realized gain on investments .. (1.24) (.02)
In excess of net realized
gain on investments .............. -- --
-------- --------
Total Distributions ............... (2.89) (1.78)
-------- --------
NET ASSET VALUE,
END OF YEAR ....................... $ 22.38 $ 25.00
======== ========
TOTAL RETURN (%) .................... 1.25 15.49
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets ........................... .90 .96
Operating expenses, gross, to
average assets ................... .90 .96
Net investment income to
average net assets ............... 7.05 7.27
Portfolio turnover ................ 180.54 229.48
Net assets, end of year
($000 omitted) ................... 197,730 122,333
Per share amount of fees waived
($ omitted) ...................... -- --
- --------------------------------------------------------------
</TABLE>
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-18-
<PAGE> 77
FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The table appears in the
Fund's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge by
writing or calling the Investment Company.
<TABLE>
<CAPTION>
VOLATILITY CONSTRAINED BOND FUND
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14 $ 19.21
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55
Net realized and unrealized
gain (loss) on investments . .58 (1.16) .45 (.88) .80 .13 .30 (.10)
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ................. 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52)
Net realized gain on
investments ................ -- -- -- -- -- -- -- --
Tax Return of capital ....... -- -- (.29) -- -- -- -- --
-------- ------- -------- -------- -------- -------- -------- -------
Total Distributions ......... (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52)
-------- -------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE,
END OF YEAR ................. $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14
======== ======= ======== ======== ======== ======== ======== ========
TOTAL RETURN (%) .............. 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets ................. .71 .67 .66 .68 .62 .62 .61 .59
Net investment income to
average net assets ......... 6.33 5.97 5.79 6.74 7.34 7.88 8.41 7.97
Portfolio turnover .......... 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69
Net assets, end of year
($000 omitted) ............. 181,881 195,007 225,672 292,909 293,603 240,887 214,745 234,095
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------
1987 1986
-------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........... $ 20.06 $ 19.93
-------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 1.48 1.53
Net realized and unrealized
gain (loss) on investments . (.67) .13
-------- --------
Total From Investment
Operations ................. .81 1.66
-------- --------
LESS DISTRIBUTIONS:
Net investment income ....... (1.59) (1.53)
Net realized gain on
investments ................ (.07) --
Tax Return of capital ....... -- --
-------- --------
Total Distributions ......... (1.66) (1.53)
-------- --------
NET ASSET VALUE,
END OF YEAR ................. $ 19.21 $ 20.06
======== ========
TOTAL RETURN (%) .............. 4.27 8.68
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets ................. .58 .58
Net investment income to
average net assets ......... 7.75 7.88
Portfolio turnover .......... 190.36 227.17
Net assets, end of year
($000 omitted) ............. 251,702 214,860
- -------------------------------------------------------
</TABLE>
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-19-
<PAGE> 78
FINANCIAL HIGHLIGHTS OF THE MULTISTRATEGY BOND FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
<TABLE>
<CAPTION>
MULTISTRATEGY BOND FUND
- --------------------------------------------------------------------------------------
1995 1994 1993++
-----------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $ 9.29 $ 10.31 $ 10.00
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................... .65 .58 .46
Net realized and unrealized gain (loss) on
investments......................................... .97 (1.03) .40
-------- -------- -------
Total From Investment Operations.................... 1.62 (.45) .86
-------- -------- -------
LESS DISTRIBUTIONS:
Net investment income............................... (.66) (.57) (.46)
Net realized gain on investments.................... -- -- (.08)
In excess of net realized gain on investments....... -- -- (.01)
-------- -------- -------
Total Distributions................................. (.66) (.57) (.55)
-------- -------- -------
NET ASSET VALUE, END OF YEAR.......................... $ 10.25 $ 9.29 $ 10.31
======== ======== =======
TOTAL RETURN (%)(a)................................... 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b).. .85 .85 .85
Operating expenses, gross, to average net
assets (b).......................................... .89 .90 1.20
Net investment income to average net assets (b)..... 6.61 6.26 5.60
Portfolio turnover (b).............................. 142.26 136.39 188.95
Net assets, end of year ($000 omitted).............. 218,765 173,035 98,374
Per share amount of fees waived ($ omitted)......... -- -- .0002
Per share amount of fees reimbursed ($ omitted)..... .0042 .0043 .0286
- --------------------------------------------------------------------------------------
</TABLE>
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.
-20-
<PAGE> 79
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use Frank Russell Company's "multi-style, multi-manager
diversification" method of investment, and to obtain Frank Russell Company's
money manager evaluation services, on a pooled and cost-effective basis.
FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS
Frank Russell Company, founded in 1936, has been providing comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. The
Company and its affiliates have offices in Tacoma, New York, Toronto, London,
Zurich, Paris, Sydney, Auckland and Tokyo, and have approximately 1,100
associates.
Three functions are at the core of Frank Russell Company's consulting service:
Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.
Asset Allocation: Allocating a client's assets among different asset
classes--such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate--in the manner most
likely to achieve the client's objectives.
Money Manager Research: Evaluating and recommending professional investment
advisory and management organizations to make specific portfolio investments
for each asset class in accord with the specified objectives, investment styles
and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above-average total return
results, either on an absolute or relative basis, over extended periods of
time. For example, there are periods of time when equity securities outperform
fixed-income securities, and vice versa. Similarly, there are periods when
securities selected for particular characteristics, or using particular
investment styles, outperform other types of securities. For example, there are
periods of time when equity securities with growth characteristics outperform
equities with income characteristics, and vice versa. While these performance
cycles tend to repeat themselves, they do so with no regularity. The blending
of asset classes and investment styles on a complementary basis can obtain more
consistent returns over longer time periods with a reduction of risk
(volatility), although a particular asset class or investment style--or a
particular Fund investing in one asset class or using a particular style--may
not achieve above-average performance at any given point in the market.
Similarly, Frank Russell Company believes financial markets generally are
efficient, and few money managers have shown the ability to time the major
highs and lows in the securities markets with any high degree of consistency.
However, some money managers have shown a consistent ability to achieve
superior results within selected asset classes and styles and have demonstrated
expertise in particular areas. Thus, by combining a mix of investment styles
within each asset class and then selecting money managers for their ability to
invest in a particular style, the investor may seek to achieve increased
returns.
Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By
pooling the assets of institutions and individuals with smaller to medium-sized
accounts in a series of Funds with different objectives and policies, Frank
Russell Company believes that it is able to provide its multi-style,
multi-manager diversification techniques and money manager evaluation services
to Eligible Investors on a basis which is both efficient and cost effective for
the investor and Frank Russell Company.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors which invest for their own
account or in a fiduciary or agency capacity with investment authority and
which have entered into Asset Management Services Agreements (collectively, the
"Agreements," and each, an "Agreement") with the Management Company, and
institutions or individuals who have acquired shares through such institutions.
There is no specified minimum amount which must be invested. Institutions
which may have a particular interest in the Funds include:
-21-
<PAGE> 80
- -. Bank trust departments managing discretionary
institutional or personal trust accounts
- -. Registered investment advisors
- -. Endowment funds and charitable foundations
- -. Broker-Dealers
- -. Employee welfare plans
- -. Pension or profit sharing plans
- -. Insurance companies
The Agreement provides, in general, for the officers and staff of the Management
Company, using the facilities and resources of Frank Russell Company, to assist
the client to define its investment objectives, desired returns and tolerance
for risk, and to develop a plan for the allocation of assets among different
asset classes. Once these decisions have been made by a client, the client's
assets are then invested in one or more of the Funds. A client may change the
allocation of its assets among the Funds, or withdraw some or all of its assets
from the Funds at any time by redeeming Fund shares.
Shares of the Funds generally are not offered or "retailed" to individual
investors, although the Management Company may enter into Agreements with
individual investors. Bank trust departments, registered investment advisers,
broker-dealers and other eligible investors ("Financial Intermediaries") which
have entered into Agreements with the Management Company may acquire shares of
the Funds for the benefit of individual customers for which they exercise
discretionary investment authority. The Management Company provides
objective-setting and asset-allocation assistance to such Financial
Intermediaries, which in turn provide the objective-setting and
asset-allocation services to their customers. These Financial Intermediaries
receive no compensation from the Management Company or the Funds; they may
charge their customers a fee for providing these and possibly other trust or
investment-related services. A shareholder may pay a fixed dollar fee to the
Management Company for other services or reports provided by the Management
Company to the shareholder.
Either the client or the Management Company may terminate the Agreement upon
written notice as provided for in the Agreement. The Management Company does
not expect to exercise its right to terminate the Agreement unless a client
does not invest sufficient assets in the Funds to compensate the Management
Company for providing services to the client. Upon termination of an Agreement
by the client or the Management Company, the Management Company will no longer
provide asset-allocation, objective-setting or other services.
GENERAL MANAGEMENT OF THE FUNDS
The Investment Company's Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with the Management Company, Frank Russell Company and the
money managers. The Investment Company's officers, all of whom are employed by
and are officers of the Management Company or its affiliates, are responsible
for the day-to-day management and administration of the Funds' operations. The
money managers are responsible for selection of individual portfolio securities
for the assets assigned to them.
The Management Company: (i) provides or oversees the provision of all general
management and administration, investment advisory and portfolio management,
and distribution services for the Funds; (ii) provides the Funds with office
space, equipment and personnel necessary to operate and administer the Funds'
business, and to supervise the provision of services by third parties such as
the money managers and Custodian; (iii) develops the investment programs,
selects money managers, allocates assets among money managers and monitors the
money managers' investment programs and results; (iv) is authorized to select
or hire money managers to select individual portfolio securities held in the
Funds' Liquidity Portfolios (see, "Investment Policies -- Liquidity
Portfolios"); and (v) provides the Funds with transfer agent, dividend
disbursing and shareholder recordkeeping services. The Management Company bears
the expenses it incurs in providing these services (other than transfer agent,
dividend disbursing and shareholder recordkeeping) as well as the costs of
preparing and distributing explanatory materials concerning the Funds.
The responsibility of overseeing the money managers rests upon the officers and
employees of the Management Company. These officers and employees, including
their business experience for the past five years, are identified below:
- -. Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.
- -. Loran M. Kaufman, who has been Director - Fund Development, Frank Russell
Investment Management Company since 1990. From 1986 to 1990, Ms. Kaufman
was employed as a Senior Research Analyst with the Frank Russell Company.
-22-
<PAGE> 81
- -. Jean E. Carter, who has been a Senior Investment Officer of Frank Russell
Investment Management Company since 1994. From 1990 to 1994, Ms. Carter
was a Client Executive in the Investment Group of the Frank Russell
Company.
- -. James M. Imhof, Investment Officer, Frank Russell Investment Management
Company, who has managed the day to day management of the Frank Russell
Investment Management Company Funds and ongoing analysis and monitoring of
Fund money managers since 1989.
- -. Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.
- -. James A. Jornlin, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since April 1995. From 1991 to
March 1995, Mr. Jornlin was employed as a Senior Research Analyst with
Frank Russell Company.
- -. Randal C. Burge, who has been a Senior Investment Officer of Frank Russell
Investment Management Company since June 1995. Mr. Burge, was a Senior
Investment Officer of the Frank Russell Trust Company from 1990 to 1995.
Mr.Burge was a Client Executive for Frank Russell Company Australia.
- -. Madelyn Smith, who has been a Senior Investment Strategist for the Frank
Russell Investment Management Company since January 1996. From 1993 to
1995, Ms. Smith was a member of a research investment strategist for Frank
Russell Company. From 1987 to 1993, Ms. Smith was director of Investment
Equity Manager Research of Frank Russell Company.
- -. Dennis J. Trittin, who has been a Senior Portfolio Manager of Frank
Russell Investment Management Company since January 1996. From 1988 to
1996, Mr. Trittin was director of US Equity Manager Research Department
with Frank Russell Company.
- -. C. Nola Williams, who has been a Senior Investment Strategist of Frank
Russell Investment Management Company since January 1996. From 1994 to
1995, Ms. Williams became a member of the Alpha Strategy Group. From 1988
to 1994, Ms. Williams was Senior Research Analyst with Frank Russell
Company.
Frank Russell Company provides to the Funds and the Management Company the
asset management consulting services--including the objective-setting and
asset-allocation technology, and the money manager research and evaluation
assistance which Frank Russell Company provides to its other consulting
clients. Frank Russell Company receives no compensation from the Funds or the
Management Company for its consulting services. Frank Russell Company and the
Management Company as affiliated companies may establish certain intercompany
cost allocations for budgeting and product profitability purposes which may
reflect Frank Russell Company's consulting services supplied to the Management
Company.
George F. Russell, Jr., Chairman of the Board of Trustees of the Investment
Company, is the Chairman of the Board and controlling shareholder of Frank
Russell Company. The Management Company is a wholly owned subsidiary of Frank
Russell Company.
The Investment Company has received an exemptive order from the U.S. Securities
and Exchange Commission (the "SEC") which permits the Investment Company, with
the approval of its Board of Trustees, to engage and terminate money managers
without a shareholder vote and to disclose, on an aggregate basis, the fees
paid to the money managers of each Investment Company Fund. The Investment
Company received shareholder approval to operate under the order at a special
meeting of the shareholders on January 22, 1996.
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<PAGE> 82
For its services, the Management Company receives a management fee from each
Fund. From this fee, the Management Company, acting as agent for the
Investment Company, is responsible for paying the money managers for their
investment selection services. The remainder is retained by the Management
Company as compensation for the services described above and to pay expenses.
The annual rate of the management fees, payable to the Management Company
monthly on a pro rata basis, are the following percentages of the average daily
net assets of each Fund: Diversified Equity Fund, 0.78%; Special Growth Fund,
0.95%; Equity Income Fund, 0.80%; Quantitative Equity Fund, 0.78%;
International Securities Fund, 0.95%; Diversified Bond Fund, 0.45%; Volatility
Constrained Bond Fund, 0.50%; and Multistrategy Bond Fund, 0.65%. The fees of
the Funds, other than the Diversified Bond and Volatility Constrained Bond
Funds, may be higher than the fees charged by some mutual funds with similar
objectives which use only a single money manager.
The Management Company has voluntarily agreed to waive all or a portion of its
management fee with respect to certain funds. In addition to these "voluntary
limits," the Management Company has agreed to reimburse each Fund the amount,
if any, by which a Fund's expenses exceed state law expense limitations.
Currently, California has an expense limitation of 2.5% of a Fund's first $30
million in average net assets, 2.0% of the next $70 million in average net
assets, and 1.5% of the remaining average net assets for any fiscal year as
determined under the state's regulations. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time.
Frank Russell Company provides its Portfolio Verification System ("PVS") to all
the Funds pursuant to a written Service Agreement. The PVS computerized data
base system records detailed transaction data for each of the Funds necessary
to prepare various financial and Internal Revenue Service accounting reports.
For these services, the Funds pay the following annual fees:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
ANALYSIS OF
TRANSACTION INTERNATIONAL
BASE FEE CHARGE HOLDING CHARGE MANAGEMENT REPORT
-------- ----------- -------------- -----------------
<S> <C> <C> <C> <C>
Equity Manager Portfolios $1,500 $ 0.10 $ 1.80 --
Fixed Income Manager Portfolios 2,500 2.00 12.00 --
Master Holding Portfolios 500 0.10 - 3.00 1.80 - 24.00 --
Multi-Currency Portfolios 14,000 3.00 24.00 $2,500
- ------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 83
Annual minimum charges are: Diversified Equity - $25,000; Special Growth -
$15,000; Equity Income - $12,000; Quantitative Equity - $23,000; Diversified
Bond - $31,000; Volatility Constrained Bond - $22,000; Multistrategy Bond -
$25,000; and $290,000 in the aggregate for all international portfolios. Any
additional domestic equity or fixed-income funds will be billed using the same
fee schedule, with an annual minimum fee of $20,000 and $25,000, respectively.
EXPENSES OF THE FUNDS
The Funds will pay their own expenses other than those expressly assumed by the
Management Company. The Funds' expenses for the year ended December 31, 1995,
as a percentage of average net assets, are shown in the Financial Highlights
tables. The Funds' principal expenses are: the management, transfer agency and
recordkeeping fees payable to the Management Company; fees for custodial and
portfolio accounting payable to State Street Bank and Trust Company;
bookkeeping service fees for preparing tax records payable to Frank Russell
Company; fees for independent auditing and legal services; and fees for filing
reports and registering shares with regulatory bodies.
THE MONEY MANAGERS
The assets of each Fund are allocated currently among the money managers listed
in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S ASSETS
AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT COMPANY. THE
MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME
BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES OF THE
INVESTMENT COMPANY. The Funds will notify shareholders of the Fund concerned
within 60 days when a money manager begins or stops providing services.
From its management fees, the Management Company, as agent for the Investment
Company, pays all fees to the money managers for their investment selection
services. Quarterly, each money manager is paid the pro rata portion of an
annual fee, based on the quarterly average of all the assets allocated to the
money manager. For the period, management fees paid to the money managers were
equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Diversified Equity Fund, .24%; Special
Growth Fund, .41%; Equity Income Fund, .20%; Quantitative Equity Fund, .21%;
International Securities Fund, .44%; Diversified Bond Fund, .09%; Volatility
Constrained Bond Fund, .19%; and Multistrategy Bond Fund, .22%; Fees paid to
the money managers are not affected by any voluntary or statutory expense
limitations. Some money managers may receive investment research prepared by
Frank Russell Company as additional compensation, or may receive brokerage
commissions for executing portfolio transactions for the Funds through
broker-dealer affiliates.
Each money manager has agreed that once the Investment Company has advanced
fees to the Management Company as agent to make payment of the money manager's
fee, the money manager will look only to the Management Company for the payment
of its fee.
The money managers are selected for the Funds based primarily upon the research
and recommendations of Frank Russell Company, which evaluates quantitatively
and qualitatively the manager's skills and results in managing assets for
specific asset classes, investment styles and strategies. Short-term investment
performance, by itself, is not a controlling factor in selecting or terminating
a money manager.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY, NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF
THE MONEY MANAGERS' INDIVIDUAL SECURITY SELECTIONS.
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<PAGE> 84
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS
Each Fund has certain "fundamental" investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the Fund's
shareholders. If there is a change in a fundamental investment objective,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. Other policies
reflect current practices of the Funds, and may be changed by the Funds without
the approval of shareholders. This section of the Prospectus describes the
Funds' principal objectives, restrictions, policies, and risks. A more detailed
discussion appears in the Statement of Additional Information.
INVESTMENT OBJECTIVES.
Each Fund's objective is "fundamental," as are the types of securities in which
it will invest. Ordinarily, each Fund will invest more than 65% of its net
assets in the types of securities identified in its statement of objectives.
However, the Funds may hold assets as cash reserves for temporary and defensive
purposes when their money managers deem that a more conservative approach is
desirable or when suitable purchase opportunities do not exist. (See,
"Investment Policies - Cash Reserves.")
DIVERSIFIED EQUITY FUND
The Diversified Equity Fund's objective is to provide income and capital growth
by investing principally in equity securities.
The Fund may invest in common and preferred stocks, securities convertible into
common stocks, rights and warrants.
SPECIAL GROWTH FUND
The Special Growth Fund's objective is to maximize total return primarily
through capital appreciation and by assuming a higher level of volatility than
is ordinarily expected from the Diversified Equity Fund, by investing in equity
securities.
Current income is a secondary consideration in selecting securities. The Fund
may invest in common and preferred stock, convertible securities, rights and
warrants. The Fund's investments may include companies whose securities have
been publicly traded for less than five years and smaller companies, such as
companies not listed in the Russell 1000(R) Index. A substantial portion of the
Fund's portfolio will generally consist of equity securities of "emerging
growth-type" companies which tend to reinvest most of their earnings, rather
than pay significant cash dividends; or companies characterized as "special
situations" where the money manager believes that cyclical developments in the
securities markets, the industry, or the issuer itself present opportunities
for capital growth.
EQUITY INCOME FUND
The Equity Income Fund's objective is to achieve a high level of current
income, while maintaining the potential for capital appreciation, by investing
primarily in income-producing equity securities.
The income objective of the Fund is to exceed the yield on the S&P 500 Index.
The Index yield will change from year to year due to changes in prices and
dividends of stocks in the Index. Income streams will be considered in light of
their current level and the opportunity for future growth. Capital appreciation
may not be comparable to that achieved by Funds such as the Special Growth Fund
whose major objective is appreciation, although the Management Company believes
that a high and growing stream of income is conducive to higher capital values.
The Fund may also invest in preferred stock, convertible securities, rights and
warrants.
QUANTITATIVE EQUITY FUND
The Quantitative Equity Fund's objectives are to provide a total return greater
than the total return of the US stock market as measured by the Russell 1000(R)
Index over a market cycle of four to six years, while maintaining volatility
and diversification similar to the Index by investing in equity securities.
The Fund will maintain industry weights and economic sector weights near those
of the Index. Over time, the Fund's average price/earnings ratio, yield and
other fundamental characteristics are expected to be near the averages for the
Index. However, the Fund's money managers may temporarily deviate from Index
characteristics based upon the managers' investment judgment that this will
increase the Fund's total return. The money managers of the Fund generally make
stock selections from the set of stocks comprising the Russell 1000(R) Index.
The Fund's portfolio characteristics and holdings are expected to be similar to
the Russell 1000(R) Index. However, a money manager may purchase securities
that are not included in the Index or sell securities still included in the
Index in order for the Fund to meet its investment objectives.
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<PAGE> 85
The Fund will seek to achieve its investment objectives by using various
quantitative management techniques. The Management Company believes
quantitative management over a market cycle should provide a portfolio with
consistent performance, diversification, market-like volatility and limited
market underperformance. However, there is no guarantee the Fund will have such
characteristics at any one time.
A quantitative manager bases its investment decisions primarily on quantitative
investment models. These models are used by the money manager to determine the
investment potential of a stock within a particular portfolio and to rank
securities most favorable to having a total return surpassing the total return
of the Russell 1000(R) Index. Once the money manager has ranked the securities,
it then selects the securities most likely to have the characteristics needed to
construct a portfolio that has superior return prospects with risks similar to
the Russell 1000(R) Index.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.
INTERNATIONAL SECURITIES FUND
The International Securities Fund's objectives are to provide favorable total
return and additional diversification for US investors by investing primarily
in equity and fixed-income securities of non-US companies, and securities
issued by non-US governments.
The Fund invests primarily in equity securities issued by companies domiciled
outside of the United States. The Fund may also invest in fixed-income
securities, including instruments issued by non-US governments and their
agencies, and in US companies which derive, or are expected to derive, a
substantial portion of their revenues from operations outside the United
States.
The Fund may invest in equity and debt securities denominated in other than US
dollars and gold-related equity investments, including gold mining stocks and
gold-backed debt instruments. However, as a matter of fundamental policy, the
Fund will not invest more than 20% of its net assets in gold-related
investments.
DIVERSIFIED BOND FUND
The Diversified Bond Fund's objectives are to provide effective diversification
against equities and a stable level of cash flow by investing in fixed-income
securities.
The Fund's portfolio will consist primarily of conventional debt instruments,
including bonds, debentures, US government and US government agency securities,
preferred and convertible preferred stocks, and variable amount demand master
notes. (These notes represent a borrowing arrangement under a letter agreement
between a commercial paper issuer and an institutional lender, such as the
Fund.) Investment selections will be based on fundamental economic, market, and
other factors leading to valuation by sector, maturity, quality and such other
criteria as are appropriate to meet the stated objectives. The Fund will
ordinarily invest at least 65% of its net assets in securities rated no less
than A or A-2 by Standard & Poor's Ratings Group ("S&P") or A or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"), or judged by the money manager to
be of at least equal credit quality to those designations.
VOLATILITY CONSTRAINED BOND FUND
The Volatility Constrained Bond Fund's objectives are the preservation of
capital and the generation of current income consistent with the preservation
of capital by investing primarily in fixed-income securities with
low-volatility characteristics.
The Fund will invest primarily in fixed-income securities, emphasizing those
which mature in two years or less from the date of acquisition or which have
similar volatility characteristics. To minimize credit risk and fluctuations in
net asset value per share, the Fund intends to maintain an average portfolio
maturity of less than five years. The Fund's money managers will seek to
identify and invest in a managed portfolio of high-quality debt securities
denominated in the US dollar and a range of foreign currencies. Under normal
circumstances, the Fund will invest in securities of issuers domiciled in at
least three different countries.
Although the Fund will invest primarily in debt securities denominated in the
US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments
among securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities, within each such country, among different types of
debt securities. The money managers which invest in foreign
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<PAGE> 86
denominated securities will maintain a substantially neutral currency exposure
relative to the US dollar, and will establish and adjust cross currency hedges
based on their perception of the most favorable markets and issuers. In this
regard, the percentage of assets invested in securities of a particular country
or denominated in a particular currency will vary in accordance with a money
manager's assessment of the relative yield of such securities and the
relationship of a country's currency to the US dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by the money managers in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector within
the Fund's investment portfolio. The Fund will not invest more than 10% of its
total assets in debt securities denominated in a single currency other than the
US dollar. At this time, the Management Company intends to limit total non-US
dollar investments to no more than 25% of total Funds assets.
The Fund will invest in debt securities denominated in currencies of countries
whose governments are considered by it to be stable (or, when the Fund invests
in countries considered unstable or undeveloped, it will only do so when it
believes it is able to hedge substantially the risk of a decline in the currency
in which the Fund's portfolio securities are denominated). In addition to the US
dollar, such currencies include, among others, the Australian Dollar, Austrian
Schilling, Belgian Franc, British Pound Sterling, Canadian Dollar, Danish Krone,
Dutch Guilder, European Currency Unit ("ECU"), French Franc, Irish Punt, Italian
Lira, Japanese Yen, New Zealand Dollar, Norwegian Krone, Spanish Peseta, Swedish
Krona, Swiss Franc and German Mark. An issuer of debt securities purchased by
the Fund may be domiciled in a country other than a country in whose currency
the instrument is denominated.
In selecting particular investments for the Fund, the money managers will seek
to minimize investment risk by limiting their portfolio investments to debt
securities of high-quality. Accordingly, the Fund's portfolio will consist only
of: (a) debt securities issued or guaranteed by the US government, its
agencies or instrumentalities ("US Government Securities"); (b) obligations
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies, or instrumentalities, or by supranational
entities, all of which are rated AAA or AA by S&P or Aaa or Aa by Moody's or,
if unrated, determined by the money managers to be of equivalent quality; (c)
investment grade corporate debt securities or, if unrated, determined by the
money managers to be of equivalent quality; (d) certificates of deposit and
bankers' acceptances issued or guaranteed by, or time deposits maintained at,
banks (including foreign branches of US banks or US or foreign branches of
foreign banks) having total assets of more than $500 million and determined by
the money managers to be of high-quality; and (e) commercial paper rated A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch
Investors Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1 or
TBW-2 by Thomson Bank Watch, Inc., or, if not rated, issued by US or foreign
companies having outstanding debt securities rated AAA, AA or A by S&P, or Aaa,
Aa or A by Moody's and determined by the money managers to be of high-quality.
As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is an organization consisting of certain European states
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specific amounts of currency of member states of the
European Community. The specific amounts of currency comprising the ECU may be
adjusted by the Counsel of Ministers of the European Community to reflect
changes in the relative values of the underlying currencies. The money managers
investing in such securities do not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-denominated
obligations.
The Fund may enter into interest rate swaps, which involve the exchange by the
Fund with another party of its respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Fund intends to use these transactions as a
hedge and not as a speculative investment.
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<PAGE> 87
MULTISTRATEGY BOND FUND
The Multistrategy Bond Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios, by investing in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: US Government Securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities
of international agencies or supranational agencies; corporate debt securities;
loan participations; corporate commercial paper; indexed commercial paper;
variable, floating and zero coupon rate securities; mortgage and other
asset-backed securities; municipal obligations; variable amount demand master
notes (these notes represent a borrowing arrangement between a commercial paper
issuer and an institutional lender, such as the Fund); bank certificates of
deposit, fixed time deposits and bankers' acceptances; repurchase agreements
and reverse repurchase agreements; and foreign currency exchange related
securities.
The Fund may also invest in convertible securities and derivatives including
warrants and interest rate swaps. Interest rate swaps are described under
"Volatility Constrained Bond Fund." The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio to protect against any increase in the
price of securities it anticipates purchasing at a later date. The Fund intends
to use these transactions as a hedge and not as a speculative investment.
As described above, the Fund may invest in debt securities issued by
supranational organizations. Supranational organizations are described under
"Volatility Constrained Bond Fund."
Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit, which are issued by
foreign branches of US or foreign banks; Eurodollar Time Deposits, which are
issued by foreign branches of US or foreign banks; and Yankee Certificates of
Deposit, which are issued by US branches of foreign banks. These instruments may
be US dollar or foreign currency denominated and are subject to the risks of
non-US issuers described under "Investment Policies - Investment in Foreign
Securities."
The variable and floating rate securities the Fund may invest in 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 some appropriate 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 a change in the prime
rate. The Fund may also invest in zero coupon US Treasury, foreign government
and US and foreign corporate debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt obligations and
coupons. A zero coupon security pays no interest to its holder prior to
maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.
The Fund's portfolio may include debt securities issued by domestic or foreign
entities, and denominated in US dollars or foreign currencies. It is anticipated
that no more than 25% of the Fund's net assets will be denominated in foreign
currencies. Foreign currency exchange transactions (options on foreign
currencies, foreign currency futures contracts and forward foreign currency
contracts) will only be used by the Fund for the purpose of hedging against
foreign currency exchange risk arising from the Fund's investment, or
anticipated investment, in securities denominated in foreign currencies. Foreign
investment may include emerging market debt. The risks associated with
investment in securities issued by foreign governments and companies are
described under "Investment Policies - Investment in Foreign Securities."
Emerging markets consist of countries determined by the money managers of the
Fund to have developing or emerging economies and markets. These countries
generally include every country in the world except the United States, Canada,
Japan, Australia and most countries located in Western Europe. Emerging market
debt that the Fund may invest in includes bonds, notes and debentures of
emerging market governments and debt and other fixed income securities issued or
guaranteed by such governments' agencies, instrumentalities or central banks, or
by banks or other companies in emerging markets determined by the money managers
to be suitable investments for the Fund. Under current market conditions, it is
expected that emerging market debt will consist predominantly of Brady Bonds and
other sovereign debt. Brady Bonds are products of the "Brady Plan," under which
bonds are
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<PAGE> 88
issued in exchange for cash and certain of the country's outstanding commercial
bank loans.
The Fund may invest up to 25% of its net assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by S&P or Baa by
Moody's) or in unrated securities judged by the money managers of the Fund to be
of comparable quality. Debt rated BB, B, CCC, CC and C, and debt rated Ba, B,
Caa, Ca and C is regarded by S&P and Moody's, respectively, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For S&P, BB indicates
the lowest degree of speculation and C the highest. For Moody's, Ba indicates
the lowest degree of speculation and C the highest. These lower rated debt
securities may include obligations that are in default or that face the risk of
default with respect to principal or interest. Such securities are sometimes
referred to as "junk bonds." For additional information on the ratings used by
S&P and Moody's and a description of lower rated debt securities, please refer
to the Funds' Statement of Additional Information.
INVESTMENT RESTRICTIONS.
The Funds have fundamental investment restrictions which cannot be changed
without shareholder approval. The principal restrictions are the following,
which, unless otherwise noted, apply on a Fund-by-Fund basis at the time an
investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less than 75%
of its assets would be represented by cash; cash items; securities of the
US government, its agencies, or instrumentalities; securities of other
investment companies; and other securities limited in respect of each
issuer to an amount not greater in value than 5% of the total assets of
such Fund. A Fund's investment in "cash reserves" (see the next section)
in shares of the Investment Company's Money Market Fund are not subject to
this restriction or to restrictions 2 or 3.
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other than
the US government, its agencies and instrumentalities).
3. Acquire more than 5% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer.
4. Borrow amounts in excess of 5% of its total assets taken at cost or at
market value, whichever is lower, and then only for temporary purposes;
invest more than 5% of its assets in securities of issuers which, together
with any predecessor, have been in operation for less than three years; or
invest more than 5% of its assets in warrants. (Currently, no Fund intends
to borrow in excess of 5% of its net assets.)
INVESTMENT POLICIES.
The Funds use certain investment instruments and techniques commonly used by
institutional investors. The principal policies are the following:
Cash Reserves. Each Fund is authorized to invest its cash reserves (i.e., funds
awaiting investment in the specific types of securities to be acquired by a
Fund) in money market instruments and in debt securities which are at least
comparable in quality to the Fund's permitted investments. In lieu of having
each of these Funds make separate, direct investments in money market
instruments, each Fund and its money managers may elect to invest the Fund's
cash reserves in the Investment Company's Money Market Fund.
The Investment Company's Money Market Fund, described in a separate prospectus,
seeks to maximize current income to the extent consistent with the preservation
of capital and liquidity, and the maintenance of a stable $1.00 per share net
asset value by investing solely in short-term money market instruments. The
Management Company currently does not collect a management or advisory fee from
the Money Market Fund, thereby eliminating any duplication of fees. The Funds
will use this procedure only so long as doing so does not adversely affect the
portfolio management and operations of the Money Market Fund and the Investment
Company's other Funds.
Russell 1000(R) Index. The Russell 1000(R) Index consists of the 1,000 largest
US companies by capitalization (i.e., market price per share times the number
of shares outstanding). The smallest company in the Index at the time of
selection has a capitalization of approximately $457 million. The Index does
not include cross-corporate holdings in a company's capitalization. For
example, when IBM owned approximately 20% of Intel, only 80% of the total
shares outstanding of Intel were used to determine Intel's capitalization. Also
not included in the Index are closed-end investment companies, companies that
do not file a Form 10-K report with the SEC, foreign securities, and American
Depository Receipts.
The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. These changes are expected to
represent
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<PAGE> 89
less than 1% of the total market capitalization of the Index. Changes for
mergers and acquisitions are made when trading ceases in the acquiree's shares.
The 1,001st largest US company by capitalization is then added to the Index to
replace the acquired stock.
The Russell 1000(R) Index is used as the basis for the Quantitative Equity
Fund's performance because it, in the Management Company's opinion, represents
the universe of stocks in which most active money managers invest and is
representative of the performance of publicly traded common stocks most
institutional investors purchase.
Frank Russell Company chooses the stocks to be included in the Index solely on
a statistical basis and it is not an indication that Frank Russell Company or
the Management Company believes that the particular security is an attractive
investment.
Repurchase Agreements. Each Fund may enter into repurchase agreements with a
bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at time of the agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies - Illiquid Securities," no Fund
will invest more than 15% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days.
Forward Commitments. Each Fund may contract to purchase securities for a fixed
price at a future date beyond customary settlement time (a "forward commitment"
or "when-issued" transaction), so long as such transactions are consistent with
each Fund's ability to manage its investment portfolio and honor redemption
requests. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund of a dollar amount sufficient to make payment for the
portfolio securities to be purchased will be segregated on the Fund's records
at the trade date and maintained until the transaction is settled.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by a money manager to be inconvenient or disadvantageous.
A reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value.
The Fund retains record ownership of the security involved, including the right
to receive interest and principal payments. At an agreed upon future date, the
Fund repurchases the security by paying an agreed upon purchase price plus
interest. Cash or liquid high-grade debt obligations of the Fund equal in value
to the repurchase price, including any accrued interest, will be segregated on
the Fund's records while a reverse repurchase agreement is in effect, subject to
the limitations described in "Investment Policies - Illiquid Securities."
Lending Portfolio Securities. Each Fund may lend portfolio securities with a
value of up to 50% of its total assets. Such loans may be terminated at any
time. A Fund will receive either cash (and agree to pay a "rebate" interest
rate), US government or US government agency securities as collateral in an
amount equal to at least 100% of the current market value of the current loaned
securities plus accrued interest. The collateral is "marked-to-market" on a
daily basis, and the borrower will furnish additional collateral in the event
that the value of the collateral drops below 100% of the market value of the
loaned securities.
Cash collateral is invested in high-quality short-term instruments, short-term
bank collective investment and money market mutual funds (including funds
advised by State Street Bank and Trust Company, the Funds' Custodian, for which
it may receive an asset-based fee) and other investments meeting certain quality
and maturity requirements established by the Funds. Income generated from the
investment of the cash collateral is first used to pay the rebate interest cost
to the borrower of the securities and the remainder is then divided between the
Fund and the Fund's Custodian.
Each Fund will retain most rights of beneficial ownership, including dividends,
interest or other distributions on the loaned securities. Voting rights may
pass with the lending. The Fund will call loans to vote proxies if a material
issue affecting the investment is to be voted upon.
Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral.
Consequently, loans are made only to borrowers which are deemed to be of good
financial standing. The Investment Company may incur costs or possible losses
in excess of the interest and fees received in connection with securities
lending transactions. Some securities purchased with cash collateral are
subject to market fluctuations while a loan is outstanding. To the extent that
the value of the cash collateral as invested is insufficient to return the full
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amount of the collateral plus rebate interest to the borrower upon termination
of the loan, the Fund must immediately pay the amount of the shortfall to the
borrower.
Illiquid Securities. The Funds will not purchase or otherwise acquire any
security if, as a result, more than 15% of a Fund's net assets (taken at
current value) would be invested in securities, including repurchase agreements
of more than seven days' duration, that are illiquid by virtue of the absence
of a readily available market or because of legal or contractual restrictions
on resale. In addition, the Funds will not invest more than 10% of their
respective net assets (taken at current value) in securities of issuers which
may not be sold to the public without registration under the Securities Act of
1933 (the "1933 Act"). These policies do not include (1) commercial paper
issued under Section 4(2) of the 1933 Act, or (2) restricted securities
eligible for resale to qualified institutional purchasers pursuant to Rule 144A
under the 1933 Act that are determined to be liquid by the money managers in
accordance with Board approved guidelines. Such guidelines take into account
trading activity for such securities and the availability of reliable pricing
information, among other factors. If there is a lack of trading interest in a
particular Rule 144A security, a Fund's holding of that security may be
illiquid. There may be undesirable delays in selling illiquid securities at
prices representing their fair value.
Liquidity Portfolios. The Management Company will exercise investment
discretion or select a money manager to exercise investment discretion for
approximately 5%-15% of the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds' assets assigned to a
"Liquidity Portfolio." The Liquidity Portfolio will be used to create
temporarily an equity exposure for cash balances until those balances are
invested in equities or used for Fund transactions.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on US or foreign exchanges or in the over-the-counter market. Investing
in securities issued by foreign governments and corporations involves
considerations and possible risks not typically associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax
laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in the United States or abroad) or changed
circumstances in dealings between nations. Costs are incurred in connection
with conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including nationalization, expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods or restrictions affecting the prompt return of capital to the United
States.
The risks associated with investing in foreign securities are often heightened
for investments in developing or emerging markets. Investments in emerging or
developing markets involve exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to have
less stability, than those of more developed countries. Moreover, the economies
of individual emerging market countries may differ favorably or unfavorably
from the US economy in such respects as the rate of growth in gross domestic
product, the rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position. Because the Funds' foreign securities will
generally be denominated in foreign currencies, the value of such securities to
the Funds will be affected by changes in currency exchange rates and in
exchange control regulations. A change in the value of a foreign currency
against the US dollar will result in a corresponding change in the US dollar
value of the Funds' foreign securities. In addition, some emerging market
countries may have fixed or managed currencies which are not free-floating
against the US dollar. Further, certain emerging market countries' currencies
may not be internationally traded. Certain of these currencies have experienced
a steady devaluation relative to the US dollar. Many emerging markets countries
have experienced substantial, and in some periods extremely high, rates of
inflation for many years. 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
Forward Foreign Currency Exchange Contracts ("forward currency contracts"). The
International Securities,
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Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds may
enter into forward currency contracts, which are agreements to exchange one
currency for another--for example, to exchange a certain amount of US dollars
for a certain amount of Japanese Yen--at a future date. The date (which may be
any agreed upon fixed number of days in the future), the amount of currency to
be exchanged and the price at which the exchange will take place will be
negotiated and fixed for the term of the contract at the time that a Fund enters
into a contract. The Funds may engage in forward contracts that involve a
currency whose changes in value are considered to be linked (a proxy) to a
currency or currencies in which some or all of the Funds' portfolio securities
are denominated. Forward currency contracts are (a) traded in an interbank
market conducted directly between currency traders (typically, commercial banks
or other financial institutions) and their customers, (b) generally have no
deposit requirements and (c) are consummated without payment of any commissions.
The Funds may, however, enter into forward currency contracts containing either
or both deposit requirements and commissions. In order to assure that the Funds'
forward currency contracts are not used to achieve investment leverage, the
Funds will segregate cash or readily marketable high-quality securities in an
amount at all times equal to or exceeding the Fund's commitment with respect to
these contracts.
Upon maturity of a forward currency contract, the Funds may (a) pay for and
receive, or deliver and be paid for, the underlying currency, (b) negotiate
with the dealer to roll over the contract into a new forward currency contract
with a new future settlement date or (c) negotiate with the dealer to terminate
the forward contract by entering into an offset with the currency trader
whereby the parties agree to pay for and receive the difference between the
exchange rate fixed in the contract and the then current exchange rate. A Fund
also may be able to negotiate such an offset prior to maturity of the original
forward contract. There can be no assurance that new forward contracts or
offsets will always be available to the Funds.
Forward currency contracts will be used only to hedge against anticipated
future changes in exchange rates which otherwise might either adversely affect
the value of a Fund's portfolio securities or adversely affect the price of
securities which the Funds intend to purchase at a later date. The amount the
Funds may invest in forward currency contracts is limited to the amount of the
Funds' aggregate investments in foreign currencies.
The market for forward currency contracts may be limited with respect to certain
currencies. These factors will restrict a Fund's ability to hedge against the
risk of devaluation of currencies in which the Fund holds a substantial quantity
of securities and are unrelated to the qualitative rating that may be assigned
to any particular portfolio security. Where available, the successful use of
forward contracts draws upon a money manager's special skills and experience
with respect to such instruments and usually depends on the money manager's
ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Fund may not achieve the anticipated benefits of forward contracts or may
realize losses and thus be in a worse position than if such strategies had not
been used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect. In the case of proxy
hedging, there is also a risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
the Funds are engaged in that strategy.
A Fund's ability to dispose of its positions in forward contracts will depend
on the availability of active markets in such instruments. It is impossible to
predict the amount of trading interest that may exist in various types of
forward contracts. Forward foreign currency contracts may be closed out only by
the parties entering into an offsetting contract. Therefore, no assurance can
be given that a Fund will be able to utilize these instruments effectively for
the purposes set forth above.
Options. The Funds may purchase and sell (write) call and put options on
securities and securities indexes provided such options are traded on a
national securities exchange or in an over-the-counter market. The Funds may
also purchase and sell put and call options on foreign currencies.
A Fund may invest up to 5% of its net assets, represented by the premium paid,
in call and put options. A Fund may write a call or put option to the extent
that the aggregate value of all securities or other assets used to cover all
such outstanding options does not exceed 25% of the value of its net assets.
Call and Put Options on Securities. A call option on a specific security gives
the purchaser of the option the right to buy, and obligates the writer to sell,
the underlying security at the exercise price at any time
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during the option period. Conversely, a put option on a specific security gives
the purchaser of the option the right to sell, and obligates the writer to buy,
the underlying security at the exercise price at any time during the option
period.
A Fund may purchase a call option on securities to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability or desire to purchase such securities in an orderly manner. A Fund may
purchase a put option on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
A Fund may write a call or a put option only if the option is covered by the
Fund holding a position in the underlying securities or by other means which
would permit immediate satisfaction of the Fund's obligations as the writer of
the option.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which
it previously wrote on the security. To close out a position as a purchaser of
an option, a Fund may make a "closing sale transaction," which involves
liquidating the Fund's position by selling the option previously purchased. The
Fund will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof.
The Funds intend to treat options in respect of specific securities that are
not traded on a national securities exchange and the securities underlying
covered call options as not readily marketable and therefore subject to the
limitations on the Funds' ability to hold illiquid securities.
The Funds intend to purchase and write call and put options on specific
securities. The Funds will purchase and write options only to the extent
permitted by the policies of state securities authorities in states where the
shares of the Funds are qualified for offer and sale.
Securities Index Options. An option on a securities index is a contract which
gives the purchaser of the option, in return for the premium paid, the right
to receive from the writer of the option cash equal to the difference between
the closing price of the index and the exercise price of the option times a
multiplier established by the exchange on which the stock index is traded. It
is similar to an option on a specific security except that settlement is in
cash and gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in the specific security. None of the Funds, other than the
Diversified Equity, Special Growth, Equity Income, Quantitative Equity and
International Securities Funds, currently intends to purchase and write call
and put options on securities indexes.
Options on Foreign Currency. The Funds may purchase and write call and put
options on foreign currencies for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires. Put options convey the
right to sell the underlying currency at a price which is anticipated to be
higher than the spot price of the currency at the time the option expires.
Currency options traded on US or other exchanges may be subject to position
limits which may limit the ability of a Fund to reduce foreign currency risk
using such options. Over-the-counter options 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. (See also "Call and Put Options on Securities"
above.) None of the Funds, other than the Multistrategy Bond Fund, currently
intends to write or purchase such options.
Risk Factors. The purchase and writing of options involves certain risks. If
a put or call option purchased by a Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a
put, remains equal to or greater than the exercise price or, in the case of a
call, remains less than or equal to the exercise price, the Fund will lose its
entire investment (i.e., the premium paid) on 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.
Where a Fund writes a call option, it has, in return for the premium it
receives, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. Where a Fund writes a put option, it is exposed
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during the term of the option to a decline in the price of the underlying
security.
There can be no assurance that a liquid market will exist when the Fund seeks
to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.
Futures Contracts and Options on Futures Contracts. The Funds may invest in
interest rate futures contracts, stock index futures contracts and foreign
currency futures contracts and options thereon that are traded on a United
States or foreign exchange or board of trade.
An interest rate or foreign currency futures contract is an agreement between
two parties (buyer and seller) to take or make delivery of a specified quantity
of financial instruments (such as GNMA certificates or Treasury bonds) or
foreign currency at a specified price at a future date. A futures contract on an
index (such as the S&P 500) is an agreement between two parties (buyer and
seller) to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. In
the case of futures contracts traded on US exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out by
delivery or purchase, as the case may be, of the financial instrument or by
payment of the change in the cash value of the index. Frequently, using futures
to effect a particular strategy instead of using the underlying or related
security or index will result in lower transaction costs being incurred.
Each Fund may also purchase and write call options and put options on futures
contracts. An option on a futures contract gives the holder the right, in
return for the premium paid, to assume a long position (in the case of a call)
or a short position (in the case of a put) in a futures contract at a specified
exercise price prior to the expiration 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 opposite is true. An option on a futures contract may be closed out (before
exercise or expiration) by an offsetting purchase or sale of an option on a
futures contract of the same series.
There are several risks associated with the use of futures and options on
futures contracts for hedging purposes. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively
new and without a significant trading history. As a result, there is no
assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent a Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
A Fund will only enter into futures contracts or options on futures contracts
which are standardized and traded on a US or foreign exchange or board of
trade, or similar entity, or quoted on an automated quotation system. A Fund
will enter into a futures contract only if the contract is "covered" or if the
Fund at all times maintains with its Custodian cash or cash equivalents equal
to or greater than the fluctuating value of the contract (less any margin or
deposit). A Fund will write a call or put option on a futures contract only if
the option is "covered." For a discussion of how to cover a written call or put
option, see "Options" above.
A Fund may enter into contracts and options on futures contracts for "bona fide
hedging" purposes, as defined under the rules of the Commodity Futures Trading
Commission. A Fund may also enter into futures contracts and options on futures
contracts for non hedging purposes provided the aggregate initial margin and
premiums required to establish these positions will not exceed 5% of the Fund's
net assets.
High Risk Bonds. The Funds, other than Multistrategy Bond Fund, do not invest
assets in securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the money managers to be of a lesser credit
quality than those designations. Securities rated BBB by S&P or Baa by Moody's
and above are considered by those rating agencies to be "investment grade"
securities, although Moody's considers securities rated Baa, and S&P considers
bonds rated BBB, to have some speculative characteristics. The Funds, other
than
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Multistrategy Bond Fund, will dispose of, in a prudent and orderly fashion,
securities whose ratings drop below these minimum ratings. The market value of
debt securities generally varies inversely in relation to interest rates.
The Multistrategy Bond Fund will invest in "investment grade" securities and
may invest up to 25% of its total assets in debt securities rated less than BBB
by S&P or Baa by Moody's, or in unrated securities judged by the money managers
of the Fund to be of comparable quality. Lower rated debt securities generally
offer a higher yield than that available from higher grade issues. However,
lower rated debt securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress which could adversely affect their
ability to make payments of principal and interest and increase the possibility
of default. In addition, the market for lower rated debt securities has
expanded rapidly in recent years, and its growth paralleled a long economic
expansion. The market for lower rated debt securities is generally thinner and
less active than that for higher quality securities, which would limit the
Fund's ability to sell such securities at fair value in response to changes in
the economy or the financial markets. While such debt may have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposure to adverse conditions. The money managers of the Fund will
seek to reduce the risks associated with investing in such securities by
limiting the Fund's holdings in such securities and by the depth of their own
credit analysis. For additional information, please refer to the Statement of
Additional Information.
PORTFOLIO TRANSACTION POLICIES
Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company or the money manager for
the Liquidity Portfolios. The Funds do not give significant weight to attempting
to realize long-term, rather than short-term, capital gains while making
portfolio investment decisions. The money managers make decisions to buy or sell
securities independently from other money managers. Thus, one money manager
could be selling a security when another money manager for the same Fund (or for
another series of the Investment Company) is purchasing the same security. In
addition, when a money manager's services are terminated and another retained,
the new manager may significantly restructure the portfolio. These practices may
increase the Funds' portfolio turnover rates, realization of gains or losses,
brokerage commissions and other transaction based costs. The annual portfolio
turnover rates for each of the Funds are shown in the Financial Highlights
tables.
The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money
manager determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of
the commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. This
arrangement is used by the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds. All Funds may also
effect portfolio transactions through and pay brokerage commissions to the
money managers (or their affiliates).
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS.
The Board of Trustees presently intends to declare dividends from net
investment income and net short-term capital gains, if any, for payment on the
following schedule:
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Declared Payable
- -------- -------
<S> <C> <C>
Monthly Early in the following month Diversified Bond, Volatility
Constrained Bond and
Multistrategy Bond Funds
Quarterly Mid: April, July, October Diversified Equity, Special
and December Growth, Equity Income and
Quantitative Equity Funds
Annually Mid-December International Securities Fund
- --------------------------------------------------------------------------------
</TABLE>
CAPITAL GAINS DISTRIBUTIONS.
The Board intends to declare distributions from capital gains through
October 31 (excess of capital gains over capital losses) annually,
generally in mid-December. In addition, in order to satisfy certain
distribution requirements, a Fund may declare special year-end dividend and
capital gains distributions during October, November or December to
shareholders of record in such month. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by a Fund and received
by shareholders on December 31 of the prior year. Capital gains realized
during November and December will be distributed during the month of February
of the following year.
Investors should be aware that by purchasing shares shortly before the record
date of a dividend or capital gains distribution, they will pay the full price
for the shares and then receive some portion of the price back as a taxable
dividend or capital gains distribution. Investors should also be aware that
all shareholders will share in and be taxed on distributions of gain realized
by a Fund on the sale of securities that have increased in value.
AUTOMATIC REINVESTMENT.
All dividends and distributions will be automatically reinvested, at the net
asset value per share at the close of business on the record date, in
additional shares of the Fund paying the dividend or making the distribution,
unless a shareholder elects to have dividends or distributions paid in cash or
invested in another Fund. Any election may be changed by delivering written
notice no later than ten days prior to the payment date to Frank Russell
Investment Management Company, the Investment Company's transfer and dividend
paying agent (the "Transfer Agent"), at Operations Department, P.O. Box 1591,
Tacoma, WA 98401.
TAXES
Each Fund intends to qualify for taxation as a "regulated investment company"
under the Internal Revenue Code (the "Code"). By distributing substantially all
of its net investment income and capital gains to shareholders and meeting
certain other requirements, a Fund will generally not be liable for federal
income or excise taxes. The Funds may be subject to nominal, if any, state and
local taxes.
For taxable shareholders: Dividends from net investment income and short-term
capital gains will be taxable as ordinary dividends whether paid in cash or
reinvested in additional shares. However, depending upon the state tax rules
pertaining to a shareholder, a portion of the dividends paid by the Diversified
Bond, Volatility Constrained Bond and Multistrategy Bond Funds attributable to
direct US Treasury and agency obligations may be exempt from state and local
taxes. Long-term capital gains distributions declared by the Investment
Company's Board are taxed as long-term gains regardless of the length of time a
shareholder has held such shares. Distributions paid in excess of a Fund's
earnings will be treated as a non-taxable return of capital. Dividends and
distributions may otherwise also be subject to state or local taxes.
For corporate investors, dividends from net investment income paid by the
Diversified Equity, Special Growth, Equity Income and Quantitative Equity Funds
will generally qualify in part for the corporate dividends-received deduction.
However, the portion of the dividends so qualified depends on the aggregate
qualifying dividend income received by such a Fund from domestic (US) sources.
Certain holding period and debt financing restrictions may apply to the
corporate investor seeking to claim the deduction.
The sale of shares of a Fund is a taxable event and may result in capital gain
or loss. A capital gain or loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Any loss incurred on sale or exchange of a Fund's
shares, held for six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
The International Securities, Diversified Bond, Volatility Constrained Bond and
Multistrategy Bond Funds will
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receive dividends and interest paid by non-US issuers which will frequently be
subject to withholding taxes by non-US governments. The Management Company
expects the International Securities Fund to invest more than 50% of its total
assets in non-US securities and to file specified elections with the Internal
Revenue Service which will permit its shareholders either to deduct (as an
itemized deduction in the case of an individual) such foreign taxes in computing
taxable income, or to use these withheld foreign taxes as credits against US
income taxes. The Fund's taxable shareholders must include their pro rata
portion of the taxes withheld on their gross income for federal income tax
purposes.
Shareholders of same Funds holding non-US holdings should also be aware that
for federal income tax purposes, foreign exchange losses realized by a Fund
are treated as ordinary losses. This treatment may have the effect of reducing
a Fund's income available for distribution to shareholders.
The Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
may acquire zero coupon securities issued with original issue discount. As the
holder of such a security, the Funds will have to include in taxable income a
portion of the original issue discount that accrues on the security for the
taxable year, even if the Funds receive no payment on the security during the
year. Because the Funds annually must distribute substantially all of their net
investment income, the Funds may be required in a particular year to distribute
as a dividend an amount that is greater than the total amount of cash the Funds
actually receive. Those distributions will be made from a Fund's cash assets
or from the proceeds of sales of portfolio securities, if necessary. The Funds
may realize capital gains or losses from those sales, which could further
increase or decrease the Funds' dividends and distributions paid to
shareholders.
Shareholders of the appropriate Funds will be notified after each calendar year
of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of
the prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of income which is a tax preference item
(if any) for alternative minimum tax purposes; of the International Securities
Fund's foreign taxes withheld; and of the percentages of the Diversified Bond,
Volatility Constrained Bond and Multistrategy Bond Funds' income attributable
to US government, Treasury and agency securities.
A Fund is required to withhold 31% of all taxable dividends, distributions and
redemption proceeds payable to any non-corporate shareholder which does not
provide the Fund with the shareholder's certified taxpayer identification
number or required certifications or which is subject to backup withholding.
Shareholders who are not US persons for purposes of federal income taxation
should consult with their financial or tax advisers regarding the applicability
of income, estate or other taxes (including income tax withholding) on their
investment in a Fund or on dividends and distributions received by them from a
Fund and the application of foreign tax laws.
Shareholders should consult their tax advisers with respect to the
applicability of any state and local intangible property or income taxes to
their shares of a Fund and distributions and redemption proceeds received from
a Fund.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.
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CALCULATION OF FUND PERFORMANCE
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during the
relevant time period, and includes all recurring fees that are charged to all
shareholder accounts. The average annual total returns for each of the Funds
are as follows:
<TABLE>
<CAPTION>
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5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1995 DECEMBER 31, 1995
DECEMBER 31, 1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) INCEPTION DATE
-------------------- -------------------- -------------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Diversified Equity 35.17% 16.22% 13.76% 15.06% 09/05/85
Special Growth 28.52 18.13 12.34 13.69 09/05/85
Equity Income 34.76 16.91 12.93 13.79 09/05/85
Quantitative Equity 37.69 17.31 -- 12.55 05/15/87
International Securities 10.20 9.95 13.33 14.36 09/05/85
Diversified Bond 17.76 9.01 8.90 9.37 09/05/85
Volatility Constrained Bond 9.89 6.06 7.04 7.10 09/05/85
Multistrategy Bond 17.92 -- -- 7.24 01/29/93
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</TABLE>
The Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
also may from time to time advertise their yields. Yield, which is based on
historical earnings and is not intended to indicate future performance, is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one month) period by the maximum offering price per
share on the last day of the month. This income is then annualized. That is,
the amount of income generated by the investment during that 30-day (or one
month) period is assumed to be generated each month over a 12-month period and
is shown as a percentage of the investment. For purposes of the yield
calculation, interest income is computed based on the yield to maturity of each
debt obligation and dividend income is computed based upon the stated dividend
rate of each security in a Fund's portfolio. The calculation includes all
recurring fees that are charged to all shareholder accounts. The 30-day yields
for the year ended December 31, 1995 for the Diversified Bond, Volatility
Constrained Bond and Multistrategy Bond Funds were, respectively, 5.96%, 5.94%
and 6.23%.
Each Fund may also advertise non-standardized performance information which is
for periods in addition to those required to be presented.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE.
The net asset value per share is calculated for each Fund on each business day
on which shares are offered or orders to redeem are tendered. For all Funds, a
business day is one on which the New York Stock Exchange is open for trading.
Net asset value per share is computed for a Fund by dividing the current value
of the Fund's assets, less its liabilities, by the number of shares of the Fund
outstanding, and rounding to the nearest cent. All Funds determine net asset
value as of the close of the New York Stock Exchange (currently 4:00 p.m.
Eastern time).
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VALUATION OF PORTFOLIO SECURITIES.
With the exceptions noted below, the Funds value portfolio securities at "fair
market value." This generally means that equity securities and fixed-income
securities listed and traded principally on any national securities exchange
are valued on the basis of the last sale price or, lacking any sale, at the
closing bid price, on the primary exchange on which the security is traded.
United States over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price, and futures contracts are
valued on the basis of last sale price.
Because many fixed-income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed-income securities therefore may be
valued using prices provided by a pricing service when such prices are believed
to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over the counter are valued on the basis of the mean of bid prices. In the
absence of a last sale or mean bid price, respectively, such securities may be
valued on the basis of prices provided by a pricing service if those prices are
believed to reflect the fair market value of such securities.
Money market instruments maturing within 60 days of the valuation date held by
Funds are valued on the basis of amortized cost, a method by which each
portfolio instrument is initially valued at cost, and thereafter a constant
accretion/amortization to maturity of any discount or premium is assumed. The
Funds utilize the amortized cost valuation method in accordance with Rule 2a-7
of the Investment Company Act of 1940, as amended (the "1940 Act"). Such money
market instruments are valued at "amortized cost" unless the Board determines
that amortized cost does not represent fair value. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Funds would
receive if they sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
Shares of the Funds are sold on each business day directly to Eligible
Investors at the net asset value next determined after an order is received in
proper form, and the order has been accepted. All purchases must be made in US
dollars. The Funds reserve the right to reject any purchase order.
ORDER PROCEDURES.
Orders by all investors (except for participants in the Three Day Settlement
Program described below) to purchase Investment Company Funds shares must be
received by the Transfer Agent, either by telephone, mail or entry into the
shareholder recordkeeping system on a day when shares of the Funds are offered
and orders in proper form accepted prior to the close of the New York Stock
Exchange (currently 4:00 p.m. Eastern time).
Payment Procedures: Payment for the purchase of Fund shares must be received
by the Funds' Custodian or Transfer Agent, depending on the method of payment,
on the day the order is accepted (except for participants in the Three Day
Settlement Program described below). There are several ways to pay for orders
received for the Funds:
Federal Funds Wire. Payment for orders may be made by wiring federal funds to
the Funds' Custodian, State Street Bank and Trust Company.
Automated Clearing House ("ACH"). Payment for orders may be made through the
ACH to the Funds' Custodian, State Street Bank and Trust Company. However,
funds transferred by ACH may or may not be converted into federal funds the
same day depending on the time the funds are received and the bank wiring the
funds. If the funds are not converted the same day, they will be converted the
next business day. Therefore, the order would be placed the next business day.
Check. Payment for orders may be made by check or other negotiable bank draft
payable to "Frank Russell Investment Company" and mailed to the Transfer Agent,
P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary, but
checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investments in the Funds will be
effected upon receipt of the check or draft by the Transfer Agent when the
check or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after
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the close of the New York Stock Exchange, the order will be effected on the
following business day.
IN-KIND EXCHANGE OF SECURITIES.
The Transfer Agent may, at its discretion, permit investors to purchase shares
through the exchange of securities they hold. Any securities exchanged must
meet the investment objective, policies and limitations of the particular Fund,
must have a readily ascertainable market value, must be liquid and must not be
subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled, which is usually within 15 days following the purchase by
exchange. A gain or loss for federal income tax purposes will generally be
realized by investors who are subject to federal taxation upon the exchange.
Investors interested in making an in-kind exchange are encouraged to consult
with their tax advisers.
The basis of the exchange will depend upon the relative net asset value of the
shares purchased and securities exchanged. Securities accepted by a Fund will
be valued in the same manner as the Fund values its assets. Any interest earned
on the securities following their delivery to the Transfer Agent and prior to
the exchange will be considered in valuing the securities. All interest,
dividends, subscription or other rights attached to the securities become the
property of the Fund, along with the securities.
THREE DAY SETTLEMENT PROGRAM.
The Investment Company will accept orders from financial institutions to
purchase shares of the Funds for settlement on the third business day following
the receipt of an order to be paid by federal wire if the investor has agreed
in writing to indemnify the Funds against any losses as a result of nonreceipt
of payment. For further information on this program, contact the Investment
Company.
THIRD PARTY TRANSACTIONS.
Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment adviser or
others, may be required to pay additional fees by such Intermediary. Investors
should contact such Financial Intermediary for information concerning what
additional fees, if any, may be charged.
EXCHANGE PRIVILEGE.
Shareholders may exchange shares of any Fund offered by this Prospectus for
shares of another Fund offered by this Prospectus on the basis of current net
asset value per share at the time of the exchange. Shares of a Fund offered by
this Prospectus may only be exchanged for shares of a Fund offered by the
Investment Company through another prospectus under certain conditions and only
in states where the exchange may legally be made. For additional information,
including a prospectus of other Investment Company Funds, contact the
Investment Company. Exchanges may be made (i) by telephone if the registrations
of the two accounts are identical; or (ii) in writing addressed to the
Investment Company.
An exchange is a redemption of the shares and is treated as a sale for income
tax purposes, and a short or long-term capital gain or loss may be realized.
The Fund shares to be acquired will be purchased when the proceeds from the
redemption become available (up to seven days from the receipt of the request).
Each investor is encouraged to talk with the investor's tax adviser.
REDEMPTION OF FUND SHARES
SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as
described below.
Payment will ordinarily be made in seven days. Generally, redemption proceeds
will be wire-transferred to the shareholder's account or to an alternate
account provided such request is given to the Transfer Agent in proper form, at
a domestic commercial bank which is a member of the Federal Reserve System.
Although the Funds currently do not charge such a fee, the Funds reserve the
right to charge a fee for the cost of wire-transferred redemptions of less than
$1,000. Payment for redemption requests of investments made by check may be
withheld for up to 15 days after the date of purchase to assure that checks in
payment for orders to purchase shares are collected by the Funds. Upon request,
redemption proceeds will be mailed to the shareholder's address of record or to
an alternate address provided such request is sent to the Transfer Agent in
proper form.
Request Procedures. Requests by all investors to redeem Investment Company
Fund shares must be received by
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<PAGE> 100
the Funds' Transfer Agent, either by telephone, mail, entry into the shareholder
recordkeeping system, or through the Systematic Withdrawal Payment Program on
the days requests to redeem are tendered prior to the close of the New York
Stock Exchange (currently 4:00 p.m. Eastern time).
Requests for redemption by telephone or entry into the shareholder
recordkeeping system must follow the procedures set forth in the Account
Registration and Investment Instruction Form, or alternate procedures may be
followed provided such requests are given to the Transfer Agent in proper form.
In the unexpected event telephone lines are unavailable, shareholders should
use the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. The redemption price
will be the net asset value next determined after receipt by the Management
Company of all required documents in good order. "Good order" means that the
request must include the following:
A. A letter of instruction or a stock assignment designating specifically
the number of shares or dollar amount to be redeemed, signed by all
owners of the shares in the exact names in which they appear on the
account; together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
B. Such other supporting legal documents, if required by applicable law,
in the case of estates, trusts, guardianships, custodianships,
corporations, and pension and profit sharing plans.
Systematic Withdrawal Payment. The Systematic Withdrawal Payment ("SWP")
program is an automated method for redeeming a predetermined dollar amount from
a Fund shareholder account to meet a standing request. The program can be used
to meet any request for periodic distributions of assets from Fund shareholder
accounts.
SWP Offering Date and Payment Procedures. SWP distributions occur once a month
and are paid by wire or check, according to the instructions provided on the
SWP form. If a client has more than one Fund from which a SWP is to be
received, the client will receive one wire or check for each SWP Fund. SWP
transactions are recorded on the twenty-fifth day of each month. If the
twenty-fifth day falls on a weekend or holiday, the transaction will be
recorded on the preceding business day. SWP payment dates are the first
business day after the trade date.
Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.
SWP Distribution by Wire. Federal Funds Wire payments will be sent to the
designated bank on the payment date.
SWP Distribution by Check. Checks will be sent by US Postal Service first
class mail, from Boston, Massachusetts to the requested address on the payment
date.
A Systematic Withdrawal Payment form must be completed and mailed to Frank
Russell Investment Management Company, Attention: Frank Russell Investment
Company, Operations Department, P.O. Box 1591, Tacoma, WA 98401-1591. The
Systematic Withdrawal Payment form must be received by Frank Russell Investment
Management Company five business days before the initial distribution date.
Redemption in Kind. A Fund may pay any portion of the redemption amount in
excess of $250,000 by a distribution in kind of securities from the Fund's
portfolio, in lieu of cash. Investors will incur brokerage charges on the sale
of these portfolio securities. The Funds reserve the right to suspend the right
of redemption or postpone the date of payment if any unlikely emergency
conditions, as specified in the 1940 Act or determined by the SEC, should
develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS.
Russell Fund Distributors, Inc., a wholly owned subsidiary of the Management
Company, is the principal Distributor for Investment Company shares. The
Distributor receives no compensation from the Investment Company for its
services.
State Street Bank and Trust Company ("State Street"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Funds.
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Coopers & Lybrand L.L.P., Boston, Massachusetts, are the Funds' independent
accountants. Shareholders will receive unaudited semiannual financial
statements and annual financial statements audited by Coopers & Lybrand L.L.P.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from the Management Company.
ORGANIZATION, CAPITALIZATION, AND VOTING.
The Investment Company was organized as a Maryland corporation on March 6,
1981, and commenced offering shares on October 15, 1981. On January 2, 1985,
the Investment Company reorganized by changing its domicile and legal status to
a Massachusetts business trust and now operates under an amended Master Trust
Agreement dated July 26, 1984. Frank Russell Company has the right to grant the
nonexclusive use of the name "Frank Russell" or any derivation thereof to any
other investment company or other business enterprise, and to withdraw from the
Investment Company the use of the name "Frank Russell."
The Investment Company issues a single class of shares divisible into an
unlimited number of funds, each of which is a separate trust under
Massachusetts law. Each fund share represents an equal proportionate interest
in that fund, has a par value of $.01 per share, and is entitled to such
dividends and distributions earned on the assets belonging to such fund as may
be declared by the Board of Trustees. Shares of a fund are fully paid and
nonassessable and have no preemptive or conversion rights.
Each Fund share has one vote; there are no cumulative voting rights. There is
no Annual Meeting of shareholders, but Special Meetings may be held. On any
matter which affects only a particular Fund, only shareholders of that Fund
vote unless otherwise required by the 1940 Act or the amended Master Trust
Agreement. The Trustees hold office for the life of the Investment Company. A
Trustee may resign or retire, and a Trustee may be removed at any time by, in
substance, a vote of two-thirds of the Investment Company shares. A vacancy in
the Board of Trustees shall be filled by the vote of a majority of the
remaining Trustees so long as, in substance, two-thirds of the Trustees have
been elected by shareholders.
MONEY MANAGER PROFILES
The money managers have no other affiliations with the Funds or with Frank
Russell Company. Each money manager has been in business for at least three
years, and is principally engaged in managing institutional investment
accounts. These managers may also serve as managers or advisers to other
Investment Company Funds, or to other clients of Frank Russell Company,
including its wholly owned subsidiary, Frank Russell Trust Company.
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000, Minneapolis,
MN 55402-4322, a limited partnership whose (i) general partner is a wholly
owned subsidiary of The Equitable Companies Incorporated ("The Equitable") and
(ii) majority unit holder is ACM, Inc., a wholly owned subsidiary of The
Equitable. As of March 1, 1995, 60.5% of The Equitable was owned by Axa, a
French insurance holding company.
BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
Columbus Circle Investors, Metro Center, One Station Place, 8th Floor, Stamford,
CT 06902, is a subsidiary Partnership of PIMCO Advisors L.P. ("Partnership").
PIMCO Partners, G.P. is the sole general partner of the Partnership. Pacific
Financial Asset Management Corporation indirectly holds a majority interest in
PIMCO Partners, G.P., with the remainder held indirectly by a group comprised of
PIMCO Managing Directors.
Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.
INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 300,
Atlanta, GA 30309, a corporation whose indirect parent is INVESCO, PLC, a
London-based financial services holding company.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606. Lincoln Capital Management, Inc. is a division of Lincoln
Capital Management Company, and is a registered investment adviser with
majority ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and
Ray Zemon.
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Suffolk Capital Management, Inc., 250 West 57th Street, Suite 420, New York, NY
10107. Suffolk Capital Management, Inc. is a registered investment adviser and
a wholly owned subsidiary of United Asset Management Company, a publicly traded
corporation.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116, is
a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.
Wellington Management Company, 75 State Street, Boston, MA 02109, is a private
Massachusetts general partnership, of which the following persons are managing
partners: Robert W. Doran, Duncan W. McFarland and John B. Neff.
SPECIAL GROWTH FUND
Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is 100%
owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048, an
investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state chartered
bank.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA 92121,
is a California limited partnership and a SEC registered investment adviser.
Its general partners are Robert J. Anslow, Jr. and Marina L. Marrelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, a wholly owned subsidiary of United Asset Management
Company, a publicly traded corporation.
Wellington Management Company, See: Diversified Equity Fund.
EQUITY INCOME FUND
Brandywine Asset Management, Inc., Three Christina Centre, Suite 1200, 201 N.
Walnut Street, Wilmington, DE 19801, is a corporation controlled by its
president, W. Anthony Hitschler and six other principals.
Equinox Capital Management, Inc., See: Diversified Equity Fund.
Trinity Investment Management Corporation, See: Diversified Equity Fund
QUANTITATIVE EQUITY FUND
BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
Franklin Portfolio Associates Trust, One Post Office Square, Suite 3660,
Boston, MA 02109, a Massachusetts business trust owned by Mellon Financial
Services Corporation, a holding company of Mellon Bank Corporation.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New York,
NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a publicly
held bank holding company.
INTERNATIONAL SECURITIES FUND
Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110, whose
majority ownership is held by the four senior partners: Jeremy Grantham,
Richard Mayo, Eyk De Mol Van Otterloo, and Kingsley Durant.
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Marathon Asset Management Limited, 115 Shaftesbury Ave., London, England WC2H
8AD, is a corporation 33.3% owned by each of the following: Jeremy Hosking,
William Arah and Neil Ostrer.
Oechsle International Advisors, One International Place, 44th Floor, Boston, MA
02110, is a limited partnership which is 100% controlled by its general
partners. The general partners are: S. Dewey Keesler, Stephen P. Langer, Walter
Oechsle, L. Sean Roche, Steven H. Schaefer and Tetsuo Shiozumi.
Rowe Price-Fleming International, Inc., 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R 7DR,
which is a joint venture of T. Rowe Price Associates, Inc., and The Fleming
Group, each of which owns 50% of the company. Ownership of The Fleming Group
holding is split equally between Copthall Overseas Limited, a subsidiary of
Robert Fleming Holdings, and Jardine Fleming International Holdings Limited, a
subsidiary of Jardine Fleming Holdings. Robert Fleming Holdings is a
London-based UK holding company with the majority of the shares distributed:
51% to public companies and 38% to the Fleming family. Jardine Fleming is a
Hong Kong-based holding company which is owned 50% by Robert Fleming Holdings
and 50% by Jardine Matheson & Co.,
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<PAGE> 103
the Hong Kong trading company, a wholly owned subsidiary of Jardine Matheson
Holdings Limited. The stock of T. Rowe Price Associates, Inc., is publicly
traded with a substantial percentage of such stock owned by the company's active
management.
DIVERSIFIED BOND FUND
Lincoln Capital Management Company, See: Diversified Equity Fund.
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisers L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO Managing Directors.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, whose
ownership is divided among seventeen directors, with no director having more
than a 25% ownership interest.
VOLATILITY CONSTRAINED BOND FUND
BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY 10154,
a wholly-owned indirect subsidiary of PNC Bank.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton HM
LX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.
MULTISTRATEGY BOND FUND
BEA Associates, 153 East 53rd Street, New York, NY 10022, is a general
partnership of Credit Suisse Capital Corporation ("CS Capital") and Basic
Appraisals, Inc. ("Basic"). CS Capital is an 80% partner, and is a wholly
owned subsidiary of Credit Suisse Investment Corporation, which is in turn a
wholly-owned subsidiary of Credit Suisse, a Swiss bank, which is in turn a
subsidiary of CS Holding, a Swiss corporation. No one person or entity
possesses a controlling interest in Basic, the 20% partner. BEA Associates is a
registered investment adviser.
Pacific Investment Management Company, See: Diversified Bond Fund.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
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<PAGE> 104
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUNDS OR
THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
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FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY
Alliance Capital Management L.P.
BZW Barclays Global Fund Advisors
Columbus Circle Investors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
Wellington Management Company
SPECIAL GROWTH
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company
EQUITY INCOME
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation
QUANTITATIVE EQUITY
BZW Barclays Global Fund Advisors
Franklin Portfolio Associates Trust
J.P. Morgan Investment Management, Inc.
INTERNATIONAL SECURITIES
Grantham, Mayo, Van Otterloo & Co.
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Oechsle International Advisers
Rowe Price-Fleming International, Inc.
DIVERSIFIED BOND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.
MULTISTRATEGY BOND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 998402
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, Pennsylvania 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001
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PROSPECTUS
[SPECIALTY FUNDS]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, WA 98402
Telephone (800) 972-0700
In Washington, (206) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series mutual
fund" with 23 different investment portfolios. This Prospectus describes and
offers shares of beneficial interest in the six investment portfolios listed
below (each, a "Fund," and collectively, the "Funds").
Frank Russell Investment Management Company (the "Management Company") operates
and administers all of the Funds which comprise the Investment Company, and
manages the portfolio of the U.S. Government Money Market Fund. The Management
Company is a wholly owned subsidiary of Frank Russell Company, which researches
and recommends to the Management Company, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each of the
individual Funds. There is no sales charge for investing in the Funds.
Real Estate Securities Fund Limited Volatility Tax Free Fund
Emerging Markets Fund U.S. Government Money Market Fund
Equity T Fund Tax Free Money Market Fund
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT OBLIGATIONS
OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED; AND MAY
FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE OR LESS
THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUNDS ("MONEY MARKET
FUNDS") WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Frank Russell Investment Company is organized as a Massachusetts business trust
under an amended Master Trust Agreement dated July 26, 1984. The Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment Funds. The Investment Company is
a diversified open-end management investment company, commonly known as a
"mutual fund."
This Prospectus sets forth concisely information about the Investment Company
and six of its Funds that a prospective investor ought to know before
investing. The Investment Company has filed a Statement of Additional
Information dated May 1, 1996 with the Securities and Exchange Commission. The
Statement of Additional Information is incorporated herein by reference and may
be obtained without charge by writing to the Secretary, Frank Russell
Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.
PROSPECTUS DATED MAY 1, 1996
<PAGE> 107
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
REAL ESTATE SECURITIES FUND -- A high level of total return generated through
above-average current income, while maintaining the potential for capital
appreciation by investing primarily in the equity securities of companies in
the real estate industry.
EMERGING MARKETS FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from developed market international portfolios, by investing primarily
in equity securities.
EQUITY T FUND -- Capital growth on an after-tax basis by investing
primarily in equity securities.
LIMITED VOLATILITY TAX FREE FUND -- A high level of federal tax-exempt income
consistent with the preservation of capital by investing primarily in municipal
obligations maturing in seven years or less from the date of acquisition.
U.S. GOVERNMENT MONEY MARKET FUND -- Maximum current income to the extent
consistent with the preservation of capital and liquidity, and the maintenance
of a stable $1.00 per share net asset value by investing exclusively in US
government obligations.
TAX FREE MONEY MARKET FUND -- Maximum current income exempt from federal income
tax consistent with the preservation of capital and liquidity, and the
maintenance of a stable $1.00 per share net asset value by investing in
short-term municipal obligations.
This Prospectus describes and offers shares of the Funds. The Real Estate
Securities, Limited Volatility Tax Free, U.S. Government Money Market and Tax
Free Money Market Funds are each an "Internal Fee Fund." The Emerging Markets
and Equity T Funds are each an "External Fee Fund." The principal
distinction between the External and the Internal Fee Funds is that a
shareholder of an External Fee Fund may pay a quarterly shareholder investment
services fee directly to the Management Company for shareholder services. The
shareholder fee is computed on the amount the shareholder has invested in an
External Fee Fund. No shareholder of the Internal Fee Funds pays such fees
and, currently, no shareholder of the Emerging Markets and Equity T
Funds pays any such fees, although such fees may be required in the future.
The Investment Company's Funds had aggregate net assets of $8.1 billion on
April 4, 1996. The net assets of these Funds on April 4, 1996 were
as follows:
<TABLE>
<S> <C> <C> <C>
Real Estate Securities $308,943,671 U.S. Government Money Market $172,034,337
Emerging Markets $211,851,585 Tax Free Money Market $ 89,773,931
Limited Volatility Tax Free $ 61,186,774
</TABLE>
The Equity T Fund was not offered for public investment prior to the
date of this Prospectus.
2
<PAGE> 108
HIGHLIGHTS AND TABLE OF CONTENTS
ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment
over time. PAGE 5.
FINANCIAL HIGHLIGHTS summarizes significant financial information concerning
the Funds for the period stated herein. The Equity T Fund was not
offered for public investment prior to the date of this Prospectus. PAGE __.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
Frank Russell Company's "multi-style, multi-manager diversification" techniques
and money manager evaluation services on an economical and efficient basis.
PAGE __.
FRANK RUSSELL COMPANY--CONSULTANT TO THE FUNDS has been primarily engaged since
1969 in providing asset management consulting services to large corporate
employee benefit funds. Major components of its consulting services are (i)
quantitative and qualitative research and evaluation aimed at identifying the
most appropriate investment management firms to invest large pools of assets in
accord with specific investment objectives and styles; and (ii) the development
of strategies for investing assets using "multi-style, multi-manager
diversification." PAGE __.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing large
pools of assets by dividing the assets into segments to be invested using
different investment styles, and selecting money managers for each segment
based upon their expertise in that style of investment. PAGE __.
ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity with investment
authority, and which have entered into an Asset Management Services Agreement
with the Management Company; and institutions or individuals who have acquired
shares through such institutions. PAGE __.
GENERAL MANAGEMENT OF THE FUNDS is provided by the Management Company, which
employs the officers and staff required to manage and administer the Funds on a
day-to-day basis. Frank Russell Company provides to the Funds and the
Management Company comprehensive consulting and money manager evaluation
services. PAGE __.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee
to the Management Company, its expenses and its portion of the general expenses
of the Investment Company. The Management Company, as agent to the Fund, pays
from its fees, the investment advisory fees of the Money Managers of the Fund.
The remainder of the fee is retained by the Management Company, for conducting
the Fund's general operations and for providing investment supervision for the
Fund. Each Eligible Investor may pay to the Management Company directly a fee
for other services provided to that Eligible Investor. PAGE __.
THE MONEY MANAGERS are evaluated and recommended by Frank Russell Company. The
money managers have complete discretion to purchase and sell portfolio
securities for their segment of a Fund consistent with the Fund's investment
objectives, policies and restrictions, and the specific strategies developed by
Frank Russell Company and the Management Company. PAGE __.
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS apply to each Fund.
Those objectives, restrictions, and policies designated "fundamental" may not be
changed without the approval of a majority of the Fund's shareholders. Risks
associated with certain Fund investment policies, such as market volatility
risk, political risk, and credit risk, are discussed in the context of policies
giving rise to such risks. PAGE __.
PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains, except in the case of the
Limited Volatility Tax Free Fund. In addition, the Equity T Fund,
which seeks to minimize the impact of taxes on its shareholders, attempts to
limit short-term capital gains and to defer the realization of long-term
capital gains. PAGE __.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Daily, by U.S.
Government Money Market and Tax Free Money Market Funds; Monthly, by Limited
Volatility Tax Free Fund; Quarterly, by Real Estate Securities Fund; and
Annually, by Emerging Markets and Equity T Funds. All Funds declare
at least annually any distributions from net realized capital gains. PAGE __.
3
<PAGE> 109
INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of the
Funds other than the Limited Volatility Tax Free and Tax Free Money Market
Funds will be subject to federal taxes on dividends. Taxable shareholders of
the Limited Volatility Tax Free and Tax Free Money Market Funds should
ordinarily not be required to pay federal tax on dividends. Taxable
shareholders of all Funds will be required to pay federal taxes on capital
gains distributions and may also be subject to state or local taxes. PAGE __.
FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE __.
VALUATION OF FUND SHARES occurs each business day (twice a day for the U.S.
Government Money Market and Tax Free Money Market Funds). The value of a share
purchased or redeemed is based upon the next computed current market value of
the assets, less liabilities, of each Fund. The U.S. Government Money Market
and Tax Free Money Market Funds utilize amortized cost pricing procedures
designed to maintain a stable $1.00 per share net asset value. PAGE __.
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE __.
REDEMPTION OF FUND SHARES may be requested on any business day. With the
exception of the Equity T Fund, there is no redemption charge assessed
by the Funds, and the redemption price is determined by the net asset value
next computed after receipt of the redemption request. The Equity T
Fund charges a redemption fee of 1%, which is retained by the Fund as a
reduction of the amount payable upon redemption. The Funds reserve the right to
redeem in kind that portion of a redemption request which is in excess of
$250,000. PAGE ___.
ADDITIONAL INFORMATION is also included in this Prospectus concerning:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE __.
4
<PAGE> 110
ANNUAL FUND OPERATING EXPENSES OF THE REAL ESTATE SECURITIES FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees . . . . . . . . . . . . . . . . . . . . .04%
Transfer Agent Fees . . . . . . . . . . . . . . . . . . .12
Other Fees . . . . . . . . . . . . . . . . . . . . . . .03
---
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . . . .19
----
Total Fund Operating Expenses + . . . . . . . . . . . . . . . . . . . 1.04%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . $11 $33 $57 $127
=== === === ====
</TABLE>
- ---------------
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
5
<PAGE> 111
ANNUAL FUND OPERATING EXPENSES OF THE EMERGING MARKETS FUND*
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (After Fee Waiver)(1) . . . . . . . . . . . . . . . . 1.11%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees . . . . . . . . . . . . . . . . . . . . .56%
Transfer Agent Fees . . . . . . . . . . . . . . . . . .16
Other Fees . . . . . . . . . . . . . . . . . . . . . . .12
---
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . . .84
----
Total Fund Operating Expenses (After Fee Waiver)(1) + . . . . . . . . 1.95%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . . $20 $61 $105 $227
=== === ==== ====
</TABLE>
- ---------------
(1) Effective May 1, 1996, the Manager has determined to discontinue its
agreement to reimburse all expenses of the Fund that exceed the annual
rate of 2.00% of average daily net assets. Also effective May 1,
1996, the Manager has voluntarily agreed to waive a portion of its
1.20% management fee, up to the full amount of that fee, equal to the
amount by which the Fund's total operating expenses exceed 1.95% of
the Fund's average daily net assets on an annual basis. The gross
annual total operating expenses absent the waiver would be 2.04% of
average net assets. This waiver is intended to be in effect for the
current year, but may be revised or eliminated at any time without
notice to shareholders.
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Funds. Currently, the Manager does not intend to
impose a shareholder investment services fee with respect to the
Emerging Markets Fund. In addition, a shareholder may pay additional
fees, expressed as fixed dollar amounts for the other services or
reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for
fees paid directly by an investor to the Management Company.
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
6
<PAGE> 112
ANNUAL FUND OPERATING EXPENSES OF THE EQUITY T FUND*
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . 1%
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (After Fee Waiver)(1) . . . . . . . . . . . . . . .66%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees(1) . . . . . . . . . . . . . . . . . .09%
Transfer Agent Fees . . . . . . . . . . . . . . . . .12
Other Fees . . . . . . . . . . . . . . . . . . . . .13
---
Total Other Expenses(2) . . . . . . . . . . . . . . . . . . . .34
----
Total Fund Operating Expenses (After Fee Waivers)(1) + . . . . . . 1.00%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . . $ 21 $ 43
====== =======
You would pay the following expenses on the same investment, assuming
no redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 $ 32
====== =======
</TABLE>
- ---------------
* Each shareholder or the financial intermediary through which the
shareholder purchases shares of the Investment Company enters into a
written Asset Management Services Agreement with the Management
Company, and agrees to pay an annual shareholder investment services
fee calculated as a specified percentage of the shareholder's average
net assets in the Funds. Currently, the Manager does not intend to
impose a shareholder investment services fee with respect to the
Fund. In addition, a shareholder may pay additional fees, expressed
as fixed dollar amounts for the other services or reports provided by
the Management Company to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Management Company.
(1) The Manager has voluntarily agreed to waive a portion of its 0.75%
management fee, up to the full amount of that fee, equal to the amount
by which the Fund's total operating expenses exceed 1.00% of the
Fund's average daily net assets on an annual basis. Additionally, the
Custodian has voluntarily agreed to waive a portion of its fees for
the first three months after the Fund becomes operational. The gross
annual Management and Custody Fees before waivers would be 0.75% and
0.10% of average daily net assets, respectively. The gross annual
total operating expenses absent the waivers would be 1.10% of average
daily net assets. The management waiver is intended to be in effect
for the current year, but may be revised or eliminated at any time
without notice to shareholders.
(2) The ratio for "other expenses" is based on estimated amounts with
expected annual average net assets of $100 million.
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
7
<PAGE> 113
ANNUAL FUND OPERATING EXPENSES OF THE LIMITED VOLATILITY TAX FREE FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . .50%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees . . . . . . . . . . . . . . . . . . . . 09%
Transfer Agent Fees . . . . . . . . . . . . . . . . . . 06
Other Fees . . . . . . . . . . . . . . . . . . . . . . 09
--
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . . .24
---
Total Fund Operating Expenses + . . . . . . . . . . . . . . . . . . . .74%
===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . . $ 8 $ 24 $ 41 $ 92
====== ======= ======= ========
</TABLE>
- ---------------
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
8
<PAGE> 114
ANNUAL FUND OPERATING EXPENSES OF THE U.S. GOVERNMENT MONEY MARKET FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (After Fee Waiver)(1) . . . . . . . . . . . . . . . . . .00%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . .03%
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . .15
Other Fees . . . . . . . . . . . . . . . . . . . . . . . . .08
---
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . . .26
----
Total Fund Operating Expenses (After Fee Waiver)(1) + . . . . . . . . .26%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . . $ 3 $ 8 $ 15 $ 33
====== ======= ====== ========
</TABLE>
- ---------------
(1) The Management Company has voluntarily agreed to waive the full
amount of its .25% management fee. The total operating expenses of
the Fund absent the fee waiver would be .51% of average daily net
assets on an annual basis. This waiver may be revised or eliminated
at any time without notice to Shareholders.
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
9
<PAGE> 115
ANNUAL FUND OPERATING EXPENSES OF THE TAX FREE MONEY MARKET FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The Examples provided in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses:
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . .05%
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . .07
Other Fees . . . . . . . . . . . . . . . . . . . . . . . . .11
---
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . . . .23
---
Total Fund Operating Expenses + . . . . . . . . . . . . . . . . . . .48%
===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period . . . . $ 5 $ 15 $ 27 $ 60
====== ======= ======= ========
</TABLE>
- ---------------
+ Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for
information concerning what additional fees, if any, will be charged.
10
<PAGE> 116
FINANCIAL HIGHLIGHTS OF THE REAL ESTATE SECURITIES FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year or period ended December 31, and
other performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989++
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . $22.53 $22.76 $21.50 $19.33 $14.99 $19.31 $20.00
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . 1.32 1.25 1.05 1.08 1.11 1.30 .42
Net realized and unrealized gain (loss) on investments . . . . 1.03 .40 2.68 2.16 4.36 (4.30) (.73)
------ ------ ------ ------ ------ ------ ------
Total From Investment Operations . . . . . . . . . . . . . . . 2.35 1.65 3.73 3.24 5.47 (3.00) (.31)
------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . (1.35) (1.23) (1.04) (1.07) (1.13) (1.32) (.38)
Net realized gain on investments . . . . . . . . . . . . . . . -- (.45) (1.43) -- -- -- --
In excess of net realized gain on investments . . . . . . . . . -- (.20) -- -- -- -- --
Tax return of capital . . . . . . . . . . . . . . . . . . . . . (.02) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total Distributions . . . . . . . . . . . . . . . . . . . . . .
(1.37) (1.88) (2.47) (1.07) (1.13) (1.32) (.38)
------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . $23.51 $22.53 $22.76 $21.50 $19.33 $14.99 $19.31
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(a) . . . . . . . . . . . . . . . . . . . . . . . 10.87 7.24 17.42 17.29 37.08 (15.92) (1.57)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets(b) . . . . . . . 1.04 1.05 1.11 1.20 1.26 .39 --
Operating expenses, gross, to average net assets(b) . . . . . . 1.04 1.05 1.11 1.20 1.31 1.60 .32
Net investment income to average net assets(b) . . . . . . . . 6.10 5.65 4.52 5.60 6.50 8.94 6.90
Portfolio turnover(b) . . . . . . . . . . . . . . . . . . . . . 23.49 45.84 58.38 19.72 13.28 12.11 8.74
Net assets, end of year ($000 omitted) . . . . . . . . . . . . 290,990 209,208 145,167 75,902 42,771 20,845 7,699
Per share amount of fees waived ($ omitted) . . . . . . . . . . -- -- -- -- -- .0491 .0394
Per share amount of fees reimbursed ($ omitted) . . . . . . . . -- -- -- -- .0076 .1155 .1327
</TABLE>
- ---------------
++ For the period July 28, 1989 (commencement of operations) to December 31,
1989.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1989 are annualized.
11
<PAGE> 117
FINANCIAL HIGHLIGHTS OF THE EMERGING MARKETS FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year or period ended December 31, and
other performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1995 1994 1993++
--------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . $12.25 $13.90 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .11 .15 .07
Net realized and unrealized gain (loss) on investments . . . . . . (1.12) (1.24) 4.09
------ ------ ------
Total From Investment Operations . . . . . . . . . . . . . . . . . (1.01) (1.09) 4.16
------ ------ ------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . (.03) (.10) (.07)
In excess of net investment income . . . . . . . . . . . . . . . . (.02) (.10) (.01)
Net realized gain on investments . . . . . . . . . . . . . . . . . -- (.31) (.18)
In excess of net realized gain on investments . . . . . . . . . . . (.03) (.05) --
------ ------ ------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.56) (.26)
------ ------ ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . $11.16 $12.25 $13.90
====== ====== ======
TOTAL RETURN (%)(a)(c) . . . . . . . . . . . . . . . . . . . . . . . (8.21) (5.83) 41.83
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets(b)(c) . . . . . . . 1.75 .80 .80
Operating expenses, gross, to average net assets(b)(c) . . . . . . 1.80 .83 1.60
Net investment income to average net assets(b)(c) . . . . . . . . . .88 1.10 1.33
Portfolio turnover(b) . . . . . . . . . . . . . . . . . . . . . . . 71.16 57.47 89.99
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . . 172,673 127,271 65,457
Per share amount of fees waived ($ omitted) . . . . . . . . . . . . .0022 .0044 .0016
Per share amount of fees reimbursed ($ omitted) . . . . . . . . . . .0032 .0017 .0420
</TABLE>
- ---------------
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating
expenses, and net investment income do not include any management fees
paid to the Manager or money managers. For periods thereafter, they are
reported net of investment management fees but gross of any investment
services fees. Management fees and investment services fees reduce
performance; for example, an investment services fee of 0.2% of average
managed assets will reduce a 10% return to 9.8%.
12
<PAGE> 118
FINANCIAL HIGHLIGHTS OF THE LIMITED VOLATILITY TAX FREE FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year or period ended December 31, and
other performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
LIMITED VOLATILITY TAX FREE FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR . . . . . . . . $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03 $20.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income . . . . . . .81 .86 .94 1.01 1.17 1.25 1.21 1.15 1.06 .99
Net realized and unrealized
gain (loss) on investments . . .77 (.97) .42 .18 .35 (.03) .17 (.10) (.48) .85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations . . . . . . . . . . 1.58 (.11) 1.36 1.19 1.52 1.22 1.38 1.05 .58 1.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income . . . . . (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15) (.90)
In excess of net investment
income . . . . . . . . . . . . -- -- (.00) -- -- -- -- -- -- --
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Total Distributions . . . . . . (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15) (.90)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR . . . . . . . . . . . $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . . . . . . 7.81 (0.54) 6.58 5.85 7.64 6.12 6.95 5.23 2.84 9.32
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average net assets . . . . . . .74 .72 .75 .80 .84 .86 .74 .65 .63 .51
Operating expenses, gross, to
average net assets . . . . . . .74 .72 .75 .80 .84 .86 .74 .65 .63 .78
Net investment income to
average net assets . . . . . . 3.91 4.14 4.40 4.89 5.68 6.06 5.64 5.50 5.20 5.22
Portfolio turnover(a) . . . . . 73.91 71.71 24.05 18.21 129.12 99.00 89.93 67.24 75.73 91.19
Net assets, end of year
($000 omitted) . . . . . . . . . 63,838 48,975 51,211 38,399 26,173 23,553 25,657 38,151 52,348 46,942
Per share amount of fees
reimbursed ($ omitted) . . . . . -- -- -- -- -- -- -- -- -- .0550
</TABLE>
- ---------------
(a) Beginning in 1992, variable rate daily demand securities were excluded
from the turnover calculation.
13
<PAGE> 119
FINANCIAL HIGHLIGHTS OF THE U.S. GOVERNMENT MONEY MARKET FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment
Company's independent accountants. The table includes selected data for a
share outstanding throughout each year or period ended December 31, and
other performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
U.S. GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR . . . . . . . $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income . . . . .0580 .0380 .0284 .0347 .0573 .0773 .0861 .0693 .0601 .0660
------- -------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income . . . . (.0580) (.0380) (.0284) (.0347) (.0573) (.0773) (.0861) (.0693) (.0601) (.0660)
------- -------- ------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE,
END OF YEAR . . . . . . . . . $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a) . . . . . . . 5.98 3.87 2.88 3.53 5.90 8.04 8.98 7.15 6.19 6.85
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average net assets . . . . . .32 .57 .49 .41 .38 .41 .42 .33 .31 .32
Operating expenses, gross, to
average net assets . . . . . .51 .57 .49 .41 .38 .41 .42 .33 .31 .32
Net investment income to
average daily net assets . . 5.82 3.91 2.85 3.47 5.74 7.69 8.69 6.94 6.01 6.50
Net assets, end of year
($000 omitted) . . . . . . . . 149,941 112,077 95,410 153,976 182,747 191,623 108,073 131,333 160,921 128,227
Per share amount of fees
waived ($ omitted) . . . . . . .0019 -- -- -- -- -- -- -- -- --
</TABLE>
14
<PAGE> 120
FINANCIAL HIGHLIGHTS OF THE TAX FREE MONEY MARKET FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand, L.L.P., the Investment Company's
independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The table
appears in the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand, L.L.P. in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Investment Company.
TAX FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987++
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... .0370 .0279 .0251 .0304 .0473 .0582 .0623 .0508 .0318
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.................... (.0370) (.0279) (.0251) (.0304) (.0473) (.0582) (.0623) (.0508) (.0318)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)........................ 3.76 2.83 2.55 3.09 4.84 5.99 6.42 5.24 3.18
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
net assets(b)......................... .48 .40 .43 .45 .45 .45 .45 .43 .22
Operating expenses, gross, to average
net assets(b)......................... .48 .40 .43 .45 .46 .52 .61 .50 .45
Net investment income to
average daily net assets(b)........... 3.69 2.84 2.52 3.03 4.73 5.82 6.28 5.36 4.83
Net assets, end of year ($000 omitted).. 78,000 100,819 68,154 73,203 61,288 59,892 30,873 39,165 22,380
Per share amount of fees waived
($ omitted)............................. -- -- -- -- -- -- -- -- .0008
Per share amount of fees reimbursed
($ omitted)............................. -- -- -- -- .0001 .0007 .0016 .0007 .0015
</TABLE>
- ---------------
++ For the period May 8, 1987 (commencement of operations) to December 31,
1987.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1987 are annualized.
15
<PAGE> 121
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use Frank Russell Company's "multi-style, multi-manager
diversification" method of investment, and to obtain Frank Russell Company's
money manager evaluation services, on a pooled and cost-effective basis.
FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS
Frank Russell Company, founded in 1936, has been providing comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. The
Company and its affiliates have offices in Tacoma, New York, Toronto, London,
Zurich, Paris, Sydney, Auckland and Tokyo, and have approximately 1,100
associates.
Three functions are at the core of Frank Russell Company's consulting service:
Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.
Asset Allocation: Allocating a client's assets among different asset classes --
such as common stocks, fixed-income securities, international securities,
temporary cash investments and real estate -- in the manner most likely to
achieve the client's objectives.
Money Manager Research: Evaluating and recommending professional investment
advisory and management organizations to make specific portfolio investments for
each asset class in accord with the specified objectives, investment styles and
strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above- average total return
results, either on an absolute or relative basis, over extended periods of time.
For example, there are periods of time when equity securities outperform
fixed-income securities, and vice versa. Similarly, there are periods when
securities selected for particular characteristics or using particular
investment styles outperform other types of securities. For example, there are
periods of time when equity securities with growth characteristics outperform
equities with income characteristics, and vice versa. While these performance
cycles tend to repeat themselves, they do so with no regularity. The blending of
asset classes and investment styles on a complementary basis can obtain more
consistent returns over longer time periods with a reduction of risk
(volatility), although a particular asset class or investment style -- or a
particular Fund investing in one asset class or using a particular style -- may
not achieve above-average performance at any given point in the market.
Similarly, Frank Russell Company believes financial markets generally are
efficient, and few money managers have shown the ability to time the major highs
and lows in the securities markets with any high degree of consistency. However,
some money managers have shown a consistent ability to achieve superior results
within selected asset classes and styles and have demonstrated expertise in
particular areas. Thus, by combining a mix of investment styles within each
asset class and then selecting money managers for their ability to invest in a
particular style, the investor may seek to achieve increased returns.
Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By pooling
the assets of institutions and individuals with smaller to medium-sized accounts
in a series of Funds with different objectives and policies, Frank Russell
Company believes that it is able to provide its multi-style, multi-manager
diversification techniques and money manager evaluation services to Eligible
Investors on a basis which is efficient and cost effective for the investor and
Frank Russell Company.
16
<PAGE> 122
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors which invest for their own
account or in a fiduciary or agency capacity with investment authority and which
have entered into Asset Management Services Agreements (collectively, the
"Agreements," and each, an "Agreement") with the Management Company, and
institutions or individuals who have acquired shares through such institutions.
There is no specified minimum amount which must be invested. Institutions which
may have a particular interest in the Funds include:
- Bank trust departments managing discretionary institutional or
personal trust accounts
- Registered investment advisors
- Endowment funds and charitable foundations
- Employee welfare plans
- Broker-Dealers
- Pension or profit sharing plans
- Insurance companies
The Agreement provides, in general, for the officers and staff of the Management
Company, using the facilities and resources of Frank Russell Company, to assist
the client to define its investment objectives, desired returns and tolerance
for risk, and to develop a plan for the allocation of assets among different
asset classes. Once these decisions have been made by a client, the client's
assets are then invested in one or more of the Funds. A client may change the
allocation of its assets among the Funds, or withdraw some or all of its assets
from the Funds at any time by redeeming Fund shares.
Shares of the Funds generally are not offered or "retailed" to individual
investors, although the Management Company may enter into Agreements with
individual investors. Bank trust departments, registered investment advisers,
broker-dealers and other eligible investors ("Financial Intermediaries") which
have entered into Agreements with the Management Company may acquire shares of
the Funds for the benefit of individual customers for which they exercise
discretionary investment authority. The Management Company provides
objective-setting and asset-allocation assistance to such Financial
Intermediaries, which in turn provide the objective- setting and
asset-allocation services to their customers. These Financial Intermediaries
receive no compensation from the Management Company or the Funds; they may
charge their customers a fee for providing these and possibly other trust or
investment- related services. A shareholder may pay a fixed dollar fee to the
Management Company for other services or reports provided by the Management
Company to the shareholder.
In the case of the Emerging Markets and Equity T Funds, both of which
are External Fee Funds, the Agreement sets forth the shareholder investment
services fees to be paid to the Management Company and is ordinarily expressed
as a percentage of assets invested in the Funds. The shareholder investment
services fee may include a fixed-dollar fee for certain specified services. The
shareholder investment services fee is agreed upon by the client and the
Management Company and is at a rate which reflects the amount of assets expected
to be invested in the Funds, the nature and extent of individualized services to
be provided by the Management Company to the client with respect to such assets,
and other factors.
Either the client or the Management Company may terminate the Agreement upon
written notice as provided in the Agreement. The Management Company does not
expect to exercise its right to terminate the Agreement unless a client does not
(i) promptly pay fees due to the Management Company; or (ii) invest sufficient
assets in the Funds to compensate the Management Company for providing services
to the client with respect to assets invested in the Funds. Upon termination of
an Agreement by the client or the Management Company, the Management Company
will no longer provide asset-allocation, objective-setting or other services.
GENERAL MANAGEMENT OF THE FUNDS
The Investment Company's Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with the Management Company, Frank Russell Company and the
money managers. The Investment Company's officers, all of whom are employed by
and are officers of the Management Company or its affiliates, are responsible
for the day-to-day management and administration of the Funds' operations. The
money managers are responsible for selection of individual portfolio securities
for the assets assigned to them.
17
<PAGE> 123
The Management Company: (i) provides or oversees the provision of all general
management and administration, investment advisory and portfolio management, and
distribution services for the Funds; (ii) provides the Funds with office space,
equipment and personnel necessary to operate and administer the Funds' business,
and to supervise the provision of services by third parties such as the money
managers and Custodian; (iii) develops the investment programs, selects money
managers, allocates assets among money managers and monitors the money managers'
investment programs and results; and (iv) provides the Funds with transfer
agent, dividend disbursing and shareholder recordkeeping services. The
Management Company bears the expenses it incurs in providing these services
(other than transfer agent and shareholder recordkeeping) as well as the costs
of preparing and distributing explanatory materials concerning the Funds.
The responsibility of overseeing the money managers rests upon the officers and
employees of the Management Company. These officers and employees, including
their business experience for the past five years, are identified below:
- Randall P. Lert, who has been Chief Investment Officer, Frank
Russell Investment Management Company since 1989.
- Loran M. Kaufman, who has been Director - Fund Development,
Frank Russell Investment Management Company since 1990. From
1986 to 1990, Ms. Kaufman was employed as a Senior Research
Analyst with the Frank Russell Company.
- Jean E. Carter, who has been a Senior Investment Officer of
Frank Russell Investment Management Company since 1994. From
1990 to 1994, Ms. Carter was a Client Executive in the
Investment Group of the Frank Russell Company.
- James M. Imhof, Investment Officer, Frank Russell Investment
Management Company, who has managed the day to day management
of Frank Russell Investment Management Company Funds and
ongoing analysis and monitoring of Fund money managers since
1989.
- Peter F. Apanovitch, who has been the Manager of Short-Term
Investment Funds for Frank Russell Investment Management
Company and Frank Russell Trust Company since 1991.
- James A. Jornlin, who has been a Senior Investment Officer of
Frank Russell Investment Management Company since April 1995.
From 1991 to March 1995, Mr. Jornlin was employed as a Senior
Research Analyst with Frank Russell Company.
- Randal C. Burge, who has been a Senior Investment Officer of
Frank Russell Investment Management Company since June 1995.
Mr. Burge was a Senior Investment Officer of the Frank
Russell Trust Company from 1990 to 1995. Mr. Burge was a
Client Executive for Frank Russell Company Australia.
- Madelyn Smith, who has been a Senior Investment Strategist for
the Frank Russell Investment Management Company since January
1996. From 1993 to 1995, Ms. Smith was a member of a research
investment strategist for Frank Russell Company. From 1987 to
1993, Ms. Smith was director of Investment Equity Manager
Research of Frank Russell Company.
- Dennis J. Trittin, who has been a Senior Portfolio Manager of
Frank Russell Investment Management Company since January
1996. From 1988 to 1996, Mr. Trittin was director of US
Equity Manager Research Department with Frank Russell Company.
- C. Nola Williams, who has been a Senior Investment Strategist
of Frank Russell Investment Management Company since January
1996. From 1994 to 1995, Ms. Williams became a member of the
Alpha Strategy Group. From 1988 to 1994, Ms. Williams was
18
<PAGE> 124
Senior Research Analyst with Frank Russell Company.
Frank Russell Company provides to the Funds and the Management Company the asset
management consulting services -- including the objective-setting and
asset-allocation technology, and the money manager research and evaluation
assistance -- which Frank Russell Company provides to its other consulting
clients. Frank Russell Company receives no compensation from the Funds or the
Management Company for its consulting services. Frank Russell Company and the
Management Company as affiliated companies may establish certain intercompany
cost allocations for budgeting and product profitability purposes which may
reflect Frank Russell Company's consulting services supplied to the Management
Company.
George F. Russell, Jr., Chairman of the Board of Trustees of the Investment
Company, is the Chairman of the Board and controlling shareholder of Frank
Russell Company. The Management Company is a wholly owned subsidiary of Frank
Russell Company.
The Investment Company has received an exemptive order from the U.S. Securities
and Exchange Commission (the "SEC") which permits the Investment Company, with
the approval of its Board of Trustees, to engage and terminate money managers
without a shareholder vote and to disclose, on an aggregate basis, the fees paid
to the money managers of each Investment Company Fund. The Investment Company
received shareholder approval to operate under the order at a Special meeting of
Shareholders on January 22, 1996.
For its services, the Management Company receives a management fee from each
Fund. From this fee the Management Company, acting as agent for the Investment
Company, is responsible for paying the money managers for their investment
selection services. The remainder is retained by the Management Company as
compensation for the services and to pay expenses as described above. The
annual rate of the management fees, payable to the Management Company monthly on
a pro rata basis, are the following percentages of the average daily net assets
of each Fund: Real Estate Securities Fund, 0.85%; Emerging Markets Fund, 1.20%;
Equity T Fund, 0.75%; Limited Volatility Tax Free Fund, 0.50%; U.S.
Government Money Market Fund, 0.25%; and Tax Free Money Market Fund, 0.25%. The
fees for the Real Estate Securities and Emerging Markets Funds may be higher
than fees charged by some mutual funds with similar objectives which use only a
single money manager.
The Management Company has voluntarily agreed to waive all or a portion of its
management fee with respect to certain funds. In addition to these "voluntary
limits," the Management Company has agreed to reimburse each Fund the amount, if
any, by which a Fund's expenses exceed state law expense limitations.
Currently, California has an expense limitation of 2.5% of a Fund's first $30
million in average net assets, 2.0% of the next $70 million in average net
assets, and 1.5% of the remaining average net assets for any fiscal year as
determined under the state's regulations. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or rescinded
at any time.
Frank Russell Company provides its Portfolio Verification System ("PVS") to the
Real Estate Securities and the Emerging Markets Funds pursuant to a written
Service Agreement. The PVS computerized data base system records detailed
transaction data for the Funds necessary to prepare various financial and
Internal Revenue Service accounting reports. For these services, the Real
Estate Securities Fund pays the following annual fees: base fee, $1,500;
transaction charge, $0.10; and holding charge, $1.80. Annual minimum charges
for the Real Estate Securities Fund are $5,000. For these services, the
Emerging Markets Fund pays the following annual fees: base fee, $14,800;
transaction charge, $3.00; and holding charge, $24.00. Annual minimum charges
for the Investment Company's International Funds (including the Fund) are
$290,000.
EXPENSES OF THE FUNDS
The Funds will pay all their expenses other than those expressly assumed by the
Management Company. The Funds' expenses for the year ended December 31, 1995,
as a percentage of average net assets, are shown in the Financial Highlights
tables. The Equity T Fund was not offered for public investment prior
to the date of this Prospectus, and therefore, Financial Highlights do not exist
for the Fund. The Funds' principal expenses are: the management, transfer
agency and recordkeeping fees payable to the Management Company; fees for
custodial and portfolio accounting payable to State Street Bank and Trust
Company; bookkeeping service fees for preparing tax records payable to Frank
Russell Company; fees for independent auditing and legal services; and fees for
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filing reports and registering shares with regulatory bodies.
THE MONEY MANAGERS
The assets of each Fund currently are allocated among the money managers listed
in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S ASSETS
AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT COMPANY. THE
MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME
BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES OF THE
INVESTMENT COMPANY. The Funds will notify shareholders of the Fund concerned
within 60 days of when a money manager begins or stops providing services.
From its management fees, the Management Company, as agent for the Investment
Company, pays all fees to the money managers for their investment selection
services. Quarterly, each money manager is paid the pro rata portion of an
annual fee, based on the quarterly average of all the assets allocated to the
money manager. For the period, management fees paid to the money managers were
equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Real Estate Securities Fund, .32%;
Emerging Markets Fund, .68%; Limited Volatility Tax Free Fund, .25%; U.S.
Government Money Market Fund, .02%; and Tax Free Money Market Fund, .02%. The
Equity T Fund was not offered to Eligible Investors during the period.
Fees paid to the money managers are not affected by any voluntary or statutory
expense limitations. Some money managers may receive investment research
prepared by Frank Russell Company as additional compensation, or may receive
brokerage commissions for executing portfolio transactions for the Funds through
broker-dealer affiliates.
Each money manager has agreed that once the Investment Company has advanced fees
to the Management Company as agent to make payment of the money manager's fee,
that money manager will look only to the Management Company for the payment of
its fee.
The money managers are selected for the Funds based primarily upon the research
and recommendations of Frank Russell Company, which evaluates quantitatively and
qualitatively the money manager's skills and results in managing assets for
specific asset classes, investment styles and strategies. Short-term investment
performance, by itself, is not a controlling factor in selecting or terminating
a money manager.
The Real Estate Securities Fund is managed by Cohen & Steers Capital Management.
The individuals responsible for the management of the Fund and their principal
occupations for the past five years are as follows: Robert H. Steers has been
the Chairman of Cohen & Steers since the founding of the company in 1986. Martin
Cohen has been president of Cohen & Steers since the founding of the company in
1986.
The Equity T Fund is managed by J.P. Morgan Investment Management, Inc.
The individual responsible for the management of the fund is James C. Weiss,
who is a Vice President and Portfolio Manager in the U.S. Structured Equity
area. Mr. Weiss joined Morgan in 1992. Prior to this, he was Stock Index
Arbitrageur at Oppenheimer and Company.
The U.S. Government Money Market Fund is managed by Frank Russell Investment
Management Company. The individual responsible for the management of the Fund
and his principal occupation for the past five years is as follows: Peter F.
Apanovitch, who has been Manager of the Short-Term Investment Funds for Frank
Russell Investment Management Company since 1991.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF
THE MONEY MANAGERS' INDIVIDUAL SECURITY SELECTIONS.
INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES AND RISKS
Each Fund has certain "fundamental" investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the Fund's
shareholders. If there is a change in a fundamental investment objective,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. Other policies
reflect current practices of the Funds, and may be changed by the
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Funds without the approval of shareholders. This section of the Prospectus
describes the Funds' principal objectives, restrictions, policies and risks. A
more detailed discussion appears in the Statement of Additional Information.
INVESTMENT OBJECTIVE.
Each Fund's objective is "fundamental," as are certain of the Fund's policies
with respect to the types of securities in which it will invest. Ordinarily,
each Fund will invest more than 65% of its net assets in the types of securities
identified in its statement of objectives. However, the Funds may hold assets
as cash reserves for temporary and defensive purposes when their money managers
deem that a more conservative approach is desirable or when suitable purchase
opportunities do not exist. (See, "Investment Policies - Cash Reserves.")
REAL ESTATE SECURITIES FUND
The Real Estate Securities Fund's objective is to generate a high level of total
return through above average current income, while maintaining the potential for
capital appreciation by investing primarily in the equity securities of
companies in the real estate industry.
Except for temporary defensive purposes, the Fund will only invest in real
estate related securities, which include securities of companies which generate
at least 50% of their revenues from the ownership, construction, financing,
management or sale of commercial, industrial or residential real estate. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
income-oriented equity securities of real estate companies, which include shares
of real estate investment trusts, partnership units of master limited
partnerships, common and preferred stock, and convertible debt securities
believed to have attractive equity characteristics. Up to 35% of the Fund's
total assets may be invested in other debt securities of real estate companies.
The Fund will concentrate more than 25% of its total assets in the real estate
and real estate related industries. The Fund will therefore be subject to the
risks associated with the direct ownership of real estate. Additional risks
include declines in the value of real estate, risks related to general and local
economic conditions, over-building and increased competition, increases in
property taxes and operating expenses, changes in neighborhood values, the
appeal of properties to tenants and increases in interest rates. The value of
securities of companies that service the real estate industry may also be
affected by such risks.
In addition to the risks discussed above, equity real estate investment trusts
may be affected by changes in the value of the underlying property owned by the
trust, while mortgage real estate investment trusts may be affected by the
quality of any credit extended. Moreover, the underlying portfolios of equity
and mortgage real estate trusts may not be diversified, and therefore are
subject to the risk of financing a single or a limited number of projects. Such
trusts are also dependent upon management skills and are subject to heavy cash
flow dependency, defaults by borrowers, self-liquidation and the possibility of
failing either to qualify for tax-free pass-through of income under the Internal
Revenue Code or to maintain their exemption from the Investment Company Act of
1940, as amended ("1940 Act").
The Fund will attempt to be invested fully at all times. However, the Fund
reserves the right to hold up to 20% of the Fund's assets in liquid reserves for
redemption needs.
EMERGING MARKETS FUND
The Emerging Markets Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from developed market international
portfolios, by investing primarily in equity securities.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities of companies in countries having emerging markets.
For purposes of the Fund's operations, an emerging markets country will be a
country having an economy and market that are or would be considered by the
World Bank or the United Nations to be emerging or developing. These countries
generally include every country in the world except the United States, Canada,
Japan, Australia and most countries located in Western Europe.
The Fund may not be invested in all such markets at all times, Investing in some
of the listed markets may not be feasible, due to lack of adequate custody
arrangements or current legal requirements. In the future, the Fund's money
managers may determine, based on information then available, to include
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additional emerging market countries in which the Fund may invest. The assets
of the Fund ordinarily will be invested in the securities of issuers in at least
three different emerging market countries. The Fund does not currently
anticipate that it will invest more than 25% of its total assets in the
securities of any one emerging market country.
A company in an emerging market means (i) a company whose securities are traded
in the principal securities market of an emerging market country; (ii) a company
that (alone or on a consolidated basis) derives 50% or more of its total revenue
from either goods produced, sales made or services performed in emerging market
countries; or (iii) a company organized under the laws of, and with a principal
office in, an emerging market country.
The Fund may invest in common and preferred stocks of emerging market companies,
including companies involved in real estate development and gold mining. The
Fund may also invest in other types of equity securities and equity derivative
securities, such as convertible securities, rights, units, warrants, American
Depository Receipts (ADRS) and European Depository Receipts (EDRs). The Fund's
equity securities will primarily be denominated in foreign currencies and may be
held outside the United States.
The Fund may invest in fixed-income securities, including instruments issued by
emerging market companies, governments and their agencies, and in US companies
that derive, or are expected to derive, a substantial portion of their revenues
from operations outside the United States. The Fund's fixed-income securities
may be denominated in other than US dollars.
Certain emerging markets are closed in whole or in part to equity investments by
foreigners. The Fund may be able to invest in such markets solely or primarily
through governmentally authorized investment vehicles. To invest in these
markets, the Fund may invest up to 10% of its total assets in the shares of
other investment companies and up to 5% of its total assets in any one
investment company, as long as that investment does not represent more than 3%
of the voting stock of the acquired investment company at the time such shares
are purchased. The risks associated with investment in securities issued by
foreign governments and companies are described under "Investment
Policies--Investment in Foreign Securities."
EQUITY T FUND
The Equity T Fund's objective is to provide capital growth on an after-tax
basis by investing principally in equity securities.
The Fund may invest in common and preferred stocks, rights and warrants and
securities convertible into common stocks. Generally, the Fund seeks to invest
primarily in domestic equity securities that the Fund's money manager believes
to be undervalued on a long-term basis.
Additionally, to maintain full exposure to the equity markets, the Fund may
purchase S&P 500 index futures contracts, which may be considered derivative
securities, with respect to Fund assets that are held in cash.
The majority of stock mutual funds are managed to maximize pre-tax total return,
without regard to the tax consequences to shareholders of portfolio activity
that may result in taxable distributions. In contrast, the Fund seeks to
achieve its investment objective while minimizing the impact of taxes on
shareholders' returns in connection with the Fund's portfolio investment income
and realized capital gains.
The Fund is designed for taxable investors who seek to minimize the impact of
taxes on their investment returns by participating on a long-term basis in a
broadly-diversified investment portfolio of equity securities. The Fund is not
recommended for either short- term investors, or for investor assets that are
already tax-deferred (such as IRAs and 401(k) plans).
In pursuing the Fund's objective, the money manager utilizes distinct investment
strategies and tax-efficient management techniques in an effort to minimize the
impact of taxes on the Fund's shareholders:
The money manager will seek to reduce taxable dividend income by purchasing,
whenever practicable, common stocks of companies that are considered to be
high-quality, with attractive long-term investment prospects, but which may be
lower yielding.
The Fund will seek to maximize unrealized capital gains, which under normal
market circumstances, is expected to result in relatively low annual portfolio
turnover rate. The Fund will attempt to limit short-term capital gains, and to
minimize the realization of long-term capital gains and subsequent distribution
of such gains, to shareholders. While the Fund is free to sell securities in
its portfolio whenever the money manager deems it appropriate, the Fund will
typically buy stocks with the intention of holding for a period of time to
qualify for the more favorable tax treatment (ie., a long-term captial gain.)
Most equity securities will be acquired with the expectation of being held for a
period of years.
The Fund will generally seek to avoid realizing short-term capital gains. When
the money manager decides to sell a particular appreciated security, the manager
will select for sale those share lots with holding periods sufficient to qualify
for long-term capital gains treatment and among those, the share lots with the
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highest cost basis to minimize capital gains. When prudent, the money manager
will sell securities in order to realize capital losses, which can be used to
offset realized capital gains, thereby reducing capital gains distributions to
Fund shareholders.
The Fund intends to remain as fully invested as possible, in order to enhance
the potential for attractive total returns. While the Fund is permitted to
invest its cash reserves in money market instruments, US government securities
and high-quality debt securities, the money manager will seek to be fully
invested in equity securities.
A redemption fee equal to 1% of the value of the shares redeemed is retained
by the Fund from all redemptions. This policy is intended to offset the
potentially negative impact that redemptions can have on the Fund's portfolio
strategy and to contain costs. The redemption fee will indirectly help to
offset tax costs that investors bear when the Fund is forced to realize
capital gains as a result of a shareholder redemption investment activity.
By being paid directly to the Fund, the fees tend to be advantageous to
long-term investors and disadvantageous to short-term investors.
LIMITED VOLATILITY TAX FREE FUND
The Limited Volatility Tax Free Fund's objective is to provide a high level of
federal tax-exempt income consistent with the preservation of capital by
investing primarily in municipal obligations maturing in seven years or less
from the date of acquisition. The Fund intends to invest 100% and will always
invest 80% of its net assets in municipal obligations.
The Fund will invest principally in municipal obligations which, at the time of
purchase, are rated no less than A or A-2 by Standard & Poor's Ratings Group
("S&P"); A, Prime-2 or MIG-2 by Moody's Investors Service, Inc. ("Moody's"); or,
if unrated, judged by the money manager to be of at least equal credit quality
to those designations, or backed by the full faith and credit of the United
States. The Fund may also invest up to 15% of its net assets in securities
subject to legal or contractual restrictions on disposition or for which no
readily available market exists.
"Municipal obligations" are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities the interest from which is exempt from federal income tax,
including the alternative minimum tax, in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities.
Municipal obligations may include project, tax anticipation, revenue
anticipation, bond anticipation, and construction loan notes; tax-exempt
commercial paper; fixed and variable rate notes; obligations whose interest and
principal are guaranteed or insured by the US government or fully collateralized
by US government securities; industrial development bonds; and floating or
variable rate obligations. (Floating or variable rate obligations are municipal
obligations with a demand feature, which, when exercised, usually becomes
effective within 30 days. The rate of return on the obligations is readjusted
periodically according to some objective standard such as changes in a
commercial bank's prime rate.)
The Fund may purchase from financial institutions (such as banks and insurance
companies) participation interests in floating or variable rate obligations.
Each participation interest is backed by an irrevocable letter of credit or
guarantee of a bank or insurance policy of an insurance company that the money
manager has determined meets the prescribed quality standards for the Fund. The
Fund has the right to sell the participation certificate back to the institution
and draw on the letter of credit or insurance on demand after 30 days' notice,
for all or any part of the full principal amount of the Fund's participation
interest in the security plus accrued interest. The Fund intends to exercise
its right to demand payment only upon a default under the terms of the documents
of the municipal obligations, when needed to provide liquidity to meet
redemptions, or to maintain the required quality of the Fund's investment
portfolio.
The Fund may purchase municipal obligations with a "put" or "stand-by
commitment." A "put" or "stand-by commitment" obligates the seller to buy the
underlying municipal obligation at an agreed upon price and time when exercised
by the Fund. In the event the seller does not honor the put or stand-by
commitment for financial reasons, the Fund may be a general creditor of the
seller.
Municipal obligations, like all investments, involve possible risks. Municipal
obligations: might be affected
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by economic, business or political developments; may be subject to the
provisions of litigation, bankruptcy, and other laws affecting the rights and
remedies of creditors; or may become subject to future laws extending the time
for payment of principal and/or interest, or limiting the rights of
municipalities to levy taxes. For instance, legislative proposals are
introduced, from time to time, to restrict or eliminate the federal income tax
exemption for municipal obligations interest. If such legislation is adopted,
the Board of Trustees will reevaluate the Fund's investment objective and may
submit possible changes in the structure of the Fund to its shareholders.
U.S. GOVERNMENT MONEY MARKET FUND
The U.S. Government Money Market Fund's objective is to provide the maximum
current income that is consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value by investing
exclusively in US Government obligations.
The types of US Government obligations the Fund may purchase include: (1) a
variety of US Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: (a) US Treasury bills have a maturity of one
year or less; (b) US Treasury notes have original maturities of one to ten
years; and (c) US Treasury bonds have original maturities of greater than ten
years; (2) obligations issued or guaranteed by US Government agencies and
instrumentalities and supported by any of the following: (a) the full faith and
credit of the US Treasury (such as Government National Mortgage Association
participation certificates); (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the US Treasury; (c) discretionary
authority of the US Government agency or instrumentality; or (d) the credit of
the instrumentality (examples of agencies and instrumentalities are Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association). No assurance can be given that the US Government will provide
financial support to such US Government agencies or instrumentalities described
in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth above, since
it is not obligated to do so by law. The Fund may purchase US Government
obligations on a forward commitment basis.
TAX FREE MONEY MARKET FUND
The Tax Free Money Market Fund's objective is to provide the maximum current
income exempt from federal income tax that is consistent with the preservation
of capital and liquidity, and the maintenance of a $1.00 per share net asset
value by investing in short-term municipal obligations. The Fund intends to
invest 100% and will always invest 80% of its total assets in municipal
obligations.
The Fund will invest in municipal obligations which at the time of purchase have
or are deemed to have remaining maturities of 397 days or less and (i) have
received a rating in one of the two highest rating categories by two nationally
recognized statistical rating agencies ("NRSROs"), including, but not limited
to, S&P and Moody's (or, if only one NRSRO has rated the obligation, one of the
two highest ratings of that NRSRO); (ii) backed by the full faith and credit of
the United States; or (iii) if unrated, determined by the Investment Company's
Board of Trustees to be of at least equal credit quality to obligations having
the ratings described in (i) above. (See, the Statement of Additional
Information for a description of the rating systems of NRSROs.) The Fund may
invest up to 10% of its net assets in securities subject to legal or contractual
restrictions on disposition or for which no readily available market exists.
"Municipal obligations" are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities the interest from which is exempt from federal income tax,
including the alternative minimum tax, in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities.
Municipal obligations may include project, tax anticipation, revenue
anticipation, bond anticipation, and construction loan notes; tax-exempt
commercial paper; fixed and variable rate notes; obligations whose interest and
principal are guaranteed or insured by the US government or fully collateralized
by US government securities; industrial development bonds; and floating or
variable rate obligations. (Floating or variable rate obligations are municipal
obligations with a demand feature, which, when exercised, usually becomes
effective within 30 days. The rate of return on
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the obligations is readjusted periodically according to some objective standard
such as changes in a commercial bank's prime rate. The maturity of floating
rate obligations is deemed to be the demand period. The maturity of variable
rate obligations is deemed to be the longer of the demand period or the period
remaining until the next rate adjustment.)
The Fund may purchase from financial institutions (such as banks and insurance
companies) participation interests in floating or variable rate obligations.
Each participation interest is backed by an irrevocable letter of credit or
guarantee of a bank or insurance policy of an insurance company that the money
manager has determined meets the prescribed quality standards for the Fund. The
Fund has the right to sell the participation certificate back to the institution
and draw on the letter of credit or insurance on demand after 30 days' notice,
for all or any part of the full principal amount of the Fund's participation
interest in the security plus accrued interest. The Fund intends to exercise
its right to demand payment only upon a default under the terms of the documents
of the municipal obligations, when needed to provide liquidity to meet
redemptions, or to maintain the required quality of the Fund's investment
portfolio. The Fund will purchase municipal obligations with demand features
only when the demand instrument and the underlying municipal obligations meet
the prescribed quality standards for the Fund. The Fund may purchase municipal
obligations with a "put" or "stand-by commitment." A "put" or "stand-by
commitment" obligates the seller to buy the underlying municipal obligation at
an agreed upon price and time when exercised by the Fund. In the event the
seller does not honor the put or stand-by commitment for financial reasons, the
Fund may be a general creditor of the seller.
Municipal obligations, like all investments, involve possible risks. Municipal
obligations: might be affected by economic, business or political developments;
may be subject to the provisions of litigation, bankruptcy and other laws
affecting the rights and remedies of creditors; or may become subject to future
laws extending the time for payment of principal and/or interest, or limiting
the rights of municipalities to levy taxes. For instance, legislative proposals
are introduced, from time to time, to restrict or eliminate the federal income
tax exemption for municipal obligations interest. If such legislation is
adopted, the Board of Trustees will reevaluate the Fund's investment objective
and may submit possible changes in the structure of the Fund to its
shareholders.
U.S. Government Money Market and Tax Free Money Market Funds. The U.S.
Government Money Market and Tax Free Money Market Funds (collectively, the
"Money Market Funds") expect to maintain, but do not guarantee, a net asset
value of $1.00 per share for purposes of purchases and redemptions by valuing
their portfolio securities at "amortized cost." The Funds will maintain a
dollar-weighted average maturity of 90 days or less, invest only in securities
with a remaining maturity at the time of purchase, or time of next interest rate
reset of 397 days or less, and follow procedures reasonably designed to assure
that the prices so determined approximate the current market value of the
portfolio securities.
INVESTMENT RESTRICTIONS.
The Funds have fundamental investment restrictions which cannot be changed
without shareholder approval. The principal restrictions are the following,
which, unless otherwise noted, apply on a Fund-by-Fund basis at the time an
investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less
than 75% of its assets would be represented by cash; cash
items; securities of the US government, its agencies, or
instrumentalities; securities of other investment companies;
and other securities limited in respect of each issuer to an
amount not greater in value than 5% of the total assets of such
Fund. A Fund's investment in "cash reserves" (see the next
section) in shares of the Investment Company's Money Market
Fund is not subject to this restriction or to restrictions 2 or
3.
2. Invest 25% or more of the value of the Fund's total assets in
the securities of companies primarily engaged in any one
industry (other than the US government, its agencies and
instrumentalities). This restriction does not apply to the
Real Estate Securities Fund, which may invest 25% or more of
its total assets in the securities of
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companies directly or indirectly engaged in the real estate
industry.
3. Acquire more than 5% of the outstanding voting securities, or
10% of all of the securities, of any one issuer.
4. Borrow amounts in excess of 5% of its total assets taken at
cost or at market value, whichever is lower, and then only for
temporary purposes; invest more than 5% of its assets in
securities of issuers which, together with any predecessor,
have been in operation for less than three years; or invest
more than 5% of its assets in warrants. (Currently, no Fund
intends to borrow in excess of 5% of its net assets.)
INVESTMENT POLICIES.
The Funds use certain investment instruments and techniques commonly used by
institutional investors. The principal policies are the following:
Cash Reserves. The Real Estate Securities, Emerging Markets, Equity T Fund
and Limited Volatility Tax Free Funds are authorized to invest their cash
reserves (i.e., funds awaiting investment in the specific types of securities to
be acquired by a Fund) in money market instruments and in debt securities which
are at least comparable in quality to each Fund's permitted investments. In lieu
of having each Fund make separate, direct investments in money market
instruments, the Funds and their money managers may elect to invest the Funds'
cash reserves in the Investment Company's Money Market Fund.
The Investment Company's Money Market Fund, described in a separate prospectus,
seeks to maximize current income to the extent consistent with the preservation
of capital and liquidity, and the maintenance of a stable $1.00 per share net
asset value by investing solely in short-term money market instruments. The
Management Company currently does not collect a management or advisory fee from
the Investment Company's Money Market Fund, thereby eliminating any duplication
of fees. The Funds will use this procedure only so long as doing so does not
adversely affect the portfolio management and operations of the Investment
Company's Money Market Fund and the Investment Company's other Funds.
Repurchase Agreements. Each Fund may enter into repurchase agreements with a
bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies - Illiquid Securities," a Fund
will not invest more than 15% of its net assets (taken at current market
value) in repurchase agreements maturing in more than seven days. The Money
Market Funds will not invest more than 10% of their respective net assets
(taken at current market value) in repurchase agreements and other illiquid
securities maturing in more than seven days.
Forward Commitments. Each Fund may contract to purchase securities for a fixed
price at a future date beyond customary settlement time (a "forward commitment"
or "when-issued" transaction), so long as such transactions are consistent with
each Fund's ability to manage its investment portfolio and honor redemption
requests. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund of a dollar amount sufficient to make payment for the
portfolio securities to be purchased will be segregated on the Fund's records at
the trade date and maintained until the transaction is settled.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by a money manager to be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value. The Fund retains record
ownership of the security involved, including the right to receive interest and
principal payments. At an agreed upon future date, the Fund repurchases the
security by paying an agreed upon purchase price plus interest. Cash or liquid
high-grade debt obligations of the Fund equal in value to the repurchase price,
including any accrued interest, will be segregated on the Fund's records while a
reverse repurchase agreement is in effect, subject to the limitation described
in "Investment Policies - Illiquid Securities."
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Lending Portfolio Securities. The Real Estate Securities, the Emerging Markets,
the Equity T and the U.S. Government Money Market Funds may lend
portfolio securities with a value of up to 50% of each Fund's total assets. Such
loans may be terminated at any time. A Fund will receive either cash (and agree
to pay a "rebate" interest rate), US government or US government agency
securities as collateral in an amount equal to at least 100% of the current
market value of the loaned securities plus accrued interest. The collateral is
"marked-to-market" on a daily basis, and the borrower will furnish additional
collateral in the event that the value of the collateral drops below 100% of the
market value of the loaned securities.
Cash collateral is invested in high-quality short-term instruments, short-term
bank collective investments and money market mutual funds (including funds
advised by State Street Bank and Trust Company, the Funds' Custodian, for which
it may receive an asset-based fee), and other investments meeting certain
quality and maturity requirements established by the Funds. Income generated
from the investment of the cash collateral is first used to pay the rebate
interest cost to the borrower of the securities and the remainder is then
divided between the Fund and the Fund's Custodian.
Each Fund will retain most rights of beneficial ownership, including dividends,
interest or other distributions on the loaned securities. Voting rights may
pass with the lending. The Fund will call loans to vote proxies if a material
issue affecting the investment is to be voted upon.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Consequently,
loans are made only to borrowers which are deemed to be of good financial
standing. The Investment Company may incur costs or possible losses in excess
of the interest and fees received in connection with securities lending
transactions. Some securities purchased with cash collateral are subject to
market fluctuations while a loan is outstanding. To the extent that the value
of the cash collateral as invested is insufficient to return the full amount of
the collateral plus rebate interest to the borrower upon termination of the
loan, a Fund must immediately pay the amount of the shortfall to the borrower.
Illiquid Securities. The Real Estate Securities, the Emerging Markets, the
Equity T and the Limited Volatility Tax Free Funds will not purchase or
otherwise acquire any security if, as a result, more than 15% of a Fund's net
assets (taken at current value) would be invested in securities, including
repurchase agreements of more than seven days' duration, that are illiquid by
virtue of the absence of a readily available market or because of legal or
contractual restrictions on resale. In the case of the Money Market Funds, this
restriction is 10% of each Fund's net assets. In addition, the Funds will not
invest more than 10% of their respective net assets (taken at current value) in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). These policies do not
include (1) commercial paper issued under Section 4(2) of the 1933 Act, or (2)
restricted securities eligible for resale to qualified institutional purchasers
pursuant to Rule 144A under the 1933 Act that are determined to be liquid by the
money managers in accordance with Board approved guidelines. Such guidelines
take into account trading activity for such securities and the availability of
reliable pricing information, among other factors. If there is a lack of
trading interest in a particular Rule 144A security, a Fund's holding of that
security may be illiquid. There may be undesirable delays in selling illiquid
securities at prices representing their fair value.
Investment in Foreign Securities. The Funds, other than the Money Market Funds,
may invest in foreign securities traded on US or foreign exchanges or in the
over-the-counter market. Investing in securities issued by foreign governments
and corporations involves considerations and possible risks not typically
associated with investing in obligations issued by the US government and
domestic corporations. Less information may be available about foreign
companies than about domestic companies, and foreign companies generally are not
subject to the same uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements comparable to those
applicable to domestic companies. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are
often incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign
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countries could be affected by other factors not present in the United States,
including nationalization, expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations, and could be subject to extended settlement periods or
restrictions affecting the prompt return of capital to the United States.
The risks associated with investing in foreign securities are often heightened
for investments in developing or emerging markets. Investments in emerging or
developing markets involve exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to have
less stability than those of more developed countries. Moreover, the economies
of individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Because each Fund's foreign securities will
generally be denominated in foreign currencies, the value of such securities to
the Fund will be affected by changes in currency exchange rates and in exchange
control regulations. A change in the value of a foreign currency against the US
dollar will result in a corresponding change in the US dollar value of a Fund's
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the US dollar. Many emerging market countries have experienced substantial, and
in some periods extremely high, rates of inflation for many years. 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 counties.
Forward Foreign Currency Exchange Contracts ("forward currency contracts"). The
Emerging Markets Fund may enter into forward currency contracts, which are
agreements to exchange one currency for another -- for example, to exchange a
certain amount of US dollars for a certain amount of Japanese yen -- at a future
date. The date (which may be any agreed upon fixed number of days in the
future), the amount of currency to be exchanged and the price at which the
exchange will take place will be negotiated and fixed for the term of the
contract at the time that the Fund enters into the contract. The Emerging
Markets Fund may engage in forward currency contracts that involve a currency
whose changes in value are considered to be linked (a proxy) to a currency or
currencies in which some or all of the Fund's portfolio securities are
denominated. Forward currency contracts are (a) traded in an interbank market
conducted directly between currency traders (typically, commercial banks or
other financial institutions) and their customers, (b) generally have no deposit
requirements and (c) are consummated without payment of any commissions. The
Fund may, however, enter into forward currency contracts containing either or
both deposit requirements and commissions. In order to assure that the Fund's
forward currency contracts are not used to achieve investment leverage, the Fund
will segregate cash or readily marketable high-quality securities in an amount
at all times equal to or exceeding the Fund's commitments with respect to these
contracts.
Upon maturity of a forward currency contract, the Emerging Markets Fund may (a)
pay for and receive, or deliver and be paid for, the underlying currency, (b)
negotiate with the dealer to roll over the contract into a new forward currency
contract with a new future settlement date or (c) negotiate with the dealer to
terminate the forward currency contract by entering into an offset with the
currency trader whereby the parties agree to pay for and receive the difference
between the exchange rate fixed in the contract and the then current exchange
rate. The Fund also may be able to negotiate such an offset prior to maturity
of the original forward currency contract. There can be no assurance that new
forward currency contracts or offsets will always be available to the Fund.
Forward currency contracts will be used only to hedge against anticipated future
changes in exchange rates which otherwise might either adversely affect the
value of the Emerging Markets Fund's portfolio securities or adversely affect
the price of securities which the Fund intends to purchase at a later date. The
amount the Fund may invest in forward currency contracts is limited to the
amount of the Fund's aggregate investments in foreign currencies.
The market for forward currency contracts may be limited with respect to certain
currencies. These factors will restrict the Emerging Markets Fund's ability to
hedge against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that
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may be assigned to any particular portfolio security. Where available, the
successful use of forward currency contracts draws upon a money manager's
special skills and experience with respect to such instruments and usually
depends on the money manager's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of forward
currency contracts or may realize losses and thus be in a worse position than if
such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to forward currency contracts, and adverse market movements
could therefore continue to an unlimited extent over a period of time. In
addition, the correlation between movements in the prices of such instruments
and movements in the price of the securities and currencies hedged or used for
cover will not be perfect. In the case of proxy hedging, there is also a risk
that the perceived linkage between various currencies may not be present or may
not be present during the particular time the Fund is engaged in that strategy.
The Emerging Markets Fund's ability to dispose of its positions in forward
currency contracts will depend on the availability of active markets in such
instruments. It is impossible to predict the amount of trading interest that
may exist in various types of forward currency contracts. Forward currency
contracts may be closed out only by the parties entering into an offsetting
contract. Therefore, no assurance can be given that the Fund will be able to
utilize these instruments effectively for the purposes set forth above.
Options. The Funds, other than the Money Market Funds, may purchase and sell
(write) call and put options on securities and securities indexes provided such
options are traded on a national securities exchange or in an over-the-counter
market. The Funds, other than the Money Market Funds, may also purchase and
sell put and call options on foreign currencies.
A Fund may invest up to 5% of its net assets, represented by the premium paid,
in call and put options. A Fund may write a call or put option to the extent
that the aggregate value of all securities or other assets used to cover all
such outstanding options does not exceed 25% of the value of its net assets.
Call and Put Options on Securities. A call option on a specific security gives
the purchaser of the option the right to buy, and obligates the writer to sell,
the underlying security at the exercise price at any time during the option
period. Conversely, a put option on a specific security gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period.
A Fund may purchase a call option on securities to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability or desire to purchase such securities in an orderly manner. A Fund may
purchase a put option on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
A Fund may write a call or a put option only if the option is covered by the
Fund by holding a position in the underlying securities or by other means which
would permit immediate satisfaction of the Fund's obligations as the writer of
the option.
To close out a position when writing covered options, a Fund may make a "closing
purchase transaction," which involves purchasing an option on the same security
with the same exercise price and expiration date as the option which it
previously wrote on the security. To close out a position as a purchaser of an
option, a Fund may make a "closing sale transaction," which involves liquidating
the Fund's position by selling the option previously purchased. The Fund will
realize a profit or loss from a closing purchase or sale transaction depending
upon the difference between the amount paid to purchase an option and the amount
received from the sale thereof.
The Funds intend to treat options in respect of specific securities that are not
traded on a national securities exchange and the securities underlying covered
call options as not readily marketable and therefore subject to the limitations
on the Funds' ability to hold illiquid securities.
The Funds intend to purchase and write call and put options on specific
securities. The Funds will purchase and write options only to the extent
permitted by the policies of state securities authorities in states where the
shares of the Funds are qualified for offer and sale.
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Securities Index Options. An option on a securities index is a
contract which gives the purchaser of the option, in return for the
premium paid, the right to receive from the writer of the option cash
equal to the difference between the closing price of the index and the
exercise price of the option times a multiplier established by the
exchange on which the stock index is traded. It is similar to an
option on a specific security except that settlement is in cash and
gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather
than price movements in the specific security.
Options on Foreign Currency. The Funds may purchase and write call and
put options on foreign currencies for the purpose of hedging against
changes in future currency exchange rates. Call options convey the
right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option
expires. Put options convey the right to sell the underlying currency
at a price which is anticipated to be higher than the spot price of the
currency at the time the option expires. Currency options traded on US
or other exchanges may be subject to position limits which may limit
the ability of a Fund to reduce foreign currency risk using such
options. Over-the-counter options 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. (See also "Call and Put Options
on Securities," above.)
Risk Factors. The purchase and writing of options involves certain
risks. If a put or call option purchased by a Fund is not sold when it
has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the
exercise price or, in the case of a call, remains less than or equal to
the exercise price, the Fund will lose its entire investment (i.e., the
premium paid) on 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.
Where a Fund writes a call option, it has, in return for the premium it
receives, given up the opportunity to profit from a price increase in
the underlying security above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss should
the price of the underlying security decline. Where a Fund writes a
put option, it is exposed during the term of the option to a decline in
the price of the underlying security.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund
may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Real Estate Securities,
the Emerging Markets, the Equity T and the Limited Volatility Tax Free
Funds may invest in interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts and options thereon that are
traded on a United States or foreign exchange or board of trade.
An interest rate or foreign currency futures contract is an agreement between
two parties (buyer and seller) to take or make delivery of a specified quantity
of financial instruments (such as GNMA certificates or Treasury bonds) or
foreign currency at a specified price at a future date. A futures contract on
an index (such as the S&P 500) is an agreement between two parties (buyer and
seller) to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. In
the case of futures contracts traded on US exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out
by delivery or purchase, as the case may be, of the financial instrument or by
payment of the change in the cash value of the index. Frequently, using futures
to effect a particular strategy instead of using the underlying or related
security or index will result in lower transaction costs being incurred.
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Each Fund may also purchase and write call options and put options on futures
contracts. An option on a futures contract gives the holder the right, in
return for the premium paid, to assume a long position (in the case of a call)
or a short position (in the case of a put) in a futures contract at a specified
exercise price prior to the expiration 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 opposite is true. An option on a futures contract may be closed out (before
exercise or expiration) by an offsetting purchase or sale of an option on a
futures contract of the same series.
There are several risks associated with the use of futures and options on
futures contracts for hedging purposes. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle so that the
portfolio return might have been greater had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position and the Fund would remain obligated to meet margin requirements until
the position is closed.
A Fund will only enter into futures contracts or options on futures contracts
which are standardized and traded on a US or foreign exchange or board of trade,
or similar entity, or quoted on an automated quotation system. A Fund will
enter into a futures contract only if the contract is "covered" or if the Fund
at all times maintains with its Custodian cash or cash equivalents equal to or
greater than the fluctuating value of the contract (less any margin or deposit).
A Fund will write a call or put option on a futures contract only if the option
is "covered." For a discussion of how to cover a written call or put option,
see "Options" above.
A Fund may enter into contracts and options on futures contracts for "bona fide
hedging" purposes, as defined under the rules of the Commodity Futures Trading
Commission. A Fund may also enter into futures contracts and options on futures
contracts for non-hedging purposes, provided the aggregate initial margin and
premiums required to establish these positions will not exceed 5% of the Fund's
net assets.
High Risk Bonds. The Funds, with the exception of the Emerging Markets Fund, do
not invest assets in securities rated less than BBB by S&P or Baa by Moody's, or
in unrated securities judged by the money managers to be of a lesser credit
quality than those designations. Securities rated BBB by S&P or Baa by Moody's
and above are considered by those rating agencies to be "investment grade"
securities, although Moody's and S&P consider securities rated Baa and BBB,
respectively, to have some speculative characteristics. The Funds will dispose
of, in a prudent and orderly fashion, securities whose ratings drop below these
minimum ratings. For additional information, please refer to the Funds'
Statement of Additional Information. The market value of debt securities
generally varies inversely in relation to interest rates.
The Emerging Markets Fund may invest up to 5% of its total assets in debt
securities rated less than BBB by S&P or Baa by Moody's, or in unrated
securities judged by the Fund's money managers to be of comparable quality.
Lower rated debt securities generally offer a higher yield than that available
from higher grade issues. However, lower rated debt securities involve higher
risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. In addition, the market for
lower rated debt securities has expanded rapidly in recent years, and its growth
paralleled a long economic expansion. The market for lower rated debt
securities is generally thinner and less active than that for higher quality
securities, which would limit the Fund's ability to sell such securities at fair
value in response to changes in the economy or the financial markets. While such
debt may have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse
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conditions. The Emerging Markets Fund's money managers will seek to reduce the
risks associated with investing in such securities by limiting the Fund's
holding in such securities and by the depth of their own credit analysis. For
additional information, please refer to the Statement of Additional Information.
PORTFOLIO TRANSACTION POLICIES
Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company as to other assets. The
Limited Volatility Tax Free Fund gives significant weight to attempting to
realize long-term, rather than short-term, capital gains when making portfolio
management decisions, and the Equity T Fund seeks to minimize the
impact of taxes on the Fund's shareholders' returns. The money managers make
decisions to buy or sell securities independently from other managers. Thus,
one money manager for a Fund could be selling a security when another money
manager for the same Fund (or for another series of the Investment Company) is
purchasing the same security. In addition, when a money manager's services are
terminated and another retained, the new manager may significantly restructure
the portfolio. These practices may increase the Funds' portfolio turnover
rates, realization of gains or losses, brokerage commissions and other
transactions based costs. The strategy of minimizing the impact of taxes on
shareholders' investment returns and avoiding the recognition of capital gains
may constrain the ability of the Management Company to change money managers of
the Equity T Fund. The annual portfolio turnover rates for the Funds
(other than the Equity T and the Money Market Funds) are shown in the
Financial Highlights tables.
The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money manager
determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of
the commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. The
Funds may also effect portfolio transactions through and pay brokerage
commissions to the money managers (or their affiliates).
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS.
The Board of Trustees presently intends to declare dividends from net investment
income and (for the Money Market Funds only) net short-term capital gains, if
any, for payment on the following schedule:
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<TABLE>
<CAPTION>
DECLARED PAYABLE
- -------- -------
<S> <C> <C>
Daily 1st business day of following month U.S. Government Money Market and Tax Free
Money Market Funds
Monthly Early in the following month Limited Volatility Tax Free Fund
Quarterly Mid: April, July, October and December Real Estate Securities Fund
Annually Mid-December Emerging Markets and Equity T
Funds
</TABLE>
The Money Market Funds determine net investment income immediately prior to the
determination of the net asset value per share at the close of the New York
Stock Exchange (currently 4:00 p.m. Eastern time) on each business day. Net
investment income will be credited daily to the accounts of shareholders of
record prior to the net asset value calculation and paid monthly.
CAPITAL GAINS DISTRIBUTIONS.
The Board intends to declare distributions from capital gains through October 31
(excess of capital gains over capital losses) annually, generally in
mid-December. In addition, in order to satisfy certain distribution
requirements, a Fund may declare special year-end dividend and capital gains
distributions during October, November or December to shareholders of record in
such month. Such distributions, if received by shareholders by January 31, are
deemed to have been paid by a Fund and received by shareholders on December 31
of the prior year. Capital gains realized during November and December will be
distributed during the month of February of the following year.
Investors should be aware that by purchasing shares shortly before the record
date of a dividend or capital gains distribution, they will pay the full price
for the shares and then receive some portion of the price back as a taxable
dividend or capital gains distribution. Investors should also be aware that all
shareholders, will share in and be taxed on distributions of gain realized by a
Fund on the sale of securities that have increased in value.
AUTOMATIC REINVESTMENT.
All dividends and distributions will be automatically reinvested, at the net
asset value per share at the close of business on the record date, in additional
shares of the Fund paying the dividend or making the distribution, unless a
shareholder elects to have dividends or distributions paid in cash or invested
in another Fund. Any election may be changed by delivering written notice no
later than ten days prior to the payment date to Frank Russell Investment
Management Company, the Investment Company's transfer and dividend paying agent
(the "Transfer Agent"), at Operations Department, P.O. Box 1591, Tacoma, WA
98401.
TAXES
Each Fund intends to qualify for taxation as a "regulated investment company"
under the Internal Revenue Code (the "Code"). By distributing substantially
all of its net investment income and capital gains to shareholders and meeting
certain other requirements, a Fund will generally not be liable for federal
income or excise taxes. The Funds may be subject to nominal, if any, state and
local taxes.
For taxable shareholders: Dividends (except those of Limited Volatility Tax
Free and Tax Free Money Market Funds) from net investment income and short-term
capital gains will be taxable as ordinary dividends, whether paid in cash or
reinvested in additional shares. However, depending upon the state tax rules
pertaining to a shareholder, a portion of the dividends paid by the U.S.
Government Money Market Fund attributable to direct US Treasury and agency
obligations may be exempt from state and local taxes. Long-term capital gains
distributions declared by the Investment Company's Board are taxed as long-term
gains regardless of the length of time a shareholder has held such shares.
Distributions paid in excess of a Fund's earnings will be treated as a
non-taxable return of capital. Dividends and distributions may otherwise also be
subject to state or local taxes.
While the Equity T Fund is managed to minimize the amount of capital
gains realized during a
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particular year, the realization of capital gains is not entirely within the
Fund's or the money manager's control, and is impacted by shareholder purchase
and redemption activity as well as by the performance of securities in which
the Funds invests. Capital gains distributions by the Equity T Fund may vary
considerably from year to year.
For corporate investors, dividends from net investment income paid by the Real
Estate Securities or Equity T Funds will generally qualify in part for
the corporate dividends received deduction. However, the portion of the
dividends so qualified depends on the aggregate qualifying dividend income
received by such a Fund from domestic (US) sources. Certain holding period and
debt financing restrictions may apply to corporate investors seeking to claim
the deduction.
The sale of shares of a Fund is a taxable event and may result in capital gain
or loss. A capital gain or loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Except for shareholders of the Limited Volatility
Tax Free or Tax Free Money Funds. Any loss incurred on sale or exchange of a
Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. For shareholders of the Limited Volatility Tax Free or Tax Free
Money Funds, any loss incurred on sale or exchange of such a Fund's shares,
held for six months or less, will be disallowed to the extent of
exempt-interest dividends paid with respect to such shares, and any loss not so
disallowed will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares.
The Emerging Markets Fund will receive dividends and interest paid by non-US
issuers which will frequently be subject to withholding taxes by non-US
governments. The Management Company expects the Emerging Markets Fund to invest
more than 50% of its total assets in non-US securities and to file specified
elections with the Internal Revenue Service which will permit its shareholders
either to deduct (as an itemized deduction in the case of an individual) such
foreign taxes in computing taxable income, or to use these withheld foreign
taxes as credits against US income taxes. The Fund's taxable shareholders must
include their pro rata portion of the taxes withheld in their gross income for
federal income tax purposes.
The Emerging Markets Fund may invest up to 10% of its total assets in the stock
of foreign investment companies that may be treated as "passive foreign
investment companies" ("PFICs") under the Internal Revenue Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that the Fund
derives may be subject to a non-deductible federal income tax at the Fund level.
In some cases, the Emerging Markets Fund may be able to avoid this tax by
electing to be taxed currently on its share of PFIC's income, whether or not
such income is actually distributed by the PFIC. The Fund will endeavor to
limit its exposure to the PFIC tax by investing in PFICs only where the election
to be taxed currently will be made. Because it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, the
Fund may incur the PFIC tax in some instances.
(1) Shareholders of the Emerging Markets Fund should also be aware that for
federal income tax purposes, foreign exchange losses realized by the Fund
are treated as ordinary losses. This treatment may have the effect of
reducing the Fund's income available for distribution to shareholders.
The Limited Volatility Tax Free and Tax Free Money Market Funds anticipate that
all dividends paid by the Funds will be exempt from federal income tax. However,
to the extent dividends are derived from taxable income from temporary
investments, short-term capital gains, or income derived from the sale of bonds
purchased with market discount after April 30, 1993, they are treated as
ordinary income, whether paid in cash or reinvested in additional shares. The
Limited Volatility Tax Free and Tax Free Money Market Funds do not intend to
purchase any municipal obligations required, in the opinion of bond counsel, to
be treated as a tax preference item by shareholders when determining their
alternative minimum tax liability. Exempt income paid by the Funds is
includable in the tax base for determining the extent to which a shareholder's
Social Security or railroad retirement benefits will be subject to federal
income tax. Shareholders are required to disclose their receipt of tax-exempt
interest on their federal income tax returns. The Internal Revenue Code also
provides that interest on indebtedness incurred, or continued, to purchase or
carry Limited Volatility Tax Free and Tax Free Money Market Fund shares is not
deductible; and that persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds may not be able
to treat the dividends paid by either Fund as tax free. Such persons should
consult their tax advisers before purchasing shares of the Limited Volatility
Tax Free or Tax Free Money Market Funds.
Shareholders of the appropriate Funds will be notified after each calendar year
of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of the
prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of the Emerging Markets Fund's foreign
taxes withheld; of the Limited Volatility Tax Free and Tax Free Money Market
Funds' dividends subject to federal tax (if any) and attributable to each state;
of income which is a tax preference item (if any)
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<PAGE> 140
for alternative minimum tax purposes; and of the percentages of the U.S.
Government Money Market Fund's income attributable to US government, Treasury
and agency securities.
Each Fund is required to withhold 31% of all taxable dividends, distributions,
and redemption proceeds payable to any non-corporate shareholder which does not
provide the Fund with the shareholder's certified taxpayer identification number
or required certifications or which is subject to backup withholding.
Shareholders who are not US persons for purposes of federal income taxation
should consult with their tax advisers regarding the applicability of income,
estate or other taxes (including income tax withholding) on their investment in
a Fund or on dividends and distributions received by them from a Fund and the
application of foreign tax laws.
Shareholders should consult their tax advisers with respect to the applicability
of any state and local intangible property or income taxes to their shares of a
Fund and distributions and redemption proceeds received from a Fund.
Additional information on these and other tax matters relating to the
Funds and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.
CALCULATION OF FUND PERFORMANCE
From time to time, the Funds may advertise their performance in terms of average
annual total return, which is computed by finding the average annual compounded
rates of return over a period that would equate the initial amount invested to
the ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested on the reinvestment dates during the relevant time
period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for each of the Funds, with the
exception of the Equity T Fund (which was not offered for public
investment prior to the date of this Prospectus) are as follows:
<TABLE>
<CAPTION>
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1 YEAR ENDED 1995 1995 1995 INCEPTION
DECEMBER 31, 1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
----------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Real Estate Securities 10.87 17.55 -- 10.13 07/28/89
Emerging Markets (8.21) -- -- 7.23 01/29/93
Limited Volatility Tax Free 7.81 5.42 5.74 5.78 09/05/85
U.S. Government Money Market 5.98 4.42 5.92 5.97 09/05/85
Tax Free Money Market 3.76 3.41 -- 4.37 05/08/87
</TABLE>
The performance for the Emerging Markets Fund prior to April 1, 1995 is
reported gross of investment advisory fees. For periods thereafter, performance
results are reported net of investment advisory fees, but gross of any
investment services fees.
The Limited Volatility Tax Free Fund also may from time to time advertise its
yield. Yield, which is based on historical earnings and is not intended to
indicate future performance, is calculated by dividing the net investment income
per share earned during the most recent 30-day (or one month) period by the
maximum offering price per share on the last day of the month. This income is
then annualized. That is, the amount of income generated by the investment
during that 30-day (or one month) period is assumed to be generated each month
over a 12-month period and is shown as a percentage of the investment. For
purposes of the yield calculation, interest income is computed based on the
yield to maturity of each debt obligation and dividend income is computed based
upon the stated dividend rate of each security in the Fund's portfolio. The
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<PAGE> 141
calculation includes all recurring fees that are charged to all shareholder
accounts. The 30-day yield for the year ended December 31, 1995 for the Limited
Volatility Tax Free Fund was 3.90%.
The Limited Volatility Tax Free Fund may also utilize tax equivalent yields
computed in the same manner as yield above, with adjustment for a stated income
tax rate. The 30-day tax equivalent yield for the year ended December 31, 1995,
based on a tax rate of 39.6%, was 6.46%.
The Money Market Funds also may advertise their yields and effective yields.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The yield of the Money Market Funds refers to the
income generated by an investment in the Money Market Funds over a seven-day
period (which period will be stated in the advertisement). This yield is
calculated by determining the net change, exclusive of capital changes, in the
value of a hypothetical preexisting account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base return. This
income is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the income earned by an investment in
a Money Market Fund is assumed to be reinvested. The effective yield will be
slightly higher than the current yield because of the compounding effect of this
assumed reinvestment. The following are the current and effective yields for
the Money Market Funds during 1995 for the seven-day periods ended:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Money Market 5.80% 5.97% 5.98% 6.16% 5.77% 5.93% 5.76% 5.93%
Tax Free Money
Market 7-day 3.97% 4.05% 3.93% 4.01% 3.71% 3.78% 4.10% 4.18%
30-day 3.83% 3.90% 3.66% 3.72% 3.57% 3.63% 3.74% 3.80%
</TABLE>
The Tax Free Money Market Fund may also utilize tax equivalent yields computed
in the same manner as yield above, with adjustment for a stated income tax rate.
The following are the current and effective tax equivalent yields, based on a
tax rate of 39.6%, during 1995 for the seven-day or thirty-day periods ended:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax Free Money
Market 7-day 6.57% 6.71% 6.51% 6.64% 6.15% 6.25% 6.78% 6.92%
30-day 6.35% 6.46% 6.06% 6.17% 5.92% 6.02% 6.19% 6.29%
</TABLE>
Each Fund may also advertise non-standardized performance information that is
for periods in addition to those required to be presented.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The net asset value per share is calculated for each
Fund on each business day on which shares are offered or orders to redeem are
tendered. For the Real Estate Securities, the Emerging
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<PAGE> 142
Markets, the Equity T and the Limited Volatility Tax Free Funds, a
business day is one on which the New York Stock Exchange is open for trading. A
business day for the Money Market Funds includes any day on which the New York
Stock Exchange is open for trading and the Boston Federal Reserve Bank is open.
Net asset value per share is computed for each Fund by dividing the current
value of the Fund's assets, less its liabilities, by the number of shares of the
Fund outstanding, and rounding to the nearest cent. All Funds determine net
asset value as of the close of the regular session of the New York Stock
Exchange (currently 4:00 p.m. Eastern time). The U.S. Government Money Market
Fund also determines its net asset value as of 1:00 p.m. Eastern time, and the
Tax Free Money Market Fund as of 12:00 noon Eastern time.
VALUATION OF PORTFOLIO SECURITIES. With the exceptions noted below, the Funds
value portfolio securities at "fair market value." This generally means that
equity securities and fixed-income securities listed and traded principally on
any national securities exchange are valued on the basis of the last sale price
or, lacking any sale, at the closing bid price, on the primary exchange on which
the security is traded. United States over-the-counter equity and fixed-income
securities and options are valued on the basis of the closing bid price and
futures contracts are valued on the basis of the last sale price.
Because many fixed-income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed-income securities therefore may be
valued using prices provided by a pricing service when such prices are believed
to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over the counter are valued on the basis of the mean of bid prices. In the
absence of a last sale or mean bid price, respectively, such securities may be
valued on the basis of prices provided by a pricing service if those prices are
believed to reflect the fair market value of such securities.
The Money Market Funds' portfolio investments are valued on the basis of
amortized cost, a method by which each portfolio instrument is initially valued
at cost, and thereafter a constant accretion/amortization to maturity of any
discount or premium is assumed. Both Funds utilize the amortized cost valuation
method in accordance with Rule 2a-7 of the 1940 Act. Money market instruments
maturing within 60 days of the valuation date held by Funds other than the Money
Market Funds are also valued at "amortized cost," unless the Board determines
that amortized cost does not represent fair value. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Funds would
receive if they sold the instrument.
The municipal investments of the Limited Volatility Tax Free Fund are appraised
or priced by an independent pricing source, approved by the Trustees, which
utilizes information with respect to bond transactions, quotations from bond
dealers, market transactions in comparable securities and various relationships
between securities.
The Funds value securities for which market quotations are not readily available
at "fair value," as determined in good faith pursuant to procedures established
by the Board of Trustees.
PURCHASE OF FUND SHARES
Shares of the Funds are sold on each business day directly to Eligible Investors
at the net asset value next determined after an order is received in proper
form, and the order has been accepted. All purchases must be made in US
dollars. The Funds reserve the right to reject any purchase order.
ORDER PROCEDURES. Orders by all investors (except for participants in the Three
Day Settlement Program described below) to purchase Investment Company Fund
shares must be received by the Transfer Agent, either by telephone, mail or
entry into the shareholder recordkeeping system on a day when shares of the Fund
are offered and orders in proper form accepted prior to:
37
<PAGE> 143
<TABLE>
<S> <C>
Close of the New York Stock Real Estate Securities, Emerging Markets, Equity T and Limited
Exchange (currently 4:00 p.m. Volatility Tax Free Funds
Eastern time)
11:45 a.m. Eastern time Tax Free Money Market Fund
12:15 p.m. Eastern time U.S. Government Money Market Fund
</TABLE>
Orders for the Money Market Funds' shares placed prior to the above time and in
the proper form can be accepted for pricing and investment, and will begin to
earn income, on that day. Money Market Fund orders received after that time
will not be accepted for pricing and investment until the next business day.
Orders for shares of any Fund that are not accepted before the respective time
for that Fund can not be invested in the particular Fund nor begin to earn
income until the next day on which shares of that Fund are offered.
Payment Procedures: Payment for the purchase of Fund shares must be received by
the Funds' Custodian or Transfer Agent, depending on the method of payment, on
the day the order is accepted (except for participants in the Three Day
Settlement Program described below). There are several ways to pay for orders
for a Fund:
Federal Funds Wire. Payment for orders may be made by wiring federal funds to
the Funds' Custodian, State Street Bank and Trust Company.
Automated Clearing House ("ACH"). Payment for orders may be made through the
ACH to the Funds' Custodian, State Street Bank and Trust Company. However,
funds transferred by ACH may or may not be converted into federal funds the same
day depending on the time the funds are received and the bank wiring the funds.
If the funds are not converted the same day, they will be converted the next
business day. Therefore, the order would be placed the next business day.
Check. Payment for orders may be made by check or other negotiable bank draft
payable to "Frank Russell Investment Company" and mailed to the Transfer Agent,
P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary, but
checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investments in the Money Market Funds
will be effected only when the check or draft is converted to federal funds. The
investment will not begin to earn dividend income until the receipt of federal
funds by the relevant Fund. Investments in the non-Money Market Funds will be
effected upon receipt of the check or draft by the Transfer Agent, when the
check or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after the close of the New York Stock Exchange, the order will be
effected on the following business day.
IN-KIND EXCHANGE OF SECURITIES.
The Transfer Agent may, at its discretion, permit investors to purchase shares
through the exchange of securities they hold. Any securities exchanged must
meet the investment objective, policies and limitations of the particular Fund,
must have a readily ascertainable market value, must be liquid and must not be
subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled, which is usually within 15 days following the purchase by
exchange. A gain or loss for federal income tax purposes will generally be
realized by investors who are subject to federal taxation upon the exchange.
Investors interested in making an in-kind exchange are encouraged to consult
with their tax advisers.
The basis of the exchange will depend upon the relative net asset value of the
shares purchased and securities exchanged. Securities accepted by a Fund will
be valued in the same manner as the Fund values its assets. Any interest earned
on the securities following their delivery to the Transfer Agent and prior to
the exchange will be considered in valuing the securities. All interest,
dividends, subscription or other rights attached to the securities become the
property of the Fund, along with the securities.
THREE DAY SETTLEMENT PROGRAM.
The Investment Company will accept orders from financial institutions to
purchase shares of the Funds, other than the Money Market Funds, for settlement
on the third business day following the receipt of an order to be paid by a
federal wire if the investor has agreed in
38
<PAGE> 144
writing to indemnify the Fund against any losses as a result of nonreceipt of
payment. For further information on this program, contact the Investment
Company.
THIRD PARTY TRANSACTIONS.
Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment advisor or
others, may be required to pay additional fees by such Intermediary. Investors
should contact the Financial Intermediary for information concerning what
additional fees, if any, may be charged.
EXCHANGE PRIVILEGE.
Shareholders may exchange shares of any Fund offered by this Prospectus for
shares of any other Fund included in the Investment Company's other prospectuses
on the basis of current net asset value per share at the time of the exchange.
Shares of a Fund offered by this Prospectus may only be exchanged for shares of
a Fund offered by the Investment Company through another prospectus under
certain conditions and only in states where the exchange may be legally made.
For additional information, including prospectuses of other Investment Company
Funds, contact a financial intermediary or the Investment Company. Exchanges
may be made (i) by telephone if the registrations of the two accounts are
identical; or (ii) in writing addressed to the Investment Company.
An exchange is a redemption of shares and is treated as a sale for income tax
purposes, and a short or long-term capital gain or loss may be realized. The
Fund shares to be acquired will be purchased when the proceeds from the
redemption become available (up to seven days from the receipt of the request).
Each investor is encouraged to consult with his or her tax adviser. Exchanges
from Equity T Fund will be considered to be redemptions and will be
subject to a redemption fee. (See "Redemption of Fund Shares" in this
Prospectus).
REDEMPTION OF FUND SHARES.
SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE FUNDS
AT (800) 972-0700; IN WASHINGTON (206) 627-7001.
For each Fund except the Equity T Fund, Fund shares may be redeemed on
any business day at the net asset value next determined after the receipt of a
redemption request in proper form as described below. In the case of the
Equity T Fund, the redemption value of an investor's shares will be 99% of
the net asset value of the shares redeemed. The redemption fee is retained by
the Equity T Fund. See "Investment Objectives, Restrictions and
Policies - Equity T Fund" in this Prospectus for more information. As
with the other Funds, shares of the Equity T Fund may be redeemed on
any business day after the receipt of a redemption requests in proper form,
described below.
Payment will ordinarily be made in seven days. Generally, redemption proceeds
will be wire-transferred to the shareholder's account or to an alternate account
provided such request is given to the Transfer Agent in proper form, at a
domestic commercial bank which is a member of the Federal Reserve System.
Although the Funds currently do not charge such a fee, the Funds reserve the
right to charge a fee for the cost of wire-transferred redemptions of less than
$1,000. Payment for redemption requests of investments made by check may be
withheld for up to 15 days after the date of purchase to assure that checks in
payment for orders to purchase shares are collected by the Funds. Upon request,
redemption proceeds will be mailed to the shareholder's address of record or to
an alternate address provided such request is sent to the Transfer Agent in
proper form.
Request Procedures. Requests by all investors to redeem Investment Company Fund
shares must be received by the Transfer Agent, either by telephone, mail, entry
into the shareholder recordkeeping system, or through the Systematic Withdrawal
Payment Program, on the days requests to redeem are tendered, prior to:
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<PAGE> 145
<TABLE>
<S> <C>
Close of the New York Stock Real Estate Securities, Emerging Markets, Equity T and Limited
Exchange (currently 4:00 p.m. Volatility Tax Free Funds
Eastern time)
11:45 a.m. Eastern time Tax Free Money Market Fund
12:15 p.m. Eastern time U.S. Government Money Market Fund
</TABLE>
Redemption requests placed for the Money Market Funds prior to the above time
will be tendered that day. Requests for these Funds after the above time will
be taken until 4:00 p.m. Eastern time, but will not be tendered until the next
business day.
Requests for redemption by telephone or entry into the shareholder recordkeeping
system must follow the procedures set forth in the Account Registration and
Investment Instruction Form, or alternate procedures may be followed provided
such requests are given to the Transfer Agent in proper form. In the unexpected
event telephone lines are unavailable, shareholders should use the mail
redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. For all Funds,
the redemption price will be the net asset value
next determined after receipt by the Management Company of all required
documents in good order. In the case of the Equity T Fund, a redemption fee of
1% will be deducted from the amount of your redemption. "Good order" means
that the request must include the following:
A. A letter of instruction or a stock assignment designating
specifically the number of shares or dollar amount to be
redeemed, signed by all owners of the shares in the exact names
in which they appear on the account, together with a guarantee
of the signature of each owner by a bank, trust company or
member of a recognized stock exchange; and
B. Such other supporting legal documents, if required by
applicable law, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit sharing
plans.
Systematic Withdrawal Payment. The Systematic Withdrawal Payment ("SWP")
program is an automated method for redeeming a predetermined dollar amount from
a Fund shareholder account to meet a standing request. The program can be used
to meet any request for periodic distributions of assets from Fund shareholder
accounts. In view of its investment objective and management strategies,
shareholders of the Equity T Fund are not able to participate in the
SWP program.
SWP Offering Date and Payment Procedures. SWP distributions occur once a month
and are paid by wire or check, according to the instructions provided on the SWP
form. If a client has more than one Fund from which a SWP is to be received,
the client will receive one wire or check for each SWP Fund. SWP transactions
are recorded on the twenty-fifth day of each month. If the twenty- fifth day
falls on a weekend or holiday, the transaction will be recorded on the preceding
business day. SWP payment dates are the first business day after the trade
date. If the SWP is coming out of one of the Money Market Funds and the trade
date falls on a Friday or the day before a holiday, income will be earned until
the payment date.
Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.
SWP Distribution by Wire. Federal Funds Wire payments will be sent to
designated bank on the payment date.
SWP Distribution by Check. Checks will be sent by US Postal Service first class
mail, from Boston, Massachusetts, to the requested address on the payment date.
A Systematic Withdrawal Payment form must be completed and mailed to Frank
Russell Investment
40
<PAGE> 146
Management Company, Attention: Frank Russell Investment Company, Operations
Department, P.O. Box 1591, Tacoma, WA 98401-1591. The Systematic Withdrawal
Payment form must be received by Frank Russell Investment Management Company
five business days before the initial distribution date.
Redemption in Kind. A Fund may pay any portion of the redemption amount in
excess of $250,000 by a distribution in kind of securities from the Fund's
portfolio, in lieu of cash. Investors will incur brokerage charges on the sale
of these portfolio securities. The Funds reserve the right to suspend the right
of redemption or postpone the date of payment if any unlikely emergency
conditions, as specified in the 1940 Act or determined by the SEC, should
develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS AND REPORTS. Russell Fund
Distributors, Inc., a wholly owned subsidiary of the Management Company, is
the principal Distributor for Investment Company shares. The Distributor
receives no compensation from the Investment Company for its services.
State Street Bank and Trust Company ("State Street"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds and provides
portfolio recordkeeping services. State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Funds.
Coopers & Lybrand L.L.P., Boston, Massachusetts, are the Funds' independent
accountants. Shareholders will receive unaudited semiannual financial
statements and audited annual financial statements from Coopers & Lybrand L.L.P.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from the Management Company.
ORGANIZATION, CAPITALIZATION, AND VOTING. The Investment Company was organized
as a Maryland corporation on March 6, 1981, and commenced offering shares on
October 15, 1981. On January 2, 1985, the Investment Company reorganized by
changing its domicile and legal status to a Massachusetts business trust and now
operates under an amended Master Trust Agreement dated July 26, 1984. Frank
Russell Company has the right to grant the nonexclusive use of the name "Frank
Russell" or any derivation thereof to any other investment company or other
business enterprise, and to withdraw from the Investment Company the use of the
name "Frank Russell."
The Investment Company issues a single class of shares divisible into an
unlimited number of funds, each of which is a separate trust under Massachusetts
law. Each fund share represents an equal proportionate interest in that fund,
has a par value of $0.01 per share, and is entitled to such dividends and
distributions earned on the assets belonging to such fund as may be declared by
the Board of Trustees. Shares of a fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Each Fund share has one vote; there are no cumulative voting rights. There is
no Annual Meeting of shareholders, but Special Meetings may be held. On any
matter which affects only a particular Fund, only shareholders of that Fund vote
unless otherwise required by the 1940 Act or the amended Master Trust Agreement.
The Trustees hold office for the life of the Investment Company. A Trustee may
resign or retire, and a Trustee may be removed at any time by, in substance, a
vote of two-thirds of Investment Company shares. A vacancy in the Board of
Trustees shall be filled by the vote of a majority of the remaining Trustees so
long as, in substance, two-thirds of the Trustees have been elected by
shareholders.
At April 4, 1996, the following shareholder may be deemed by the 1940 Act
to "control" the Funds listed after their name, because they own more than 25%
of the voting shares of the indicated Funds: Second National Bank
(Saginaw) -- Tax Free Money
Market Fund.
MONEY MANAGER PROFILES. The money managers identified below have no other
affiliations with the Funds or with Frank Russell Company. Each money manager
has been in business for at least three years and is principally engaged in
managing institutional investment accounts. These managers may also serve as
managers or advisers to other Investment Company Funds, or to other clients of
Frank Russell Company, including its wholly owned subsidiary, Frank Russell
Trust Company.
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management, 757 Third Avenue, New York, NY 10017, is a
corporation whose two
41
<PAGE> 147
principals, Robert H. Steers and Martin Cohen, control the corporation within
the meaning of the 1940 Act.
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd., Bermuda House, St. Julian's Ave., St. Peter Port,
Guernsey, Channel Islands, is a limited liability company organized under the
laws of the state of Guernsey, the Channel Islands, and has been engaged in the
investment advisory business since 1990. Genesis Asset Managers, Ltd., is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. Genesis Asset Managers Ltd., is affiliated with and has common
investment executives with the Genesis Group of fund management companies. The
Genesis Group, whose holding company is Genesis Holdings Ltd., is controlled
32.58% by management and 67.42% by 12 outside shareholders, with the largest
single holding being 19.68%.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New York,
NY 10036, is a wholly owned subsidiary of J.P. Morgan and Co., Inc., a publicly
held bank holding company.
Montgomery Asset Management L.P., 600 Montgomery Street, 17th Floor, San
Francisco, CA 94111, is a California limited partnership and a registered
investment adviser. Montgomery Asset Management, Inc., is the general partner
of Montgomery Asset Management, L.P. and Montgomery Securities is the sole
limited partner. Montgomery Asset Management, Inc., and Montgomery Securities
may be deemed control persons of Montgomery Asset Management, L.P.
EQUITY T FUND
J.P. Morgan Investment Management, Inc. See: Emerging Markets Fund.
LIMITED VOLATILITY TAX FREE FUND
MFS Asset Management, Inc., 500 Boylston Street, Boston, MA 02116, a wholly
owned, indirect subsidiary of Sun Life Assurance Company of Canada (US), a
mutual insurance company.
T. Rowe Price Associates, Inc., 100 E. Pratt Street, Baltimore, MD 21202, whose
stock is publicly traded, a large portion of which is held by active employees.
U.S. GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management Company, 909 A Street, Tacoma, WA 98402, a
registered investment adviser wholly owned by Frank Russell Company.
TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C., One New York Plaza, 30th Floor, New York,
NY 10004, a registered investment adviser which is wholly owned by
its principals.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUNDS OR
THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
42
<PAGE> 148
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (206) 627-7001
MONEY MANAGERS
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management, Inc.
Montgomery Asset Management, L.P.
EQUITY T FUND
J.P. Morgan Investment Management, Inc.
LIMITED VOLATILITY TAX FREE FUND
MFS Asset Management, Inc.
T. Rowe Price Associates, Inc.
U.S. GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management Company
TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
Office of Shareholders Inquiries
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington, (206) 627-7001
43
<PAGE> 149
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
Frank Russell Investment Company is a single legal entity organized as a
Massachusetts business trust. The Investment Company operates investment
portfolios referred to as "Funds." The Investment Company offers shares of
beneficial interest in the Funds in three separate Prospectuses dated May 1,
1996. The Funds are divided into two groupings:
As of the date of this Statement of Additional Information, Investment Company
is comprised of the following investment portfolios, each of which commenced
operations on the date set forth opposite the portfolio's name:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Equity I Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Equity II Fund External Fee Fund December 28, 1981
- --------------------------------------------------------------------------------
Equity III Fund External Fee Fund November 27, 1981
- --------------------------------------------------------------------------------
Equity Q Fund External Fee Fund May 29, 1987
- --------------------------------------------------------------------------------
Equity T Fund External Fee Fund *
- --------------------------------------------------------------------------------
International Fund External Fee Fund January 31, 1983
- --------------------------------------------------------------------------------
Emerging Markets Fund External Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Fixed Income I Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Fixed Income II Fund External Fee Fund October 30, 1981
- --------------------------------------------------------------------------------
Fixed Income III Fund External Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Money Market Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Diversified Equity Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Special Growth Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Equity Income Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Quantitative Equity Fund Internal Fee Fund May 15, 1987
- --------------------------------------------------------------------------------
International Securities Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Real Estate Securities Fund Internal Fee Fund July 28, 1989
- --------------------------------------------------------------------------------
Diversified Bond Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Volatility Constrained Bond Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Multistrategy Bond Fund Internal Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Limited Volatility Tax Free Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
U.S. Government Money Market Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Tax Free Money Market Fund Internal Fee Fund May 8, 1987
- --------------------------------------------------------------------------------
</TABLE>
The eleven External Fee Funds, which had aggregate net assets of $4,295,573,313
on April 4, 1996. The twelve Internal Fee Funds which had aggregate net
assets of $3,850,250,985 on April 4, 1996.
* As of the date of this Statement of Additional Information, this portfolio has
not commenced operations.
<PAGE> 150
The principal distinction between the External Fee Funds and the Internal Fee
Funds is that a shareholder of the External Fee Funds may enter into a separate
agreement with the Management Company to obtain certain services from, and pay a
separate quarterly individual shareholder investment services fee directly to,
the Management Company. The amount of the fee is based upon the assets subject
to the agreement and the services obtained under that agreement. A shareholder
of the Internal Fee Funds does not execute such an agreement to acquire such
services and pays no such fees. In each case, the Management Company may charge
fees to a shareholder for non-investment services provided directly to that
shareholder.
This Statement of Additional Information supplements or describes in greater
detail information concerning the Investment Company and the Funds contained in
the Prospectuses of the Funds dated May 1, 1996. Nine of the eleven External Fee
Funds are described in the External Fee Funds' Prospectus, and eight of the
Internal Fee Funds are described in the Internal Fee Funds' Prospectus. Real
Estate Securities, Emerging Markets, Equity T, Limited Volatility Tax
Free, U.S. Government Money Market and Tax Free Money Market are described in
the Specialty Funds' Prospectus. This Statement is not a Prospectus; the
Statement should be read in conjunction with the Funds' Prospectuses.
Prospectuses may be obtained without charge by telephoning or writing the
Investment Company at the number or address shown above.
This Statement incorporates by reference the Investment Company's Annual Reports
to Shareholders for the year ended December 31, 1995. Copies of the Funds'
Annual Reports accompany this Statement.
-2-
<PAGE> 151
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE
Organization and Business History
Shareholder Meetings
Controlling Shareholders
Trustees and Officers
OPERATION OF THE INVESTMENT COMPANY
Service Providers
Consultant
Manager
Money Managers
Distributor
Custodian
Transfer and Dividend Disbursing Agent
Fund Expenses
Valuation of Fund Shares
Portfolio Transaction Policies
Portfolio Turnover Rate
Brokerage Allocations
Brokerage Commissions
Yield and Total Return Quotations
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Investment Restrictions
Investment Policies
Certain Investments
TAXES
RATINGS OF DEBT INSTRUMENTS
FINANCIAL STATEMENTS
</TABLE>
-3-
<PAGE> 152
STRUCTURE AND GOVERNANCE
Organization and Business History. The Investment Company commenced business
operations as a Maryland corporation in October, 1981 and on January 2, 1985
reorganized as a Massachusetts business trust.
The Investment Company is currently organized and operates under an amended
Master Trust Agreement dated July 26, 1984 and the provisions of Massachusetts
law governing the operation of a Massachusetts business trust. The Board of
Trustees may amend the Master Trust Agreement from time to time; provided,
however, that any amendment which would materially and adversely affect
shareholders of the Investment Company as a whole, or shareholders of a
particular Fund, must be approved by the holders of a majority of the shares of
the Investment Company or Fund, respectively.
The Investment Company is authorized to issue shares of beneficial interest, and
may divide the shares into two or more series, each of which evidences a pro
rata ownership interest in a different investment portfolio -- a "Fund." The
Trustees may, without seeking shareholder approval, create additional Funds at
any time. The amended Master Trust Agreement provides that a shareholder may be
required to redeem shares in a Fund under circumstances set forth in the Master
Trust Agreement.
Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that shareholders
shall not be subject to any personal liability for the acts or obligations of a
Fund and that every written agreement, obligation or other undertaking of the
Funds shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The amended Master Trust Agreement also provides
that the Investment Company shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of a Fund and satisfy any
judgment thereon. Thus, the risk of any shareholder incurring financial loss
beyond his investment on account of shareholder liability is limited to
circumstances in which a Fund itself would be unable to meet its obligations.
Shareholder Meetings. The Investment Company will not have an annual meeting of
shareholders, but special meetings may be held. Special meetings may be convened
by (i) the Board of Trustees, (ii) upon written request to the Board by
shareholders holding at least 10% of the outstanding shares, or (iii) upon the
Board's failure to honor the shareholders' request described above, by
shareholders holding at least 10% of the outstanding shares by giving notice of
the special meeting to shareholders.
Controlling Shareholders. The Trustees have the authority and responsibility to
manage the business of the Investment Company, and hold office for life unless
they resign or are removed by, in substance, a vote of two-thirds of the
Investment Company shares outstanding. Under these circumstances, no one person,
entity or shareholder "controls" the Investment Company.
-4-
<PAGE> 153
The following shareholders owned 5% or more of the voting shares of the
Investment Company or of the Funds at April 4, 1996:
Frank Russell Investment Company: U.S. National Bank of Oregon, Bancorp Tower
Building, 111 S.W. Fifth Avenue, Suite 1, Portland, OR 97204, 9.96%, record;
Second National Bank (Saginaw), 101 North Washington Avenue, Saginaw, MI 48607,
9.62%, record; Ronald Blue & Company, 1100 Johnson Ferry Road N.E., Suite 600,
Atlanta, GA 30342, 9.61%, record; FMB Trust, One Financial Plaza, 10717 Adams
Street, Holland, MI 49423 6.40%, record; Miller/Russell and Associates, Inc.,
2929 E. Camelback Road, Suite 223, Phoenix, AZ 85016, 5.26%, record.
Equity I: U.S. National Bank of Oregon, 36.73%, record; Ronald Blue & Company,
9.50%, record; First Fidelity Bank, N.A., 765 Broad Street, Newark, NJ 07102,
8.65%, record; National City Bank of Minneapolis, Sixth on the Mall, 651
Nicollet Mall, Minneapolis, MN 55402, 6.78%, record.
Equity II: National City Bank of Minneapolis, 15.42%, record; Ronald Blue &
Company, 14.91%, record; U.S. National Bank of Oregon, 12.20%, record; First
Fidelity Bank, N.A., 8.10%, record; Anchor/Russell Capital Advisors, Inc., One
Post Office Square, 38th Floor, Boston, MA 02109, 5.42%, record.
Equity III: U.S. National Bank of Oregon, 21.42%, record; Firstar Bank
Sheboygan, N.A., 605 North Eight Street, Sheboygan, WI 53081, 12.07%, record;
First Fidelity Bank, N.A., 11.76%, record; National City Bank of Minneapolis,
9.90%, record; Ingham/Russell Investment Advisors, Inc., 1570 Madruga Avenue,
4th Floor, Coral Gables, FL 33146, 6.24%, record; Ronald Blue & Company, 5.16%,
record; Anchor/Russell Capital Advisors, Inc., 5.09%, record.
Equity Q: U.S. National Bank of Oregon, 43.03%, record; Ronald Blue & Company,
11.38%, record; First Fidelity Bank, N.A., 8.15%, record; National City Bank of
Minneapolis, 7.79%, record; Anchor/Russell Capital Advisors, Inc., 5.42%,
record.
International: U.S. National Bank of Oregon, 37.15%, record; Ronald Blue &
Company, 10.27%, record; National City Bank of Minneapolis, 7.48%, record.
Emerging Markets: U.S. National Bank of Oregon, 23.48%, record; Ronald Blue &
Company, 10.65%, record; Atlantic Capital Management, LLC, 7404-B Chapel Hill
Road, Raleigh, NC 27607, 5.42%, record.
Fixed Income I: U.S. National Bank of Oregon, 20.48%, record; First Fidelity
Bank, N.A., 18.21%, record; National City Bank of Minneapolis, 17.59%, record;
Ronald Blue & Company, 8.81%, record; Anchor/Russell Capital Advisors, Inc.,
6.13%, record.
Fixed Income II: Ronald Blue & Company, 22.69%, record; U.S. National Bank of
Oregon, 10.79%, record; Anchor/Russell Capital Advisors, Inc., 10.31%, record;
First Tennessee Bank, N.A. FBO Knox County, Plaza Tower 5th Floor, 800 South Gay
Street, Knoxville TN 37995, 9.57%, record; National City Bank of Minneapolis,
8.28%, record; Boys Republic, 3493 Grand Avenue, Chino, CA 91709, 7.92%,
record; Reber/Russell Company, 1225 Seventeenth Street, Suite 1400, Denver, CO
80202, 6.66%, record; First Fidelity Bank, N.A., 5.47%, record.
Fixed Income III: U.S. National Bank of Oregon, 39.95%, record; Ronald Blue &
Company, 19.16%, record, Miller/Russell and Associates, Inc., 5.57%, record;
Savant/Russell, Inc., 461 Second Street, Suite 151, San Francisco, CA 94107,
5.15%, record.
Diversified Equity: FMB Trust, 6.82%, record.
Special Growth: FMB Trust, 10.93%, record; Hawaiian Trust Investment Services,
130 Merchant Street, 10th Floor Tower, Honolulu, HI 96813, 7.94%, record.
Equity Income: FMB Trust, 10.20%, record; Hawaiian Trust Investment Services,
8.01%, record; Second National Bank (Saginaw), 6.77%, record.
Quantitative Equity: FMB Trust, 11.11%, record.
International Securities: FMB Trust, 6.71%, record; First Tennessee Bank N.A.
FBO Knox County, 6.35%, record; Hawaiian Trust Investment Services, 6.17%,
record.
Real Estate Securities: U.S. National Bank of Oregon, 20.43%, record; Ronald
Blue & Company, 16.52%, record.
Diversified Bond: Second National Bank (Saginaw), 13.60%, record; FMB Trust,
10.58%, record; Hawaiian Trust Investment Services, 6.90%, record; Society Bank,
Michigan, 100 South Main Street, Ann Arbor, MI 48104, 6.04%, record.
Volatility Constrained Bond: Commerce Bank, 416 Main Street 2nd Floor, Peoria,
IL 61602-1126, 6.26%, record; CP&S/Russell, 1508 Elizabeth Avenue, Charlotte, NC
28204, 5.81%, record; Ronald Blue & Company, 5.55%, record; First Tennessee Bank
N.A. FBO Knox County, 5.17%, record.
Multistrategy Bond: Halbert, Hargrove/Russell, 111 West Ocean Boulevard, Suite
1240, Long Beach, CA 90802, 8.54%, record; Empire National Bank, 1227 East Front
Street, Traverse City, MI 49686, 6.47%, record; Ronald Blue & Company, 6.23%,
record; IFG/Russell Advisors, Inc., 1205 Westlakes Drive, Suite 365, Berwyn, PA
19312, 5.65%, record; Anchor/Russell Capital Advisors, Inc., 5.48%, record;
National Bank of Alaska, 301 West Northern Lights Boulevard, Anchorage AK 99503,
5.28%, record; Indiana Trust & Investment Management Company, 3930 Edison Lakes
Parkway, Suite 250, Mishawaka, IN 46545, 5.06%, record.
Limited Volatility Tax Free: Ronald Blue & Company, 21.20%, record; Halbert,
Hargrove/Russell, 11.80%, record; Branson Fowlkes/Russell Inc., 2603 Augusta,
Suite 711, Houston, TX 77057, 9.32%, record; Zions First National Bank,
One South Main Street, Salt Lake City, UT 84111, 6.98%, record; Norwest Bank
Iowa, N.A., 666 Walnut Street, 3rd Floor, Des Moines, IA 50309, 6.05% record.
U.S. Government Money Market: Ronald Blue & Company, 13.48%, record;
Tri-Advisors Investment Services, Inc., 221 West Crest Street, Suite 300,
Escondido, CA 92025, 6.85%, record; Miller/Russell and Associates, Inc., 6.47%,
record; Sterling National Bank & Trust Company, 355 Lexington Avenue at 40th
Street, New York, NY 10017, 5.17%, record.
Tax Free Money Market: Second National Bank (Saginaw), 45.41%, record; FMB
Trust, 21.81%, record; Miller/Russell and Associates, Inc., 12.83%, record;
Branson Fowlkes/Russell, 5.28%, record.
Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. The officers, all of whom are employed by
and are officers of Frank Russell Investment Management Company or its
affiliates, are responsible for the day-to-day management and administration of
the Funds' operations.
The Investment Company paid $96,696 for the year ended December 31, 1995 to
the Trustees as a group who are not officers or employees of the Management
Company or its affiliates. Trustees are paid an annual fee plus travel and other
expenses incurred in attending Board meetings. The Investment Company's officers
and employees are paid by Frank Russell Investment Management Company or its
affiliates.
The following lists the Trustees and officers and their positions with the
Investment Company, their ages, their present and principal occupations during
the past five years and the mailing addresses of Trustees who are not affiliated
with the Investment Company. The mailing address for all Trustees and officers
affiliated with the Investment Company is Frank Russell Investment Company, 909
A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested person"
of the Investment Company as defined in the Investment Company Act of l940, as
amended (the "1940 Act"). As used in the table, "Frank Russell Company" includes
its corporate predecessor, Frank Russell Co., Inc.
*George F. Russell, Jr.--63 years old--Trustee and Chairman of the Board.
Director and Chairman of the Board, Frank Russell Company; Director, Chief
Executive Officer and Chairman of the Board, Russell Building Management
Company, Inc., Director and Chairman of the Board, Frank Russell Securities,
Inc. and Frank Russell Trust Company, Director, Frank Russell Investment
Management Company; Director, Chairman of the Board and President of Russell
20-20 Association. March 1988 to April 1992, Director of Russell-Zisler, Inc.
(real estate consulting); January 1957 to March 1993, Chief Executive Officer of
Frank Russell Company; March 1982 to November 1995, Chairman of the Board of
Frank Russell Investment Management Company.
*Lynn L. Anderson--57 years old--Trustee, President and Chief Executive Officer.
Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc. Director and President, Russell Insurance Funds, Inc.;
Trustee and President, The Seven Seas Series Fund (investment company);
Director, Chief Executive Officer and Chairman of the Board, Frank Russell
Investment Management Company; Director, Chief Executive Officer and President,
Frank Russell Trust Company; Director and Chairman, Frank Russell Investment
Company Public Limited Company; Director and Chairman of the Board, Frank
Russell Company (Delaware); March 1989 to June 1993, Director, Frank Russell
Company, Director of Frank Russell Investments (Ireland) Limited, Director and
Chairman, Frank Russell Investment Company Public Limited Company. Until
September 1994, Director and President, The Laurel Funds, Inc. (investment
company).
-5-
<PAGE> 154
Paul E. Anderson--64 years old--Trustee. 23 Forest Glen Lane, Tacoma,
Washington 98409. President, Vancouver Door Company, Inc.
Paul Anton, Ph.D.--76 years old--Trustee. 2218 55th Street, N.W., Gig Harbor,
Washington 98335. President, Paul Anton and Associates (Marketing Consultant on
emerging international markets for small corporations). From 1986 to 1991,
Visiting Associate Professor, International Marketing School of Business
Administration and International Trade Institute, Portland State University,
Portland, Oregon; 1991-1994, Adjunct Professor, International Marketing,
University of Washington, Tacoma, Washington.
William E. Baxter--60 years old--Trustee. 800 North C Street, Tacoma,
Washington 98403. Retired.
Lee C. Gingrich--65 years old--Trustee. 1730 North Jackson, Tacoma, Washington
98406. President, Gingrich Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer--69 years old--Trustee. 2025 Narrows View Circle, P. O. Box
1057, Gig Harbor, Washington 98335. Retired. Until August 1981, Director, Vice
President and Treasurer of Frank Russell Company; since October 1980, Director
of Frank Russell Trust Company.
George W. Weber--44 years old--Treasurer and Chief Accounting Officer. Director
of Finance and Operations, Frank Russell Trust Company; Director, Fund
Administration and Operations of Frank Russell Management Company and Russell
Fund Distributors, Inc. Director, Treasurer and Chief Accounting Officer of
Russell Insurance Funds; Senior Vice President and Fund Treasurer of Seven Seas
Series Fund (investment company) March 1993 to January 1996, Vice President,
Operations, Funds Management, J.P. Morgan; December 1985 to March 1993, Senior
Vice President, Operations, Frank Russell Investment Company, The Laurel Funds,
Inc. and The Seven Seas Series Fund (investment companies); Director of
Operations, Frank Russell Investment Management Company and Frank Russell Trust
Company; Director, Russell Fund Distributors, Inc.
*Randall P. Lert--42 years old--Director of Investments. Senior Investment
Officer and Director of Investment Services, Frank Russell Trust Company;
Director and Chief Investment Officer, Frank Russell Investment Management
Company; Director and Chief Investment Officer, Russell Fund Distributors, Inc.
April 1990 to November 1995, Director of Investments of Frank Russell General
Investment Management Company.
*Karl J. Ege--54 years old--Secretary and General Counsel. Director, Secretary
and General Counsel of Frank Russell Company, Director and Secretary and
Russell Insurance Funds; Secretary and General Counsel of Frank Russell
Investment Management Company, Frank Russell Trust Company and Russell Fund
Distributors, Inc.; Director and Secretary of Russell Building Management
Company; Director and Assistant Secretary of Frank Russell Company Limited and
Russell Systems Ltd. Director, Frank Russell Investment Company LLC, Frank
Russell Investments (Cayman) Ltd., Frank Russell Investment Company Public
Limited Company and Frank Russell Investments (Ireland) Limited; Director and
Secretary, Frank Russell Company (Delaware) and Frank Russell International
Services, Co., Inc.; Director,
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<PAGE> 155
Secretary and General Counsel, Russell Fiduciary Services Company and Frank
Russell Capital Inc.; Director of Frank Russell Company, S.A., Frank Russell
Japan, Frank Russell Company (N.Z.) Limited and Russell Investment Nominee Co.
PTY Ltd., Director and Secretary, Russell 20-20 Association. From July 1992 to
June 1994, Director, President and Secretary of Frank Russell Shelf Corporation.
From 1972 to 1991, Partner, Bogle and Gates (law firm).
*Peter Apanovitch--51 years old--Manager of Short-Term Investment Funds.
Manager of Short-Term Investment Funds, Frank Russell Investment Management
Company and Frank Russell Trust Company.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE*
- -----------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
Trustee from the Benefits Accrued Retirement From the
Investment as Part of the Investment
Company Investment Company Paid to
Company Trustees
Expenses
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $ 0 $0 $0 $ 0
- -----------------------------------------------------------------------------------------------------------
Paul E. Anderson $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------
Paul Anton, PhD $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------
William E. Baxter $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------
Lee C. Gingrich $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------
Eleanor W. Palmer $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------
George F. Russell $ 0 $0 $0 $ 0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Effective April 28, 1995; information is expected to remain accurate through
1996.
OPERATION OF THE INVESTMENT COMPANY
Service Providers. Most of the Investment Company's necessary day-to-day
operations are performed by separate business organizations under contract to
the Investment Company. The principal service providers are:
Consultant Frank Russell Company
Manager, Transfer and Dividend Frank Russell Investment Management
Disbursing Agent Company
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
Consultant. Frank Russell Company, the corporate parent of the Management
Company, was responsible for organizing the Investment Company and provides
ongoing consulting services, described in the Prospectuses, to the Investment
Company and the Management Company. Frank Russell Company provides (i) Portfolio
Verification Services ("PVS"), which are based upon a transactional verification
of securities purchases and sales, cash
-7-
<PAGE> 156
transactions and other investment portfolio operations of each money manager's
portfolio except money managers for the Equity T, Money Market, Limited
Volatility Tax Free, U.S. Government Money Market and Tax Free Money Market
Funds, and (ii) Analysis of International Management Reports ("AIM") by country
on each International, Emerging Markets and International Securities Funds'
money manager's portfolio. The reports are paid for by the Funds and provide
certain of the financial and tax accounting information required by the
Investment Company.
The Management Company does not pay Frank Russell Company an annual fee for
consulting services.
For the years ended December 31, 1995, 1994 and 1993, respectively, the Funds
accrued fees for PVS and AIM Reports from Frank Russell Company as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Equity I $ 25,946 $25,182 $25,000
Equity II 20,268 21,186 17,859
Equity III 12,000 12,000 11,255
Equity Q 23,375 23,631 23,000
International 167,632 62,137 61,334
Emerging Markets* 73,250 47,431 29,062
Fixed Income I 52,174 41,500 34,725
Fixed Income II 21,739 23,372 20,160
Fixed Income III* 25,990 26,752 18,750
Diversified Equity 25,080 25,000 25,000
Special Growth 18,212 23,613 20,875
Equity Income 12,000 12,000 11,593
Quantitative Equity 23,062 23,299 23,000
International Securities 165,549 62,137 61,333
Real Estate Securities 5,231 5,000 5,000
Diversified Bond 56,280 39,173 31,274
Volatility Constrained Bond 22,829 24,982 20,098
Multistrategy Bond* 26,872 27,022 18,750
</TABLE>
- ------------
* The Emerging Markets, Fixed Income III and Multistrategy Bond Funds
commenced operations on January 29, 1993.
Equity T Fund was not offered for public investment during this period.
Frank Russell Company provides comprehensive consulting and money manager
evaluation services to institutional clients, including the Management Company
and Frank Russell Trust Company, and to high net worth individuals and families
($100 million) through its
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<PAGE> 157
Russell Private Investment Division. Frank Russell Company also provides: (i)
consulting services for international investment to these and other clients
through its International Division and its wholly owned subsidiaries, Frank
Russell Company London (Frank Russell Company Limited), Frank Russell Canada
(Frank Russell Canada Limited/Limitee), Frank Russell Australia (Frank Russell
Company Pty., Limited), Frank Russell Japan, Frank Russell AG (Zurich), Frank
Russell Company S.A. (Paris) and Frank Russell Company (N.Z.) Limited
(Auckland), and (ii) investment account and portfolio evaluation services to
corporate pension plan sponsors and institutional money managers through its
Russell Data Services Division. Frank Russell Securities, Inc., a wholly owned
subsidiary of Frank Russell Company, carries on an institutional brokerage
business as a member of the New York Stock Exchange. Frank Russell Capital Inc.,
a wholly owned subsidiary of Frank Russell Company, carries on an investment
banking business as a registered broker-dealer. Frank Russell Trust Company, a
wholly-owned subsidiary of Frank Russell Company, provides comprehensive trust
and investment management services to corporate pension and profit-sharing
plans. Frank Russell Investments (Cayman) Ltd., a wholly owned subsidiary of
Frank Russell Company, provides investment advice and other services. Frank
Russell Investment (Ireland) Ltd., a wholly owned subsidiary of Frank Russell
Company, provides investment advice and other services. Frank Russell
International Services Co., Inc., a wholly owned subsidiary of Frank Russell
Company, provides services to U.S. personnel secunded to overseas enterprises.
Russell Fiduciary Services Company, a wholly owned subsidiary of Frank Russell
Company, provides fiduciary services to pension and welfare benefit plans and
other institutional investors. The mailing address of Frank Russell Company is
909 A Street, Tacoma, WA 98402.
Manager. Frank Russell Investment Management Company provides or oversees the
provision of all general management and administration, investment advisory and
portfolio management, and distribution services for the Funds. The Management
Company provides the Funds with office space, equipment and the personnel
necessary to operate and administer the Funds' business and to supervise the
provision of services by third parties such as the money managers and custodian.
The Management Company also develops the investment programs for each of the
Funds, selects money managers for the Funds (subject to approval by the Board of
Trustees), allocates assets among money managers, monitors the money managers'
investment programs and results, and may exercise investment discretion over
assets invested in the Funds' Liquidity Portfolios. (See, "Investment Policies
- -- Liquidity Portfolios.") The Management Company also acts as the Investment
Company's transfer agent, dividend disbursing agent and as the money manager for
the Money Market and U.S. Government Money Market Funds. The Management Company,
as agent for the Investment Company, pays the money managers' fees for the
Funds, as a fiduciary for the Funds.
Prior to April 1, 1995, the External Fee Funds paid no management fee to the
Management Company. Each shareholder entered into a written Asset Management
Services Agreement with the Management Company and agreed to pay annual fees,
billed quarterly on a pro rata basis and calculated as a specified percentage of
the average assets which the shareholder had invested at each month end in any
of the Funds. Beginning April 1, 1995, the
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<PAGE> 158
Investment Company's Management Agreement was amended to provide that each
External Fee Fund will pay an annual management fee directly to the Management
Company, billed monthly on a pro rata basis and calculated as a specified
percentage of the average daily net assets of each of the External Fee Funds.
(See the External Fee Funds' Prospectus and the Specialty Funds' Prospectus for
the External Fee Funds' annual percentage rates.) A shareholder of the External
Fee Funds would continue to enter into a written Asset Management Services
Agreement with the Management Company to obtain separately individual
shareholder services, and therefore would pay fees under such agreement based on
a specified percentage of average assets which are subject to the agreement
concerning the Management Company's provision of individual shareholder
investment services with respect to that shareholder.
Each of the Funds pays an annual management fee directly to the Management
Company, billed monthly on a pro rata basis and calculated as a specified
percentage of the average daily net assets of each of the Funds. (See the Funds'
Prospectuses for the Funds' annual percentage rates.)
The following Internal Fee Funds paid the Management Company the listed
management fees for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Diversified Equity $3,842,471 $3,156,276 $2,859,190
Special Growth 2,588,270 2,028,150 1,544,101
Equity Income 1,314,461 1,196,187 1,204,256
Quantitative Equity 3,469,134 2,712,324 2,209,895
International Securities 5,723,534 5,096,797 3,376,561
Real Estate Securities 2,065,552 1,541,758 968,541
Diversified Bond 2,308,823 2,263,561 2,063,142
Volatility Constrained Bond 985,215 1,094,128 1,232,493
Multistrategy Bond* 1,217,039 945,756 275,047
Limited Volatility Tax Free 294,007 290,090 212,524
U.S. Government Money Market 338,745 207,926 256,180
Tax Free Money Market 214,949 228,123 157,066
</TABLE>
- ------------
* Multistrategy Bond Fund commenced operations on January 29, 1993.
Equity T Fund was not offered for public investment during this
period.
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<PAGE> 159
For the period from April 1, 1995 through December 31, 1995, the External Fee
Funds paid the Management Company the following management fees:
<TABLE>
<S> <C>
Equity I $3,021,465
Equity II 1,456,132
Equity III 945,888
Equity Q 2,434,051
International 4,112,338
Emerging Markets 1,380,549
Fixed Income I 1,330,021
Fixed Income II 626,548
Fixed Income III 892,253
Money Market 980,668
</TABLE>
Equity T Fund was not offered for public investment during this period.
During 1993, the Management Company reimbursed the Emerging Markets, Fixed
Income III and Multistrategy Bond Funds for all expenses exceeding 0.80%, 0.20%
and 0.85%, respectively, on an annualized basis of average net assets. In 1994,
reimbursements for the Emerging Markets and Multistrategy Bond Funds were
$13,539 and $66,525, respectively. As a result of the reimbursement, management
fees paid by the Multistrategy Bond Fund amounted to $879,231. The amounts
reimbursed for the Emerging Markets, Fixed Income III and Multistrategy Bond
Funds in 1993 were $187,755, $103,620, and $148,504, respectively. As a result
of the reimbursement, management fees paid by the Multistrategy Bond Fund
amounted to $126,543.
Through March 31, 1995, the Management Company reimbursed the Emerging Markets,
Fixed Income III and Multistrategy Bond Funds for all expenses exceeding 0.80%,
0.20% and 0.85% of average daily net assets on an annual basis, respectively.
Effective April 1, 1995, the Management Company reimbursed the Emerging Markets,
Fixed Income III and Multistrategy Bond Funds for all expenses exceeding 2.00%,
0.75% and 0.85% of average daily net assets on an annual basis, respectively. In
1995, reimbursements for the Emerging Markets and Multistrategy Bond Funds were
$37,115 and $83,382, respectively. No reimbursement was necessary for the Fixed
Income III Fund. As a result of the reimbursements, management fees paid by the
Emerging Markets and Multistrategy Bond Funds amounted to $1,343,434 and
$1,187,657, respectively. Additionally, the Management Company waived fees of
$261,988 and $980,668 for the U.S. Government Money Market and Money Market
Funds, respectively. As a result of the waivers, management fees paid by the
U.S. Government Money Market and Money Market Funds amounted to $76,757 and $0,
respectively.
The Management Company is a wholly owned subsidiary of Frank Russell Company.
The Management Company's mailing address is 909 A Street, Tacoma, WA 98402.
Money Managers. Except with respect to the Money Market and U.S. Government
Money Market Funds, the money managers have no affiliations or relationships
with the Investment Company or the Management Company other than as
discretionary managers for all or a portion of a Fund's portfolio, except some
money managers (and their affiliates) may effect brokerage transactions for the
Funds (see, "Brokerage Allocations" and "Brokerage Commissions"). Money managers
may serve as advisers or discretionary managers for Frank Russell Trust Company,
other consulting clients of Frank Russell Company, other off-shore vehicles
and/or for accounts which have no business relationship with the Frank Russell
Company organization.
From its management fees, the Management Company, as agent for the Investment
Company, pays all fees to the money managers for their investment selection
services. Quarterly, each money manager is paid the pro rata portion of an
annual fee, based on the average for the quarter of all the assets allocated to
the money manager. For the period,
-11-
<PAGE> 160
management fees paid to the money managers were Equity I $1,572,199; Equity II
$999,551; Equity III $399,940; Fixed Income I $487,575; Fixed Income II
$305,646; Fixed Income III $456,590; International $3,143,259; Equity Q
$1,075,446; Emerging Markets $990,905; Diversified Equity $1,209,215; Special
Growth $1,111,417; Equity Income $326,253; Diversified Bond $448,354; Volatility
Constrained Bond $372,467; International Securities $2,668,349;
Multistrategy Bond $436,464; Quantitative Equity $931,171; Real Estate
Securities $776,312; Limited Volatility Tax Free $146,084 and Tax Free
Money Market $84,857. The Equity T Fund has yet to begin operations.
Fees paid to the money managers are not affected by any voluntary or statutory
expense limitations. Some money managers may receive investment research
prepared by Frank Russell Company as additional compensation; or may receive
brokerage commissions for executing portfolio transactions for the Funds through
broker-dealer affiliates.
Distributor. Russell Fund Distributors, Inc. serves as the distributor of the
Investment Company shares. The distributor receives no compensation from the
Investment Company for its services. The distributor is a wholly owned
subsidiary of the Management Company and its mailing address is 909 A Street,
Tacoma, WA 98402.
Custodian. State Street Bank and Trust Company ("State Street") serves as the
custodian for the Investment Company. State Street also provides the basic
portfolio recordkeeping required by each of the Funds for regulatory and
financial reporting purposes. State Street is paid an annual fee of $16,800 per
portfolio per fund, except for Emerging Markets, which is subject to an annual
fee of $18,000, plus specified transaction costs per portfolio per Fund for
these portfolio recordkeeping services.
Transfer and Dividend Disbursing Agent. The Management Company serves as
Transfer Agent for the Investment Company. For this service, the Management
Company is paid a fee of $20.00 per shareholder transaction by all Funds except
Money Market, U.S. Government Money Market and Tax Free Money Market Funds.
The Money Market, U.S. Government Money Market and Tax Free Money Market Funds
pay $15.00 per Shareholder Transaction. The Management Company is also
reimbursed by the Investment Company for certain out-of-pocket expenses
including postage, taxes, wires, stationery and telephone.
Independent Accountants. Coopers & Lybrand L.L.P. serves as the independent
accountants of the Investment Company. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards and federal
tax returns. The mailing address of Coopers & Lybrand L.L.P. is One Post Office
Square, Boston, MA 02109.
Fund Expenses. The Funds will pay all their expenses other than those expressly
assumed by the Management Company. The principal expense of the Funds is the
annual management fee payable to the Management Company. The Funds' other
expenses include: fees for independent accountants, legal, transfer agent,
registrar, custodian, dividend disbursement, and portfolio and shareholder
recordkeeping services fees for PVS and AIM Reports, and maintenance of tax
records payable to Frank Russell Company (except for Money Market, Limited
Volatility Tax Free, U.S. Government Money Market, Equity T
-12-
<PAGE> 161
and Tax Free Money Market Funds); state taxes; brokerage fees and
commissions; insurance premiums; association membership dues; fees for filing of
reports and registering shares with regulatory bodies; and such extraordinary
expenses as may arise, such as federal taxes and expenses incurred in connection
with litigation proceedings and claims and the legal obligations of the
Investment Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents with respect thereto.
Whenever an expense can be attributed to a particular Fund, the expense is
charged to that Fund. Other common expenses are allocated among the Funds based
primarily upon their relative net assets.
As of the date of this Statement of Additional Information, the Management
Company has voluntarily agreed to waive all or a portion of its Management Fee
with respect to certain Funds. These limits may be changed or rescinded at any
time. (See, the Prospectuses of the External Fee Funds, the Internal Fee Funds
and the Specialty Funds, for the expense guarantees.) In addition to these
"voluntary limits," if the expenses of any Fund exceed the expense limitations
established by the State of California, the Management Company will pay the
excess amount. California's expense limitation is 2.5% of a Fund's first $30
million of average net assets, 2.0% of the next $70 million of average net
assets, and 1.5% of the remaining average net assets for any year.
Valuation of Fund Shares. The net asset value per share is calculated for each
Fund on each business day on which shares are offered or orders to redeem are
tendered. A business day is one on which the New York Stock Exchange is open for
trading, and for the Money Market, U.S. Government Money Market, and Tax Free
Money Market Funds, any day on which both the New York Stock Exchange is open
for trading and the Boston Federal Reserve Bank is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Boston Federal Reserve Bank is open for
business Good Friday and every day the New York Stock Exchange is open, except
Martin Luther King Day, Columbus Day and Veterans Day.
The International, Emerging Markets, International Securities, Fixed Income I,
Diversified Bond, Fixed Income III and Multistrategy Bond Funds' portfolio
securities actively trade on foreign exchanges which may trade on Saturdays and
on days that the Funds do not offer or redeem shares. The trading of portfolio
securities on foreign exchanges on such days may significantly increase or
decrease the net asset value of Fund shares when the shareholder is not able to
purchase or redeem Fund shares. Further, because foreign securities markets may
close prior to the time the Funds determine net asset value, events affecting
the value of the portfolio securities occurring between the time prices are
determined and the time the Funds calculate net asset value may not be reflected
in the calculation of net asset value unless the Management Company determines
that a particular event would materially affect the net asset value.
-13-
<PAGE> 162
Portfolio Transaction Policies. Generally, securities are purchased for Equity
I, Equity III, Equity Q, International, Emerging Markets, Fixed Income I,
Diversified Equity, Equity Income, Quantitative Equity, International
Securities, Real Estate Securities and Diversified Bond Funds for investment
income and/or capital appreciation and not for short-term trading profits.
However, these Funds may dispose of securities without regard to the time they
have been held when such action, for defensive or other purposes, appears
advisable to its money managers. Equity II, Fixed Income II, Fixed Income III,
Special Growth, Volatility Constrained Bond, Multistrategy Bond and Limited
Volatility Tax Free Funds trade more actively to realize gains and/or to
increase yields on investments by trading to take advantage of short-term market
variations. This policy is expected to result in higher portfolio turnover for
these Funds. Conversely, Equity T Fund, which seeks to minimize the
impact of taxes on its shareholders, attempts to limit short-term capital gains
and to minimize the realization of long-term capital gains. These policies are
expected to result in a low portfolio turnover rate for the Fund.
The portfolio turnover rates for certain Funds are likely to be somewhat higher
than the rates for comparable mutual funds with a single money manager.
Decisions to buy and sell securities for each Fund are made by a money manager
independently from other money managers. Thus, one money manager could be
selling a security when another money manager for the same Fund is purchasing
the same security thereby increasing the Fund's portfolio turnover ratios and
brokerage commissions. The Funds' changes of money managers may also result in a
significant number of portfolio sales and purchases as the new money manager
restructures the former money manager's portfolio. In view of Equity T
Fund's investment objective and policies, the Fund's ability to change money
managers may be constrained.
The Funds, except the Limited Volatility Tax Free and Equity T Funds,
do not give significant weight to attempting to realize long-term, rather than
short-term, capital gains when making portfolio management decisions.
Portfolio Turnover Rate. The portfolio turnover rate for each Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts,
and repurchase agreements, are excluded.
The portfolio turnover rates for the last two years for each Fund (other than
the Money Market, U.S. Government Money Market and Tax Free Money Market Funds)
were:
<TABLE>
<CAPTION>
Years Ended
------------------------
12/31/95 12/31/94
-------- --------
<S> <C> <C>
Equity I 92% 75%
Equity II 89 58
Equity III 103 86
Equity Q 74 46
</TABLE>
-14-
<PAGE> 163
<TABLE>
<CAPTION>
<S> <C> <C>
International 37% 71%
Emerging Markets 71 57
Fixed Income I 138 174
Fixed Income II 269 234
Fixed Income III 141 134
Diversified Equity 93 58
Special Growth 88 55
Equity Income 92 90
Quantitative Equity 79 46
International Securities 43 72
Real Estate Securities 23 46
Diversified Bond 136 153
Volatility Constrained Bond 257 183
Multistrategy Bond 142 136
Limited Volatility Tax Free 74 72
</TABLE>
Equity T Fund was not offered for public investment during the
period. The anticipated annual portfolio turnover rate to the Equity T
Fund is expected to be 20%.
- ------------
Brokerage Allocations. Transactions on US stock exchanges involve the payment
of negotiated brokerage commissions; on non-US exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, including most debt
securities and money market instruments, but the price includes an undisclosed
payment in the form of a mark-up or mark-down. The cost of securities purchased
from underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection of a
broker or dealer to execute portfolio transactions is usually made by the money
manager. The Investment Company's Agreements with the Management Company and the
money managers provide, in substance and subject to specific directions from
officers of the Investment Company or the Management Company, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
is to seek the best overall terms available to the Fund. Securities will
ordinarily be purchased from the primary markets, and the money manager shall
consider all factors it deems relevant in assessing the best overall terms
available for any transaction, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any (for the specific transaction and on a continuing basis).
In addition, the Agreements authorize the Management Company and money manager,
respectively, in selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, to consider the
"brokerage and research
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<PAGE> 164
services" (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) provided to the Fund, the Management Company and/or to the
money manager (or their affiliates). The Management Company and the money
managers are authorized to cause the Funds to pay a commission to a broker or
dealer who provides such brokerage and research services for executing a
portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The
Management Company or the money manager, as appropriate, must determine in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided -- viewed in terms of that particular
transaction or in terms of all the accounts over which the Management Company or
the money manager exercises investment discretion. Any commission, fee or other
remuneration paid to an affiliated broker-dealer is paid in compliance with the
Investment Company's procedures adopted in accordance with Rule 17e-1 of the
1940 Act.
The Management Company does not expect the Investment Company ordinarily to
effect a significant portion of the Investment Company's total brokerage
business with broker-dealers affiliated with its money managers. However, a
money manager may effect portfolio transactions for the segment of a Fund's
portfolio assigned to the money manager with a broker-dealer affiliated with the
manager, as well as with brokers affiliated with other money managers.
The Investment Company effects portfolio transactions with or through Frank
Russell Securities, Inc., only when it has been determined by the applicable
money managers that the Investment Company will receive competitive execution,
price and commission. Frank Russell Securities, Inc. refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to the Management Company. As to brokerage
transactions effected by money managers on behalf of the Funds through Frank
Russell Securities, Inc. at the request of the Manager, research services
obtained from third party service providers at market rates are provided to the
Funds by Frank Russell Securities, Inc. Such research services include
performance measurement statistics, fund analytics systems and market monitoring
systems. As to other brokerage transactions effected by the Funds through Frank
Russell Securities, research services provided by Frank Russell Company and
Russell Data Services are provided to the money managers. Such services include
market performance indices, investment adviser performance information and
market analysis. This arrangement is used by Equity I, Equity II, Equity III,
Equity Q, International, Emerging Markets, Diversified Equity, Special Growth,
Equity Income, Quantitative Equity, International Securities and Real Estate
Securities Funds.
Brokerage Commissions. The Board of Trustees reviews, at least annually, the
commissions paid by the Funds to evaluate whether the commissions paid over
representative periods of time were reasonable in relation to commissions being
charged by other brokers and the benefits to the Funds. Frank Russell Company
maintains an extensive data base showing commissions paid by institutional
investors, which is the primary basis for making this evaluation. Certain
services received by the Management Company or
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<PAGE> 165
money managers attributable to a particular transaction may benefit one or more
other accounts for which investment discretion is exercised by the money
manager, or a Fund other than that for which the particular portfolio
transaction was effected. The fees of the money managers are not reduced by
reason of their receipt of such brokerage and research services.
During the last three years, the brokerage commissions paid by the Funds were:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Equity I $1,492,270 $1,102,030 $1,197,566
Equity II 452,355 327,972 301,635
Equity III 470,068 482,877 360,540
Equity Q 663,851 351,400 314,482
International 1,467,692 2,130,525 1,394,963
Emerging Markets* 1,039,478 635,093 310,566
Diversified Equity 1,118,548 807,894 943,992
Special Growth 467,162 382,307 382,457
Equity Income 413,220 388,380 318,701
Quantitative Equity 561,459 284,366 294,689
International
Securities 1,251,533 1,896,734 1,096,271
Real Estate Securities 419,508 627,282 454,990
========== ========== ==========
Total $9,817,144 $9,416,860 $7,370,852
========== ========== ==========
</TABLE>
* Emerging Markets Fund commenced operations on January 29, 1993.
Equity T was not offered for public investment during this period.
The principal reasons for changes in several Funds' brokerage commissions for
the three years were (1) change in Fund asset size, (2) changes in market
conditions, and (3) in 1995, 1994 and 1993, changes in money managers of certain
Funds which required substantial portfolio restructurings, resulting in
increased securities transactions and brokerage commissions.
Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond, Volatility
Constrained Bond, Multistrategy Bond, Limited Volatility Tax Free, Money Market,
U.S. Government Money Market and Tax Free Money Market Funds normally do not pay
a stated brokerage commission on transactions.
During the year ended December 31, 1995, approximately $917,000 of the
brokerage commissions of the Funds were directed to brokers who provided
research services to the Management Company. The research services included
industry and company analysis, portfolio strategy reports, economic analysis,
and statistical data pertaining to the capital markets.
-17-
<PAGE> 166
Gross brokerage commissions received by affiliated broker/dealers from
affiliated and non-affiliated money managers for the years ended December 31,
1995, 1994, and 1993 from portfolio transactions effected for the Funds were as
follows:
<TABLE>
<CAPTION>
Percent of Total
Affiliated Broker/Dealer Commissions Commissions
- --------------------------------------------------------------------------------
<S> <C> <C>
Autranet, Inc. $ 8,488 0.09%
Baring London 7,257 0.07
Baring Securities 5,794 0.06
Donaldson, Lufkin & Jenrette 132,734 1.35
Frank Russell Securities 684,903 6.97
Fleming Martin 1,030 0.01
Jardine-Fleming Securities 43,729 0.45
J.P. Morgan Securities, Inc. 39,161 0.40
Morgan Guarantee Trust 518 0.01
Ord Minnett, Inc. 45,018 0.46
Paine Webber, Inc. 27,806 0.28
--------- -----
Total Affiliate Commissions $996,438 10.15%
--------- -----
</TABLE>
The percentage of total affiliated transactions (relating to trading activity)
to total transactions during fiscal 1995 for the Funds was 10.11%.
<PAGE> 167
During the year ended December 31, 1995, the Funds purchased securities issued
by the following regular brokers or dealers as defined by Rule 10b-1 of the 1940
Act, each of which is one of the Funds' ten largest brokers or dealers by dollar
amounts of securities executed or commissions received on behalf of the Funds.
The value of broker-dealer securities held as of December 31, 1995, was as
follows:
TABLE 1
HOLDINGS OF TOP 10 BROKER-DEALERS AT 12/31/95
<TABLE>
<CAPTION>
Daiwa Goldman Merrill Morgan Paine Salomon
FUND Bear Stearns Securities Sachs & Co. Lynch Stanley Webber Brothers
- ---------------------------- ------------ ---------- ----------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity I $0 $0 $0 $3,080,000 $742,000 $0 $0
Equity III $0 $0 $0 $0 $0 $388,000 $0
Equity Q $2,691,000 $0 $0 $551,000 $1,443,000 $78,000 $1,708,000
International $0 $4,178,000 $0 $0 $0 $0 $0
Fixed Income I $797,000 $0 $1,991,000 $998,000 $0 $0 $5,421,000
Fixed Income II $1,311,000 $0 $1,865,000 $1,346,000 $457,000 $0 $1,547,000
Fixed Income III $0 $0 $1,062,000 $792,000 $0 $733,000 $2,700,000
Money Market $0 $0 $20,000,000 $26,967,000 $0 $0 $0
Diversified Equity $0 $0 $0 $2,162,000 $452,000 $0 $0
Equity Income $0 $0 $0 $0 $0 $314,000 $0
Quantitative Equity $2,323,000 $0 $0 $474,000 $887,000 $52,000 $1,360,000
International Securities $0 $3,229,000 $0 $0 $0 $0 $0
Diversified Bond $771,000 $0 $1,587,000 $0 $45,000 $1,434,000
Volatility Constrained Bond $1,028,000 $0 $2,514,000 $2,277,000 $0 $2,735,000
Multistrategy Bond $0 $0 $704,000 $0 $0 $733,000 $2,329,000
</TABLE>
At 12/31/95, the Funds did not have any holdings in the following top 10
broker-dealers:
- -Frank Russell Securities
- -Investment Technology Group
- -Instinet Corp.
Yield and Total Return Quotations. The Funds compute their average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission (the "SEC"). Average annual total return is computed by
finding the average annual compounded rates of return on a hypothetical initial
investment of $1,000 over the one, five and ten year periods (or life of the
Funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
(n)
P(1+T) = ERV
Where: P = a hypothetical initial payment of
$1,000;
T = average annual total return;
N = number of years; and
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the one,
five or ten year period at the end of the one, five or ten
year period (or fractional portion thereof).
The calculation assumes that all dividends and distributions of each Fund are
reinvested at the price stated in the Prospectuses on the dividend dates during
the period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for the External and Internal Fee
Funds are reported in their respective Prospectuses.
Yields are computed by using standardized methods of calculation required by the
SEC. Yields for Funds other than the Money Market Funds are calculated by
dividing the net investment income per share earned during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[((a-b)+1)(6)-1]
cd
Where: a = dividends and interest earned
during the period
b = expenses accrued for the period
(net of reimbursements)
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<PAGE> 168
c = average daily number of shares
outstanding during the period that were entitled to receive
dividends
d = the maximum offering price per
share on the last day of the period
The yields for the Funds investing primarily in fixed income instruments are
reported in the Prospectuses.
Each Fund investing primarily in money market instruments ("Money Market Funds")
computes its current annualized and compound effective annualized yields using
standardized methods required by the SEC. The annualized yield for each Money
Market Fund is computed by (a) determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of a seven
calendar day period; (b) dividing the net change by the value of the account at
the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends declared on both the original share and such additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. Compound effective yields are computed by adding
1 to the base period return (calculated as described above), raising that sum to
a power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because each Money Market Fund's yield fluctuates, its yield cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed-to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each fund's investment
policies, including the types of investments made, length of maturities of
portfolio securities, the methods used by each fund to compute the yield
(methods may differ) and whether there are any special account charges which may
reduce effective yield.
Current and effective yields for the Money Market Funds are reported in the
Funds' Prospectuses.
Each Fund may, from time to time, advertise non-standard performances, including
average annual total return.
Each Fund may compare its performance with various industry standards of
performance, including Lipper Analytical Services, Inc. or other industry
publications, business periodicals, rating services and market indices.
Tax-equivalent yields for the Limited Volatility Tax Free and Tax Free Money
Market Funds are calculated by dividing that portion of the yield of the
appropriate Fund as
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<PAGE> 169
computed above which is tax exempt by one minus a stated income tax rate and
adding the product to that quotient, if any, of the yield of the Fund that is
not tax exempt. The tax-equivalent yields for the Limited Volatility Tax Free
and Tax Free Money Market Funds are reported in the Speciality Funds'
Prospectus.
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Each Fund has certain fundamental investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the
shareholders of that Fund. Other policies may be changed by a Fund without
shareholder approval. The Funds' investment objectives are set forth in the
Prospectuses.
Investment Restrictions. Each Fund is subject to the following fundamental
investment restrictions. Unless otherwise noted, these restrictions apply on a
Fund-by-Fund basis at the time an investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less than 75% of
its assets would be represented by cash; cash items; securities of the US
government, its agencies, or instrumentalities; securities of other
investment companies; and other securities limited in respect of each
issuer to an amount not greater in value than 5% of the total assets of
such Fund. Investments by Funds, other than the Tax Free Money Market and
U.S. Government Money Market Funds, in shares of the Money Market Fund are
not subject to this restriction, or to Investment Restrictions 2, 3, 10 and
14. (See, "Investment Policies -- Cash Reserves.")
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other than
the US government, its agencies and instrumentalities), but such
concentration may occur incidentally as a result of changes in the market
value of portfolio securities. This restriction does not apply to the Real
Estate Securities Fund. The Real Estate Securities Fund may invest 25% or
more of its total assets in the securities of companies directly or
indirectly engaged in the real estate industry. The Money Market Fund may
invest more than 25% of its assets in money market instruments issued by
domestic branches of US banks having net assets in excess of $100,000,000.
(Please refer to the description of the Real Estate Securities Fund and
Money Market Fund in the applicable prospectuses for a description of each
Fund's policy with respect to concentration in a particular industry.)
3. Acquire more than 5% of the outstanding voting securities, or 10% of all of
the securities, of any one issuer.
4. Invest in companies for the purpose of exercising control or management.
5. Purchase or sell real estate; provided that a Fund may invest in securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
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6. Purchase or sell commodities or commodities contracts, or interests in oil,
gas or other mineral exploration or development programs, except stock
index and financial futures contracts.
7. Borrow amounts more than 5% of the Fund's total assets taken at cost or at
market value, whichever is lower, and only from banks as a temporary
measure for extraordinary or emergency purposes, except that a Fund may
engage in reverse repurchase agreements to meet redemption requests without
immediately selling any portfolio instruments. The Fund will not mortgage,
pledge or in any other manner transfer as security for any indebtedness,
any of its assets. Collateral arrangements with respect to margin for
futures contracts are not deemed a pledge of assets.
8. Purchase securities on margin or effect short sales (except that a Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases or sales of securities, may trade in futures and related options,
and may make margin payments in connection with transactions in futures
contracts and related options).
9. Engage in the business of underwriting securities issued by others or
purchase securities, except as permitted by the Limited Volatility Tax Free
and Tax Free Money Market Funds' investment objectives.
10. Invest in securities of an issuer which, together with any predecessor, has
been in operation for less than three years if, as a result, more than 5%
of the Fund's total assets would then be invested in such securities.
11. The Investment Company will not participate on a joint or a joint and
several basis in any trading account in securities except to the extent
permitted by the 1940 Act and any applicable rules and regulations and
except as permitted by any applicable exemptive orders from the 1940 Act.
The "bunching" of orders for the sale or purchase of marketable portfolio
securities with two or more Funds, or with a Fund and such other accounts
under the management of the Management Company or any money manager for the
Funds to save brokerage costs or to average prices among them shall not be
considered a joint securities trading account. The purchase of shares of
the Money Market Fund by any other Fund shall also not be deemed to be a
joint securities trading account.
12. Make loans of money or securities to any person or firm; provided, however,
that the making of a loan shall not be construed to include (i) the
acquisition for investment of bonds, debentures, notes or other evidences
of indebtedness of any corporation or government which are publicly
distributed or of a type customarily purchased by institutional investors;
(ii) the entry into "repurchase agreements;" or (iii) the lending of
portfolio securities in the manner generally described in the Funds'
Prospectuses' section "Investment Policies -- Lending Portfolio
Securities."
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13. Purchase or sell options except to the extent permitted by the policies set
forth in the sections "Certain Investments -- Options on Securities and
Indices," "Certain Investments -- Foreign Currency Options," "Certain
Investments -- Futures Contracts and Options on Future Contracts" and
"Certain Investments -- Forward Foreign Currency Contracts" below. The
Limited Volatility Tax Free and Tax Free Money Market Funds may purchase
municipal obligations from an issuer, broker, dealer, bank or other persons
accompanied by the agreement of such seller to purchase, at the Fund's
option, the municipal obligation prior to maturity thereof.
14. The Investment Company will not purchase the securities of other investment
companies except to the extent permitted by the 1940 Act and any applicable
rules and regulations and except as permitted by any applicable exemptive
orders from the 1940 Act.
15. Purchase from or sell portfolio securities to the officers, Trustees or
other "interested persons" (as defined in the 1940 Act) of the Investment
Company, including the Fund's money managers and their affiliates, except
as permitted by the 1940 Act, SEC rules or exemptive orders.
16. No Fund will issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit any Fund from making
any otherwise permissible borrowings, mortgages or pledges, or entering
into permissible reverse repurchase agreements, and options and futures
transactions, or issuing shares of beneficial interest in multiple classes.
Additional fundamental policies are: (a) Equity I, Equity II, Equity III, Equity
Q, Equity T, Emerging Markets, Fixed Income III, Diversified Equity,
Special Growth, Equity Income, Quantitative Equity and Multistrategy Bond Funds
will not invest more than 5% of the current market value of their assets in
warrants nor more than 2% of such value in warrants which are not listed on the
New York or American Stock Exchanges; warrants attached to other securities are
not subject to this limitation. (b) Fixed Income I, Fixed Income II, Diversified
Bond and Volatility Constrained Bond Funds may acquire convertible bonds which
will be disposed of by these Funds in as timely a manner as is practical after
conversion. (c) No Fund will purchase or retain the securities of an issuer if,
to the Fund's knowledge, one or more of the Trustees or officers of the
Investment Company, or one or more of the officers or directors of the money
manager responsible for the investment or its directors or officers,
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together own beneficially more than 5% of such securities. Compliance
with this policy by the Investment Company's Trustees and officers is monitored
by Fund officers.
For purposes of these Investment Restrictions, the Limited Volatility Tax Free
and Tax Free Money Market Funds will consider as a separate issuer each:
governmental subdivision (i.e., state, territory, possession of the United
States or any political subdivision of any of the foregoing, including agencies,
authorities, instrumentalities, or similar entities, or of the District of
Columbia) if its assets and revenues are separate from those of the government
body creating it and the security is backed by its own assets and revenues; the
non-governmental user of an industrial development bond, if the security is
backed only by the assets and revenues of a non-governmental user. The guarantee
of a governmental or some other entity is considered a separate security issued
by the guarantor as well as the other issuer for Investment Restrictions,
industrial development bonds and governmental
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issued securities. The issuer of all other municipal obligations will be
determined by the money manager on the basis of the characteristics of the
obligation, the most significant being the source of the funds for the payment
of principal and interest.
Each Fund has adopted the following additional "non-fundamental" investment
restrictions, which may be changed without shareholder approval, in compliance
with applicable law and regulatory policy. No Fund will:
1) Invest in real estate limited partnerships that are not readily
marketable. This restriction shall not apply to the Real Estate
Securities Fund's investment in partnership units of master
limited partnerships; or
2) Invest in oil, gas and mineral leases.
Investment Policies.
Cash Reserves. Each Fund, except the Money Market, U.S.
Government Money Market and Tax Free Money Market Funds, and their money
managers, may elect to invest the Fund's cash reserves in the Money Market Fund.
The Money Market Fund and the Funds investing in the Money Market Fund treat
such investments as the purchase and redemption of Money Market Fund shares. Any
Fund investing in the Money Market Fund pursuant to this procedure participates
equally on a pro rata basis in all income, capital gains and net assets of the
Money Market Fund, and will have all rights and obligations of a shareholder as
provided in the Trust's Master Trust Agreement, including voting rights.
However, shares of the Money Market Fund issued to other Funds will be voted by
the Trustees of the Investment Company in the same proportion as the shares of
the Money Market Fund which are held by shareholders which are not Funds. Funds
investing in the Money Market Fund currently do not pay a management fee to the
Money Market Fund.
Liquidity Portfolios. A Fund at times has to sell portfolio
securities in order to meet redemption requests. The selling of securities may
effect a Fund's performance since the money manager sells the securities for
other than investment reasons. A Fund can avoid selling its portfolio securities
by holding adequate levels of cash to meet anticipated redemption requests.
The holding of significant amounts of cash is contrary to the
investment objectives of the Equity I, Equity II, Equity III, Equity Q,
Equity T, International, Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds. The more cash these
Funds hold, the more difficult it is for their returns to meet or surpass their
respective benchmarks.
A Liquidity Portfolio addresses this potential detriment by
having the Management Company or a money manager selected for this purpose
create an equity exposure for cash reserves through the use of options and
futures contracts. This will
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enable the Funds to hold cash while receiving a return on the cash which is
similar to holding equity securities.
Money Market Instruments. The Money Market, U.S. Government
Money Market and Tax Free Money Market Funds expect to maintain, but do not
guarantee, a net asset value of $1.00 per share for purposes of purchases and
redemptions by valuing their Fund shares at "amortized cost." The three Money
Market Funds will maintain a dollar-weighted average maturity of 90 days or
less. Each of the Funds will invest in securities with maturities of 397 days or
less at the time from the trade date or such other date upon which a Fund's
interest in a security is subject to market action. Each Fund will follow
procedures reasonably designed to assure that the prices so determined
approximate the current market value of the Funds' securities. The procedures
also address such matters as diversification and credit quality of the
securities the Funds purchase, and were designed to ensure compliance by the
Funds with the requirements of Rule 2a-7 of the 1940 Act. For additional
information concerning these Funds, refer to the Prospectuses.
Russell 1000 Index. The Russell 1000(R) Index consists of the
1,000 largest US companies by capitalization. The Index does not include cross
corporate holdings in a company's capitalization. For example, when IBM owned
approximately 20% of Intel, only 80% of the total shares outstanding of Intel
were used to determine Intel's capitalization. Also not included in the Index
are closed-end investment companies, companies that do not file a Form 10-K
report with the SEC, foreign securities and American Depository Receipts (ADRs).
The Index's composition is changed annually to reflect changes
in market capitalization and share balances outstanding. These changes are
expected to represent less than 1% of the total market capitalization of the
Index. Changes for mergers and acquisitions are made when trading ceases in the
acquirer's shares. The 1,001st largest US company by capitalization is then
added to the Index to replace the acquired stock.
Certain Investments.
Repurchase Agreements. Each Fund may enter into repurchase
agreements with the seller -- a bank or securities dealer -- who agrees to
repurchase the securities at the Fund's cost plus interest within a specified
time (normally one day). The securities purchased by the Fund have a total value
in excess of the value of the repurchase agreement and are held by the Fund's
custodian bank until repurchased. Repurchase agreements assist a Fund in being
invested fully while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. The Funds will limit repurchase transactions to those
member banks of the Federal Reserve System and primary dealers in US government
securities whose credit worthiness is continually monitored and found
satisfactory by the Funds' money managers.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements to meet redemption requests where the liquidation of
portfolio
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securities is deemed by the Fund's money manager to be inconvenient or
disadvantageous. A reverse repurchase agreement is a transaction whereby a Fund
transfers possession of a portfolio security to a bank or broker-dealer in
return for a percentage of the portfolio securities' market value. The Fund
retains record ownership of the security involved including the right to receive
interest and principal payments. At an agreed upon future date, the Fund
repurchases the security by paying an agreed upon purchase price plus interest.
Cash or liquid high grade debt obligations of the Fund equal in value to the
repurchase price, including any accrued interest, will be segregated on the
Fund's records while a reverse repurchase agreement is in effect.
High Risk Bonds. The Funds, other than the Emerging Markets,
Fixed Income III and Multistrategy Bond Funds, do not invest assets in
securities rated less than BBB by Standard & Poor's Ratings Group ("S&P") or Baa
by Moody's Investors Service, Inc. ("Moody's"), or in unrated securities judged
by the money manager to be of a lesser credit quality than those designations.
Securities rated BBB by S&P or Baa by Moody's are the lowest ratings which are
considered "investment grade." The Funds, other than Emerging Markets, Fixed
Income III and Multistrategy Bond Funds, will dispose of securities which they
have purchased which drop below these minimum ratings.
Securities rated BBB by S&P or Baa by Moody's may involve
greater risks than securities in higher rating categories. Securities receiving
S&P's BBB rating are regarded as having adequate capacity to pay interest and
repay principal. Such securities typically exhibit adequate investor protections
but 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 rating categories.
Securities possessing Moody's Baa rating are considered medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.
Risk Factors. The market for lower rated debt securities is
relatively new, its operating history is not extensive, and its growth has
paralleled a long period of economic expansion. Lower rated debt securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. The prices of low rated
debt securities have been found to be less sensitive to interest rate changes
than investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low rated debt securities defaults, a Fund
may incur additional expenses to seek financial recovery.
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In addition, the markets in which low rated debt securities are
traded are more limited than those for higher rated securities. The existence of
limited markets for particular securities may diminish a Fund's ability to sell
the securities at fair value either to meet redemption requests or to respond to
changes in the economy or in the financial markets and could adversely affect
and cause fluctuations in the daily net asset value of the Fund's shares.
Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of a Fund to
achieve its investment objectives may be more dependent on credit analysis than
would be the case if the Fund was investing only in investment grade securities.
The managers of the Funds may use ratings to assist in
investment decisions. Ratings of debt securities represent a rating agency's
opinion regarding their quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates.
Illiquid Securities. The expenses of registration of restricted
securities that are illiquid (excluding securities that may be resold by the
Funds pursuant to Rule 144A, as explained in the Prospectuses) may be negotiated
at the time such securities are purchased by a Fund. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, the Fund may not be
able to obtain as favorable a price as that prevailing at the time of the
decision to sell. A Fund also may acquire, through private placements,
securities having contractual resale restrictions, which might lower the
amount realizable upon the sale of such securities.
Delayed Delivery Transactions. A Fund may make contracts to
purchase securities for a fixed price at a future date beyond customary
settlement time ("forward commitments" or "when-issued" transactions) consistent
with the Fund's ability to manage its investment portfolio and meet redemption
requests. A Fund may dispose of a commitment or when-issued transaction prior to
settlement if it is appropriate to do so and realize short-term profits or
losses upon such sale. When effecting such transactions, cash or liquid high
grade debt obligations of the Fund in a dollar amount sufficient to make payment
for the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled.
Forward commitments and when-issued transactions involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
the other party to the transaction fails to complete the transaction.
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Additionally, under certain circumstances, the International, International
Securities and Emerging Markets Funds may occasionally engage in "free trade"
transactions in which delivery of securities sold by the Fund is made prior to
the Fund's receipt of cash payment therefor or the Fund's payment of cash for
portfolio securities occurs prior to the Fund's receipt of those securities.
"Free trade" transactions involve the risk of loss to a Fund if the other party
to the "free trade" transaction fails to complete the transaction after a Fund
has tendered cash payment or securities, as the case may be.
Options and Futures. The Funds, other than the Money Market, US
Government Money Market and Tax Free Money Market Funds, may purchase and sell
(write) both call and put options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts for hedging
purposes. If other types of options, futures contracts, or options on futures
contracts are traded in the future, the Funds may also use those instruments,
provided that the Investment Company's Board determines that their use is
consistent with the Funds' investment objectives, and provided that their use is
consistent with restrictions applicable to options and futures contracts
currently eligible for use by the Funds (i.e., that written call or put options
will be "covered" or "secured" and that futures and options on futures contracts
will be used only for hedging purposes).
Options on Securities and Indexes. Each Fund, except as noted
above, may purchase and write both call and put options on securities and
securities indexes in standardized contracts traded on foreign or national
securities exchanges, boards of trade, or similar entities, or quoted on 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.
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 specified
facets of a particular financial or securities market, a specified group of
financial instruments or securities, or certain economic indicators.)
A Fund 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 Fund 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 cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Fund. For a call option on an index,
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the option is covered if the Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (1) equal to or less than the exercise price
of the call written, or (2) greater than the exercise price of the call written,
provided the difference is maintained by the Fund in cash or cash equivalents in
a segregated account with its custodian. A put option on a security or an index
is "covered" if the Fund maintains cash or cash equivalents equal to the
exercise price in a segregated account with its custodian. A put option is also
covered if the Fund holds a put on the same security or index as the put written
where the exercise price of the put held is (1) equal to or greater than the
exercise price of the put written, or (2) less than the exercise price of the
put written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
If an option written by a Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss (long or short-term depending on whether the Fund's holding period
for the option is greater than one year) equal to the premium paid.
Prior to the earlier of exercise or expiration, an 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).
There can be no assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
A Fund will realize a capital gain from a closing transaction on
an option it has written if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the Fund 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 Fund will realize a
capital gain or, if it is less, the Fund will realize a capital loss. With
respect to closing transactions on purchased options, the capital gain or loss
realized will be short or long-term depending on the holding period of the
option closed out. 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 Fund is
an asset of the Fund. The premium received for an option written by a Fund is
recorded as a liability. 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.
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
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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 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
Fund seeks to close out an option position. If a Fund 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
Fund 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 Fund
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.
If trading were suspended in an option purchased by a Fund, the
Fund would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. A Fund 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.
Currency options traded on US or other exchanges may be subject to position
limits which may limit the ability of a Fund to reduce foreign currency risk
using such options. Over-the-counter options 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.
Futures Contracts and Options on Futures Contracts. A Fund may
use interest rate, foreign currency or index futures contracts, as specified for
the Fund in its Prospectus. 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. A futures contract on an index
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 the 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 may be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies. For example: the S&P 500; the Russell 2000(R); Nikkei 225; CAC-40;
FT-SE 100; the NYSE composite; US Treasury bonds; US Treasury notes;
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GNMA Certificates; three-month US Treasury bills; 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 will be developed and
traded in the future.
A Fund may purchase and write call and put options on futures
contracts. Options on futures contracts possess many of the same characteristics
as options on securities and indexes (discussed above). A futures option gives
the holder 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
opposite is true.
As long as required by regulatory authorities, each Fund will
limit its use of futures contracts and options on futures contracts to hedging
transactions. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. Additionally, a Fund may use futures contracts to create
equity exposure for its cash reserves for liquidity purposes.
A Fund will only enter into futures contracts and options on
futures contracts which are standardized and traded on a US or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund,
the Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or US government securities ("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. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund 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 Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark-to-market its open futures positions.
A Fund 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
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requirements), the current market value of the option, and other futures
positions held by the Fund.
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 (same exchange, underlying security or index, and delivery month). If
an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. The transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options on Futures Contracts.
A Fund 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
Fund's total 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 Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, US government
securities or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, 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 Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
When selling a call option on a futures contract, a Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash, US
government securities or other highly liquid debt securities 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 Fund 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
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call option permitting the Fund to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash, US
government securities or other highly liquid debt securities that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund 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 Fund.
In order to comply with applicable regulations of the Commodity
Futures Trading Commission ("CFTC") pursuant to which the Funds avoid being
deemed to be a "commodity pool," the Funds are limited in their futures
activities to positions which constitute "bona fide hedging" positions within
the meaning and intent of applicable CFTC rules, and with respect to positions
which do not qualify under that hedging test, to positions for which the
aggregate initial margins and premiums will not exceed 5% of the net assets of a
Fund as determined under the CFTC Rules.
The requirements for qualification as a regulated investment
company also may limit the extent to which a Fund may enter into futures,
options on futures contracts or forward contracts. See "Taxation."
Risks Associated with Futures and Options on Futures Contracts.
There are several risks associated with the use of futures contracts and options
on futures contracts 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. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
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 options on futures contracts on
securities, including technical influences in futures trading and options on
futures contracts, 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. 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.
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
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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 Fund seeks to close out a futures or a futures option position, and
that Fund 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 Contract and Options
Thereon. Options on securities, futures contracts, options on futures contracts,
currencies 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. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (5) lesser
trading volume.
Hedging strategies. Stock index futures contracts may be used by
the Equity I, Equity II, Equity III, Equity Q, International, Emerging Markets,
Diversified Equity, Special Growth, Equity Income, Quantitative Equity, Equity T
and International Securities Funds as on "equitization" vehicle for cash
reserves held by the Funds. For example: equity index futures contracts are
purchased to correspond with the cash reserves in each of the Funds. As a
result, a Fund will realize gains or losses based on the performance of the
equity market corresponding to the relevant indices for which futures contracts
have been purchased. Thus, each Fund's cash reserves always will be fully
exposed to equity market performance.
Financial futures contracts may be used by the International,
Emerging Markets, Fixed Income I, Fixed Income II, Fixed Income III,
International Securities, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond and Limited Volatility Tax Free Funds as a hedge during or in
anticipation of interest rate changes. For example: if interest rates were
anticipated to rise, financial futures contracts would be sold (short hedge)
which would have an effect similar to selling bonds. Once interest rates
increase, fixed-income securities held in the Fund's portfolio would decline,
but the futures contract
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value would decrease, partly offsetting the loss in value of the fixed-income
security by enabling the Fund to repurchase the futures contract at a lower
price to close out the position.
The Funds may purchase a put and/or sell a call option on a
stock index futures contract instead of selling a futures contract in
anticipation of market decline. Purchasing a call and/or selling a put option on
a stock index futures contract is used instead of buying a futures contract in
anticipation of a market advance, or to temporarily create an equity exposure
for cash balances until those balances are invested in equities. Options on
financial futures are used in a similar manner in order to hedge portfolio
securities against anticipated changes in interest rates.
When purchasing a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, US government
securities or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
Foreign Currency Futures Contracts. The Funds are also permitted
to enter into foreign currency futures contracts in accordance with their
investment objectives and as limited by the procedures outlined above.
A foreign currency futures contract is a bilateral agreement
pursuant to which one party agrees to make, and the other party agrees to accept
delivery of a specified type of debt security or currency at a specified price.
Although such futures contacts by their terms call for actual delivery or
acceptance of debt securities or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
The Funds may sell a foreign currency futures contract to hedge
against possible variations in the exchange rate of the foreign currency in
relation to the US dollar. When a manager anticipates a significant change in a
foreign exchange rate while intending to invest in a foreign security, a Fund
may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate which may add additional costs to acquiring the
foreign security position. The Fund may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate. The
Fund may purchase a call option or write a put option on a foreign exchange
futures contract to hedge against a decline in the foreign exchange rates or the
value of its foreign securities. The Fund may write a call option on a foreign
currency futures contract as a partial hedge against the effects of declining
foreign exchange rates on the value of foreign securities.
Risk Factors. There are certain investment risks in using
futures contracts and/or options as a hedging technique. One risk is the
imperfect correlation between price
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movement of the futures contracts or options and the price movement of the
portfolio securities, stock index or currency subject of the hedge. The risk
increases for the Limited Volatility Tax Free Fund since financial futures
contracts that may be engaged in are on taxable securities rather than tax
exempt securities. There is no assurance that the price of taxable securities
move in a similar manner to the price of tax exempt securities. Another risk is
that a liquid secondary market may not exist for a futures contract causing a
Fund to be unable to close out the futures contract thereby affecting a Fund's
hedging strategy.
In addition, foreign currency options and foreign currency
futures involve additional risks. 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.
The value of such positions could also 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 Funds' 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.
Forward Foreign Currency Exchange Transactions. The Funds may
engage in forward foreign currency exchange transactions to hedge against
uncertainty in the level of future exchange rates. The Funds will conduct their
forward foreign currency exchange transactions either on a spot (i.e. cash)
basis at the rate prevailing in the currency exchange market, or through
entering into forward currency exchange contracts ("forward contract") to
purchase or sell currency at a future date. A forward 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. The Funds may engage in a
forward contract that involves transacting in a currency whose changes in value
are considered to be linked (a proxy) to a currency or currencies in which some
or all of the Funds' portfolio securities are or are expected to be denominated.
A Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of foreign currency with respect to specific receivables or
payables of the Funds generally accruing in connection with the purchase or sale
of its portfolio securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in the
currency. The Funds may not position hedge with respect to a particular currency
to an extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in or
currency convertible into that particular currency (or another currency or
aggregate of currencies which act as a proxy for that currency). The Funds may,
however, enter into a position hedging transaction with respect to a currency
other than that held in the Funds' portfolios, if such a transaction is deemed a
hedge. If a Fund enters into this type of hedging transaction, cash or liquid
high grade debt securities will be placed in a segregated account in an amount
equal to the value of the Fund's total assets committed to the
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consummation of the forward contract. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
commitment with respect to the contract. Hedging transactions may be made from
any foreign currency into US dollars or into other appropriate currencies.
At or before the maturity of a forward foreign currency
contract, a Fund may either sell a portfolio security and make delivery of the
currency, or retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which the Fund
will obtain, on the same maturity date, the same amount of the currency which it
is obligated to deliver. If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward currency contract prices. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a currency and the date that it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the extent that
the price of the currency that it has agreed to sell exceeds the price of the
currency that it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency that it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. In addition, although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, at the same time, they limit any potential
gain that might result should the value of the currency increase.
If a devaluation is generally anticipated, a Fund may be able to
contract to sell the currency at a price above the devaluation level that it
anticipates. A Fund will not enter into a currency transaction if, as a result,
it will fail to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), for a given year.
Forward foreign currency contracts are not regulated by the SEC.
They are traded through financial institutions acting as market-makers. In the
forward foreign currency market, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Moreover, a trader of forward contracts could lose
amounts substantially in excess of its initial investments, due to the
collateral requirements associated with such positions.
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Forward foreign currency transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by (a)
other complex foreign political and economic factors, (b) lesser availability
than in the United States of data on which to make trading decisions, (c) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States and the United Kingdom, (d) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, (e) lesser trading volume and (f) that a
perceived linkage between various currencies may not persist throughout the
duration of the contracts.
Indexed Commercial Paper. Indexed commercial paper is US-dollar
denominated commercial paper the yield of which is linked to certain foreign
exchange rate movements. The yield to the investor on indexed commercial paper
is established at maturity as a function of spot exchange rates between the US
dollar and a designated currency as of or about that time. The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on US-dollar
denominated commercial paper, with both the minimum and maximum rates of return
on the investment corresponding to the minimum and maximum values of the spot
exchange rate two business days prior to maturity. While such commercial paper
entails risk of loss of principal, the potential risk for realizing gains as a
result of changes in foreign currency exchange rates enables a Fund to hedge (or
cross-hedge) against a decline in the US-dollar value of investments denominated
in foreign currencies while providing an attractive money market rate of return.
Currently only the Fixed Income III and Multistrategy Bond Funds intend to
invest in indexed commercial paper, and then only for hedging purposes. The
staff of the SEC is currently considering whether the purchase of this type of
commercial paper would result in the issuance of a "senior security." If
required by the appropriate authorities to assure that investments in indexed
commercial paper are not used to achieve investment leverage, a Fund will
segregate cash or readily marketable high quality securities in an amount at all
times equal or exceeding the Fund's commitment with respect to these contracts.
US Government Obligations. The types of US government
obligations the Funds may purchase include: (1) a variety of US Treasury
obligations which differ only in their interest rates, maturities and times of
issuance: (a) US Treasury bills at time of issuance have maturities of one year
or less, (b) US Treasury notes at time of issuance have maturities of one to ten
years and (c) US Treasury bonds at time of issuance generally have maturities of
greater than ten years; (2) obligations issued or guaranteed by US government
agencies and instrumentalities and supported by any of the following: (a) the
full faith and credit of the US Treasury (such as Government National Mortgage
Association participation certificates), (b) the right of the issuer to borrow
an amount limited to a specific line of credit from the US Treasury, (c)
discretionary authority of the US government agency or instrumentality, or (d)
the credit of the instrumentality (examples of agencies and instrumentalities
are: Federal Land Banks, Farmers Home Administration,
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Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home
Loan Banks and Federal National Mortgage Association). No assurance can be given
that the US government will provide financial support to such US government
agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d) in the
future, other than as set forth above, since it is not obligated to do so by
law. The Funds may purchase US government obligations on a forward commitment
basis.
Variable and Floating Rate Securities. A floating rate security
is one whose terms provide for the automatic adjustment of an interest rate
whenever a specified interest rate changes. A variable rate security is one
whose terms provide for the automatic establishment of a new interest rate on
set dates. The interest rate on floating rate securities is ordinarily tied to
and is a percentage of the prime rate of a specified bank or some similar
objective standard, such as 90-day US Treasury Bill rate, and may change as
often as twice daily. Generally, changes in interest rates on floating rate
securities will reduce changes in the securities' market value from the original
purchase price resulting in the potential for capital appreciation or capital
depreciation being less than for fixed-income obligations with a fixed interest
rate.
The U.S. Government Money Market Fund may purchase variable rate
US government obligations which are instruments issued or guaranteed by the US
government, or an agency or instrumentality thereof, which have a rate of
interest subject to adjustment at regular intervals but no less frequently than
annually. Variable rate US government obligations whose interest rates are
readjusted no less frequently than annually will be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
Variable Amount Master Demand Notes. The Money Market and U.S.
Government Money Market Funds, consistent with their fundamental investment
objectives, may invest in variable amount master demand notes. Variable amount
master demand notes are unsecured obligations redeemable upon notice that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements with the issuer of the instrument. A variable amount master
demand note differs from ordinary commercial paper in that (1) it is issued
pursuant to a written agreement between the issuer and the holders, (2) its
amount may, from time to time, be increased (subject to an agreed maximum) or
decreased by the holder of the issue, (3) it is payable on demand, (4) its rate
of interest payable varies with an agreed upon formula and (5) it is not
typically rated by a rating agency.
Zero Coupon Securities. Zero coupon securities are notes, bonds
and debentures that (i) do not pay current interest and are issued at a
substantial discount from par value, (ii) have been stripped of their unmatured
interest coupons and receipts or (iii) pay no interest until a stated date one
or more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts. Zero coupon
securities trade at a discount from their par value and are subject to greater
fluctuations of market value in response to changing interest rates.
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Mortgage-Related and other Asset-Backed Securities. The forms of
mortgage-related and other asset-backed securities the Funds may invest in
include the securities described below:
Mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of
mortgages in which payments of both interest and principal on
the securities are generally made monthly. The securities are
"pass-through" securities because they provide investors with
monthly payments of principal and interest which in effect are a
"pass-through" of the monthly payments made by the individual
borrowers on the underlying mortgages, net of any fees paid to
the issuer or guarantor. The principal governmental issuer of
such securities is the Government National Mortgage Association
("GNMA"), which is a wholly-owned US government corporation
within the Department of Housing and Urban Development.
Government-related issuers include the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of
the United States created pursuant to an Act of Congress, which
is owned entirely by the Federal Home Loan Banks, and the
Federal National Mortgage Association ("FNMA"), a government
sponsored corporation owned entirely by private stockholders.
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 be the
originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities.
Collateralized Mortgage Obligations. Collateralized mortgage
obligations ("CMOs") are hybrid instruments with characteristics
of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and pre-paid principal
on a CMO are paid, in most cases, monthly. 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. CMOs are structured into
multiple classes (or "tranches"), with each class bearing a
different stated maturity.
Asset-Backed Securities. Asset-backed securities represent
undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related
pass-through securities. Payments of principal and interest are
passed through to holders of the securities and are typically
supported by some form of credit enhancement, such as a letter
of credit, surety bond, limited guarantee by another entity or
by priority to certain of the borrower's other securities. The
degree of enhancement varies, generally applying only until
exhausted and covering only a fraction of the security's par
value. If the credit enhancement held by a Fund has been
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exhausted, and if any required payments of principal and
interest are not made with respect to the underlying loans, the
Fund may experience loss or delay in receiving payment and a
decrease in the value of the security.
Risk Factors. Prepayment of principal on mortgage or
asset-backed securities may expose a Fund to a lower rate of
return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost. Like
other fixed-income securities, the value of mortgage-related
securities is affected by fluctuations in interest rates.
Loan Participations. The Fixed Income III and Multistrategy Bond
Funds may purchase participations in commercial loans. Such indebtedness
may be secured or unsecured. Loan participations typically represent direct
participation in a loan to a corporate borrower, and generally are offered
by banks or other financial institutions or lending syndicates. In
purchasing the loan participations, a Fund assumes the credit risk
associated with the corporate buyer and may assume the credit risk
associated with the interposed bank or other financial intermediary. The
participation may not be rated by a nationally recognized rating service.
Further, loan participations may not be readily marketable and may be
subject to restrictions on resale.
Municipal Obligations. "Municipal obligations" are debt
obligations issued by states, territories and possessions of the United
States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, or multi-state agencies or authorities the
interest from which is exempt from federal income tax in the opinion of
bond counsel to the issuer. Municipal obligations include debt obligations
issued to obtain funds for various public purposes and certain industrial
development bonds issued by or on behalf of public authorities. Municipal
obligations are classified as general obligation bonds, revenue bonds and
notes.
Municipal Bonds. Municipal bonds generally have maturities of
more than one year when issued and have two principal
classifications -- General Obligation Bonds and Revenue Bonds.
General Obligation Bonds - are secured by the issuer's
pledge of its faith, credit and taxing power for the
payment of principal and interest.
Revenue Bonds - are payable only from the revenues
derived from a particular facility or group of
facilities or from the proceeds of special excise or
other specific revenue service.
Industrial Development Bonds - are a type of revenue
bond and do not generally constitute the pledge of
credit of the issuer of such bonds. The payment of the
principal and interest on such bonds is dependent
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on the facility's user to meet its financial
obligations and the pledge, if any, of real and
personal property financed as security for such
payment. Industrial development bonds are issued by or
on behalf of public authorities to raise money to
finance public and private facilities for business,
manufacturing, housing, ports, pollution control,
airports, mass transit and other similar type projects.
Municipal Notes. Municipal notes generally have maturities of
one year or less when issued and are used to satisfy short-term
capital needs. Municipal notes include:
Tax Anticipation Notes - are issued to finance working
capital needs of municipalities and are generally
issued in anticipation of future tax revenues.
Bond Anticipation Notes - are issued in expectation of
a municipality issuing a long term bond in the future.
Usually the long-term bonds provide the money for the
repayment of the notes.
Revenue Anticipation Notes - are issued in expectation
of receipt of other types of revenues such as certain
federal revenues.
Construction Loan Notes - are sold to provide
construction financing and may be insured by the
Federal Housing Administration. After completion of the
project, FNMA or GNMA frequently provides permanent
financing.
Pre-Refunded Municipal Bonds - are bonds no longer
secured by the credit of the issuing entity, having
been escrowed with US Treasury securities as a result
of a refinancing by the issuer. The bonds are escrowed
for retirement either at original maturity or at an
earlier call date.
Tax Free Commercial Paper - is a promissory obligation
issued or guaranteed by a municipal issuer and
frequently accompanied by a letter of credit of a
commercial bank. It is used by agencies of state and
local governments to finance seasonal working capital
needs, or as short-term financing in anticipation of
long-term financing.
Tax Free Floating and Variable Rate Demand Notes - are
municipal obligations backed by an obligation of a
commercial bank to the issuer thereof which allows the
issuer to issue securities with a demand feature,
which, when exercised, usually becomes effective within
thirty days. The rate of return on the notes is
readjusted periodically
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according to some objective standard such as changes in
a commercial bank's prime rate.
Tax Free Participation Certificates - are tax free
floating or variable rate demand notes which are issued
by a bank, insurance company or other financial
institution or affiliated organization that sells a
participation in the note. They are usually purchased
by the Limited Volatility Tax Free and Tax Free Money
Market Funds to maintain liquidity. The Funds' money
managers will continually monitor the pricing, quality
and liquidity of the floating and variable rate demand
instruments held by the Funds, including the
participation certificates.
A participation certificate gives a Fund an undivided
interest in the municipal obligation in the proportion
that the Fund's participation interest bears to the
total principal amount of the municipal obligation and
provides the demand feature described below. Each
participation is backed by: an irrevocable letter of
credit or guaranty of a bank which may be the bank
issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing
bank, or a bank serving as agent of the issuing bank
with respect to the possible repurchase of the
certificate of participation; or insurance policy of an
insurance company that the money manager has determined
meets the prescribed quality standards for the Fund.
The Fund has the right to sell the participation
certificate back to the institution and draw on the
letter of credit or insurance on demand after thirty
days' notice for all or any part of the full principal
amount of the Fund's participation interest in the
security plus accrued interest. The Funds' money
managers intend to exercise the demand feature only (1)
upon a default under the terms of the bond documents,
(2) as needed to provide liquidity to the Funds in
order to make redemptions of Fund shares, or (3) to
maintain the required quality of its investment
portfolios.
The institutions issuing the participation certificates
will retain a service and letter of credit fee and a
fee for providing the demand feature, in an amount
equal to the excess of the interest paid on the
instruments over the negotiated yield at which the
participations were purchased by a Fund. The total fees
generally range from 5% to 15% of the applicable prime
rate or other interest rate index. The Fund will
attempt to have the issuer of the participation
certificate bear the cost of the insurance. The Fund
retains the option to purchase insurance if necessary,
in which case the cost of insurance will be a
capitalized expense of the Fund.
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<PAGE> 192
Demand Notes. The Limited Volatility Tax Free and Tax Free Money
Market Funds may purchase municipal obligations with the right
to a "put" or "stand-by commitment." A "put" on a municipal
obligation obligates the seller of the put to buy within a
specified time and at an agreed upon price a municipal
obligation the put is issued with. A stand-by commitment is
similar to a put except the seller of the commitment is
obligated to purchase the municipal obligation on the same day
the Fund exercises the commitment and at a price equal to the
amortized cost of the municipal obligation plus accrued
interest. The seller of the put or stand-by commitment may be
the issuer of the municipal obligation, a bank or broker-dealer.
The Funds will enter into put and stand-by commitment with
institutions such as banks and broker-dealers that the Funds'
money managers continually believes satisfy the Funds' credit
quality requirements. The ability of the Funds to exercise the
put or stand-by commitment may depend on the seller's ability to
purchase the securities at the time the put or stand-by
commitment is exercised or on certain restrictions in the buy
back arrangement. Such restrictions may prohibit the Funds from
exercising the put or stand-by commitment except to maintain
portfolio flexibility and liquidity. In the event the seller
would be unable to honor a put or stand-by commitment for
financial reasons, the Funds may, in the opinion of Funds'
management, be a general creditor of the seller. There may be
certain restrictions in the buy back arrangement which may not
obligate the seller to repurchase the securities. (See, "Certain
Investments -- Municipal Notes -- Tax Free Participation
Certificates.")
The Limited Volatility Tax Free and Tax Free Money Market Funds
may purchase from issuers floating or variable rate municipal
obligations some of which are subject to payment of principal by
the issuer on demand by the Fund (usually not more than thirty
days' notice). The Funds may also purchase floating or variable
rate municipal obligations or participations therein from banks,
insurance companies or other financial institutions which are
owned by such institutions or affiliated organizations. Each
participation is usually backed by an irrevocable letter of
credit, or guaranty of a bank or insurance policy of an
insurance company.
Interest Rate Transactions. The Fixed Income II, Fixed Income
III, Volatility Constrained Bond and Multistrategy Bond Funds may enter into
interest rate swaps, on either an asset-based or liability-based basis,
depending on whether they are hedging their assets or their liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Funds receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these hedging
transactions are entered into for good faith hedging purposes, the Money
Managers and the Funds believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the
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Funds' obligations over their entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash or liquid high-grade
debt securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Funds'
custodian. To the extent that the Funds enter into interest rate swaps on other
than a net basis, the amount maintained in a segregated account will be the full
amount of the Funds' obligations, if any, with respect to such interest rate
swaps, accrued on a daily basis. The Funds will not enter into any interest rate
swaps unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction. If
there is a default by the other party to such a transaction, the Funds will have
contractual remedies pursuant to the agreement related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
The use of interest rate swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If a money manager using this
technique is incorrect in its forecast of market values, interest rates and
other applicable factors, the investment performance of a Fund would diminish
compared to what it would have been if this investment technique was not used.
A Fund may only enter into interest rate swaps to hedge its
portfolio. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Funds are contractually obligated to make. If the other party to an interest
rate swap defaults, the Funds' risk of loss consists of the net amount of
interest payments that the Funds are contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Funds expect to achieve an
acceptable degree of correlation between their rights to receive interest on
their portfolio securities and their rights and obligations to receive and pay
interest pursuant to interest rate swaps.
Foreign Government Securities. Foreign government securities
which the Funds may invest in generally consist of obligations issued or backed
by the national, state or provincial government or similar political
subdivisions or central banks in foreign countries. Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or backed by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. These securities also
include debt securities of "quasi-government agencies" and debt securities
denominated in multinational currency units of an issuer.
Brady Bonds. The Fixed Income III and Multistrategy Bond Funds
may invest in Brady Bonds, the products of the "Brady Plan," under which bonds
are issued in
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<PAGE> 194
exchange for cash and certain of a country's outstanding commercial bank loans.
The Brady Plan offers relief to debtor countries that have effected substantial
economic reforms. Specifically, debt reduction and structural reform are the
main criteria countries must satisfy in order to obtain Brady Plan status. Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily US-dollar) and are actively traded on the over-the-counter
market. Brady Bonds have been issued only recently and accordingly they do not
have a long payment history.
TAXES
In order to qualify for treatment as a regulated investment company ("RIC")
under Subchapter M of the Code, each Fund must distribute annually to its
shareholders at least 90% of its investment company taxable income (generally,
net investment income plus net short-term capital gain) ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of a Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities or foreign currencies (exclusive of losses), or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (ii) less than 30% of a Fund's gross income each taxable
year may be derived from gains (exclusive of losses) from the sale or other
disposition of any stock or securities; any options, futures, or forward
contracts; foreign currencies including any options or futures thereon (which
are not directly related to a Fund's business in investing) held for less than
three months (the "Short-Short Limitation"); (iii) at the close of each quarter
of a Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the Fund
and that does not represent more than 10% of the outstanding voting securities
of such issuer; and (iv) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its assets may be invested in securities
(other than US government securities or the securities of other RICs) of any one
issuer.
Notwithstanding the Distribution Requirement described above, which only
requires each Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss),
each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of its ordinary
income for that year and 98% of its capital gain net income for the one-year
period ending on October 31 of that year, plus prior-year shortfalls. For this
and other purposes, dividends declared by a RIC in October, November or December
of any calendar year and payable to shareholders of record on a date in such a
month will be deemed to have been paid by the RIC and received by shareholders
on December 31 of such year if the dividends are paid by the RIC at any time
through the end of the following January.
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<PAGE> 195
At December 31, 1995, certain of the Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains of
each succeeding year until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/97 12/31/98 12/31/99 12/31/01 12/31/02 12/31/03
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income I $ -- $ -- $ -- $ -- $ -- $(12,046,548) $ --
Fixed Income II (948,478) (3,534,633) (698,949)
Fixed Income III (2,010,657)
Emerging Markets (5,631,976)
Money Market (42,377)
Diversified Bond (9,899,442)
Volatility Constrained Bond (2,298,957) (5,583,410) (1,871,605)
Multistrategy Bond
Limited Volatility Tax Free (238,975) (103,283) (26,604) (383,404) (345,504) (110,634)
Real Estate Securities (2,387,399)
U.S. Government Money Market (1,309) (4,913)
</TABLE>
The Equity T Fund. The fundamental documents
establishing the Equity T Fund provide that the amount payable upon the
redemption of shares of the Fund will be equal to ninety-nine percent of the net
asset value per share. The one percent retained by the Fund will be treated by
the Fund as a contribution to the capital of the Fund.
Issues Related to Hedging and Option Investments. The use of
hedging instruments, such as options and futures contracts, involves specialized
and complex rules that will determine the character for income tax purposes of
the income received in connection therewith by a Fund and thereby affect, among
other things, the amount and proportion of distributions that will be taxable to
shareholders as ordinary income or capital gain.
As described above and in the Funds' Prospectuses, the Funds may
buy and sell foreign currencies and options on foreign currencies, and may enter
into forward currency contracts and currency futures contracts. The Funds
anticipate that these investment activities will not prevent the Funds from
qualifying as a regulated investment company. As a general rule, gains or losses
on the disposition of debt securities denominated in a foreign currency that are
attributable to fluctuations in exchange rates between the date that the debt
securities are acquired and the date of disposition, gains and losses from the
disposition of foreign currencies, and gains and losses attributable to options
on foreign currencies, forward currency contracts and currency futures contracts
will be treated as ordinary income or loss.
Gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues interest or other receivables, or
expenses or other liabilities, denominated in a foreign currency and the time
the Fund actually collects such receivables, or pays such liabilities, are
generally treated as ordinary income or loss. Similarly, gains or losses on
disposition of debt securities denominated in a foreign currency between the
date of acquisition of the security and the date of disposition also are treated
as ordinary gain or loss. These gains, referred to under the Code as "Section
988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders, rather
than increasing or decreasing the amount of the Fund's capital gains or losses.
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<PAGE> 196
As noted above and in the Prospectuses, the Funds may acquire
forward currency contracts, currency futures contracts and options on foreign
currencies to hedge their risk of currency fluctuations with regard to property
held or to be held by the Funds, and before the close of the day on which the
Funds enter into the contract or options, the Funds will, as a general rule,
identify on their records that the contracts or options were entered into as
part of a hedging transaction. If the Funds were to invest in a forward currency
contract, currency futures contract or option on a foreign currency and
offsetting positions in such contracts or options, and if the two offsetting
positions were characterized as a straddle (as opposed to a hedge) for federal
income tax purposes, then the Funds might not be able to receive the benefit of
certain realized losses from the liquidation of one of those positions for an
indefinite period of time (i.e., until the gain position and any successor
positions are disposed of). The Funds expect that their activities with respect
to forward foreign currency contracts, currency futures contracts and options on
foreign currencies will not require them, as a general rule, to have to treat
such contracts or options as straddle positions for federal income tax purposes.
Under current law, unless certain requirements are satisfied, the Funds will be
required to calculate separately certain gains and losses attributable to
certain of their forward currency contracts, currency futures contracts and
options on foreign currencies, even if the Funds acquired the contracts or
options to hedge their risk of currency fluctuations with regard to capital
assets held or to be held by the Funds. The Internal Revenue Service, however,
has the authority to issue additional regulations that would permit or require
the Funds either to integrate some or all of their forward currency contracts,
currency futures contracts, options on foreign currencies and hedged investments
as a single transaction or otherwise to treat the contracts or options in the
manner that is consistent with the hedged investments. It is uncertain if or
when these regulations will be issued.
To the extent that a Fund's forward contracts, currency futures
contracts or options on foreign currencies can be classified as either regulated
futures contracts or foreign currency contracts (as described in section 1256(b)
of the Code) (collectively referred to herein as "section 1256 contracts"), such
investments will be taxed pursuant to a special "mark-to-market" system. Under
the mark-to-market system, the Funds may be treated as realizing a greater or
lesser amount of gains or losses than actually realized. As a general rule,
except for certain currency related activities ( as described above) in which
gain or loss is treated as ordinary income or loss, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and accordingly, the mark-to-market system generally will
affect the amount of capital gains or losses taxable to the Funds and the amount
of distributions taxable to a shareholder. Moreover, if the Funds invested in
both section 1256 contracts and offsetting positions with respect to such
contracts, then the Funds might not be able to receive the benefit of certain
realized losses for an indeterminate period of time (i.e., until disposition of
the "gain leg" of the straddle and any successor position). The Funds expect
that their activities with respect to section 1256 contracts and offsetting
positions in such contracts (a) will not cause them or their shareholders to be
treated as receiving a materially greater amount of ordinary income, capital
gains, dividends, or distributions than actually realized or received by the
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<PAGE> 197
Funds and (b) will permit them to use substantially all of the losses of the
Funds for the fiscal years in which such losses actually occur.
Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by a portfolio
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a Fund. In
addition, losses realized by a Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to a Fund are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the
Code which are applicable to straddles. If a Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
in any given fiscal year as compared to a fund that did not engage in such
hedging transactions.
The 30% limit on gains from the disposition of certain options,
futures and forward contracts held less than three months and the qualifying
income and diversification requirements applicable to a Fund's assets may limit
the extent to which a Fund will be able to engage in transactions in options,
futures contracts or forward contracts.
Income (excluding certain gains) from transactions in options
and futures contracts derived by a Fund with respect to its business of
investing in securities, will qualify as permissible income under the Income
Requirement. Furthermore, any increase in value on a position that is part of a
"designated hedge" will be offset by any decrease in value (whether realized or
not) of the offsetting hedging position during the period of the hedge for
purposes of determining whether the Fund satisfies the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be included in
gross income for purposes of that limitation. The Funds anticipate engaging in
hedging transactions that are intended to qualify for this treatment, but at the
present time it is not clear whether this treatment will be available to all of
a Fund's hedging transactions. To the extent this treatment is not available, a
Fund may be forced to defer the closing out of certain options and futures
contracts beyond the time when it otherwise would be advantageous to do so, in
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order for the Fund to qualify as a RIC. Income derived from currencies, options,
futures and forward contracts on currencies directly related to a Fund's
principal business of investing in stocks or securities is excluded from the
Short-Short Limitation computation.
If a call option written by a Fund expires, the Fund will
realize a capital gain equal to the amount of the premium it received for
writing the option. If a Fund terminates its obligations under a call option it
has written, or if the Fund writes a put option terminating its rights as the
holder of a put option, the Fund will realize a capital gain or loss, depending
on whether the cost of the closing transaction is less than or exceeds the
premium received when the option was written. If a call option written by a Fund
is exercised, the Fund will be treated as having sold the underlying security
and will realize a long-term or short-term capital gain and loss, depending on
the holding period of the underlying security and on whether the sum of the
option price received upon the exercise plus the premium received when the
option was written exceeds or is less than the basis of the optioned security.
If an option purchased by a Fund expires, the Fund generally
will realize a capital loss equal to the cost of the option, long-term if the
option was held for more than one year. If the Fund sells the option, it
generally will realize a capital gain or loss, depending on whether the proceeds
from the sale are greater or less than the cost of the option plus the
transaction costs. If the Fund exercises a call option, the cost of the option
will be added to the basis of the security purchased. If the Fund exercises a
put option, it will realize a capital gain or loss (depending on the Fund's
basis for the underlying security), which will be long-term or short-term,
depending on the holding period of the underlying security. Any such capital
gain will be decreased (or loss increased) by the premium paid for the option.
FOREIGN INCOME TAXES. Investment income received from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle a Fund to a reduced rate on such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for a Fund in advance since the amount of the assets to be
invested within various countries is not known.
If a Fund invests in an entity that is classified as a "passive
foreign investment company" ("PFIC") for federal income tax purposes, the
application of certain provisions of the Code applying to PFICs could result in
the imposition of certain federal income taxes on the Fund. Under U.S. Treasury
regulations for PFICs, the International, Emerging Markets and International
Securities Funds can elect to mark-to-market their PFIC holdings in lieu of
paying taxes on gains or distributions therefrom.
STATE AND LOCAL TAXES. Depending upon the extent of a Fund's
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, a Fund may be subject to the tax
laws of such states or localities.
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RATINGS OF DEBT INSTRUMENTS
Corporate and Municipal Bond Ratings.
Moody's Investors Service, Inc. (Moody's):
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 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 which make the long-term risks
appear somewhat larger than in 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 which 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 period 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 other 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 the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
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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 and 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.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic
category; the modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Ratings Group ("S&P"):
AAA -- This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. While bonds with this rating normally
exhibit 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 debt in
higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to inadequate
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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 implied BBB- rating.
B -- Bonds rated B have a greater vulnerability to default but currently
have 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 -- Bonds rated CCC have a currently identifiable vulnerability to
default, and are 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 which is assigned an actual or implied CCC debt rating. The C
rating has been used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in payment default. The D rating 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
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
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
appropriate category.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic issues. The ratings measure
the creditworthiness of the obligor but do not take into account currency
exchange and related uncertainties.
State, Municipal Notes and Tax Exempt Demand Notes.
Moody's:
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Moody's rating for state, municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is
in recognition of the differences between short-term credit risk and
long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors
of the first importance in bond risk are of lesser importance in the
short run. Symbols used are as follows:
MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing or both.
MIG-2--Notes bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
S&P:
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of Payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a
note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used to denote the put
option (for example, "AAA/A-1+") or if the nominal maturity is short, a
rating of "SP-1+/AAA" is assigned.
Commercial Paper Ratings.
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Moody's:
Commercial paper rated Prime by Moody's is based upon its evaluation of
many factors, including: (1) management of the issuer; (2) the issuer's
industry or industries and the speculative-type risks which may be
inherent in certain areas; (3) the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships
which exist with the issue; and (8) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Relative
differences in these factors determine whether the issuer's commercial
paper is rated Prime-1, Prime-2, or Prime-3.
Prime-1 - indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions
in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate
reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial
markets and assured sources of alternative liquidity.
Prime-2 - indicates a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
S&P:
Commercial paper rated A by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements. Long-term
senior debt is rated A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has
a strong position within the industry. The reliability and quality of
management are unquestioned. Relative strength or weakness of the above
factors determine whether the issuer's commercial paper is rated A-1,
A-2, or A-3.
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
-54-
<PAGE> 204
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
Duff and Phelps, Inc.:
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank
loans, master notes, bankers acceptances, irrevocable letters of credit,
and current maturities of long-term debt. Asset-backed commercial paper
is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including
trade credit, bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds
on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term
debt issuers carry the highest rating, yet quality differences exist
within that tier. As a consequence, Duff & Phelps has incorporated
gradations of '1+' (one plus) and '1-' (one minus) to assist investors
in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free US
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
Satisfactory Grade
Duff 3--Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
-55-
<PAGE> 205
Non-Investment Grade
Duff 4--Speculative investment characteristics. Liquidity is not
sufficient to ensure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
Default
Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.
IBCA, Inc.:
In addition to conducting a careful review of an institution's reports
and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to
the preparation of individual reports and ratings. To keep abreast of
any changes that may affect assessments, analysts maintain contact
throughout the year with the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which
is essential to maximize the value of their meetings with management and
to properly analyze a company's written materials. They also have a
thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot
be disclosed in reports, they are taken into account when assigning
ratings. Before dispatch to subscribers, a draft of the report is
submitted to each company to permit correction of any factual errors and
to enable clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following the Committee
meetings, ratings are issued directly to subscribers. At the same time,
the company is informed of the ratings as a matter of courtesy, but not
for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely
repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
-56-
<PAGE> 206
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher
categories.
B2--Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.
C1--Obligations for which there is an inadequate capacity to ensure
timely repayment.
D1--Obligations which have a high risk of default or which are currently
in default.
Fitch Investors Service, Inc.:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
Fitch short-term ratings are as follows:
F-1+--Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1--Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2--Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3--Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-5--Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
D--Default. Issues assigned this rating are in actual or imminent
payment default.
Thomson BankWatch (TBW) Short-Term Ratings:
-57-
<PAGE> 207
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned. These ratings are derived exclusively from a quantitative analysis of
publicly available information. Qualitative judgments have not been
incorporated. The ratings are intended to be applicable to all operating
entities of an organization but there may be in some cases more credit liquidity
and/or risk in one segment of the business than another.
The TBW short-term rating applies only to unsecured instruments that have a
maturity of one year or less, and reflects the likelihood of an untimely payment
of principal or interest.
TBW-1 The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated
"TBW-1".
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external)
than obligations with higher ratings, capacity to service
principal and interest in a timely fashion is considered
adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
FINANCIAL STATEMENTS
The 1995 annual financial statements of the Funds, including notes to the
financial statements and financial highlights and the Report of Independent
Accountants, are included in the Investment Company's Annual Reports to
Shareholders. Copies of these Annual Reports accompany this Statement of
Additional Information and are incorporated herein by reference.
-58-
<PAGE> 208
FRANK RUSSELL INVESTMENT COMPANY
File No. 2-71299 and 811-3153
1933 Act Post-Effective Amend. No. 32
1940 Act Amendment No. 32
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements for the year ended 12/31/95 for
each "External Fee Fund" (comprised of Equity I, Equity
II, Equity III, Equity Q, Fixed Income I, Fixed Income
II, Fixed Income III, International, Emerging Markets
and Money Market Funds), and for each "Internal Fee
Fund" (comprised of Diversified Equity, Special Growth,
Equity Income, Quantitative Equity, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond,
International Securities, Limited Volatility Tax Free,
Real Estate Securities, U.S. Government Money Market and
Tax Free Money Market Funds).
Equity T Fund has not commenced operations and was not
offered for public investment prior to the effective date
of this registrant statement.
Part A Supplementary Per Share Information
Part B Incorporated by Reference to "External Fee
Funds" and "Internal Fee Funds" Annual
Reports for the Fiscal year ended
December 31, 1995.
1. Statement of Net Assets
2. Statement of Assets and Liabilities
3. Statement of Operations
4. Statement of Changes in Net Assets
5. Financial Highlights
6. Portfolio Management Discussion
(b) Exhibits
1(a) Master Trust Agreement
1(b) 11/29/84 Amendment to Master Trust
Agreement
1(c) 5/19/85 Amendment to Master Trust Agreement
1(d) 1/26/87 Amendment to Master Trust Agreement
<PAGE> 209
Exhibits
1(e) 2/23/89 Amendment to Master Trust Agreement
1(f) 5/11/92 Amendment to Master Trust Agreement
1(g) 3/22/96 Amendment to Master Trust Agreement
2. Bylaws (incorporated by reference to
Post-Effective Amendment No. 6)
3. Voting Trust Agreement (not applicable)
4. Specimen Securities
4(a) External Fee Fund (incorporated by
reference to Post-Effective Amendment No. 7)
4(b) Internal Fee Fund (incorporated by
reference to the Post-Effective Amendment
No. 9)
4(c) Quantitative Equity, Equity Q and Tax Free
Money Market Funds (incorporated by
reference to Post-Effective Amendment No.
11)
4(d) Real Estate Securities Fund (incorporated
by reference to the Post-Effective
Amendment No. 15 filed on May 1, 1989
["Post-Effective Amendment No. 15"])
5(a) Amended and Restated Management Agreement
with Frank Russell Investment Management
Company
5(a)(1) Letter Agreement adding Equity T Fund to the
Management Agreement
5(b)(1) Service Agreement with Frank Russell Company
and Frank Russell Investment Management
Company (incorporated by reference to
Post-Effective Amendment No. 11)
<PAGE> 210
Exhibits
5(b)(2) Letter Agreement adding Real Estate
Securities Fund to the Service Agreement
(incorporated by reference to
Post-Effective Amendment No. 15)
5(b)(3) Amendment 1 to Service Agreement with Frank
Russell Company and Frank Russell Investment
Management Company changing services and
fees (incorporated by reference to
Post-Effective Amendment No. 22)
5(b)(4) Letter Agreement adding Fixed Income III,
Multistrategy Bond and Emerging Markets
Funds to the Service Agreement
(incorporated by reference to
Post-Effective Amendment No. 22)
5(b)(5) Amendment No. 2 to the Service Agreement
with Frank Russell Company and Frank Russell
Investment Management Company amending
Section 4 of the Agreement
5(b)(6) Letter Agreement adding Equity T Fund to the
Service Agreement
5(b)(7) Letter Agreement with State Street Bank and
Trust Company for development of a Tax
Accounting System
5(c)(1) Portfolio Management Contract, as amended,
with Money Managers and Frank Russell
Investment Management Company
6(a)(1) Distribution Agreement with Russell Fund
Distributors, Inc. (incorporated by
reference to Post-Effective Amendment No.
13 filed on 3/31/88 ["Post-Effective
Amendment No. 13"])
6(a)(2) Letter Agreement adding Real Estate
Securities Fund to the Distribution
Agreement (incorporated by reference to
Post-Effective Amendment No. 15)
<PAGE> 211
Exhibits
6(a)(3) Letter Agreement adding Fixed Income III,
Multistrategy Bond and Emerging Markets
Funds to the Distribution Agreement
(incorporated by reference to
Post-Effective Amendment No. 22)
6(a)(4) Letter Agreement adding Equity T Fund to the
Distribution Agreement
7. Bonus Plans (none)
8(a) Custodian Agreement with State Street Bank
and Trust Company (incorporated by
reference to Post-Effective Amendment No.
14)
8(b) Letter Agreement adding Real Estate
Securities Fund to the Custodian Agreement
(incorporated by reference to
Post-Effective Amendment No. 15)
8(c) Letter Agreement adding Fixed Income III
and Multistrategy Bond Funds to the
Custodian Agreement (incorporated by
reference to Post-Effective Amendment No.
23 filed on November 2, 1992
["Post-Effective Amendment No. 23"])
8(d) Letter Agreement adding Emerging Markets
Fund to the Custodian Agreement
(incorporated by reference to
Post-Effective Amendment No. 23)
8(e) Amendment No. 1 to Custodian Agreement
with State Street Bank and Trust Company
amending Section 3.5 of the Agreement.
(Incorporated by reference to
Post-Effective Amendment No. 29)
8(f) Form of Amendment to Custodian Agreement
with State Street Bank and Trust Company
amending Sections 2.2 and 2.7 of the
Agreement (incorporated by reference to
Post-Effective Amendment No. 28)
<PAGE> 212
Exhibits
8(g) Amendment to the Custodian Agreement with
State Street Bank and Trust Company
amending Sections 2.2 and 2.7 of the
Agreement (incorporated by reference to
Post-Effective Amendment No. 29.)
8(h) Amendment to the Fee Schedule of the
Custodian Agreement with State Street Bank
and Trust Company (incorporated by
reference to Post-Effective Amendment No.
29)
8(i) Amendment to the Custodian Agreement with
State Street Bank and Trust Company for
addition of Omnibus accounts
8(j) Amendment to the Custodian Agreement with
State Street Bank and Trust Company
amending Section 7 of the Fee Schedule for
all Funds except the Emerging Markets Fund
8(k) Amendment to the Custodian Agreement with
State Street Bank and Trust Company
amending Section 7 of the Fee Schedule for
the Emerging Markets Fund
8(l) Amendment to the Custodian Agreement with
State Street Bank and Trust Company adding
Equity T Fund
9(a)(1) Agency Agreement with Frank Russell
Investment Management Company (incorporated
by reference to Post-Effective Amendment No.
13)
9(a)(2) Letter Agreement adding Real Estate
Securities Fund to the (Transfer) Agency
Agreement (incorporated by reference to
Post-Effective Amendment No. 15)
9(a)(3) Letter Agreement adding Fixed III Income,
Multistrategy Bond and Emerging Markets
Funds to the (Transfer) Agency Agreement
(incorporated by reference to
Post-Effective Amendment No. 22)
<PAGE> 213
Exhibits
9(a)(4) Letter Agreement amending Schedule A of the
Transfer and Dividend Disbursing Agency
Agreement with Frank Russell Investment
Management Company
9(a)(5) Letter Agreement adding Equity T Fund to the
Agency Agreement
9(b) General forms of Frank Russell Investment
Management Company's Asset Management
Services Agreements with Bank Trust
Departments and with other clients
(incorporated by reference to
Post-Effective Amendment No. 10)
9(c) General form of Frank Russell Investment
Management Company's Asset Management
Services Agreement with External Fee Fund
clients and Internal Fee Fund clients
(incorporated by reference to
Post-Effective Amendment No. 9)
9(d) General form of Frank Russell Investment
Management Company's Asset Management
Services Agreement with Private Investment
Consulting clients of Frank Russell
Company (incorporated by reference to
Post-Effective Amendment No. 1 filed on
February 22, 1982)
10. Opinion and Consent of Counsel relating to
the Equity T Fund*
11(a) Other Opinions-Consent of Independent
Accountants
11(b) Limited Power of Attorney with respect to
Amendments to the SEC Registration
Statements of Frank Russell Investment
Company of Frank Russell Investment Company
Trustees (incorporated by reference to
Post-Effective Amendment No. 31)
____________________
* Registrant has registered an indefinite number of shares pursuant to Rule
24f-2 under the Investment Company Act of 1940, and filed an opinion of counsel
with its Rule 24f-2 Notice for the External and Internal Fee Funds on February
28, 1996.
<PAGE> 214
Exhibits
12. Financial Statements omitted from Item 23
(none)
13. Agreement related to Initial Capital
provided by Frank Russell Company
(incorporated by reference to
Post-Effective Amendment No. 2 filed on
April 1, 1982)
14. Model Retirement Plans
(none)
15. Rule 12b-1 Distribution Financing Plan
(none)
16. Schedule of Computation of Performance
Calculation
17. Financial Data Schedules
Item 25. Persons Controlled by or Under Common Control with Registrant
None
<TABLE>
<CAPTION>
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders as of April 12, 1996
-------------- ---------------------------------------------
<S> <C>
Shares of beneficial interest
Par Value $0.01
Equity I 3,555
Equity II 3,353
Equity III 1,712
Equity Q 3,192
Equity T 0*
International 3,605
Emerging Markets 7,007
Fixed Income I 2,618
Fixed Income II 1,774
Fixed Income III 2,323
Money Market 107
Diversified Equity 6,517
Special Growth 6,100
Equity Income 3,792
Quantitative Equity 6,290
International Securities 6,752
Diversified Bond 3,848
Volatility Constrained Bond 1,944
Multistrategy Bond 4,558
Limited Volatility Tax Free 613
Real Estate Securities Fund 8,853
U.S. Government Money Market 5,294
Tax Free Money Market 560
</TABLE>
* Equity T Fund has not commenced operations and was not offered
for public investment prior to the effective date of this
registration statement.
<PAGE> 215
Item 27. Indemnification
Incorporated by reference to Post-Effective Amendment No. 6.
Item 28. Business and Other Connections of Investment Advisor
See, Registrant's prospectus sections "Frank Russell
Company--Consultant to the Funds," "The Money Managers" and
"Money Manager Profiles," the Statement of Additional Information
sections "Structure and Governance--Trustees and Officers," and
"Operation of Investment Company--Consultant."
Item 29. Principal Underwriters
(a) The Seven Seas Series Fund.
(b) Russell Fund Distributors, Inc. is the principal
underwriter of the Registrant. The directors and officers
of Russell Fund Distributors, Inc., their principal
business address, and positions and offices with the
Registrant and Russell Fund Distributors, Inc. are set
forth below:
<TABLE>
<CAPTION>
Name and Positions and Position and
Principal Business Officers with Offices with
Address Registrant Underwriter
------------------ ------------- -------------
<S> <C> <C>
Lynn L. Anderson Trustee, President, Chief Director, Chairman of the Board and
Executive Officer Chief Executive Officer
Eric A. Russell None Director and President
George W. Weber Treasurer and Chief Accounting Director, Funds Administration
Officer and Operations
Karl J. Ege Secretary and General Counsel Secretary and General Counsel
Randall P. Lert Director of Investments Director
Norma Schellberg None Treasurer
J. David Griswold None Assistant Secretary, Associate
General Counsel and Chief
Compliance Officer
Gregory J. Lyons Assistant Secretary Assistant Secretary
Mary E. Hughs None Assistant Secretary
Warren Thompson III None Corporate Tax Counsel
John J. James None Assistant Secretary
Nancy M. Jacoby None Assistant Secretary
Sandra J. Burke Assistant Secretary None
Deedra S. Walkey Assistant Secretary None
Emily Davis Assistant Secretary None
Amy Osler Assistant Secretary None
</TABLE>
(c) Inapplicable.
<PAGE> 216
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are
maintained in the following locations:
<TABLE>
<CAPTION>
FRIC FRIMCo
---- ------
<S> <C>
Frank Russell Investment Company Frank Russell Investment
909 A Street Management Company
Tacoma, Washington 98402 909 A Street
Tacoma, Washington 98402
<CAPTION>
SS MM
-- --
<S> <C>
State Street Bank & Trust Company Money Managers
1776 Heritage Drive JA4N See, Prospectus Section
North Quincy, Massachusetts 02171 "Money Manager Profiles"
for Names and Addresses
</TABLE>
Rule 31a-1
(a) Records forming basis for financial statements -
at principal offices of SS, FRIC, FRIMCo, and
MM for each entity
(b) FRIC Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable
(4) FRIC - Corporate charter, etc.
(5) MM - Brokerage orders
(6) MM - Other portfolio purchase orders
(7) SS - Contractual commitments
(8) SS and FRIC - Trial balances
(9) MM - Reasons for brokerage allocations
(10) MM - Persons authorizing purchases and
sales
(11) FRIC and MM - Files of advisory
material
(12) ---
(c) Inapplicable
(d) FRIMCo - Broker-dealer records, to the extent
applicable
(e) Inapplicable
(f) FRIMCo and MM - Investment adviser records
Item 31. Management Services
None except as described in Parts A and B.
Item 32. Undertakings
(b) The Registrant undertakes to file a post-effective amendment for
the Equity T Fund containing financial statements, which need not
be certified, for that Fund within four to six months from
effective date of this registration statement.
(c) Registrant has elected to include its Management's discussion of
Fund performance required under N-1A, Item 5A in its annual
report. Registrant therefore undertakes to provide annual reports
without charge to any recipient of a Prospectus who requests the
information.
<PAGE> 217
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to rule
485(b) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 32 to its Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Tacoma, and State of
Washington, on the 25th day of April, 1996.
FRANK RUSSELL INVESTMENT COMPANY
Registrant
By: /s/ Lynn L. Anderson
Lynn L. Anderson, Trustee and President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on April 25, 1996.
Signatures Title
/s/ Lynn L. Anderson Trustee and President
- ---------------------------- in his capacity as
Lynn L. Anderson* Chief Executive Officer
/s/ George W. Weber Treasurer, in his capacity
- ---------------------------- as Chief Accounting Officer
George W. Weber
Trustee
- ----------------------------
Paul E. Anderson*
Trustee
- ----------------------------
Paul Anton, PhD*
Trustee
- ----------------------------
William E. Baxter*
Trustee
- ----------------------------
Lee C. Gingrich*
<PAGE> 218
Trustee
- ----------------------------
Eleanor W. Palmer*
Trustee
- ----------------------------
George F. Russell, Jr.*
By: /s/ Gregory J. Lyons
----------------------------
Gregory J. Lyons
- ---------------
* Original Powers of Attorney authorizing the President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary, and each of
them singly to sign this Amendment thereto, on behalf of the Board of
Trustees of Frank Russell Investment Company which have been filed with the
Securities and Exchange Commission.
<PAGE> 219
FRANK RUSSELL INVESTMENT COMPANY
FILE NO. 2-71299
FILE NO. 811-3153
EXHIBITS
Listed in Part C, Item 1(b)
To Post-Effective Amendment No. 32
and Amendment No. 32
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment Company Act of 1940
<PAGE> 220
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Name of Exhibit Exhibit Number
- --------------- --------------
<S> <C>
Master Trust Agreement 99.1(a)
11/19/84 Amendment 99.1(b)
to Master Trust Agreement
5/29/85 Amendment 99.1(c)
to Master Trust Agreement
1/26/87 Amendment 99.1(d)
to Master Trust Agreement
2/23/89 Amendment 99.1(e)
to Master Trust Agreement
5/11/92 Amendment 99.1(f)
to Master Trust
3/19/96 Amendment 99.1(g)
to Master Trust Agreement
Amended and Restated 99.5(a)
Management Agreement with
Frank Russell Investment Company
Letter Agreement adding 99.5(a)(1)
Equity T Fund to the Management Agreement
Amendment No. 2 to the 99.5(b)(5)
Service Agreement with Frank
Russell Company and Frank
Russell Investment Management
Company amending Section 4
of the Agreement
Form of Letter Agreement adding 99.5(b)(6)
Equity T Fund to the Service Agreement
Letter Agreement with State Street 99.5(b)(7)
Bank and Trust Company for development
of a Tax Account System
</TABLE>
<PAGE> 221
<TABLE>
<S> <C>
Portfolio Management Contract, 99.5(c)(1)
as amended, with Money Managers
and Frank Russell Investment
Management Company
Letter Agreement adding Equity T Fund 99.6(a)(4)
to the Distribution Agreement
Amendment to the Custodian Agreement 99.8(i)
with State Street Bank and Trust Company
for adding Omnibus accounts
Amendment to the Custodian Agreement 99.8(j)
with State Street Bank and Trust Company
amending Section 7 of the Fee Schedule for
all the Funds except the Emerging Markets Fund
Amendment to the Custodian Agreement 99.8(k)
with State Street Bank and Trust Company
amending Section 7 of the Fee Schedule of
the Emerging Markets Fund
Amendment to the Custodian Agreement 99.8(l)
with State Street Bank and Trust Company
adding Equity T Fund
Letter Agreement amending Schedule A 99.9(a)(4)
of the Transfer and Dividend Disbursing
Agency Agreement with Frank Russell
Investment Management Company
Letter Agreement adding Equity T Fund 99.9(a)(5)
to the Agency Agreement
Opinion and Consent of Counsel 99.10
relating to the Equity T Fund
Consent of Independent Accountants 99.11(a)
Schedule of Computation of 99.16
Performance Calculation
Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 99.1(a)
FRANK RUSSELL INVESTMENT COMPANY
MASTER TRUST AGREEMENT (c)
July 26, 1984
(c) 1983 Goodwin, Procter & Hoar
All Rights Reserved
<PAGE> 2
FRANK RUSSELL INVESTMENT COMPANY
MASTER TRUST AGREEMENT
<TABLE>
<CAPTION>
ARTICLE I. NAME AND DEFINITIONS Page
- ---------- -------------------- ----
<S> <C> <C>
Section 1.1 Name 1
Section 1.2 Definitions 1
(a) "Trust" 1
(b) "Trustees" 2
(c) "Shares" 2
(d) "Sub-Trust" or "Series" 2
(e) "Shareholder" 2
(f) "1940 Act" 2
(g) "Commission" 2
(h) "Declaration of Trust" 2
(i) "By-Laws" 2
ARTICLE II. PURPOSE OF TRUST 2
ARTICLE III. THE TRUSTEES 2
Section 3.1 Number, Designation, Election, Term, etc. 2
(a) Initial Trustee(s) 2
(b) Number 3
(c) Election and Term 3
(d) Resignation and Retirement 3
(e) Removal 3
(f) Vacancies 3
(g) Effect of Death, Resignation, etc. 4
(h) No Accounting 4
Section 3.2 Powers of Trustees 4
(a) Investments 5
(b) Disposition of Assets 5
(c) Ownership Powers 5
(d) Subscription 5
(e) Form of Holding 6
(f) Reorganization, etc. 6
(g) Voting Trusts, etc. 6
(h) Compromise 6
(i) Partnerships, etc. 6
(j) Borrowing and Security 6
(k) Guarantees, etc. 6
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
(l) Insurance 6
(m) Pensions, etc. 7
Section 3.3 Certain Contracts 7
(a) Advisory 8
(b) Administration and Sub-Advisory 8
(c) Distribution 8
(d) Custodian and Depository 8
(e) Transfer and Dividend Disbursing Agency 8
(f) Shareholder Servicing 8
(g) Accounting 8
Section 3.4 Payment of Trust Expenses and Compensation of Trustees 9
Section 3.5 Ownership of Assets of the Trust 10
ARTICLE IV. SHARES 10
Section 4.1 Description of Shares 10
Section 4.2 Establishment and Designation of Sub-Trusts 11
(a) Assets Belonging to Sub-Trusts 12
(b) Liabilities Belonging to Sub-Trusts 12
(c) Dividends 13
(d) Liquidation 13
(e) Voting 14
(f) Redemption by Shareholder 14
(g) Redemption by Trust 14
(h) Net Asset Value 15
(i) Transfer 15
(j) Equality 16
(k) Fractions 16
(l) Conversion Rights 16
Section 4.3 Ownership of Shares 17
Section 4.4 Investments in the Trust 17
Section 4.5 No Pre-emptive Rights 17
Section 4.6 Status of Shares and Limitation of Personal Liability 17
ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS 18
Section 5.1 Voting Powers 18
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 5.2 Meetings 19
Section 5.3 Record Dates 19
Section 5.4 Quorum and Required Vote 19
Section 5.5 Action by Written Consent 20
Section 5.6 Inspection of Records 20
Section 5.7 Additional Provisions 20
Section 5.8 Shareholder Communications 20
ARTICLE VI. LIMITATION OF LIABILITY; INDEMNIFICATION 21
Section 6.1 Trustees, Shareholders, etc. Not Personally Liable; Notice 21
Section 6.2 Trustee's Good Faith Action; Expert
Advice; No Bond or Surety 22
Section 6.3 Indemnification of Shareholders 22
Section 6.4 Indemnification of Trustees, Officers, etc. 22
Section 6.5 Compromise Payment 23
Section 6.6 Indemnification Not Exclusive, etc. 24
Section 6.7 Liability of Third Persons Dealing with Trustees 24
ARTICLE VII. MISCELLANEOUS 24
Section 7.1 Duration and Termination of Trust 24
Section 7.2 Reorganization 25
Section 7.3 Amendments 26
Section 7.4 Filing of Copies; References; Headings 26
Section 7.5 Applicable Law 27
</TABLE>
<PAGE> 5
FRANK RUSSELL INVESTMENT COMPANY
MASTER TRUST AGREEMENT
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts this
26th day of July, 1984, by the Trustee hereunder, and by the holder of shares of
beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH
WHEREAS this Trust has been formed to carry on the business of an
investment company; and
WHEREAS this Trust is authorized to issue its shares of beneficial
interest in separate series, each separate series to be a Sub-Trust hereunder,
all in accordance with the provisions hereinafter set forth; and
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust or Sub-Trusts created
hereunder as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1 Name. This Trust shall be known as "FRANK RUSSELL
INVESTMENT COMPANY" and the Trustees shall conduct the business of the Trust
under that name or any other name or names as they may from time to time
determine. Notwithstanding the foregoing, the Trust expressly acknowledges and
agrees that if Frank Russell Company, a corporation organized and existing under
the laws of the State of Washington, or any of its corporate affiliates, no
longer serves as investment adviser to the Trust, the Trust will immediately
take all action necessary to change its name to delete any reference to "Frank
Russell."
Section 1.2 Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust established
by this Agreement and Declaration of Trust, as amended from time to time,
inclusive of each and every Sub-Trust established hereunder;
<PAGE> 6
(b) "Trustees" refers to the Trustees of the Trust and of each
Sub-Trust hereunder named herein or elected in accordance with Article III;
(c) "Shares" refers to the transferable units of interest into which
the beneficial interest in the Trust and each Sub-Trust of the Trust (as the
context may require) shall be divided from time to time;
(d) "Series" refers to Series of Shares established and designated
under or in accordance with the provisions of Article IV, each of which Series
shall be a Sub-Trust of the Trust;
(e) "Shareholder" means a record owner of Shares;
(f) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder or exemptions therefrom, all as amended from
time to time;
(g) The term "Commission" shall have the meaning given it in the 1940
Act;
(h) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust as amended or restated from time to time; and
(i) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to operate as an investment company and to
offer Shareholders of the Trust and each Sub-Trust of the Trust one or more
investment vehicles primarily in securities and debt instruments.
ARTICLE III
THE TRUSTEES
Section 3.1 Number, Designation, Election, Term, etc.
(a) Initial Trustee(s). Upon his execution of this Declaration of Trust
or a counterpart hereof or some other writing in which he accepts such
Trusteeship and agrees to the provisions hereof, Lee C. Gingrich shall become a
Trustee hereof and of each Sub-Trust hereunder.
(b) Number. The Trustee(s) serving as such, whether named above or
hereafter becoming a Trustee, may increase or decrease the number of Trustees to
a number other than the number theretofore determined. No decrease in the number
of Trustees shall have the effect of removing any Trustee from office prior to
the expiration of his term, but the number of Trustees
<PAGE> 7
may be decreased in conjunction with the removal of a Trustee pursuant to
subsection (e) of this Section 3.1.
(c) Election and Term. The Trustees shall be elected by the
Shareholders of the Trust prior to the public offering of Shares of the Trust.
Each Trustee, whether named above or hereafter becoming a Trustee, shall serve
as a Trustee of the Trust and of each Sub-Trust hereunder during the lifetime of
this Trust and until its termination as hereinafter provided except as such
Trustee sooner dies, resigns or is removed. Subject to Section 16(a) of the 1940
Act, the Trustees may elect their own successors and may, pursuant to Section
3.1(f) hereof, appoint Trustees to fill vacancies.
(d) Resignation and Retirement. Any Trustee may resign his trust or
retire as a Trustee, by written instrument signed by him and delivered to the
other Trustees or to any officer of the Trust, and such resignation or
retirement shall take effect upon such delivery or upon such later date as is
specified in such instrument and shall be effective as to the Trust and each
Sub-Trust hereunder.
(e) Removal. Any Trustee may be removed with or without cause at any
time: (i) by written instrument, signed by at least two-thirds of the number of
Trustees prior to such removal, specifying the date upon which such removal
shall become effective; or (ii) by vote of Shareholders holding not less than
two-thirds of the Shares then outstanding, cast in person or by proxy at any
meeting called for the purpose; or (iii) by a written declaration signed by
Shareholders holding not less than two-thirds of the Shares then outstanding and
filed with the Trust's Custodian. Any such removal shall be effective as to the
Trust and each Sub-Trust hereunder.
(f) Vacancies. Any vacancy or anticipated vacancy resulting from any
reason, including without limitation the death, resignation, retirement, removal
or incapacity of any of the Trustees, or resulting from an increase in the
number of Trustees by the other Trustees may (but need not unless required by
the 1940 Act) be filled by a majority of the remaining Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, through the appointment in writing
of such other person as such remaining Trustees in their discretion shall
determine and such appointment shall be effective upon the written acceptance of
the person named therein to serve as a Trustee and agreement by such person to
be bound by the provisions of this Declaration of Trust, except that any such
appointment in anticipation of a vacancy to occur by reason of retirement,
resignation, or increase in number of Trustees to be effective at a later date
shall become effective only at or after the effective date of said retirement,
resignation, or increase in number of Trustees. As soon as any Trustee so
appointed shall have accepted such appointment and shall have agreed in writing
to be bound by this Declaration of Trust and the appointment is effective, the
Trust estate shall vest in the new Trustee, together with the continuing
Trustees, without any further act or conveyance.
(g) Effect of Death, Resignation, etc. The death, resignation,
retirement, removal, or incapacity of the Trustees, or any one of them, shall
not operate to annul or terminate the Trust or
<PAGE> 8
any Sub-Trust hereunder or to revoke or terminate any existing agency or
contract created or entered into pursuant to the terms of this Declaration of
Trust.
(h) No Accounting. Except to the extent required by the 1940 Act or
under circumstances which would justify his removal for cause, no person ceasing
to be a Trustee as a result of his death, resignation, retirement, removal or
incapacity (nor the estate of any such person) shall be required to make an
accounting to the Shareholders or remaining Trustees upon such cessation.
Section 3.2 Powers of Trustees. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient to carry out
that responsibility and the purpose of the Trust. Without limiting the
foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration
of Trust providing for the conduct of the business and affairs of the Trust and
may amend and repeal them to the extent that such By-Laws do not reserve that
right to the Shareholders; they may from time to time in accordance with the
provisions of Section 4.1 hereof establish Sub-Trusts, each such Sub-Trust to
operate as a separate and distinct investment medium and with separately defined
investment objectives and policies and distinct investment purpose; they may as
they consider appropriate elect and remove officers and appoint and terminate
agents and consultants and hire and terminate employees, any one or more of the
foregoing of whom may be a Trustee, and may provide for the compensation of all
of the foregoing; they may appoint from their own number, and terminate, any one
or more committees consisting of two or more Trustees, including without implied
limitation an executive committee, which may, when the Trustees are not in
session and subject to the 1940 Act, exercise some or all of the power and
authority of the Trustees as the Trustees may determine; in accordance with
Section 3.3 they may employ one or more Advisers, Administrators, Depositories
and Custodians and may authorize any Depository or Custodian to employ
subcustodians or agents and to deposit all or any part of such assets in a
system or systems for the central handling of securities and debt instruments,
retain transfer, dividend, accounting or Shareholder servicing agents or any of
the foregoing, provide for the distribution of Shares by the Trust through one
or more distributors, principal underwriters or otherwise, set record dates or
times for the determination of Shareholders or various of them with respect to
various matters; they may compensate or provide for the compensation of the
Trustees, officers, advisers, administrators, custodians, other agents,
consultants and employees of the Trust or the Trustees on such terms as they
deem appropriate; and in general they may delegate to any officer of the Trust,
to any committee of the Trustees and to any employee, adviser, administrator,
distributor, depository, custodian, transfer and dividend disbursing agent, or
any other agent or consultant of the Trust such authority, powers, functions and
duties as they consider desirable or appropriate for the conduct of the business
and affairs of the Trust, including without implied limitation the power and
authority to act in the name of the Trust and of the Trustees, to sign documents
and to act as attorney-in-fact for the Trustees.
Without limiting the foregoing and to the extent not inconsistent with
the 1940 Act or other applicable law, the Trustees shall have power and
authority for and on behalf of the Trust and each separate Sub-Trust established
hereunder:
<PAGE> 9
(a) Investments. To invest and reinvest cash and other property, and to
hold cash or other property uninvested without in any event being bound or
limited by any present or future law or custom in regard to investments by
trustees;
(b) Disposition of Assets. To sell, exchange, lend, pledge, mortgage,
hypothecate, write options on and lease any or all of the assets of the Trust;
(c) Ownership Powers. To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities, debt instruments or
property; and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities, debt instruments
or property as the Trustees shall deem proper;
(d) Subscription. To exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of securities or debt
instruments;
(e) Form of Holding. To hold any security, debt instrument or property
in a form not indicating any trust, whether in bearer, unregistered or other
negotiable form, or in the name of the Trustees or of the Trust or of any
Sub-Trust or in the name of a custodian, subcustodian or other depository or a
nominee or nominees or otherwise;
(f) Reorganization, etc. To consent to or participate in any plan for
the reorganization, consolidation or merger of any corporation or issuer, any
security or debt instrument of which is or was held in the Trust; to consent to
any contract, lease, mortgage, purchase or sale of property by such corporation
or issuer, and to pay calls or subscriptions with respect to any security or
debt instrument held in the Trust;
(g) Voting Trusts, etc. To join with other holders of any securities or
debt instruments in acting through a committee, depository, voting trustee or
otherwise, and in that connection to deposit any security or debt instrument
with, or transfer any security or debt instrument to, any such committee,
depository or trustee, and to delegate to them such power and authority with
relation to any security or debt instrument (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to pay,
such portion of the expenses and compensation of such committee, depository or
trustee as the Trustees shall deem proper;
(h) Compromise. To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any Sub-Trust or any matter in controversy,
including but not limited to claims for taxes;
(i) Partnerships, etc. To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
<PAGE> 10
(j) Borrowing and Security. To borrow funds and to mortgage and pledge
the assets of the Trust or any Sub-Trust or any part thereof to secure
obligations arising in connection with such borrowing;
(k) Guarantees, etc. To endorse or guarantee the payment of any notes
or other obligations of any person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust property (or Sub-Trust property) or any part thereof to secure any of
or all such obligations;
(l) Insurance. To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, consultants, investment advisers, managers,
administrators, distributors, principal underwriters, or independent
contractors, or any thereof (or any person connected therewith), of the Trust
individually against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such person in
any such capacity, including any action taken or omitted that may be determined
to constitute negligence, whether or not the Trust would have the power to
indemnify such person against such liability; and
(m) Pensions, etc. To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out pension,
profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trust and provisions, including the
purchasing of life insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees, officers,
employees and agents of the Trust.
Except as otherwise provided by the 1940 Act or other applicable law,
this Declaration of Trust or the By-Laws, any action to be taken by the Trustees
on behalf of the Trust or any Sub-Trust may be taken by a majority of the
Trustees present at a meeting of Trustees (a quorum, consisting of at least a
majority of the Trustees then in office, being present), within or without
Massachusetts, including any meeting held by means of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting, or by written consents of a
majority of the Trustees then in office (or such larger or different number as
may be required by the 1940 Act or other applicable law).
Section 3.3 Certain Contracts. Subject to compliance with the
provisions of the 1940 Act, but notwithstanding any limitations of present and
future law or custom in regard to delegation of powers by trustees generally,
the Trustees may, at any time and from time to time and without limiting the
generality of their powers and authority otherwise set forth herein, enter into
one or more contracts with any one or more corporations, trusts, associations,
partnerships, limited partnerships, other type of organizations, or individuals
("Contracting Party"), to provide for the performance and assumption of some or
all of the following services, duties and
<PAGE> 11
responsibilities to, for or on behalf of the Trust and/or any Sub-Trust, and/or
the Trustees, and to provide for the performance and assumption of such other
services, duties and responsibilities in addition to those set forth below as
the Trustees may determine appropriate, and to authorize such Contracting Party
to employ or retain any one or more corporations, trusts, associations,
partnerships, limited partnerships, other type of organizations, or individuals
to provide to the Trust or to the Contracting Party such services:
(a) Advisory and Sub-Advisory. Subject to the general supervision of
the Trustees and in conformity with the stated policy of the Trustees with
respect to the investments of the Trust or of the assets belonging to any
Sub-Trust of the Trust (as that phrase is defined in subsection (a) of Section
4.2), to appoint an adviser and sub-advisers to manage such investments and
assets, make investment decisions with respect thereto, and to place purchase
and sale orders for portfolio transactions relating to such investments and
assets;
(b) Administration. Subject to the general supervision of the Trustees
and in conformity with any policies of the Trustees with respect to the
operations of the Trust and each Sub-Trust, to supervise all or any part of the
operations of the Trust and each Sub-Trust, and to provide all or any part of
the administrative and clerical personnel, office space and office equipment and
services appropriate for the efficient administration and operations of the
Trust and each Sub-Trust;
(c) Distribution. To distribute the Shares of the Trust and each
Sub-Trust, to be principal underwriter of such Shares, and/or to act as agent of
the Trust and each Sub-Trust in the sale of Shares and the acceptance or
rejection of orders for the purchase of Shares;
(d) Custodian and Depository. To act as depository for and to maintain
custody of the property of the Trust and each Sub-Trust and accounting records
in connection therewith;
(e) Transfer and Dividend Disbursing Agency. To maintain records of the
ownership of outstanding Shares, the issuance and redemption and the transfer
thereof, and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and/or the instructions of any
particular Shareholder to reinvest any such dividends;
(f) Shareholder Servicing. To provide service with respect to the
relationship of the Trust and its Shareholders, records with respect to
Shareholders and their Shares, and similar matters; and
(g) Accounting. To handle all or any part of the accounting
responsibilities, whether with respect to the Trust's properties, Shareholders
or otherwise.
The same person may be the Contracting Party for some or all of the services,
duties and responsibilities to, for and of the Trust and/or the Trustees, and
the contracts with respect thereto may contain such terms interpretive of or in
addition to the delineation of the services, duties and responsibilities
provided for, including provisions that are not inconsistent with the 1940 Act
relating to the standard of duty of and the rights to indemnification of the
Contracting Party and
<PAGE> 12
others, as the Trustees may determine. Nothing herein shall preclude, prevent or
limit the Trust or a Contracting Party from entering into sub-contractual
arrangements relative to any of the matters referred to in Sections 3.3(a)
through (g) hereof.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or
for any Contracting Party, or of or for any parent or affiliate of any
Contracting Party or that the Contracting Party or any parent or
affiliate thereof is a Shareholder or has an interest in the Trust or
any Sub-Trust, or that
(ii) any Contracting Party may have a contract providing for
the rendering of any similar services to one or more other
corporations, trusts, associations, partnerships, limited partnerships
or other organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption
of services, duties and responsibilities to, for or of the Trust or any
Sub-Trust and/or the Trustees or disqualify any Shareholder, Trustee or officer
of the Trust from voting upon or executing the same or create any liability or
accountability to the Trust, any Sub-Trust or its Shareholders, provided that in
the case of any relationship or interest referred to in the preceding clause (i)
on the part of any Trustee or officer of the Trust either (x) the material facts
as to such relationship or interest have been disclosed to or are known by the
Trustees not having any such relationship or interest and the contract involved
is approved in good faith by a majority of such Trustees not having any such
relationship or interest (even though such unrelated or disinterested Trustees
are less than a quorum of all of the Trustees), (y) the material facts as to
such relationship or interest and as to the contract have been disclosed to or
are known by the Shareholders entitled to vote thereon and the contract involved
is specifically approved in good faith by vote of the Shareholders, or (z) the
specific contract involved is fair to the Trust as of the time it is authorized,
approved or ratified by the Trustees or by the Shareholders.
Section 3.4 Payment of Trust Expenses and Compensation of Trustees. The
Trustees are authorized to pay or to cause to be paid out of the principal or
income of the Trust or any Sub-Trust, or partly out of principal and partly out
of income, and to charge or allocate the same to, between or among such one or
more of the Sub-Trusts that may be established and designated pursuant to
Article IV, as the Trustees deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust or any Sub-Trust,
or in connection with the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for the services of the
Trust's officers, employees, investment adviser, administrator, distributor,
principal underwriter, auditor, counsel, depository, custodian, transfer agent,
dividend disbursing agent, accounting agent, Shareholder servicing agent, and
such other agents, consultants, and independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Without limiting the generality of any other provision hereof, the Trustees
shall be entitled to reasonable compensation from the Trust for their services
as Trustees and may fix the amount of such compensation.
<PAGE> 13
Section 3.5 Ownership of Assets of the Trust. Title to all of the
assets of the Trust shall at all times be considered as vested in the Trustees.
ARTICLE IV
SHARES
Section 4.1 Description of Shares. The beneficial interest in the Trust
shall be divided into Shares, all at $.01 par value and of one class, but the
Trustees shall have the authority from time to time to divide the class of
Shares into two or more Series of Shares (each of which Series of Shares shall
be a separate and distinct Sub-Trust of the Trust, including without limitation
those Sub-Trusts specifically established and designated in Section 4.2), as
they deem necessary or desirable. Each Sub-Trust established hereunder shall be
deemed to be a separate trust under Massachusetts General Laws Chapter 182. The
Trustees shall have exclusive power without the requirement of shareholder
approval to establish and designate such separate and distinct Sub-Trusts, and
to fix and determine the relative rights and preferences as between the shares
of the separate Sub-Trusts as to right of redemption and the price, terms and
manner of redemption, special and relative rights as to dividends and other
distributions and on liquidation, sinking or purchase fund provisions,
conversion rights, and conditions under which the several Sub-Trusts shall have
separate voting rights or no voting rights.
The number of authorized Shares and the number of Shares of each
Sub-Trust that may be issued is unlimited, and the Trustees may issue Shares of
any Sub-Trust for such consideration and on such terms as they may determine (or
for no consideration if pursuant to a Share dividend or split-up), all without
action or approval of the Shareholders. All Shares when so issued on the terms
determined by the Trustees shall be fully paid and non-assessable (but may be
subject to mandatory contribution back to the Trust as provided in subsection
(h) of Section 4.2). The Trustees may classify or reclassify any unissued Shares
or any Shares previously issued and reacquired of any Sub-Trust into one or more
Sub-Trusts that may be established and designated from time to time. The
Trustees may hold as treasury Shares, reissue for such consideration and on such
terms as they may determine, or cancel, at their discretion from time to time,
any Shares of any Sub-Trust reacquired by the Trust.
The Trustees may from time to time close the transfer books or
establish record dates and times for the purposes of determining the holders of
Shares entitled to be treated as such, to the extent provided or referred to in
Section 5.3.
The establishment and designation of any Sub-Trust in addition to those
established and designated in Section 4.2 shall be effective upon the execution
by a majority of the then Trustees of an instrument setting forth such
establishment and designation and the relative rights and preferences of the
Shares of such Sub-Trust, or as otherwise provided in such instrument. At any
time that there are no Shares outstanding of any particular Sub-Trust previously
established and designated the Trustees may by an instrument executed by a
majority of their number abolish that
<PAGE> 14
Sub-Trust and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment to this
Declaration of Trust.
Any Trustee, officer or other agent of the Trust, and any organization
in which any such person is interested may acquire, own, hold and dispose of
Shares of any Sub-Trust of the Trust to the same extent as if such person were
not a Trustee, officer or other agent of the Trust; and the Trust may issue and
sell or cause to be issued and sold and may purchase Shares of any Sub-Trust
from any such person or any such organization subject only to the general
limitations, restrictions or other provisions applicable to the sale or purchase
of Shares of such Sub-Trust generally.
Section 4.2 Establishment and Designation of Sub-Trusts. Without
limiting the authority of the Trustees set forth in Section 4.1 to establish and
designate any further Sub-Trusts, the Trustees hereby establish and designate
nine Sub-Trusts: the "Equity I Fund," "Equity II Fund," "Equity III Fund,"
"Fixed Income I Fund," "Fixed Income II Fund," "International Fund," "Money
Market Fund," "Municipal Bond I Fund" and "Municipal Bond II Fund." The Equity I
Fund Shares, Equity II Fund Shares, Equity III Fund Shares, Fixed Income I Fund
Shares, Fixed Income II Fund Shares, International Fund Shares, Money Market
Fund Shares, Municipal Bond I Fund Shares and Municipal Bond II Fund Shares and
any Shares of any further Sub-Trusts that may from time to time be established
and designated by the Trustees shall (unless the Trustees otherwise determine
with respect to some further Sub-Trust at the time of establishing and
designating the same) have the following relative rights and preferences:
(a) Assets Belonging to Sub-Trusts. All consideration received by the
Trust for the issue or sale of Shares of a particular Sub-Trust, together with
all assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be, shall
be held by the Trustees in trust for the benefit of the holders of Shares of
that Sub-Trust and shall irrevocably belong to that Sub-Trust for all purposes,
and shall be so recorded upon the books of account of the Trust. Such
consideration, assets, income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, together with any General Items
allocated to that Sub-Trust as provided in the following sentence, are herein
referred to as "assets belonging to" that Sub-Trust. In the event that there are
any assets, income, earnings, profits, and proceeds thereof, funds, or payments
which are not readily identifiable as belonging to any particular Sub-Trust
(collectively "General Items"), the Trustees shall allocate such General Items
to and among any one or more of the Sub-Trusts established and designated from
time to time in such manner and on such basis as they, in their sole discretion,
deem fair and equitable; and any General Items so allocated to a particular
Sub-Trust shall belong to that Sub-Trust. Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all Sub-Trusts for all
purposes.
(b) Liabilities Belonging to Sub-Trusts. The assets belonging to each
particular Sub-Trust shall be charged with the liabilities in respect of that
Sub-Trust and all expenses, costs,
<PAGE> 15
charges and reserves attributable to that Sub-Trust, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Sub-Trust shall be allocated
and charged by the Trustees to and among any one or more of the Sub-Trusts
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so charged to a Sub-Trust
are herein referred to as "liabilities belonging to" that Sub-Trust. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the Shareholders of all Sub-Trusts for all
purposes. Any creditor of any Sub-Trust may look only to the assets of that
Sub-Trust to satisfy such creditor's debt.
The Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and which
items as capital; and each such determination and allocation shall be conclusive
and binding upon the Shareholders.
(c) Dividends. Dividends and distributions on Shares of a particular
Sub-Trust may be paid with such frequency as the Trustees may determine, which
may be daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Trustees may determine, to the
holders of Shares of that Sub-Trust, from such of the income and capital gains,
accrued or realized, from the assets belonging to that Sub-Trust, as the
Trustees may determine, after providing for actual and accrued liabilities
belonging to that Sub-Trust. All dividends and distributions on Shares of a
particular Sub-Trust shall be distributed pro rata to the holders of Shares of
that Sub-Trust in proportion to the number of Shares of that Sub-Trust held by
such holders at the date and time of record established for the payment of' such
dividends or distributions, except that in connection with any dividend or
distribution program or procedure the Trustees may determine that no dividend or
distribution shall be payable on Shares as to which the Shareholder's purchase
order and/or payment have not been received by the time or times established by
the Trustees under such program or procedure. Such dividends and distributions
may be made in cash or Shares of that Sub-Trust or a combination thereof as
determined by the Trustees or pursuant to any program that the Trustees may have
in effect at the time for the election by each Shareholder of the mode of the
making of such dividend or distribution to that Shareholder. Any such dividend
or distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with subsection (h) of Section 4.2.
(d) Liquidation. In the event of the liquidation or dissolution of the
Trust or any Sub-Trust, the Shareholders of each Sub-Trust that has been
established and designated and that has voted to be liquidated or dissolved,
shall be entitled to receive, when and as declared by the Trustees, the excess
of the assets belonging to that Sub-Trust over the liabilities belonging to that
Sub-Trust. The assets so distributable to the Shareholders of any particular
Sub-Trust shall be distributed among such Shareholders in proportion to the
number of Shares of that Sub-Trust held by them and recorded on the books of the
Trust. The liquidation of any particular Sub-Trust may be authorized by vote of
a majority of the Trustees then in office subject to the approval of a majority
of the outstanding voting Shares of that Sub-Trust, as defined in the 1940 Act.
<PAGE> 16
(e) Voting. On each matter submitted to a vote of the Shareholders,
each holder of a Share of each Sub-Trust shall be entitled to one vote for each
whole Share and to a proportionate fractional vote for each fractional Share
standing in his name on the books of the Trust and all Shares of each Sub-Trust
entitled to vote shall vote as a separate class except as otherwise required by
the 1940 Act. As to any matter which does not affect the interest of a
particular Sub-Trust, only the holders of Shares of the one or more affected
Sub-Trusts shall be entitled to vote thereon.
(f) Redemption by Shareholder. Each holder of Shares of a particular
Sub-Trust shall have the right at such times as may be permitted by the Trust,
but no less frequently than once each week, to require the Trust to redeem all
or any part of his Shares of that Sub-Trust at a redemption price equal to the
net asset value per Share of that Sub-Trust next determined in accordance with
subsection (h) of this Section 4.2 after the Shares are properly tendered for
redemption. Payment of the redemption price shall be in cash; provided, however,
that if the Trustees determine, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or undesirable, the
Trust may, subject to the requirements of the 1940 Act, make payment wholly or
partly in securities or other assets belonging to the Sub-Trust of which the
Shares being redeemed are part at the value of such securities or assets used in
such determination of net asset value.
Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the holders of Shares of any
Sub-Trust to require the Trust to redeem Shares of that Sub-Trust during any
period or at any time when and to the extent permissible under the 1940 Act.
(g) Redemption by Trust. Each Share of each Sub-Trust that has been
established and designated is subject to redemption by the Trust at the
redemption price which would be applicable if such Share was then being redeemed
by the Shareholder pursuant to subsection (f) of this Section 4.2: (a) at any
time, if the Trustees determine in their sole discretion that failure to so
redeem may have materially adverse consequences to the holders of the Shares of
the Trust or any Sub-Trust thereof, or (b) upon such other conditions as may
from time to time be determined by the Trustees, including without limitation in
furtherance of subsection (i) of this Section 4.2, and set forth in the then
current Prospectus of the Trust with respect to maintenance of Shareholder
accounts of a minimum amount. Upon such redemption the holders of the Shares so
redeemed shall have no further right with respect thereto other than to receive
payment of such redemption price.
(h) Net Asset Value. The net asset value per Share of any Sub-Trust
shall be the quotient obtained by dividing the value of the net assets of that
Sub-Trust (being the value of the assets belonging to that Sub-Trust less the
liabilities belonging to that Sub-Trust) by the total number of Shares of that
Sub-Trust outstanding, all determined in accordance with the methods and
procedures, including without limitation those with respect to rounding,
established by the Trustees from time to time.
<PAGE> 17
The Trustees may determine to maintain the net asset value per Share of
any Sub-Trust at a designated constant dollar amount and in connection therewith
may adopt procedures not inconsistent with the 1940 Act for the continuing
declarations of income attributable to that Sub-Trust as dividends payable in
additional Shares of that Sub-Trust at the designated constant dollar amount and
for the handling of any losses attributable to that Sub-Trust. Such procedures
may provide that in the event of any loss each Shareholder shall be deemed to
have contributed to the capital of the Trust attributable to that Sub-Trust his
pro rata portion of the total number of Shares required to be canceled in order
to permit the net asset value per Share of that Sub-Trust to be maintained,
after reflecting such loss, at the designated constant dollar amount. Each
Shareholder of the Trust shall be deemed to have agreed, by his investment in
any Sub-Trust with respect to which the Trustees shall have adopted any such
procedure, to make the contribution referred to in the preceding sentence in the
event of any such loss.
(i) Transfer. Subject to the limitations set forth below, all Shares of
each particular Sub-Trust shall be transferable, but transfers of Shares of a
particular Sub-Trust will be recorded on the Share transfer records of the Trust
applicable to that Sub-Trust only at such times as Shareholders shall have the
right to require the Trust to redeem Shares of that Sub-Trust and at such other
times as may be permitted by the Trustees.
Notwithstanding the foregoing, the Trust reserves the right, to the
maximum extent permitted by the Massachusetts General Laws and the 1940 Act, to
prohibit or restrict the transfer of its Shares from the person or company, as
those terms are defined in the 1940 Act, to whom the Shares were issued to any
other person or company; and to prohibit the continued holding of its Shares by
any person or company which does not have an effective contractual relationship,
to be referred to and known initially as an Asset Management Services Agreement,
with Frank Russell Company, a corporation organized and existing under the laws
of the State of Washington, or any of its corporate affiliates or any successors
in interest thereto whether by merger, consolidation or otherwise, which serves
as the Trust's principal investment adviser and provides management and
administrative services to the Trust. In furtherance of the foregoing, and not
in limitation thereof, so long as Shares of the Trust are offered pursuant to
arrangements with the Trust's principal investment adviser and provider of
management and administrative services, the Trust reserves the right:
(i) To refuse to register or to transfer Shares to any person
or company other than the person or company to whom such Shares were
originally issued and, in lieu of such registration and transfer, to
redeem such Shares at the then current net asset value at the price and
in the manner specified in subsection (f) of this Section 4.2; and
(ii) Upon the mailing of a written notice to the holder of
Shares at its address as shown on the Trust's books and records which
notice shall set forth the Trust's intention to do so, after five days
from the date of the mailing of the notice, to redeem the Shares of any
holder who does not have a then currently effective Asset Management
Services Agreement, or comparable contractual arrangement, with Frank
Russell Company or any of its corporate affiliates or any successors in
interest thereto including
<PAGE> 18
any person or company which serves as the principal adviser to and
provides management and administrative services to the Trust.
(j) Equality. All Shares of each particular Sub-Trust shall represent
an equal proportionate interest in the assets belonging to that Sub-Trust
(subject to the liabilities belonging to that Sub-Trust), and each Share of any
particular Sub-Trust shall be equal to each other Share of that Sub-Trust; but
the provisions of this sentence shall not restrict any distinctions permissible
under subsection (c) of this Section 4.2 that may exist with respect to
dividends and distributions on Shares of the same Sub-Trust. The Trustees may
from time to time divide or combine the Shares of any particular Sub-Trust into
a greater or lesser number of Shares of that Sub-Trust without thereby changing
the proportionate beneficial interest in the assets belonging to that Sub-Trust
or in any way affecting the rights of Shares of any other Sub-Trust.
(k) Fractions. Any fractional Share of any Sub-Trust, if any such
fractional Share is outstanding, shall carry proportionately all the rights and
obligations of a whole Share of that Sub-Trust, including rights and obligations
with respect to voting, receipt of dividends and distributions, redemption of
Shares, and liquidation of the Trust or any Sub-Trust.
(l) Conversion Rights. Subject to compliance with the requirements of
the 1940 Act, the Trustees shall have the authority to provide that holders of
Shares of any Sub-Trust shall have the right to convert said Shares into Shares
of one or more other Sub-Trust in accordance with such requirements and
procedures as may be established by the Trustees.
Section 4.3 Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or of a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each
Sub-Trust that has been established and designated. No certificates certifying
the ownership of Shares need be issued except as the Trustees may otherwise
determine from time to time. The Trustees may make such rules as they consider
appropriate for the issuance of Share certificates, the use of facsimile
signatures, the transfer of Shares and similar matters. The record books of the
Trust as kept by the Trust or any transfer or similar agent, as the case may be,
shall be conclusive as to who are the Shareholders and as to the number of
Shares of each Sub-Trust held from time to time by each such Shareholder.
Section 4.4 Investments in the Trust. The Trustees may accept
investments in the Trust and each Sub-Trust thereof from such persons and on
such terms and for such consideration, not inconsistent with the provisions of
the 1940 Act, as they from time to time authorize. The Trustees may authorize
any distributor, principal underwriter, custodian, transfer agent or other
person to accept orders for the purchase of Shares that conform to such
authorized terms and to reject any purchase orders for Shares whether or not
conforming to such authorized terms.
To the extent permitted by the 1940 Act and to the extent that the
portfolio management and operations of the Money Market Fund are not adversely
affected, each Sub-Trust other than the Money Market Fund, may invest its cash
assets in Shares of the Money Market Fund to the extent permitted by the then
current Prospectus applicable to such Sub-Trust. For all Trust
<PAGE> 19
purposes, such investments in the Money Market Fund by other Sub-Trusts will be
deemed the issuance of Shares by the Money Market Fund to the Sub-Trusts and the
withdrawal of such investments will be deemed a redemption of Shares of the
Money Market Fund. Similarly, each of the other Sub-Trusts will deem such an
investment a purchase or redemption of Shares of the Money Market Fund. Any
Sub-Trust investing in the Money Market Fund pursuant to this procedure, will
participate equally on a pro-rata basis in all income, capital gains and net
assets of the Money Market Fund and will have all rights and obligations of a
Shareholder as provided in this Declaration of Trust, including voting rights
hereunder provided, however, that such Shares of the Money Market Fund issued to
such other Sub-Trusts shall be voted by the Trustees in the same proportion as
the Shares of the Money Market Fund which are not held by the other Sub-Trusts.
Section 4.5 No Pre-emptive Rights. Shareholders shall have no
pre-emptive or other right to subscribe to any additional Shares or other
securities issued by the Trust.
Section 4.6 Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance of
the Trust shall not operate to terminate the Trust or any Sub-Trust thereof nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 5.1 Voting Powers. The Shareholders shall have power to vote
only (i) for the election or removal of Trustees as provided in Section 3.1,
(ii) with respect to any contract with a Contracting Party as provided in
Section 3.3 as to which Shareholder approval is required by the 1940 Act, (iii)
with respect to any termination or reorganization of the Trust or any Sub-Trust
to the extent and as provided in Sections 7.1 and 7.2, (iv) with respect to any
amendment of this Declaration of Trust to the extent and as provided in Section
7.3, (v) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or any Sub-Trust thereof or the Shareholders (provided, however,
that a shareholder of a particular Sub-Trust shall not be entitled to a
derivative or class action on behalf of any other Sub-Trust (or shareholder of
any other Sub-Trust) of the Trust) and (vi) with
<PAGE> 20
respect to such additional matters relating to the Trust as may be required by
the 1940 Act, this Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, this Declaration of Trust or the By-Laws to be taken by
Shareholders.
Section 5.2 Meetings. No annual or regular meeting of Shareholders is
required. Special meetings of Shareholders may be called by the Trustees from
time to time for the purpose of taking action upon any matter requiring the vote
or authority of the Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Written notice of any
meeting of Shareholders shall be given or caused to be given by the Trustees by
mailing or transmitting such notice at least seven days before such meeting,
postage prepaid, stating the time, place and purpose of the meeting, to each
Shareholder at the Shareholder's address as it appears on the records of the
Trust. The Trustees shall promptly call and give notice of a meeting of
Shareholders for the purpose of voting upon removal of any Trustee of the Trust
when requested to do so in writing by Shareholders holding not less than 10% of
the Shares then outstanding. If the Trustees shall fail to call or give notice
of any meeting of Shareholders for a period of 30 days after written application
by Shareholders holding at least 10% of the Shares then outstanding requesting a
meeting be called for any other purpose requiring action by the Shareholders as
provided herein or in the By-Laws, then Shareholders holding at least 10% of the
Shares then outstanding may call and give notice of such meeting, and thereupon
the meeting shall be held in the manner provided for herein in case of call
thereof by the Trustees.
Section 5.3 Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution, or
for the purpose of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding 30 days (except at or in
connection with the termination of the Trust), as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date and time not more
than 60 days prior to the date of any meeting of Shareholders or other action as
the date and time of record for the determination of Shareholders entitled to
vote at such meeting or any adjournment thereof or to be treated as Shareholders
of record for purposes of such other action, and any Shareholder who was a
Shareholder at the date and time so fixed shall be entitled to vote at such
meeting or any adjournment thereof or to be treated as a Shareholder of record
for purposes of such other action, even though he has since that date and time
disposed of his Shares, and no Shareholder becoming such after that date and
time shall be so entitled to vote at such meeting or any adjournment thereof or
to be treated as a Shareholder of record for purposes of such other action.
<PAGE> 21
Section 5.4 Quorum and Required Vote. A majority of the Shares entitled
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, but any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting without the necessity of further notice. A
majority of the Shares voted, at a meeting of which a quorum is present shall
decide any questions and a plurality shall elect a Trustee, except when a
different vote is required or permitted by any provision of the 1940 Act or
other applicable law or by this Declaration of Trust or the By-Laws.
Section 5.5 Action by Written Consent. Subject to the provisions of the
1940 Act and other applicable law, any action taken by Shareholders may be taken
without a meeting if a majority of Shareholders entitled to vote on the matter
(or such larger proportion thereof as shall be required by the 1940 Act or by
any express provision of this Declaration of Trust or the ByLaws) consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
Section 5.6 Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
stockholders of a Massachusetts business corporation under the Massachusetts
Business Corporation Law.
Section 5.7 Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof.
Section 5.8 Shareholder Communications. Whenever ten or more
Shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either Shares having a net
asset value of at least $25,000 or at least 1% of the outstanding Shares,
whichever is less, shall apply to the Trustees in writing, stating that they
wish to communicate with other Shareholders with a view to obtaining signatures
to a request for a Shareholder meeting and accompanied by a form of
communication and request which they wish to transmit, the Trustees shall within
five business days after receipt of such application either (1) afford to such
applicants access to a list of the names and addresses of all Shareholders as
recorded on the books of the Trust or Sub-Trust, as applicable; or (2) inform
such applicants as to the approximate number of Shareholders of record, and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Trustees elect to follow the course specified in clause (2)
above, the Trustees, upon the written request of such applicants, accompanied by
a tender of the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all Shareholders of
record at their addresses as recorded on the books, unless within five business
days after such tender the Trustees shall mail to such applicants and file with
the Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Trustees to the effect that in
their opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion. The Trustees
<PAGE> 22
shall thereafter comply with any order entered by the Commission
and the requirements of the 1940 Act and the Securities Exchange Act of 1934.
ARTICLE VI
LIMITATION OF LIABILITY; INDEMNIFICATION
Section 6.1 Trustees, Shareholders, etc. Not Personally Liable; Notice.
All persons extending credit to, contracting with or having any claim against
the Trust shall look only to the assets of the Sub-Trust with which such person
dealt for payment under such credit, contract or claim; and neither the
Shareholders of any Sub-Trust nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, nor any other Sub-Trust
shall be personally liable therefor. Every note, bond, contract, instrument,
certificate or undertaking and every other act or thing whatsoever executed or
done by or on behalf of the Trust, any Sub-Trust or the Trustees or any of them
in connection with the Trust shall be conclusively deemed to have been executed
or done only by or for the Trust (or the Sub-Trust) or the Trustees and not
personally. Nothing in this Declaration of Trust shall protect any Trustee or
officer against any liability to the Trust or the Shareholders to which such
Trustee or officer would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee or of such officer.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officers or officer shall give notice that
this Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite to the effect that the same was executed or made
by or on behalf of the Trust or by them as Trustees or Trustee or as officers or
officer and not individually and that the obligations of such instrument are not
binding upon any of them or the Shareholders individually but are binding only
upon the assets and property of the Trust, or the particular Sub-Trust in
question, as the case may be, but the omission thereof shall not operate to bind
any Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually.
Section 6.2 Trustee's Good Faith Action; Expert Advice; No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable for his own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law.
Subject to the foregoing, (a) the Trustees shall not be responsible or liable in
any event for any neglect or wrongdoing of any officer, agent, employee,
consultant, adviser, administrator, distributor or principal underwriter,
custodian or transfer, dividend disbursing, Shareholder servicing or accounting
agent of the Trust, nor shall any Trustee be responsible for the act or omission
of any other Trustee; (b) the Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust
and their duties as Trustees, and shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice;
and (c) in discharging their duties, the Trustees, when acting in good faith,
shall be entitled to rely upon the books of account of the Trust and upon
written reports made to
<PAGE> 23
the Trustees by any officer appointed by them, any independent public
accountant, and (with respect to the subject matter of the contract involved)
any officer, partner or responsible employee of a Contracting Party appointed by
the Trustees pursuant to Section 3.3. The Trustees as such shall not be required
to give any bond or surety or any other security for the performance of their
duties.
Section 6.3 Indemnification of Shareholders. In case any Shareholder
(or former Shareholder) of any Sub-Trust of the Trust shall be charged or held
to be personally liable for any obligation or liability of the Trust solely by
reason of being or having been a Shareholder and not because of such
Shareholder's acts or omissions or for some other reason, said Sub-Trust (upon
proper and timely request by the Shareholder) shall assume the defense against
such charge and satisfy any judgment thereon, and the Shareholder or former
Shareholder (or his heirs, executors, administrators or other legal
representatives or in the case of a corporation or other entity, its corporate
or other general successor) shall be entitled out of the assets of said
Sub-Trust estate to be held harmless from and indemnified against all loss and
expense arising from such liability.
Section 6.4 Indemnification of Trustees Officers, etc. The Trust shall
indemnify (from the assets of the Sub-Trust or Sub-Trusts in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise [hereinafter referred to as
a "Covered Person"]) against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person (i) did not act in good faith in the reasonable belief that such Covered
Person's action was in or not opposed to the best interests of the Trust or (ii)
had acted with willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being referred to
hereafter as "Disabling Conduct"). A determination that the Covered Person is
entitled to indemnification may be made by (i) a final decision on the merits by
a court or other body before whom the proceeding was brought that the person to
be indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of
a court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the Covered Person was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Trust as defined in section
2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. Expenses, including accountants' and counsel
fees so incurred by any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or penalties), may be paid
from time to time by the Sub-Trust in question in advance of the final
disposition of any such action, suit or proceeding, provided that the Covered
Person shall have undertaken to repay the amounts so paid
<PAGE> 24
to the Sub-Trust in question if it is ultimately determined that indemnification
of such expenses is not authorized under this Article VI and (i) the Covered
Person shall have provided security for such undertaking, (ii) the Trust shall
be insured against losses arising by reason of any lawful advances, or (iii) a
majority of a quorum of the disinterested Trustees who are not a party to the
proceeding, or an independent legal counsel in a written opinion, shall have
determined, based on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.
Section 6.5 Compromise Payment. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 6.4,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the disinterested
Trustees who are not a party to the proceeding or (b) by an independent legal
counsel in a written opinion. Approval by the Trustees pursuant to clause (a) or
by independent legal counsel pursuant to clause (b) shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in
or not opposed to the best interests of the Trust or to have been liable to the
Trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office.
Section 6.6 Indemnification Not Exclusive, etc. The right of
indemnification provided by this Article VI shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article VI, "Covered Person" shall include such person's heirs, executors
and administrators, an "Interested Covered Person" is one against whom the
action, suit or other proceeding in question or another action, suit or other
proceeding on the same or similar grounds is then or has been pending or
threatened, and a "disinterested" person is a person against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or threatened.
Nothing contained in this article shall affect any rights to indemnification to
which personnel of the Trust, other than Trustees and officers, and other
persons may be entitled by contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on behalf of any such person.
Section 6.7 Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
<PAGE> 25
ARTICLE VII
MISCELLANEOUS
Section 7.1 Duration and Termination of Trust. Unless terminated as
provided herein, the Trust shall continue without limitation of time and,
without limiting the generality of the foregoing, no change, alteration or
modification with respect to any Sub-Trust shall operate to terminate the Trust.
The Trust may be terminated at any time by a majority of the Trustees then in
office subject to a favorable vote of a majority of the outstanding voting
securities, as defined in the 1940 Act, Shares of each Sub-Trust voting
separately by Sub-Trust.
Upon termination, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall in accordance with such procedures
as the Trustees consider appropriate reduce the remaining assets to
distributable form in cash, securities or other property, or any combination
thereof, and distribute the proceeds to the Shareholders, in conformity with the
provisions of subsection (d) of Section 4.2.
Section 7.2 Reorganization. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one or more
Sub-Trusts, to another trust, partnership, association or corporation organized
under the laws of any state of the United States, or to the Trust to be held as
assets belonging to another Sub-Trust of the Trust, in exchange for cash, shares
or other securities (including, in the case of a transfer to another Sub-Trust
of the Trust, Shares of such other Sub-Trust) with such transfer either (1)
being made subject to, or with the assumption by the transferee of, the
liabilities belonging to each Sub-Trust the assets of which are so transferred,
or (2) not being made subject to, or not with the assumption of such
liabilities; provided, however, that no assets belonging to any particular
Sub-Trust shall be so transferred unless the terms of such transfer shall have
first been approved at a meeting called for the purpose by the affirmative vote
of the holders of a majority of the outstanding voting Shares, as defined in the
1940 Act, of that Sub-Trust. Following such transfer, the Trustees shall
distribute such cash, shares or other securities (giving due effect to the
assets and liabilities belonging to and any other differences among the various
Sub-Trusts the assets belonging to which have so been transferred) among the
Shareholders of the Sub-Trust the assets belonging to which have been so
transferred; and if all of the assets of the Trust have been so transferred, the
Trust shall be terminated.
The Trust, or any one or more Sub-Trusts, may, either as the successor,
survivor, or non-survivor, (1) consolidate with one or more other trusts,
partnerships, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state of the United States, to form a
new consolidated trust, partnership, association or corporation under the laws
of which any one of the constituent entities is organized, or (2) merge into one
or more other trusts, partnerships, associations or corporations organized under
the laws of the Commonwealth of Massachusetts or any other state of the United
States, or have one or more such trusts, partnerships, associations or
corporations merged into it, any such consolidation or merger to be upon such
terms and conditions as are specified in an agreement and plan of reorganization
<PAGE> 26
entered into by the Trust, or one or more Sub-Trusts as the case may be, in
connection therewith. The terms "merge" or "merger" as used herein shall also
include the purchase or acquisition of any assets of any other trust,
partnership, association or corporation which is an investment company organized
under the laws of the Commonwealth of Massachusetts or any other state of the
United States. Any such consolidation or merger shall require the affirmative
vote of the holders of a majority of the outstanding voting Shares, as defined
in the 1940 Act, of each Sub-Trust affected thereby.
Section 7.3 Amendments. All rights granted to the Shareholders under
this Declaration of Trust are granted subject to the reservation of the right to
amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or Trustee
or repeal the prohibition of assessment upon the Shareholders without the
express consent of each Shareholder or Trustee involved. Subject to the
foregoing, the provisions of this Declaration of Trust (whether or not related
to the rights of Shareholders) may be amended at any time, so long as such
amendment does not adversely affect the rights of any Shareholder with respect
to which such amendment is or purports to be applicable and so long as such
amendment is not in contravention of applicable law, including the 1940 Act, by
an instrument in writing signed by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees). Any
amendment to this Declaration of Trust that adversely affects the rights of
Shareholders may be adopted at any time by an instrument in writing signed by a
majority of the then Trustees (or by an officer of the Trust pursuant to a vote
of a majority of such Trustees) when authorized to do so by the vote in
accordance with subsection (e) of Section 4.2 of Shareholders holding a majority
of the Shares entitled to vote. Subject to the foregoing, any such amendment
shall be effective as provided in the instrument containing the terms of such
amendment or, if there is no provision therein with respect to effectiveness,
upon the execution of such instrument and of a certificate (which may be a part
of such instrument) executed by a Trustee or officer of the Trust to the effect
that such amendment has been duly adopted.
Section 7.4 Filing of Copies; References; Headings. The original or a
copy of this instrument and of each amendment hereto shall be kept at the office
of the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with the Boston City Clerk,
as well as any other governmental office where such filing may from time to time
be required, but the failure to make any such filing shall not impair the
effectiveness of this instrument or any such amendment. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such amendments have been made, as to the identities of the Trustees and
officers, and as to any matters in connection with the Trust hereunder; and,
with the same effect as if it were the original, may rely on a copy certified by
an officer of the Trust to be a copy of this instrument or of any such
amendments. In this instrument and in any such amendment, references to this
instrument, and all expressions like "herein," "hereof" and "hereunder" shall be
deemed to refer to this instrument as a whole as the same may be amended or
affected by any such amendments. The masculine gender shall include the feminine
and neuter genders. Headings are placed herein for convenience of reference only
and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this
<PAGE> 27
instrument. This instrument may be executed in any number of counterparts each
of which shall be deemed an original.
Section 7.5 Applicable Law. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth,
including the Massachusetts Business Corporation Law as the same may be amended
from time to time, to which reference is made with the intention that matters
not specifically covered herein or as to which an ambiguity may exist shall be
resolved as if the Trust were a business corporation organized in Massachusetts,
but the reference to said Business Corporation Law is not intended to give the
Trust, the Trustees, the Shareholders or any other person any right, power,
authority or responsibility available only to or in connection with an entity
organized in corporate form. The Trust shall be of the type referred to in
Section 1 of Chapter 182 of the Massachusetts General Laws and of the type
commonly called a Massachusetts business trust and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
<PAGE> 28
IN WITNESS WHEREOF, the undersigned hereunto sets his hand and seal in the City
of Boston, Massachusetts for himself and his assigns, as of the day and year
first above written.
/s/ Lee C. Gingrich
-----------------------------
Lee C. Gingrich
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss.
Then personally appeared the above-named Lee C. Gingrich who acknowledged the
foregoing instrument to be his free act and deed, before me, this 26th day of
July, 1984.
/s/signature illegible
-----------------------------
Notary Public
My commission expires: 1/26/90
C164/J
7/25/84
<PAGE> 29
ACCEPTANCE OF APPOINTMENT OF TRUSTEES
Frank Russell Investment Company, a Maryland corporation, the sole shareholder
of Frank Russell Investment Company, a Massachusetts business trust, hereby
accepts and approves the appointment of George F. Russell, Jr., Paul E.
Anderson, William E. Baxter, Nancy L. Jacob, Paul R. Kaltinick, Eleanor W.
Palmer, and Warren R. Peterson, as Trustees of Frank Russell Investment Company.
August 8, 1984
FRANK RUSSELL INVESTMENT COMPANY,
a Maryland corporation
/s/Alfred C. Morley, Jr.
---------------------------------
Alfred C. Morley, Jr., President
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named who acknowledged the foregoing
instrument to be his free act and deed, before me, this 8th day of August, 1984.
[ SEAL. ]
/s/ Joyce A. Bradrk
---------------------------------
Notary Public
My commission expires: 7/20/86
C178/B
<PAGE> 30
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank
Russell Investment Company, the undersigned hereby accepts his appointment as a
Trustee of said Trust and agrees to the provisions of said Master Trust
Agreement.
IN WITNESS WHEREOF, the undersigned has set his hand and seal on the
date set opposite his signature.
August 8, 1984 /s/Paul E. Anderson
-------------------------
Paul E. Anderson
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Paul E. Anderson, who
acknowledged the foregoing instrument to be his free act and deed, before me,
this 8th day of August, 1984.
[Seal] /s/ Joyce A. Bradrk
Notary Public
-------------------------
My commission expires: 7/20/86
C177/T(5)
<PAGE> 31
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts his appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set his hand and seal on the date set
opposite his signature.
August 8, 1984
/s/George F. Russell, Jr.
---------------------------
George F. Russell, Jr.
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named George F. Russell, Jr., who
acknowledged the foregoing instrument to be his free act and deed, before me,
this 8th day of August, 1984.
[ SEAL ]
/s/ Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
C177/T(4)
<PAGE> 32
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts his appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set his hand and seal on the date set
opposite his signature.
August 8, 1984
/s/Paul R. Kaltinick
---------------------------
Paul R. Kaltinick
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Paul R. Kaltinick, who acknowledged the
foregoing instrument to be his free act and deed, before me, this 8th day of
August, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
C177/T(2)
<PAGE> 33
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts her appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set her hand and seal on the date set
opposite her signature.
August 8, 1984
/s/Eleanor W. Palmer
---------------------------
Eleanor W. Palmer
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Eleanor W. Palmer, who acknowledged the
foregoing instrument to be her free act and deed, before me, this 8th day of
August, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
C177/T(6)
<PAGE> 34
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts his appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set his hand and seal on the date set
opposite his signature.
August 8, 1984
/s/William E. Baxter
---------------------------
William E. Baxter
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named William E. Baxter, who acknowledged the
foregoing instrument to be his free act and deed, before me, this 8th day of
August, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
C177/T(3)
<PAGE> 35
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts her appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set her hand and seal on the date set
opposite her signature.
September 28, 1984
/s/Nancy L. Jacob
---------------------------
Nancy L. Jacob
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Nancy L. Jacob, who acknowledged the
foregoing instrument to be her free act and deed, before me, this 28th day of
September, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
<PAGE> 36
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts his appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set his hand and seal on the date set
opposite his signature.
August 8, 1984
/s/Warren R. Peterson
---------------------------
Warren R. Peterson
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Warren R. Peterson, who acknowledged
the foregoing instrument to be his free act and deed, before me, this 8th day of
August, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
---------------------------
Notary Public
My commission expires: 7/20/86
C177/T(1)
<PAGE> 37
ACCEPTANCE OF TRUST
Frank Russell Investment Company, a Maryland corporation, the sole
shareholder of Frank Russell Investment Company, a Massachusetts business trust,
hereby accepts, approves and authorizes the Master Trust Agreement of Frank
Russell Investment Company.
July 26, 1984 FRANK RUSSELL INVESTMENT COMPANY
a Maryland Corporation
By: /s/Alfred C. Morley, Jr.
------------------------------
Alfred C. Morley, Jr., President
C179/W
STATE OF WASHINGTON )
) ss.
County of Pierce )
On this 8th day of August, 1984, before me personally appeared Alfred C. Morley,
Jr., to me known to be the president of the corporation that executed the within
and foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument
and that the seal affixed is the corporate seal of said corporation.
In witness whereof, I have hereunto set my hand and affixed my official seal the
day and year first above written.
[ SEAL ]
/s/Joyce A. Bradrk
------------------------------
Notary Public
My commission expires: 7/20/86
<PAGE> 38
ACCEPTANCE OF TRUST
As contemplated in Section 3.1 of the Master Trust Agreement of Frank Russell
Investment Company, the undersigned hereby accepts his appointment as a Trustee
of said Trust and agrees to the provisions of said Master Trust Agreement.
IN WITNESS WHEREOF the undersigned has set his hand and seal on the date set
opposite his signature.
October 25, 1984
/s/Don G. Powell
------------------------------
Don G. Powell
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named Don G. Powell, who acknowledged the
foregoing instrument to be his free act and deed, before me, this 25th day of
October, 1984.
[ SEAL ]
/s/Joyce A. Bradrk
------------------------------
Notary Public
My commission expires: 7/20/86
<PAGE> 39
ACCEPTANCE OF APPOINTMENT OF TRUSTEES
Frank Russell Investment Company, a Maryland corporation, the sole
shareholder of Frank Russell Investment Company, a Massachusetts business trust,
hereby accepts and approves the appointment of Don G. Powell as a Trustee of
Frank Russell Investment Company.
October 25, 1984 FRANK RUSSELL INVESTMENT COMPANY
a Maryland corporation
/s/Don G. Powell
------------------------------
Don G. Powell, President
STATE OF WASHINGTON
County of Pierce, ss.
Then personally appeared the above-named who acknowledged the foregoing
instrument to be his free act and deed, before me, this 25th day of October,
1984.
[ SEAL ]
/s/Joyce A. Bradrk
------------------------------
Notary Public
My commission expires: 7/20/86
<PAGE> 1
Exhibit 99.1(b)
FRANK RUSSELL INVESTMENT COMPANY
(a Massachusetts Business Trust)
AMENDMENTS TO MASTER TRUST AGREEMENT
In accordance with Section 7.3 of the Frank Russell Investment Company's (the
"Trust") Master Trust Agreement and upon authority of a majority vote of Trust
shareholders voted in accordance with subsection (e) of Section 4.2 of the
Trust's Master Trust Agreement, the following amendments to the Trust's Master
Trust Agreement are hereby adopted on and as of November 19, 1984:
Section 4.2(g) of Frank Russell Investment Company's, a Massachusetts business
trust, Master Trust Agreement is amended to state the following:
Redemption by Trust. Each Share of each Sub-Trust that has been established and
designated is subject to redemption by the Trust at the redemption price which
would be applicable if such Share was then being redeemed by the Shareholder
pursuant to subsection (f) of this Section 4.2: (a) at any time, if the Trustees
determine in their sole discretion that failure to so redeem may have materially
adverse consequences to the holders of the Shares of the Trust or any Sub-Trust
thereof, (b) upon such other conditions as may from time to time be determined
by the Trustees, including without limitation in furtherance of subsection (i)
of this Section 4.2, and set forth in the then current Prospectus of the Trust
with respect to the maintenance of Shareholder accounts of a minimum amount or
(c) at any time from any Shareholder who does not have an effective contractual
relationship, to be referred to and known initially as an Asset Management
Services Agreement, with Frank Russell Company, a corporation organized and
existing under the laws of the State of Washington, or any of its corporate
affiliates or any successors in interest thereto whether by merger,
consolidation or otherwise, which serves as the Trust's principal investment
adviser and provides management and administrative services to the Trust.
Upon the mailing of a written notice to the holder of Shares at its address as
shown on the Trust's books and records which notice shall set forth the Trust's
intention to do so, after five days from the date of the mailing of the notice,
the Trust shall then have the right, without taking any further action to redeem
the Shares of any holder who does not have a then currently effective Asset
Management Services Agreement, or comparable contractual arrangement, with Frank
Russell Company or any of its corporate affiliates or any successors in interest
thereto including any person or company which serves as the principal adviser to
and provides management and administrative services to the Trust.
Section 4.2(i) of the Frank Russell Investment Company's, a Massachusetts
business trust, Master Trust Agreement is amended to state the following:
<PAGE> 2
Transfer. Subject to the limitations set forth in Section 4.2(g) above, and in
the following paragraph all Shares of each particular Sub-Trust shall be freely
transferable, but transfers of Shares of a particular Sub-Trust will be recorded
on the Share transfer records of the Trust applicable to that Sub-Trust only at
such times as Shareholders shall have the right to require the Trust to redeem
shares of that Sub-Trust and at such other times as may be permitted by the
Trustees.
The Trust is hereby granted and shall have a right of first refusal to purchase
any Shares from any Shareholder who does not then have an Asset Management
Services Agreement with Frank Russell Company and who then wishes to transfer
such Shares to any person, other than the Trust, at a price equal to the then
per Share net asset value on the date such right of first refusal is exercised.
A right of first refusal shall be exercised by the Trust by mailing written
notice to the holder of Shares at its address as shown in the Trust's books and
records and shall become effective on the fifth day following the mailing of
such notice.
/s/Paul E. Anderson, Trustee /s/Paul R. Kaltinick, Trustee
- ------------------------------------- --------------------------------
Paul E. Anderson, Trustee Paul R. Kaltinick, Trustee
/s/William E. Baxter, Trustee /s/Eleanor W. Palmer, Trustee
- ------------------------------------- --------------------------------
William E. Baxter, Trustee Eleanor W. Palmer, Trustee
/s/Lee C. Gingrich, Trustee /s/Warren R. Peterson, Trustee
- ------------------------------------- --------------------------------
Lee C. Gingrich, Trustee Warren R. Peterson, Trustee
/s/Nancy L. Jacob, Trustee /s/Don G. Powell, Trustee
- ------------------------------------- --------------------------------
Nancy L. Jacob, Trustee Don G. Powell, Trustee
/s/George F. Russell, Jr., Trustee
- -------------------------------------
George F. Russell, Jr., Trustee
<PAGE> 1
Exhibit 99.1(c)
FRANK RUSSELL INVESTMENT COMPANY
ESTABLISHMENT OF NEW SUB-TRUSTS
AMENDMENT TO MASTER TRUST AGREEMENT
AMENDMENT to the Amended Master Trust Agreement (also referred to as the
Agreement and Declaration of Trust) dated July 26, 1984 ("Agreement"), this 29th
day of May, 1985, by the Trustees hereunder.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have established and designated
nine sub-trusts; and
WHEREAS, the Trustees have the authority, without shareholder approval, under
Section 4.1 of the Agreement to establish and designate additional separate and
distinct sub-trusts and to fix and determine certain relative rights and
preferences as between the shares of the sub-trusts;
NOW, THEREFORE, the Trustees hereby desire to establish and designate eight new
sub-trusts and fix their shares' rights and preferences;
Establishment and Designation of Sub-Trusts.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
effecting rights and preference of the nine existing sub-trusts, the Trustees
hereby establish and designate eight new sub-trusts: The "Diversified Equity
Fund," "Special Growth Fund," "Equity Income Fund," "Diversified Bond Fund,"
"Volatility Constrained Bond Fund," "International Securities Fund," "Limited
Volatility Tax Free Fund," and "U.S. Government Money Market Fund." The
Diversified Equity Fund shares, Special Growth Fund shares, Equity Income Fund
shares, Diversified Bond Fund shares, Volatility Constrained Bond Fund shares,
International Securities Fund shares, Limited Volatility Tax Free Fund shares,
and U.S. Government Money Market Fund shares shall have all the relative rights
and preferences granted by the Agreement to the existing sub-trusts including
those listed in Section 4.2 of the Agreement.
The undersigned hereby certify that the amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written.
/s/Paul Anton /s/Eleanor W. Palmer
- --------------------------- -----------------------------
Paul Anton Eleanor W. Palmer
/s/Paul E. Anderson /s/Warren R. Peterson
- --------------------------- -----------------------------
Paul E. Anderson Warren R. Peterson
/s/William E. Baxter /s/Don G. Powell
- --------------------------- -----------------------------
William E. Baxter Don G. Powell
/s/ Lee C. Gingrich /s/George F. Russell, Jr.
- --------------------------- -----------------------------
Lee C. Gingrich George F. Russell, Jr.
/s/Paul R. Kaltinick
- ---------------------------
Paul R. Kaltinick
<PAGE> 1
Exhibit 99.1(d)
FRANK RUSSELL INVESTMENT COMPANY
ESTABLISHMENT OF NEW SUB-TRUSTS
AMENDMENT TO MASTER TRUST AGREEMENT
AMENDMENT No. 3 to the Amended Master Trust Agreement (also referred to as the
Agreement and Declaration of Trust) dated July 26, 1984 ("Agreement"), this 26th
day of January, 1987, by the Trustees hereunder.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have established and designated
fifteen sub-trusts; and
WHEREAS, the Trustees have the authority, without shareholder approval, under
Section 4.1 of the Agreement to establish and designate additional separate and
distinct sub-trusts and to fix and determine certain relative rights and
preferences as between the shares of the sub-trusts;
NOW, THEREFORE, the Trustees hereby desire to establish and designate four new
sub-trusts and fix their shares' rights and preferences.
Establishment and Designation of Sub-Trusts.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
effecting rights and preferences of the fifteen existing sub-trusts, the
Trustees hereby establish and designate four new sub-trusts: The "Tax Free Money
Market Fund," "Quantitative Equity Fund," "Russell 1000 Index Fund," and "Equity
Q Fund." The Tax Free Money Market Fund shares, Quantitative Equity Fund shares,
Russell 1000 Index Fund shares, and Equity Q Fund shares shall have all the
relative rights and preferences granted by the Agreement to the existing
sub-trusts including those listed in Section 4.2 of the Agreement.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written.
/s/Paul Anton /s/Eleanor W. Palmer
- --------------------------- -----------------------------
Paul Anton Eleanor W. Palmer
/s/Paul E. Anderson /s/Warren R. Peterson
- --------------------------- -----------------------------
Paul E. Anderson Warren R. Peterson
/s/William E. Baxter /s/Don G. Powell
- --------------------------- -----------------------------
William E. Baxter Don G. Powell
/s/ Lee C. Gingrich /s/George F. Russell, Jr.
- --------------------------- -----------------------------
Lee C. Gingrich George F. Russell, Jr.
/s/Paul R. Kaltinick
- ---------------------------
Paul R. Kaltinick
<PAGE> 1
Exhibit 99.1(e)
FRANK RUSSELL INVESTMENT COMPANY
ESTABLISHMENT OF NEW SUB-TRUST
AMENDMENT TO MASTER TRUST AGREEMENT
AMENDMENT NO. 4 to the Amended Master Trust Agreement (also referred to as the
Agreement and Declaration of Trust) dated July 26, 1984, this 23rd day of
February 1989, by the Trustees hereunder.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have established and
designated eighteen sub-trusts; and
WHEREAS, the Trustees have the authority, without shareholder approval,
under Section 4.1 of the Agreement to establish and designate additional
separate and distinct sub-trusts and to fix and determine certain relative
rights and preferences as between the shares of the sub-trusts;
NOW, THEREFORE, the Trustees hereby desire to establish and designate a new
sub-trust and to fix the rights and preferences of the shares thereof.
Establishment and Designation of Sub-Trust.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
effecting rights and preferences of the eighteen existing sub-trusts, the
Trustees hereby establish and designate a new sub-trust to be named the "Real
Estate Securities Fund." The shares of the new Fund shall have all the relative
rights and preferences granted by the Agreement to the existing sub-trusts
including those listed in Section 4.2 of the Agreement.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
/s/Lynn L. Anderson /s/Eleanor W. Palmer
- --------------------------- ----------------------------
Lynn L. Anderson Eleanor W. Palmer
/s/Paul E. Anderson /s/Warren R. Peterson
- --------------------------- ----------------------------
Paul E. Anderson Warren R. Peterson
/s/Paul Anton /s/Lee C. Gingrich
- --------------------------- ----------------------------
Paul Anton Lee C. Gingrich
/s/William E. Baxter /s/George F. Russell, Jr.
- --------------------------- ----------------------------
William E. Baxter George F. Russell, Jr.
/s/Paul R. Kaltinick
- ---------------------------
Paul R. Kaltinick
<PAGE> 1
Exhibit 99.1(f)
FRANK RUSSELL INVESTMENT COMPANY
ESTABLISHMENT OF NEW SUB-TRUST
AMENDMENT TO MASTER TRUST AGREEMENT
AMENDMENT NO. 5 to the Amended Master Trust Agreement (also referred to as the
Agreement and Declaration of Trust) dated July 26, 1984, this 11th day of May
1992, by the Trustees hereunder.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have established and
designated nineteen sub-trusts; and
WHEREAS, the Trustees have the authority, without shareholder approval,
under Section 4.1 of the Agreement to establish and designate additional
separate and distinct sub-trusts and to fix and determine certain relative
rights and preferences as between the shares of the sub-trusts;
NOW, THEREFORE, the Trustees hereby desire to establish and designate four
new sub-trusts and to fix the rights and preferences of the shares thereof.
Establishment and Designation of Sub-Trust.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
effecting rights and preferences of the nineteen existing sub-trusts, the
Trustees hereby establish and designate four new sub-trusts to be named the
"Fixed Income III Bond," "Multistrategy Bond," "Emerging Markets" and "Emerging
Market Securities Funds." The shares of the new Funds shall have all the
relative rights and preferences granted by the Agreement to the existing
sub-trusts including those listed in Section 4.2 of the Agreement.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
/s/Lynn L. Anderson /s/Eleanor W. Palmer
- ------------------------------ ------------------------------
Lynn L. Anderson Eleanor W. Palmer
/s/Paul E. Anderson /s/Lee C. Gingrich
- ------------------------------ ------------------------------
Paul E. Anderson Lee C. Gingrich
/s/Paul Anton /s/George F. Russell, Jr.
- ------------------------------ ------------------------------
Paul Anton George F. Russell, Jr.
/s/William E. Baxter
- ------------------------------
William E. Baxter
<PAGE> 1
Exhibit 99.1(g)
FRANK RUSSELL INVESTMENT COMPANY
ESTABLISHMENT OF NEW SUB-TRUST
AMENDMENT TO MASTER TRUST AGREEMENT
AMENDMENT NO. 6 to the Amended Master Trust Agreement (also referred to as the
Agreement and Declaration of Trust) dated July 26, 1984, this 19th day of March,
1996, by the Trustees hereunder.
WITNESSETH
WHEREAS, pursuant to the Agreement, the Trustees have established and
designated twenty- two sub-trusts; and
WHEREAS, the Trustees have the authority, without shareholder approval,
under Section 4.1 of the Agreement to establish and designate additional
separate and distinct sub-trusts and to fix and determine certain relative
rights and preferences as between the shares of the sub-trusts;
WHEREAS, the Trustees hereby desire to establish and designate one new
sub-trust and to fix the rights and preferences of the shares thereof.
ESTABLISHMENT AND DESIGNATION OF SUB-TRUST.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
effecting rights and preferences of the twenty-two existing sub-trusts, the
trustees hereby establish and designate one new sub-trust to be named the
"Equity T Fund." The shares of the new Fund shall have all the relative rights
and preferences granted by the Agreement to the existing sub-trusts including
those listed in Section 4.2 of the Agreement.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provision of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
/s/Lynn L. Anderson /s/Eleanor W. Palmer
- ---------------------------- ----------------------------
Lynn L. Anderson Eleanor W. Palmer
/s/Paul E. Anderson /s/Lee C. Gingrich
- ---------------------------- ----------------------------
Paul E. Anderson Lee C. Gingrich
/s/Paul Anton /s/George F. Russell, Jr.
- ---------------------------- ----------------------------
Paul Anton George F. Russell, Jr.
/s/William E. Baxter
- ----------------------------
William E. Baxter
<PAGE> 1
Exhibit 99.5(a)
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made this lst day of April, 1995 between FRANK RUSSELL
INVESTMENT COMPANY, a Massachusetts business trust hereinafter called the
"Trust" and FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY, a Washington
Corporation hereinafter called the "Manager."
WHEREAS, the Trust has been organized by and at the expense of a company
affiliated with the Manager and operates as an investment company of the
"series" type registered under the Investment Company Act of 1940 ("1940 Act")
for the purpose of investing and reinvesting its assets in portfolios of
securities, each of which has distinct investment objectives and policies (each
distinct portfolio being referred to herein as a "Sub-Trust"), as set forth more
fully in its Master Trust Agreement, its By-Laws and its Registration Statements
under the 1940 Act and the Securities Act of 1933, all as heretofore amended and
supplemented; and the Trust desires to avail itself of the services,
information, advice, assistance, and facilities of a manager and to have a
manager perform for it various management, administrative, statistical,
research, money manager selection, investment management, and other services;
and
WHEREAS, the Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 and will engage in the business of rendering investment
advisor, counseling, money manager recommendation, and supervisory services to
investment consulting clients; and the Manager and its affiliated corporations
have undertaken the initiative and expense of organizing the Trust in order to
have a means to commingle assets for certain investors to have access to and
utilize the "Multi-Style, Multi-Manager" method of investment and to provide
services to the Trust in consideration of and on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the Trust and the Manager agree as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Trust's assets and to act
as a discretionary Money Manager to certain of the Sub-Trusts in the
manner set forth in Section 2(B) of this Agreement, and to administer
its business and administrative operations, subject to the direction of
the Board of Trustees and the officers of the Trust, for the period, in
the manner, and on the terms hereinafter set forth. The Manager .hereby
accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth. The Manager
shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized (whether herein
or otherwise), have no authority to act for or represent the Trust in
any way.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume
the following obligations:
<PAGE> 2
A. Management and Administrative Services.
(1) The Manager shall furnish to the Trust
adequate (a) office space, which may be space within
the offices of the Manager or in such other place as
may be-agreed upon from time to time, (b) office
furnishings, facilities, and equipment as may be
reasonably required for managing and administering
the business and operations of the Trust, including
(i) complying with the business trust, securities,
and tax reporting requirements of the United States
and the various states in which the Trust does
business, (ii) conducting correspondence and other
communications with the shareholders of the Trust
("Shareholders"), and (iii) maintaining or
supervising the maintenance of all internal
bookkeeping, accounting, and auditing services and
records in connection with the Trust's investment and
business activities. The Trust agrees that its
shareholder recordkeeping services, the computing of
net asset value and the preparation of certain of its
records required by Rule 31 under the 1940 Act are
maintained by the Trust's Transfer Agent, Custodian,
and Money Managers, and that with respect to these
records the Manager's obligations under this Section
2(A) are supervisory in nature.
(2) The Manager shall employ or provide and
compensate the executive, administrative,
secretarial, and clerical personnel necessary to
supervise the provision of the services set forth in
sub-paragraph 2(A)(l), and shall bear the expense of
providing such services except as provided in Section
4 of this Agreement. The Manager shall also
compensate all officers and employees of the Trust
who are officers or employees of the Manager, or its
affiliated companies.
B. Investment Management Services.
(1) The Trust intends to appoint one or more persons or
companies ("Money Manager[s]") for each of the
Sub-Trusts or segments thereof, and each Money
Manager shall have full investment discretion and
shall make all determinations with respect to the
investment of a Sub-Trust's assets assigned to the
Money Manager and the purchase and sale of portfolio
securities with those assets, and such steps as may
be necessary to implement its decision- The Manager
shall not be responsible or liable for the investment
merits of any decision by a Money Manager to
purchase, hold, or sell a security for a Sub-Trust
portfolio.
(2) The Manager shall, subject to and in accordance with
the investment objectives and policies of the Trust
and each Sub-Trust and any directions which the
Trust's. Board of Trustees may issue to the Manager,
have: (i) overall supervisory responsibility for the
general management and investment of the Trust's
assets and securities portfolios; and (ii) full
<PAGE> 3
investment discretion to make all determinations with
respect to the investment of Sub-Trust assets not
assigned to a Money Manager.
(3) The Manager shall develop overall investment
programs and strategies for each Sub-Trust, or
segments thereof, shall revise such programs as
necessary, and shall monitor and report periodically
to the Board of Trustees concerning the
implementation of the programs.
(4) The Manager shall research and evaluate Money
Managers and shall advise the Board of Trustees of
the Trust of the Money Managers which the Manager
believes are best suited to invest the assets of each
Sub-Trust; shall monitor and evaluate the investment
performance of each Money Manager employed by the
Trust; shall determine the portion of each
Sub-Trust's assets to be managed by each Money
Manager; shall recommend changes or additions of
Money Managers when appropriate; shall coordinate the
investment activities of the Money Managers; and
acting as a fiduciary for the Trust shall compensate
the Money Managers.
(5) The Manager shall render to the Trust's Board
of Trustees such periodic reports concerning the
Trust's and Sub-Trusts' business and investments as
the Board of Trustees shall reasonably request.
C. Use of Frank Russell Company Research.
The Manager is hereby authorized and expected to utilize the
research and other resources of Frank Russell Company, its
corporate parent, or any predecessor organization, in
providing the Investment Management Services specified in
Subsection "B," above. Neither the Manager nor the Trust shall
be obligated to pay any fee to Frank Russell Company for these
services.
D. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and Other
Materials.
The Manager will make available and provide financial,
accounting, and statistical information required by the Trust
for the preparation of registration statements, reports, and
other documents required by federal and state securities laws,
and with such information as the Trust may reasonably request
for use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and
distribution of the Trust's shares.
E. Other Obligations and Services.
The Manager shall make available its officers and employees
to the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration and
management of the Trust and its investment activities.
<PAGE> 4
3. Execution and Allocation of Portfolio Brokerage Commissions. The
Manager or the Money Managers, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to
time, shall place, in the name of the Trust, orders for the execution
of the Sub-Trusts' portfolio transactions. When placing such orders,
the primary objective of the Manager and Money Managers shall be to
obtain the best net price and execution for the Trust, but this
requirement shall not be deemed to obligate the Manager or a Money
Manager to place any order solely on the basis of obtaining the lowest
commission rate if the other standards set forth in this section have
been satisfied. The Trust recognized that there are likely to be many
cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with
respect to particular trades, it is desirable to choose those brokers
who furnish "brokerage and research services" (as defined in Section
28(e)(3) of the Securities and Exchange Act or 1934) or statistical
quotations and other information to the Trust, the Manager and/or the
Money Managers in accord with the standards set forth below. Moreover,
to the extent that it continues to be lawful to do so and so long as
the Board determines as a matter of general policy that the Trust will
benefit, directly or indirectly, by doing so, the Manager or a Money
Manager may place orders with a broker who charges a commission for
that transaction which is in excess of the amount of commission that
another broker would have charged for effecting that transaction,
provided that the excess commission is reasonable in relation to the
value of brokerage and research services provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager and the
Money Managers shall select brokers for the execution of the
Sub-Trusts' portfolio transactions from among:
A. Those brokers and dealers who provide brokerage and research
services, or statistical quotations and other information to
the Trust, specifically including the quotations necessary to
determine the Trust's net assets, in such amount of total
brokerage as may reasonably be required in light of such
services;
B. Those brokers and dealers who supply brokerage and research
services to the Manager and/or its affiliated corporations, or
the Money Managers, which relate directly to portfolio
securities, actual or potential, of the Trust, or which place
the Manager or Money Managers in a better position to make
decisions in connection with the management of the Trust's
assets and portfolios, whether or not such data may also be
useful to the Manager and its affiliates, or the Money
Managers and their affiliates, in managing other portfolios or
advising other clients, in such amount of total brokerage as
may reasonably be required; and
C. Frank Russell Securities, Inc., an affiliate of the Manager,
when the Manager or Money Manager has determined that the
Trust will receive competitive execution, price, and
commissions. The Manager shall render regular reports to the
Trust, not more frequently than quarterly, of how much total
brokerage business has been placed with Frank Russell
Securities, Inc., and the manner in which the allocation has
been accomplished.
<PAGE> 5
The Manager agrees and each Money Manager will be required to agree,
that no investment decision will be made or influenced by a desire to
provide brokerage for allocation in accordance with the foregoing, and
that the right to make such allocation of brokerage shall not interfere
with the Manager's or Money Managers' primary duty to obtain the best
net price and execution for the Trust.
4. Expenses of the Trust. It is understood that the Trust will pay
all its expenses other than those expressly assumed by the Manager
herein, which expenses payable by the Trust shall include:
A. Fees for the services of the Money Managers;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, dividend disbursing
agent, and shareholder recordkeeping services;
D. Expenses of custodial services including recordkeeping
services provided by the Custodian;
E. Expenses of obtaining quotations for calculating the value of
the Trust's net assets;
F. Expenses of obtaining Portfolio Activity Reports and Analyses
of International Management reports for each portfolio of each
Sub-Trust;
G. Expenses of maintaining each Sub-Trust's tax records;
H. Salaries and other compensation of any of the Trust's
executive officers and employees, if any, who are not
officers, directors, stockholders, or employees of the
Manager;
I. Taxes levied against the Trust;
J. Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
K. Costs, including the interest expense, of borrowing money;
L. Costs and/or fees incident to meetings of the Trust, the
preparation and mailings of prospectuses and reports of the
Trust to its Shareholders, the filing of reports with
regulatory bodies, the maintenance of the Trust's existence,
and the registration of shares with federal and state
securities authorities;
<PAGE> 6
M. Legal fees, including the legal fees related to the
registration and continued qualification of the Trust shares
for sale;
N. Costs of printing stock certificates representing shares of
the Trust;
O. Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Manager or any of its
affiliates;
P. The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
Q. Association membership dues; and
R. Extraordinary expenses as may arise including expenses
incurred in connection with litigation, proceedings, other
claims, and the legal obligations of the Trust to indemnify
its Trustees, officers, employees, Shareholders, distributors,
and agents with respect thereto.
5. Activities and Affiliates of the Manager.
A. The services of the Manager and its affiliated corporations to
the Trust hereunder are not to be deemed exclusive, and the
Manager and any of its affiliates shall be free to render
similar services to others.
(1) The Manager and its affiliated corporations
shall use the same skill and care in the management
of the Sub-Trusts' portfolios as they use in the
administration of other accounts to which they
provide asset management consulting and manager
selection services, but they shall not be obligated
to give the Trust more favorable or preferential
treatment vis-a-vis their other clients.
(2) The Trust expressly recognizes that Frank Russell
Trust Company ("Trust Company"), a corporation
affiliated with the Manager, is also a client of a
corporation affiliated with the Manager and receives
substantially the same portfolio structuring and
money manager selection services from the - affiliate
as does the Trust; that Trust Company has, or may
have, commingled investment funds with substantially
the same investment objectives, strategies, and
programs as the Trust; that the Trust was organized
by and at the expense of a corporation affiliated
with the Manager for the express purpose of offering
the same type of investment management services to
the Trust's Shareholders, at least some of whom could
not obtain these services through Trust Company, as
Trust Company provides to its trust customers; and
that over time Trust Company and the Trust may
utilize some of the same money managers and have
similar portfolio securities holdings.
<PAGE> 7
B. Subject to and in accordance with the Master Trust Agreement
(as defined below) and By-Laws of the Trust and to Section
10(a) of the 1940 Act, it is understood that Trustees,
officers, agents, and Shareholders of the Trust are or may be
interested in the Manager or its affiliates as directors,
agents, or stockholders of the Manager or its affiliates; that
directors, officers, agents, and stockholders of the Manager
or its affiliates are or may be interested in the Trust as
Trustees, officers, agents, Shareholders, or otherwise; that
the Manager or its affiliates may be interested in the Trust
as Shareholders or otherwise; and that the effect of any such
interests shall be governed by said Master Trust Agreement,
By-Laws, and the 1940 Act.
6. Compensation of the Manager.
A. External Fee Sub-Trusts. The Manager shall receive
from each of the following Sub-Trusts an annual management
fee, accrued daily at the rate of 1/365th of the applicable
management fee and payable following the last day of each
month. The annual management fee, including the fee payable to
the Money Managers (for each respective Sub-Trust), shall be
computed based on the following annual percentages of each
Sub-Trust's average daily net assets during the month:
<TABLE>
<S> <C>
Equity I 0.60%
Equity II 0.75
Equity III 0.60
Equity Q 0.60
International. 0.75
Fixed Income I 0.30
Fixed Income II 0.50
Fixed Income III 0.55
Emerging Markets 1.20
Money Market 0.25
</TABLE>
From this management fee, the Manager, acting as a fiduciary
of the Trust, shall compensate the Money Managers.
B. Internal Fee Sub-Trusts. The Manager shall receive from each
of the following Sub-Trusts an annual management fee, accrued
daily at the rate of 1/365th of the applicable management fee
and payable following the last day of each month. The annual
management fee, including the fee payable to the Money
Managers
<PAGE> 8
(for each respective Sub-Trust), shall be computed based on
the following annual percentages of each Sub-Trust's average
daily net assets during the month:
<TABLE>
<S> <C>
Diversified Equity 0.78%
Special Growth 0.95
Equity Income 0.80
Quantitative Equity 0.78
Diversified Bond 0.45
Volatility Constrained Bond 0.50
International Securities 0.95
Limited Volatility Tax Free 0.50
US Government Money Market 0.25
Tax Free Money Market 0.25
Russell 1000(TM)Index 0.25
Real Estate Securities Fund 0.85
Multistrategy Bond 0.65
</TABLE>
7. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of obligations or
duties hereunder or on the part of the Manager or its
corporate affiliates, the Manager and its corporate affiliates
shall not be subject to liability to the Trust or to any
Shareholder of the Trust for any act or omission in the course
of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding, or sale
of any security.
B. No provision of this Agreement shall be construed to protect
any Trustee or officer of the Trust, or the Manager and its
corporate affiliates, from liability in violation of Sections
17(h) and (i) of the 1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on and as of April 1,
1995 and shall continue in effect as to each Sub-Trust until
April 30, 1997. The Agreement is renewable annually thereafter
for successive one-year periods (a) by a vote of a majority of
the Trustees of the Trust, or (b) as to any Sub-Trust, by a
vote of a majority of the outstanding voting securities of
that Sub-Trust, and in either case by a majority of the
Trustees who are not parties to the Agreement or interested
persons of any parties to the Agreement (other than as
Trustees of the Trust), cast in person at a meeting called for
purposes of voting on the Agreement; provided, however, that
if the Shareholders of any one or more Sub-Trusts fail to
approve the Agreement as provided herein, the Manager may
continue to serve in such capacity in the manner and to the
extent permitted by the 1940 Act and Rules and Regulations
thereunder.
<PAGE> 9
B. This Agreement:
(a) May at any time be terminated without the
payment of any penalty either by vote of the Board of
Trustees of the Trust or, as to any Sub-Trust, by
vote of a majority of the outstanding voting
securities of the Sub-Trust, on 60 days' written
notice to the Manager;
(b) Shall immediately terminate in the event of its
assignment; and
(c) May be terminated by the Manager on 60 days' written
notice to the Trust.
C. As used in this Section 8, the terms "assignment,"
"interested person" and "vote of a majority of the outstanding
voting securities" shall have the meanings set forth for any
such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed postpaid, to the other
party at any office of such party.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder
of this Agreement shall not be affected
thereby.
10. Reservation of Name. The parties hereto acknowledge that Frank Russell
Company has reserved the right to grant the non-exclusive use of the
name "Frank Russell," or any derivative thereof, to any other
investment company, investment advisor, distributor or other business
enterprise, and to withdraw from the Trust the use of the name "Frank
Russell." In the event that Frank Russell Company should elect to
withdraw the use of the name "Frank Russell" from the Trust, the Trust
will submit the question of continuing this Agreement to a vote of its
Shareholders.
11. Limitation of Liability. The Master Trust Agreement, dated July 26,
1984, as amended from time to time, establishing the Trust, which is
hereby referred to and a copy of which is on file with the Secretary of
The Commonwealth of Massachusetts, provides that the name Frank Russell
Investment Company means the Trustees from time to time serving (as
Trustees but not personally) under said Master Trust Agreement. It is
expressly acknowledged and agreed that the obligations of the Trust
hereunder shall not be binding upon any of the Shareholders, Trustees,
officers, employees, or agents of the Trust, personally, but shall bind
only the trust property of the Trust, as provided in its Master Trust
Agreement. The execution and delivery of this Agreement have been
authorized by the Trustees of the Trust and signed by the President of
the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust
property of the Trust as provided in its Master Trust Agreement.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT COMPANY
/s/Gregory J. Lyons By: /s/Lynn L. Anderson
- -------------------------------------- -----------------------------
Gregory J. Lyons, Assistant Secretary Lynn L. Anderson, President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
/s/Gregory J. Lyons By: /s/Lynn L. Anderson
- -------------------------------------- -----------------------------
Gregory J. Lyons, Assistant Secretary Lynn L. Anderson, President
FRANK RUSSELL COMPANY agrees to provide consulting services without charge to
the Trust upon the request of the Board of Trustees or officers of the Trust, or
upon the request of Manager pursuant to Section 2(C).
FRANK RUSSELL COMPANY
/s/J. David Griswold By: /s/Michael J.A. Phillips
- -------------------------------------- -----------------------------
J. David Griswold, Assistant Secretary Michael J.A. Phillips, President
<PAGE> 1
Exhibit 99.5(a)(1)
LETTER AGREEMENT
Frank Russell Investment Management Company
P.O. Box 1591
Tacoma, WA 98401-1591
Dear Sirs:
This Letter Agreement is to the Amended and Restated Management Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company dated April 1, 1995. Frank Russell Investment Company advises you that
it is creating one new fund to be named the Equity T Fund ("Fund") and that the
Fund desires Frank Russell Investment Management Company to manage the Fund
pursuant to the terms and conditions of the Management Agreement. Section 6A Sub
Trust is amended to include the new External Fee fund, the Equity T Fund with an
annual management fee of 0.75% of average daily net assets, payable as set forth
in that Section.
Please indicate your acceptance of the amendment to the Management Agreement by
executing the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/Lynn L. Anderson
-----------------------------------
Lynn L. Anderson
President
Accepted this 10th day of April, 1996.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/Eric A. Russell
-----------------------------------
Eric A. Russell
President
Frank Russell Company agrees to provide consulting services without charge to
the Investment Company upon the request of the Board of Trustees or Officers of
the Trust, or upon the request of Manager pursuant to Section 2(c).
FRANK RUSSELL COMPANY
By: /s/Michael J.A. Phillips
----------------------------------
Michael J.A. Phillips, President
<PAGE> 1
Exhibit 99.5(b)(5)
Amendment No. 2 to the Service Agreement
between Frank Russell Investment Company
and Frank Russell Company
Amendment No. 2 as of this __ day of August, 1995 to the Service Agreement dated
May 1, 1987 (the "Agreement") between Frank Russell Investment Company, a
Massachusetts business trust (the "Trust") and Frank Russell Company, a
Washington corporation (hereinafter "Company").
WHEREAS, the Trust is a diversified management investment company registered
under the Investment Company Act of 1940 ("1940 Act") offering shares of twenty
two investment funds with different investment objectives and policies
("Sub-Trust"); and
WHEREAS, Company is registered as an investment advisor under the Investment
Advisors Act of 1940, and prepares and provides to clients, statistical,
financial, tax, and analytical reports and information concerning their
investment portfolios; and
WHEREAS, Company furnishes Portfolio Verification System ("PVS") services to
clients providing accounting and tax status information on assets held by the
client; and
WHEREAS, at the meeting held on August 7, 1995, the Trustees approved to
eliminate the renewal section of the Service Agreement to reflect the SEC's
current position on the approval, amendment and renewal of service agreements;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, it is hereby agreed that Section 4, of the Agreement is hereby amended
and restated to read in its entirety as follows:
4. Termination.
A. This Agreement:
(1) may at any time be terminated without the payment of
any penalty either by vote of the Board of Trustees
of the Trust on 60 days written notice to the
Company; and
(2) shall immediately terminate in the event of its
assignment; and
(3) may be terminated by the Company on 60 days written
notice to the Trust.
B. As used in this Section 4, the terms of "assignment", and
"interested person" shall have the meanings set forth for any
such terms in the 1940 Act.
<PAGE> 2
C. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other
party at any office of such party.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by the officers designated below as of the day and year first above
written.
ATTEST: FRANK RUSSELL INVESTMENT COMPANY
BY: /s/Beverly Taylor BY: /s/Lynn L. Anderson
------------------------ ---------------------------------
Beverly Taylor Lynn L. Anderson, President
ATTEST: FRANK RUSSELL COMPANY
BY: Mary E. Hughs BY: /s/Michael J.A. Phillips
------------------------ ---------------------------------
Mary E. Hughs Michael J.A. Phillips, President
<PAGE> 1
Exhibit 99.5(b)(6)
LETTER AGREEMENT
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
Dear Sirs:
Pursuant to Section 14 of the Yield Calculation Services Agreement of Frank
Russell Investment Company, dated January 2, 1985, the Frank Russell Investment
Company advises you that it is creating a new fund to be named the Equity T Fund
(the "Fund") and that the Fund desires for State Street Bank and Trust Company
to compute the performance results of the Fund with respect to the Fund pursuant
to the terms and conditions of the Yield Calculation Service Agreement.
Please indicate your acceptance to amend the Yield Calculation Service Agreement
by executing the acceptance copy of this letter agreement and returning it to
the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
---------------------------------
Lynn L. Anderson
President
Accepted this ________ day of ________ , 1996.
STATE STREET BANK AND TRUST COMPANY
By:
---------------------------------
Its:
---------------------------------
<PAGE> 1
Exhibit 99.5(b)(7)
State Street Bank and Trust Company
Legal Division
1776 Heritage Drive
North Quincy, MA 02171-2197
March 14, 1996
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Ladies and Gentlemen:
Reference is made to the Custodian Contract between State Street Bank and Trust
Company (the "Bank") and Frank Russell Investment Company (the "Fund") dated
October 31, 1988, as amended (the "Custodian Contract"). This letter sets forth
our understanding of the consideration and certain terms and conditions pursuant
to which the Bank will provided date to support tax reporting and compliance
testing to the portfolios of the Fund in conjunction with the services provided
under the Custodian Contract.
The Bank will develop a system (the "System") to provide certain data to support
tax reporting and compliance testing to investment companies, and under the
direction and guidance of the administrator and tax advisor for the Fund, will
implement the System to provide such support to the Fund. Development and
implementation of the System will take place in three phases, and is anticipated
to continue through the year 1996. Details of the development and implementation
of the System is set forth in the Tax Accounting Project Plan attached hereto as
Schedule 1.
The System will not be developed for the Fund's exclusive use, and the Bank
shall be free to use the System to provide the tax reporting and compliance
testing support to others. This agreement shall not transfer to the Fund any
right to, or interest in the System or in any related trademark or proprietary
rights of the Bank.
Developmental costs unique to the Fund ("Unique Costs") will be incurred in
implementing the System. All such Unique Costs of such implementation will be
shared equally by the Fund and the Bank. The Fund will pay its fifty percent
portion of such Unique Costs, which in any event shall not exceed a total of
$75,000, on a monthly agreeable schedule.
The Bank shall pay fifty percent of the fees of independent auditors arising
from such auditors' advice with respect to the design and implementation of the
System; provided, however, that the Bank's payments shall not exceed $25,000.
<PAGE> 2
Once the System is operational, the Bank shall provide the reports set forth on
Schedule 3 hereto (the "Reports") for the compensation set forth in Schedule 2
hereto.
The type of information to be contained in and the format of all Reports shall
be subject to review by the Fund's tax professionals, and the Bank shall have no
liability relating therefrom to qualification of any portfolio of the Fund as a
regulated investment company or any liability relating to the compliance with
any federal or state tax law, regulation or ruling by any portfolio of the Fund.
The Bank shall not be liable in any way for any delays, inaccuracies, errors in
or omissions from the Reports or for any damages arising from or occasioned by
the provision of such Reports, unless due to the Bank's negligence. Under no
circumstances will the Bank be liable for special, indirect, incidental or
consequential damages of any kind whatsoever (including, without limitation,
attorneys' fees) with respect to the Reports except as set forth above.
If the System is unable to produce the Reports, the Bank shall reimburse the
Fund for all costs of implementation actually paid under this letter agreement
and for any compensation set forth in Schedule 2 hereto actually paid to the
Bank during the preceding twelve months.
This letter agreement may be terminated by either party by an instrument in
writing delivered or mailed, postage prepaid to the other party. Such
termination will take effect not sooner than sixty (60) days after the date of
such delivery and, at the Fund's option, not later than (i) up to
one-hundred-eighty (180) days after such delivery or (ii) the Fund's procurement
of replacement services for those provided by the Bank under this letter
agreement, whichever occurs first. Subject to such notice period, this letter
agreement shall terminate simultaneously with a termination of the Custodian
Contract, but nothing in this letter agreement or in the Custodian Contract
shall prevent the termination of this letter agreement without the termination
of the Custodian Contract.
Except as otherwise provided herein, the Reports shall be provided subject to
the terms and conditions of the Custodian Contract. If any provision of this
letter agreement is inconsistent with the Custodian Contract, the terms of this
letter agreement shall govern with respect to the provision of the Reports.
The signature below indicates the binding nature of this letter agreement and
its attachments.
Very truly yours,
State Street Bank and Trust Company
By: /s/Nancy E. Grady 3/18/96
-----------------------------------
Nancy E. Grady, Vice President
<PAGE> 3
Accepted and Agreed:
Frank Russell Investment Company
By: /s/Mark Swanson 4/02/96
----------------------------------
Mark Swanson
<PAGE> 4
Schedule 1
Tax Accounting Project Plan
<PAGE> 5
<TABLE>
<CAPTION>
TAX ACCOUNTING PROJECT PLAN
TAX ACCOUNTING SYSTEM PRIORITIES FREQUENCY RESPONSIBILITY STATUS TARGET DATE
<S> <C> <C> <C> <C> <C>
CONVERSION
1. SSB to set up tax funds on Horizon. One time only R. Ribokas No development 1/1/96
required
2. Convert Frank Russell historical tax One time only K. Malone/ Refer Conversion
information from Russell's PVS system to L. Nelson Plan (Addendum 1)
Horizon.
3. SSB to create a feed of the monthly Monthly SSB/FRIMCo/
trading activity from Horizon's book C & L
records to Horizon's tax records - (by
portfolio, buys before sells). Russell to
obtain approval on methodology from C & L.
4. Russell to determine if Cooper's will On demand C & L/FRIMCo
require a periodic reconciliation between
PVS and Horizon's tax records?
WASH SALES
CORE
1. SSB to identify Wash Sales for US equities Monthly SSB Complete
2. SSB to resolve documented bugs with the One time only SSB (ITD) Identified bugs
Potential Wash Sales reporting for US have been
equities (See Addendum 2) submitted
3. SSB to enhance the Wash Sale functionality One time only SSB (ITD) SSB to determine
to adjust for aquisition date. programming
timeframe.
4. SSB to enhance the Wash Sale functionality One time only SSB (ITD) SSB to determine
to flag adjusted lots. programming
timeframe.
5. SSB to define wash sales reporting D. Landy Requires Complete
requirements for: definition, Pending
Fixed Income, coding etc. review of
Foreign Equities. (refer revisions
attachment B) and
international
equities.
COMPLIANCE
CORE
988 TRANSACTIONS
Russell is able to use the 988 Reports in Annually SSB Complete
1994 for the bifurcation portion of IRS
Section 988.
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
TAX ACCOUNTING PROJECT PLAN
TAX ACCOUNTING SYSTEM PRIORITIES FREQUENCY RESPONSIBILITY STATUS TARGET DATE
<S> <C> <C> <C> <C> <C>
IRS 50% DIVERSIFICATION RULE (SUBCHAPTER M)
At least 50% of the value of the fund's total Quarterly
assets must be "Qualifying assets which
include: cash, cash equivalents, US Gov't
Securities, Securities of other RICS,
Securities. Excludes securities which do not
pass the 5% and 10% rules.
A. 5% RULE (SUBCHAPTER M)
Total market value of any one issuer that Quarterly MFIS Need to enhance
exceeds 5% of total assets of the RIC are Horizon Portfolio
considered non-qualifying assets. Appraisal to link
issuers
B. 10% VOTING SHARES DIVERSIFICATION RULE
The total assets of any one issuer that Quarterly MFIS Requires vendor
represent more than 10% of the outstanding feed of total
voting shares of the issuer are considered number of common
non-qualifying assets stock shares
outstanding.
30% SHORT 3 INCOME TEST (SUBCHAPTER M)
A RIC will be disqualified from its Annually Horizon Gain/Loss
pass-through tax status if 30% or more of its Report should meet
gross earnings for the taxable year result Russell's needs
from the sale or disposition of assets held Conversion
for less than 3 months (short 3 gains/gross Complete
income).
DIVIDENDS RECEIVED DEDUCTION
Corporations invested in a RIC are allowed to Annually MFIS SSB to develop a
look through the fund as if they were report to identify
actually invested in equity securities. The ineligible
dividends paid on these securities are 80% securities
deductible by the corporation on their return.
ENHANCEMENTS
75% SEC TEST
At least 75% of the value of total assets
must be represented by one or more of the
following items: cash and cash items
(including receivables, government
securities, securities of other regulated
investment companies or other securities
(other than those mentioned above) which meet
the following limitations:
(a) Securities of any on issuer
owned by the fund having a market
value not greater than 5% of the
value of the fund's total assets, and
(b) Securities that do not represent
more than 10% of the outstanding
voting securities of any one issuer
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
TAX ACCOUNTING PROJECT PLAN
TAX ACCOUNTING SYSTEM PRIORITIES FREQUENCY RESPONSIBILITY STATUS TARGET DATE
<S> <C> <C> <C> <C>
IRS 25% DIVERSIFICATION TEST (SUBCHAPTER M)
No more than 25% of the market value of Quarterly
total assets can be invested in the
securities of any one issuer or of two or
more issuers in the same industry which
are controlled by the fund (other than
Government securities or the securities of
other RICS).
90% QUALIFIED INCOME TEST
At the end of a fund's fiscal year, 90% of Annually
a fund's gross income must be derived from
qualifying sources of income (dividends,
interest, gains)
PFICS Product Development Definition
Any foreign corporation if: (1) 75% or
more of the gross income of such
corporation for the taxable year is
passive income; for (2) the average % of
assets (by value) held by such corporation
during the taxable year which produced
passive income or which are held for the
production of passive income is at least
50%
Requirements: Annually
- -------------
1. Develop ability to adjust the tax cost
at the lot level
2. Develop ability to track reversals
once a lot has been sold
3. Develop ability to MTM lots
NON-INCOME PRODUCING SECURITIES
Securities that did not have a cash Semi-annual MFIS Requires
dividend in the preceeding 12 months definition
AFFILIATED BROKERS Annually Requires
definition
All required information should be
available via Global Quest.
1256 TRANSACTIONS Product Development Definition
Futures, foreign forward currency
contracts, non equity option, and equity
dealer options. Any unrealized gain loss
with respect to a 1256 contract shall be
treated as:
A. Short-term capital gain or loss, to
the extent of 40% of such gain or
loss, and
B. Long-term capital gain or loss, to the
extent of 60% of such gain or loss
Requirements
- ------------
1. Develop ability to adjust the tax cost Annually
at the lot level to reflect
current period mark
2. Develop ability to track reversals Annually
once lot has been sold
GROSS GAIN/LOSS REPORT
Gross non-bifurcation methodology On Demand K. Malone Complete 1/1/96
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
MFIS CLIENT SERVICES FRAX PROJECT PLAN
March 6, 1996
TARGET COMPLETION DATES
DESCRIPTION STATUS DEFINITION REVIEW DEVELOPMENT UAT PROD. DATE
<S> <C> <C> <C> <C> <C> <C>
1. CONVERSION OF TAX FUNDS FROM PVS TO MCH
a. Scope/requirements complete 11/17/95 11/27/95 n/a n/a n/a
b. Issues/questions/resolutions
- data elements complete 11/17/95 11/30/95 n/a n/a n/a
- base cost vs. local cost vs. complete 1/2/96 1/22/96 2/2/96 3/8/96
exchange rate: SSB developed
changes to calculate local
values using PVS exchange rates
and eliminated the need to
manually scrub the lots when
ratio between local and base
had decimal places too large to
fit in data field (ETD rejects
lots if net amount does not
crossfoot); SSB also used
special sender code MCHCONV to
bypass warning messages when
loading the lots.
- FX: fund group will enter complete 11/20/96 11/20/96 n/a n/a
manually.
- MBS original face: SSB developed complete 12/20/95 2/12/96 2/16/96 3/8/96
calculation to provide missing
original face.
- Historical data: SSB developed complete 12/20/95 2/12/96 2/24/96 3/8/96
changes to ETD to allow
exchange rate prior to 1986 and
settle date of holiday (only
for past settle dates)
- Unmatched asset ID's: SSB complete for 12/20/95 2/12/96 2/24/96 3/15/96
developed a new matching equities/fixed
program to identify unmatched income; in
securities between PVS and testing for
MCH. A cusip cross reference, international
provided by fund group, was
included in the automated
conversion process. FR also
built a cross reference file
that they used to translate the
PVS file.
- Currency code: FR translated PVS open 12/20/95 1/12/96 1/5/96 3/15/96
code to MCH code. Few
differences in MCH security
master currency code vs. PVS
(e.g., CAD vs. USD) are still
being researched by fund group.
- Broker codes: SSB defaulted to complete 12/20/95 1/15/96 1/17/96 1/17/96
99133 if missing.
- Flag lots that were adjusted for open
wash sales: is this required
for 1996?
c. Reconciliation reports: SSB
developed three reports:
- Conversion report to list complete 12/4/95 12/12/95 12/19/95 1/17/96
exception items (e.g.,
unmatched currencies, cusips,
alpha/numeric edits, missing
data, etc.)
- Match PVS book fund positions to complete 12/20/95 12/22/95 1/5/96 1/22/96
MCH book fund positions
- Match MCH book fund positions to complete 1/12/96 1/15/96 1/31/96 2/23/96
MCH tax fund positions (after
load)
2. POSTING OF BOOK FUND ACTIVITIES TO
TAX FUND
a. Scope/requirements 11/17/95
b. Issues/questions/resolutions
- Frequency of posting: Monthly complete 11/20/95 12/4/95 n/a n/a
- Sequence of posting: SSB is testing 12/5/95 2/12/96 3/15/96 5/31/96
developing the program to post
the book funds lot activities
to the appropriate tax funds.
The sort will be by: buys first
then sells (by tax fund, cusip,
trade date, shares)
- Paydowns needs
definition
- Amortization needs
definition
c. Reconciliation report: SSB to use complete
the same report from item 1C
(third report).
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
MFIS CLIENT SERVICES FRAX PROJECT PLAN
March 6, 1996
TARGET COMPLETION DATES
DESCRIPTION STATUS DEFINITION REVIEW DEVELOPMENT UAT PROD. DATE
<S> <C> <C> <C> <C> <C> <C>
3. TEST PLAN:
- Convert equity tax fund (GU3X) of 9/30/95 in complete 3/8/96
pilot
- Convert fixed income tax fund (CH7X) of complete 3/8/96
9/30/95 in pilot
- Convert international tax fund (GU6X) of testing 3/15/96
9/30/95 in pilot: must be done in
production region due to incomplete
security master in pilot
- Conversion reconciliation/sign off on GU3X complete 3/8/96
pilot testing
- Conversion reconciliation/sign off on CH7X 3/15/96
pilot testing
- Conversion reconciliation/sign off on GU6X 3/31/96
production testing
- Post monthly (10/95) MCH book funds to GU3X testing 3/8/96
in pilot
- Post monthly (10/95) MCH book funds to CH7X) testing 3/8/96
in pilot
- Post monthly (10/95) MCH book funds to GU6X) 4/12/96
in production
- Posting reconciliation/sign off on GU3X 3/8/96
pilot testing
- Posting reconciliation/sign off on CH7X 3/8/96
pilot testing
- Posting reconciliation/sign off on GU6X 4/12/96
production testing
4. PARALLEL PLAN:
- Convert equity tax fund (GU3X) of 12/31/95
in production
- Convert fixed income tax fund (CH7X) of
12/31/95 in production
- Convert international tax fund (GU6X?) of
12/31/95 in production
- Conversion reconciliation/sign off on GU3X
- Conversion reconciliation/sign off on CH7X
- Conversion reconciliation/sign off on GU6X(?)
- Post monthly (1/96) MCH book funds to GU3X
- Post monthly (1/96) MCH book funds to CH7X)
- Post monthly (1/96) MCH book funds to
GU6X?)
- Posting reconciliation/sign off 1/96 on
GU3X
- Posting reconciliation/sign off 1/96 on CH7X
- Posting reconciliation/sign off 1/96 on
GU6X(?)
- Post monthly (2/96) MCH book funds to GU3X
- Post monthly (2/96) MCH book funds to CH7X)
- Post monthly (2/96) MCH book funds to
GU6X?)
- Posting reconciliation/sign off 2/96 on
GU3X
- Posting reconciliation/sign off 2/96 on CH7X
- Posting reconciliation/sign off 2/96 on
GU6X(?)
5. ROLL-OUT PLAN: needs
definition
</TABLE>
<PAGE> 10
Schedule 2
Fee Schedule
Fees:
$8,500 per Equity Fund
$11,000 per Fixed Income Fund
$15,000 per Global Fund.
Fees are reported on an annualized basis and will be billed and payable monthly:
<PAGE> 11
Schedule 3
Tax Reporting and Compliance Testing Support
- - Realized g/l reports for flexible reporting periods
- - Disallowed loss reports for flexible reporting periods
The system must be capable of recording and tracking cost basis
adjustments and acquisition date changes
- - Bifurcation reports
- - Gross gains report that can be run for flexible reporting periods
- - 5% report
- - 10% report
- - Report for dividends received on securities held for less than 45 days
- - Report of securities not paying a dividend within the past 12 months
- - Report of securities that demonstrates recording and tracking PFIC cost
basis adjustments
- - Report of securities that demonstrates recording and tracking of
Section 1256 cost basis adjustments
<PAGE> 1
Exhibit 99.5(c)(1)
Contract Mailed:
Effective Date:
Termination Date: April 30,
Fund(s):
Mr.
Re: Frank Russell Investment Company Portfolio Management Contract
Dear Mr. :
Frank Russell Investment Company ("Investment Company"), a
Massachusetts business trust, is a diversified open-end management investment
company of the series type registered as an investment company under the
Investment Company Act of 1940 ("Act"), and subject to the rules and regulations
promulgated thereunder. The Investment Company is a so-called "series" company
which issues shares evidencing beneficial interests in separate investment
portfolios, each with different investment objectives and policies ("Funds").
Frank Russell Investment Management Company ("FRIMCo") acts as the
manager and administrator of the Investment Company pursuant to the terms of a
Management Agreement, and is an "investment adviser" to the Investment Company
as defined in Section 2(a)(20) of the Act. FRIMCo is responsible for the
day-to-day management and administration of the Investment Company and for the
coordination of investment of each Fund's assets in portfolio securities.
However, specific portfolio purchases and sales for each Fund's investment
portfolio, or a portion thereof, are to be made by portfolio management
organizations recommended and selected by FRIMCo, and appointed by, and subject
to the approval of, the Board of Trustees of the Investment Company.
1. Appointment as a Money Manager. Investment Company being duly
authorized hereby appoints and employs you ("Money Manager") as a discretionary
money manager to the Investment Company's Fund(s) designated above, on the terms
and conditions set forth herein, for those assets of the Fund(s) which FRIMCo,
as a fiduciary for Investment Company,
<PAGE> 2
determines to assign to you (those assets being referred to for the Fund(s)
individually and collectively as the "Fund Account").
2. Acceptance of Appointment; Standard of Performance. Money
Manager accepts the appointment as a discretionary money manager and agrees to
use its best professional judgment to make timely investment decisions for the
Investment Company with respect to the investments of the Fund Account in
accordance with the provisions of this Contract.
3. Portfolio Management Services of Money Manager. Money Manager
is hereby employed and authorized to select portfolio securities for investment
by the Fund(s), to determine to purchase and sell securities of the Fund
Account, and upon making any purchase or sale decision, to place orders for the
execution of such portfolio transactions in accordance with paragraphs 5 and 6
hereof and Exhibit A hereto (as amended from time to time). In providing
portfolio management services to the Fund Account: Money Manager shall be
subject to such investment restrictions as are set forth in the Act and Rules
thereunder, the supervision and control of the Board of Trustees of the
Investment Company, such specific instructions as the Board may adopt and
communicate to Money Manager, the investment objectives, policies and
restrictions of the Fund furnished pursuant to paragraph 4, and instructions
from FRIMCo; and Money Manager shall maintain on behalf of the Investment
Company the records listed in Exhibit B hereto (as amended from time to time).
At Investment Company's reasonable request, Money Manager will consult with
Investment Company or with FRIMCo, with respect to any decision made by it with
respect to the investments of the Fund Account.
4. Investment Objectives, Policies and Restrictions. The
Investment Company shall provide Money Manager with a statement of the
investment objectives and policies of the Fund Account and any specific
investment restrictions applicable thereto as established by Investment Company,
including those set forth in its Prospectus as amended from time to time.
Investment Company retains the right, on written notice to Money Manager from
the Investment Company or FRIMCo, to modify any such objectives, policies or
restrictions in any manner at any time.
5. Transaction Procedures. All transactions will be consummated
by payment to or delivery by State Street Bank & Trust Company (the
"Custodian"), or such depositories, or agents, as may be designated by the
Custodian, as custodian for the Investment Company, of all cash and/or
securities due to or from the Fund Account, and Money Manager shall not have
possession or custody thereof or any responsibility or liability with respect
thereto. Money Manager shall advise Custodian and confirm in writing to
Investment Company all investment orders for the Fund Account placed by it with
brokers and dealers at the time and in the manner and as set forth in Exhibit A
hereto (as amended from time to time). Investment Company shall issue to the
Custodian such instructions as may be appropriate in connection with the
settlement of any transaction initiated by Money Manager. Investment Company
shall be responsible for all custodial arrangements and the payment of all
custodial charges and fees, and upon giving proper instructions to the
Custodian, Money Manager shall have no responsibility or liability with respect
to custodial arrangements or the acts, omissions or other conduct of the
Custodian.
6. Allocation of Brokerage. Money Manager shall have authority
and discretion to select brokers and dealers to execute portfolio transactions
initiated by Money Manager, and for the selection of the markets on/in which the
transaction will be executed.
<PAGE> 3
A. In doing so, the Money Manager's primary objective shall be to
seek to select a broker-dealer that can be expected to obtain the best net price
and execution for the Investment Company. However, this responsibility shall not
be deemed to obligate the Money Manager to solicit competitive bids for each
transaction; and Money Manager shall have no obligation to seek the lowest
available commission cost to Investment Company, so long as Money Manager
believes in good faith, based upon its knowledge of the capabilities of the firm
selected, that the broker or dealer can be expected to obtain the best price on
a particular transaction and that the commission cost is reasonable in relation
to the total quality and reliability of the brokerage and research services made
available by the broker to Money Manager viewed in terms of either that
particular transaction or of Money Manager's overall responsibilities with
respect to its clients, including the Investment Company, as to which Money
Manager exercises investment discretion, notwithstanding that Investment Company
may not be the direct or exclusive beneficiary of any such services or that
another broker may be willing to charge Investment Company a lower commission on
the particular transaction.
B. Investment Company shall retain the right to request that
transactions giving rise to brokerage commissions, in an amount to be agreed
upon by Investment Company and Money Manager, shall be executed by brokers and
dealers which provide brokerage or research services to the Investment Company
or FRIMCo, or as to which an ongoing relationship will be of value to Investment
Company in its management of the Fund(s), which services and relationship may,
but need not, be of direct benefit to the Fund Account, so long as (i) the Money
Manager believes in good faith, based upon its knowledge of the capabilities of
the firm selected, that the broker or dealer can be expected to obtain the best
price on a particular transaction and (ii) the Investment Company determines
that the commission cost is reasonable in relation to the total quality and
reliability of the brokerage and research services made available to Investment
Company, or to FRIMCo for the benefit of its clients for which it exercises
investment discretion, notwithstanding that the Fund Account may not be the
direct or exclusive beneficiary of any such service or that another broker may
be willing to charge Investment Company a lower commission on the particular
transaction.
C. Money Manager agrees that it will not execute any portfolio
transactions with a broker or dealer which is an "affiliated person" (as defined
in the Act) of the Investment Company or of any Money Manager for the Investment
Company without the prior written approval of the Investment Company. Investment
Company agrees that it will provide Money Manager with a list of brokers and
dealers which are "affiliated persons" of the Investment Company and its Money
Managers.
D. As used in this paragraph 6, "brokerage and research services"
shall have the meaning defined in Section 28(e)(3) of the Securities Exchange
Act of 1934.
7. Proxies. Unless FRIMCo gives written instructions to the
contrary, Money Manager shall vote all proxies solicited by or with respect to
the issuers of securities in which assets of the Fund Account may be invested.
Money Manager shall use its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Company's shareholders.
8. Reports to Money Manager. Investment Company shall provide
Money Manager with such periodic reports concerning the status of the Fund
Account as Money Manager may reasonably request.
<PAGE> 4
9. Fees for Services. The compensation of Money Manager for its
services under this Contract shall be calculated and paid by FRIMCo, acting as a
fiduciary for Investment Company with respect to the Internal Fee Funds, and for
shareholders with respect to the External Fee Funds, in accordance with the
attached Exhibit C. To the extent that the Investment Company, as principal, has
discharged or been relieved of, its duty to pay over to FRIMCo, by reason of its
payment of FRIMCo, in its capacity as a fiduciary for Investment Company, any or
all amounts payable to the Money Manager, the Money Manager agrees to look to
the agent for payment of amounts payable to Money Manager hereunder. Money
Manager hereby agrees to contact the Secretary of the Investment Company if
payment is not received from FRIMCo.
10. Other Investment Activities of Money Manager. Investment
Company acknowledges that Money Manager, or one or more of its affiliates, may
have investment responsibilities or render investment advice to, or perform
other investment advisory services for, other individuals or entities
("Affiliated Accounts"). Subject to the provisions of paragraph 2 hereof,
Investment Company agrees that Money Manager or its affiliates may give advice
or exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from advice given or the timing or
nature of action taken with respect to the Fund Account, provided that Money
Manager acts in good faith, and provided, further, that it is Money Manager's
policy to allocate, within its reasonable discretion, investment opportunities
to the Fund Account over a period of time on a fair and equitable basis relative
to the Affiliated Accounts, taking into account the investment objectives and
policies of the Fund Account and any specific investment restrictions applicable
thereto. Investment Company acknowledges that one or more of the Affiliated
Accounts may at any time hold, acquire, increase, decrease, dispose of or
otherwise deal with positions in investments in which the Fund Account may have
an interest from time to time, whether in transactions which may involve the
Fund Account or otherwise. Money Manager shall have no obligation to acquire for
the Fund Account a position in any investment which any Affiliated Account may
acquire, and the Investment Company shall have no first refusal, coinvestment or
other rights in respect of any such investment, either for the Fund Account or
otherwise.
11. Certificate of Authority. Investment Company, FRIMCo and Money
Manager shall furnish to each other from time to time certified copies of the
resolutions of their Board of Directors, Board of Trustees or executive
committee evidencing the authority of officers and employees who are authorized
to act on behalf of Investment Company, Fund Account, FRIMCo and/or Money
Manager.
12. Limitation of Liability. Money Manager shall not be liable for
any action taken, omitted or suffered to be taken by it in its reasonable
judgment, in good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Contract, or in
accordance with (or in the absence of) specific directions or instructions from
Investment Company; provided, however, that such acts or omissions shall not
have resulted from Money Manager's willful misfeasance, bad faith or gross
negligence, violation of the standard of care established by and applicable to
Money Manager in its actions under this Contract, or breach of its duty or of
its obligations hereunder.
13. Confidentiality. Subject to the right of each Money Manager
and Investment Company to comply with applicable law, including any demand of
any regulatory or taxing
<PAGE> 5
authority having jurisdiction over it, the parties hereto shall treat as
confidential all information pertaining to the Fund Account and the actions of
each Money Manager and Investment Company in respect thereof.
14. Assignment. No assignment, as that term is defined in Section
2(a)(4) of the Act, of this Contract shall be made by Money Manager, and this
Contract shall terminate automatically in the event that it is assigned. Money
Manager shall notify Investment Company in writing sufficiently in advance of
any proposed change of control, as defined in Section 2(a)(9) of the Act, as
will enable Investment Company to consider whether an assignment as defined in
Section 2(a)(4) of the Act will occur, and to take the steps necessary to enter
into a new Contract with Money Manager.
15. Representations, Warranties and Agreements of the Company. The
Investment Company represents, warrants and agrees that:
A. Money Manager has been duly appointed by the Board of
Trustees of the Investment Company to provide investment services to the Fund
Account as contemplated hereby.
B. Investment Company will deliver to Money Manager a
true and complete copy of its current prospectus as effective from time to time,
such other documents or instruments governing the investments of Fund Account,
and such other information as is necessary for Money Manager to carry out its
obligations under this Contract.
C. The organization of the Investment Company and the
conduct of the business of Fund(s) and the Fund Account as contemplated by this
Contract, complies, and shall at all times comply, with the requirements imposed
upon the Investment Company by applicable law.
16. Representations, Warranties and Agreements of Money
Manager. Money Manager represents, warrants and agrees that:
A. Money Manager is registered as an "investment
adviser" under the Investment Advisers Act of 1940 ("Advisers Act"); or it is a
"bank" as defined in Section 202(a)(2) of the Advisers Act or an "insurance
company" as defined in Section 202(a)(12) of the Advisers Act.
B. Money Manager will maintain, keep current and
preserve on behalf of the Investment Company, in the manner required or
permitted by the Act, the records identified in Exhibit B. Money Manager agrees
that such records (other than those required by No. 4 of Exhibit B) are the
property of the Investment Company, and will be surrendered to the Investment
Company promptly upon request.
C. Money Manager will adopt a written code of ethics
complying with the requirements of Rule 17j-1 under the Act, will provide to the
Investment Company a copy of the code of ethics and evidence of its adoption,
and will make such reports to the Investment Company as required by Rule 17j-1
under the Act.
D. Money Manager will notify the Investment Company of
any changes in the membership of its partnership within a reasonable time after
such change.
<PAGE> 6
17. Amendment. This Contract may be amended at any time,
but only by written agreement between Money Manager and Investment Company,
which amendment, other than amendments to Exhibits A and B, must be approved by
the Board of Trustees of the Investment Company in the manner required by the
Act.
18. Effective Date; Term. This Contract shall become
effective for the Fund(s) on the effective date set forth on page 1 of this
Contract, and shall continue in effect until the termination date set forth on
page 1 of this Contract. Thereafter, the Contract shall continue in effect for
successive annual periods only so long as its continuance has been specifically
approved at least annually by the Board of Trustees of the Investment Company in
the manner required by the Act.
19. Termination. This Contract may be terminated by
either party hereto, without the payment of any penalty, immediately upon
written notice to the other party, but any such termination shall not affect the
status, obligations, or liabilities of any party hereto to the other.
20. Applicable Law. To the extent that state law shall
not have been preempted by the provisions of any laws of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Contract shall be administered, construed, and enforced according to the
laws of the State of Washington.
21. Notice of Liability Letter. Money Manager will
notify, in writing, any organization with whom it places orders for the
execution of Investment Company portfolio transactions that the organization
will be: (i) executing portfolio transactions of a Massachusetts business trust;
and (ii) that the Investment Company's Master Trust Agreement contains an
express disclaimer of shareholder, officer or Trustee liability for acts or
obligations of the Investment Company and requires that all obligations of the
Investment Company be satisfied out of its assets. Mailing a notice
substantially similar to Exhibit D will be deemed to be compliance with this
section.
22. Limitation of Liability. The Master Trust Agreement
dated July 26, 1984, as amended from time to time, establishing the Investment
Company, which is hereby referred to and a copy of which is on file with the
Secretary of The Commonwealth of Massachusetts, provides that the name Frank
Russell Investment Company means the Trustees from time to time serving (as
Trustees but not personally) under said Master Trust Agreement. It is expressly
acknowledged and agreed that the obligations of the Investment Company hereunder
shall not be binding upon any of the shareholders, Trustees, officers, employees
or agents of the Investment Company, personally, but shall bind only the trust
property of the Investment Company, as provided in its Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Investment Company and signed by the President of the Investment
Company, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been made by
any of them
<PAGE> 7
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Investment Company as provided in its Master
Trust Agreement.
(Money Manager) Frank Russell Investment Company
Frank Russell Investment Management Company,
as a fiduciary for Frank Russell Investment
Company
BY: BY:
------------------------ -------------------------------
Lynn L. Anderson
President
DATE: DATE:
---------------------- -----------------------------
EXHIBITS: A. Operational Procedures (including Schedules 1, 2 and 3).
B. Recordkeeping Requirements.
C. Fee Schedule.
D. Notice of Liability Letter.
<PAGE> 8
FRANK RUSSELL INVESTMENT COMPANY
PORTFOLIO MANAGEMENT CONTRACT
EXHIBIT A
OPERATIONAL PROCEDURES
A Money Manager ("MM") for Frank Russell Investment Company ("Investment
Company") should abide by certain rules and procedures in order to minimize
operational problems. MM will be required to have various records and files (as
required by regulatory agencies) at their offices. MM will have to maintain a
certain flow of information to State Street Bank & Trust Company ("SSB"), the
custodian bank for Investment Company.
MM will be required to furnish SSB with daily information as to executed trades.
SSB should receive this data no later than the morning following the day of the
trade. The necessary information should be transmitted to SSB (1) via facsimile
machine (the direct line to the facsimile machine is 617-985-3999) or (2) via an
electronic communications system ("System") approved by SSB that meets the
following criteria:
- The System must provide a method by which State Street can reasonably
ensure that each communication received by it through the System
actually originated from the MM.
- Only persons properly authorized by MM's senior operations officer
shall be authorized to access the System and enter information, and MM
must employ reasonable procedures to permit only authorized persons to
have access to the System.
- MM will create separate System files containing the daily executed
securities trade information with respect to each Investment Company
portfolio it manages, or MM will transmit separately the trades for
each such portfolio.
- SSB, through System or otherwise, will provide to MM prompt
certification or acknowledgment of SSB's receipt of each transmission
by MM of executed trade information.
- If the System malfunctions, MM will transmit all trade information via
facsimile transmission.
Upon receipt of brokers' confirmations, MM or SSB will be required to notify the
other party if any differences exist. The reporting of trades by the MM to SSB
must include the following:
- Purchase or Sale
- Security name
- Number of shares or principal amount
- Price per share or bond
- Commission rate per share or bond, or if a net trade
- Executing broker
- Trade date
<PAGE> 9
- Settlement date
- If security is not eligible for DTC
- This information can be reported using your forms, if applicable
When opening accounts with brokers for Investment Company, the account should be
a cash account. No margin accounts are to be maintained. The broker should be
advised to use SSB IDC's ID system number (No. 20997) to facilitate the receipt
of information by SSB. If this procedure is followed, DK problems will be held
down to a minimum and additional costs of security trades will not become an
important factor in doing business. Delivery and receipt instructions are
attached as Schedule 2.
MM will be required to submit to SSB a daily trade authorization report, either
through a System or, if a facsimile transmission is used, on a form signed by
two authorized individuals prior to settlement date and a list of authorized
persons with specimen signatures must have previously been sent to SSB (see
Schedule 3). The daily trade authorization report will contain information on
which SSB can rely to either accept delivery or deliver out of the account,
securities as per MM trades. If facsimile transmission is used, a preprinted
form will be supplied to MM by Investment Company, or MM can use an equivalent
form acceptable to SSB and Investment Company.
<PAGE> 10
SCHEDULE 1
Reserved for future use.
<PAGE> 11
SCHEDULE 2
Mailing Instructions and Delivery Instructions:
Confirmation Instructions (Copy of Broker Advice):
State Street Bank and Trust Company
Mutual Fund Services
1776 Heritage Drive (A4E)
North Quincy, MA 02171
Attn: Fund Name/Fund Number
For the account of Frank Russell Investment Company ( FUND
NAME )
Delivery Instructions:
All DTC Eligible Securities:
Depository Trust Company (DTC) #997 Custodian Services
#20997 Agent Bank
All Ineligible DTC Securities (i.e., Commercial Paper)
State Street Bank and Trust Company
State Street Boston-Securities Corp.
61 Broadway
Main Concourse Level
New York, NY 10006
"VS Payment" (Federal Funds on Commercial Paper Only)
For the account of Frank Russell Investment Company ( FUND
NAME )
All Government Issues:
Delivered through Book Entry of Federal Reserve
Bank to: State St Bos/Spec/Fund Name/Fund #
(VS Payment Federal Funds)
Foreign Holdings:
Please confer with Brad Payne, State Street Bank,
(Phone: 617-985-5389) to obtain delivery instructions
of the State Street Global Custody Network
<PAGE> 12
SCHEDULE 3
Example of Authorized Signature Letter
(To Be Typed on Your Letterhead)
[DATE]
State Street Bank and Trust
Mutual Fund Services
1776 Heritage Drive (A4E)
North Quincy, MA 02171
Attention: Frank Russell Investment Company Funds
RE: Persons Authorized To Execute Trades For __________________ Fund
The following list of individuals are authorized to execute and report trade
instructions on behalf of the Fund. Should there be any changes to the
authorized persons listed below, we will notify you immediately of those
changes.
NAME SIGNATURE
---- ---------
Sincerely yours,
[Money Manager]
<PAGE> 13
EXHIBIT B
RECORDS TO BE MAINTAINED BY MONEY MANAGER
*1. A record of each brokerage order, and all other portfolio purchases and
sales, given by Money Manager or on behalf of the Investment Company
for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such records shall include:
A. The name of the broker,
B. The terms and conditions of the order, and of any modification
or cancellation thereof,
C. The time of entry or cancellation,
D. The price at which executed,
E. The time of receipt of report of execution, and
F. The name of the person who placed the order on behalf of the
Investment Company (1940 Act Rule, 31a-1(b)(5) and (6)).
*2. A record for each fiscal quarter, completed within ten (10) days after
the end of the quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio
securities to brokers or dealers, and the division of brokerage
commissions or other compensation on such purchase and sale orders. The
record:
A. Shall include the consideration given to:
(i) the sale of shares of the Company
(ii) the supplying of services or benefits by brokers or
dealers to:
(a) The Investment Company,
(b) The Investment Management Company,
(c) Yourself (i.e., the Money Manager), and
(d) Any person other than the foregoing
(iii) Any other considerations other than the technical
qualifications of the brokers and dealers as such.
B. Shall show the nature of the services or benefits made
available.
C. Shall describe in detail the application of any general or
specific formula or other determinant used in arriving at such
allocation of purchase and sale orders and such division of
brokerage commissions or other compensation.
D. The identities of the persons responsible for making the
determination of such allocation and such division of brokerage
commissions or other compensation (1940 Act, Rule 31a-1(b)(9)).
<PAGE> 14
*3. A record in the form of an appropriate memorandum identifying the
person or persons, committees, or groups authorizing the purchase or
sale of portfolio securities. Where an authorization is made by a
committee or group, a record shall be kept of the names of its members
who participate in the authorization. There shall be retained as part
of this record any memorandum, recommendation, or instruction
supporting or authorizing the purchase or sale of portfolio securities
(1940 Act, Rule 31a-1(b)(10)) and such other information as is
appropriate to support the authorization.**
*4. Such accounts, books and other documents as are required to be
maintained by registered investment advisers by rule adopted under
Section 204 of the Investment Advisers Act of 1940, to the extent such
records are necessary or appropriate to record Money Manager's
transactions with the Investment Company. (1940 Act, Rule 31a-1(f)).
- ----------
* Maintained as property of the Company pursuant to 1940 Act Rule 31a-3(a).
** Such information might include: the current Form 10-K, annual and quarterly
reports, press releases, reports by analysts and from brokerage firms
(including their recommendations, i.e., buy, sell, hold), and any internal
reports or portfolio manager reviews.
<PAGE> 15
EXHIBIT C
PORTFOLIO MANAGER FEE
FRANK RUSSELL INVESTMENT COMPANY
FUND NAME
For investment advisory services provided to the Fund Account under this
Agreement, Frank Russell Investment Management Company ("Management Company") as
a fiduciary for Investment Company shall pay Money Managers a fee determined by
multiplying the Average Account Assets by the Applicable Percentage as defined
below. All fees shall be calculated annually and paid quarterly. Fees for
partial periods shall be prorated for any calendar quarter for which services
were rendered. The Applicable Percentage for any quarter shall be the weighted
average fee determined by applying the Average Total Assets to the following
table (e.g., the resulting total fee in dollars divided by the Average Total
Assets).
____________ b.p. on the first $_______________
____________ b.p. on the next $_______________
____________ b.p. on the next $_______________
____________ b.p. on all amounts thereafter
(expressed as annualized rates)
For purposes of this Exhibit:
"Average Account Assets" for any quarter shall mean the average of the assets in
the Fund Account on the last business day of the preceding calendar quarter and
the last business day of each month during the calendar quarter.
"Average Total Assets" for any quarter shall mean the sum of the Average Account
Assets and the average for the same quarter of all other assets in other
accounts (calculated in the same manner as Average Account Assets) managed by
Money Manager for the Frank Russell Group of Companies which use a substantially
equivalent investment strategy to that employed by Money Manager for the Fund
Account.
"Frank Russell Group of Companies" shall mean the Management Company and any
affiliated company which controls, is controlled by or is under common control
with the Management Company.
INVESTMENT MANAGEMENT COMPANY
Portfolio Management Contract
DATE
<PAGE> 16
EXHIBIT D
Gentlemen:
Frank Russell Investment Company, a Massachusetts business trust (the "Trust")
and an SEC-registered investment company, has requested that I correspond with
you concerning purchases and/or sales of the Trust's portfolio instruments that
will be made on behalf of the Trust with your organization.
The Trust is required under its Master Trust Agreement to inform you that
although the Trust is organized as a Massachusetts business trust, the Trust's
Master Trust Agreement contains an express disclaimer of shareholder, officer
and trustee liability for acts or obligations of the Trust and requires that all
obligations of the Trust be satisfied out of its assets. The purpose of this
disclaimer is for the Trust's shareholders, officers and Trustees to have the
same protection against being liable for the Trust's obligations as
shareholders, officers and Directors of a corporation. The responsibility of the
Trust for its transactions with you is not changed by this notice. No action is
needed on your part in response to this notice.
Should you have any questions concerning the information contained herein,
please contact Gregory J. Lyons, Associate General Counsel of the Trust, at
(206) 596-2406.
Sincerely yours,
<PAGE> 1
Exhibit 99.6(a)(4)
LETTER AGREEMENT
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Introductory Section 1 of the Distribution Agreement between Frank
Russell Investment Company and Russell Fund Distributors, Inc., dated March 7,
1988, the Frank Russell Investment Company advises you that it is creating a new
fund to be named the Equity T Fund (the "Fund") and that the Fund desires for
Russell Fund Distributors, Inc. to serve as Distributor with respect to the Fund
pursuant to the terms and conditions of the Distribution Agreement. The fees to
be charged the Fund in return for the Distributor's services are the same as in
the Distribution Agreement.
Please indicate your acceptance to act as Distributor to the Equity T Fund by
executing the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Lynn L. Anderson
------------------------------------
Lynn L. Anderson
President
Accepted this 10th day of April, 1996
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/ Eric Russell
------------------------------------
Its: President
---------------------------------
<PAGE> 1
Exhibit 99.8(i)
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and Frank Russell Investment Company (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract dated
October 31, 1988 (the "Custodian Contract") governing the terms and conditions
under which the Custodian maintains custody of the securities and other assets
of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and conditions
under which the Custodian maintains the Fund's securities and other non-cash
property in the custody of certain foreign sub-custodians in conformity with
the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained herein,
the Custodian and the Fund hereby amend the Custodian Contract by the addition
of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of the Fund which are maintained
in such account shall identify by book-entry those securities and other
non-cash property belonging to the Fund and (ii) the Custodian shall
require that securities and other non-cash property so held by the
foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full
force and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this 11th day of August, 1995.
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Lynn L. Anderson
-------------------------------
Lynn L. Anderson
Title: President & CEO
STATE STREET BANK AND TRUST COMPANY
By: /s/ signature illegible
-------------------------------
Title: Executive Vice President
<PAGE> 2
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
FRIC Emerging Markets Fund
Addendum to Agreement dated October, 1992
GLOBAL CUSTODY - Comprised of Asset Charges and Transactions
Group I Group II Group III Group IV Group V
- ------- -------- --------- -------- -------
Euroclear Australia Austria Botswana Argentina
Japan Canada Belgium Brazil Bangladesh
Germany Denmark Finland China Bolivia*
France Indonesia Czech Republic Chile
Hong Kong Ireland Ecuador* Colombia
Italy Malaysia Egypt Cyprus
New Zealand Mexico Ghana Greece
Singapore Netherlands Israel Hungary
South Africa Norway Kenya India
Switzerland Philippines Luxembourg Jamaica*
UK Portugal Morocco Jordan
Spain Sri Lanka Mauritius
Sweden Taiwan Namibia
Thailand Trinidad and Pakistan
Tobago*
Turkey Peru
Zambia Poland
Zimbabwe Slovakia*
South Korea
Tunisia*
Uruguay
Venezuela
*Not 17F-5 eligible at this time
ASSET CHARGE**(IN BASIS POINTS)
<TABLE>
<CAPTION>
Group I Group II Group III Group IV Group V
------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
First $25 Million 6 8 18 40 45
Over $25 Million 3 6 15 35 45
</TABLE>
**Excludes: Agent, depository and local auditing fees, stamp duties and
registration fees
TRANSACTION CHARGE:
<TABLE>
<CAPTION>
Group I Group II Group III Group IV Group V
------- -------- --------- -------- -------
<S> <C> <C> <C> <C>
$25 $50 $70 $100 $125
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY STATE STREET BANK AND TRUST COMPANY
By: /s/Kenneth W. Lamb By: /s/Nancy E. Grady
--------------------------- -------------------------------
Kenneth W. Lamb Nancy E. Grady
Title: Assistant Treasurer Title: Vice President
Date: 8/24/95 Date: 8/24/95
<PAGE> 1
Exhibit 99.8(j)
STATE STREET BANK & TRUST COMPANY
GATEWAY/GLOBAL QUEST FEE SCHEDULE
FRANK RUSSELL INVESTMENT COMPANY
AMENDMENT TO THE FEE SCHEDULE, DATED APRIL 18, 1994,
TO CUSTODIAN AGREEMENT DATED OCTOBER 31, 1988, AS
AMENDED
Section VII of the Fee Schedule, dated April 18, 1994, to the Custodian
Agreement dated October 31, 1988, between Frank Russell Investment Company and
State Street Bank and Trust Company, as amended, is hereby amended in its
entirety to read as follows:
VII. ON-LINE ACCESS CHARGE
For each Frank Russell Investment Company fund set forth on Addendum A
hereto, access to both Global Quest and Gateway will be charged a flat
rate of $2,500 per fund on an annual basis. This fee will be billable
and payable on a monthly basis.
FRANK RUSSELL INVESTMENT COMPANY STATE STREET BANK AND TRUST COMPANY
By: /s/Kenneth W. Lamb By: /s/N. Grady
----------------------------- -------------------------------
Kenneth W. Lamb N. Grady
Title: Assistant Treasurer Title: Vice President
Date: November 14, 1995 Date: October 18, 1995
<PAGE> 2
ADDENDUM A
FRIC Equity I
FRIC Equity II
FRIC Equity III
FRIC Fixed Income I
FRIC Fixed Income II
FRIC Fixed Income III
FRIC Equity Q
FRIC International Fund
FRIC International Securities Fund
FRIC Diversified Equity Fund
FRIC Real Estate Securities Fund
FRIC Special Growth Fund
FRIC Equity Income Fund
FRIC Diversified Bond Fund
FRIC Volatility Constrained Bond Fund
FRIC Limited Volatility Tax Free
FRIC Quantitative Equity Fund
FRIC Multistrategy Fund
FRIC Money Market Fund
FRIC U.S. Government Money Market Fund
FRIC Tax Exempt Money Market Fund
<PAGE> 1
Exhibit 99.8(k)
STATE STREET BANK & TRUST COMPANY
GATEWAY/GLOBAL QUEST FEE SCHEDULE
FRANK RUSSELL INVESTMENT COMPANY
EMERGING MARKETS FUND AMENDMENT TO THE
FEE SCHEDULE, DATED AUGUST 7, 1995, TO CUSTODIAN
AGREEMENT DATED OCTOBER 26, 1992, AS AMENDED
The Fee Schedule, dated August 7, 1995, to the Custodian Agreement dated October
26, 1992, between Frank Russell Investment Company and State Street Bank and
Trust Company, as amended, is hereby amended to add the following Section VIII:
VIII. ON-LINE ACCESS CHARGE
For the Frank Russell Investment Company Emerging Markets Fund hereto,
access to both Global Quest and Gateway will be charged a flat rate of
$2,500 on an annual basis. This fee will be billable and payable on a
monthly basis.
FRANK RUSSELL INVESTMENT COMPANY STATE STREET BANK AND TRUST COMPANY
By: /s/Kenneth W. Lamb By: /s/N. Grady
------------------------------ ------------------------------
Kenneth W. Lamb N. Grady
Title: Assistant Treasurer Title: Vice President
Date: November 14, 1995 Date: October 18, 1995
<PAGE> 1
Exhibit 99.8(l)
LETTER AGREEMENT
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
Dear Sirs:
Pursuant to Section 14 of the Custodian Contract between Frank Russell
Investment Company and State Street Bank and Trust Company, dated October 31,
1988, the Frank Russell Investment Company advises you that it is creating a new
fund to be named the Equity T Fund (the "Fund") and that the Fund desires for
State Street Bank and Trust Company to serve as the Custodian with respect to
the Fund pursuant to the terms and conditions of the Custodian Contract. The
fees to be charged by the Administrator to the Fund in return for its services
are contained in the attached fee schedule to the Custodian Contract.
Please indicate your acceptance to act as Custodian to the Equity T Fund by
executing the acceptance copy of this letter agreement and returning it to
the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/Lynn L. Anderson
-------------------------------------
Lynn L. Anderson
President
Accepted this 12th day of April, 1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/N. Grady
-------------------------------------
Its: Vice President
-------------------------------------
<PAGE> 1
Exhibit 99.9(a)(4)
LETTER AGREEMENT
AND
AMENDED SCHEDULE A
August 11, 1995
Frank Russell Investment
Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 26 of the Transfer and Dividend Disbursing Agency Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company, dated April 1, 1988, the Frank Russell Investment Company advises you
that it desires to amend Schedule A of the Transfer and Dividend Disbursing
Agency Agreement to revise the fees to be charged by you to the Funds in return
for your services as set forth in the attached Transfer Agent Fee Schedule.
Please indicate your acceptance to act as Transfer and Dividend Disbursing Agent
to the amendment of Schedule A by executing the acceptance copy of this letter
agreement and returning to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:/s/Lynn L. Anderson
--------------------------------------
Lynn L. Anderson
President
Accepted this 11th day of August, 1995
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By:/s/Lynn L. Anderson
--------------------------------------
Lynn L. Anderson
President and Chief Executive Officer
<PAGE> 2
TRANSFER AGENT FEE SCHEDULE
FEE EFFECTIVE APRIL 1, 1988
$15 per transaction for all funds and applicable out-of-pocket postage charges.
PROPOSED FEE EFFECTIVE AUGUST 11, 1995
$20 per transaction and applicable out-of-pocket postage charges for the
following funds:
Equity I Fund Diversified Equity Fund
Equity II Funds Special Growth Fund
Equity III Fund Equity Income Fund
Equity Q Fund Quantitative Equity Fund
International Fund International Securities Fund
Emerging Markets Fund Real Estate Securities Fund
Fixed Income I Fund Diversified Bond Fund
Fixed Income II Fund Volatility Constrained Bond Fund
Fixed Income III Fund Multistrategy Bond Fund
Limited Volatility Tax Free Fund
$15 per transaction and applicable out-of-pock postage charges for the following
funds:
Money Market Fund U.S. Government Money Market Fund
Tax Free Money Market Fund
<PAGE> 1
Exhibit 99.9(a)(5)
LETTER AGREEMENT
AND
AMENDED SCHEDULE A
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 26 of the Transfer and Dividend Disbursing Agency Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company, dated April 1, 1988, the Frank Russell Investment Company advises you
that it is creating a new fund to be named the Equity T Fund (the "Fund") and
that the Fund desires for Frank Russell Investment Management Company to serve
as the Transfer and Dividend Disbursing Agent with respect to the Fund pursuant
to the terms and conditions of the Transfer and Dividend Disbursing Agency
Agreement. The Fund also desires to amend Schedule A of the Transfer and
Dividend Disbursing Agency Agreement to add the Fund. The fees to be charged by
the Administrator to the Fund in return for its services are the same as those
set forth in the Transfer and Dividend Disbursing Agency Agreement.
Please indicate your acceptance to act as Transfer and Dividend Disbursing Agent
to the Equity T Fund and of the amendment of Schedule A by executing the
acceptance copy of this letter agreement and returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/Lynn L. Anderson
--------------------------------------
Lynn L. Anderson
President
Accepted this 10th day of April, 1996.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/George W. Weber
--------------------------------------
Its: Director, Fund Administration and Operations
--------------------------------------------
<PAGE> 2
Exhibit 9(a)(5)
AMENDED
SCHEDULE A
FRANK RUSSELL INVESTMENT COMPANY
Equity I
Equity II
Equity III
Equity Q
Fixed Income I
Fixed Income II
Fixed Income III
Money Market
International
Emerging Markets
Equity T Fund
Diversified Equity
Special Growth
Equity Income
Quantitative Equity
International Securities
Real Estate Securities
Diversified Bond
Volatility Constrained Bond
Multistrategy Bond
Limited Volatility Tax Free
U.S. Government Money Market
Tax Free Money Market
<PAGE> 1
Exhibit 99.10
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Direct Dial: (215) 564-8074
April 8, 1996
Frank Russell Investment Company
909 A Street
Tacoma, Washington 98402
Re: FRANK RUSSELL INVESTMENT COMPANY
THE "EQUITY T FUND" SERIES
Gentlemen:
We have examined the Amended Master Trust Agreement (the
"Trust Agreement") of the Frank Russell Investment Company (the "Trust"), a
Massachusetts business trust organized under the laws of the Commonwealth of
Massachusetts. We have also reviewed the By-Laws of the Trust, resolutions
adopted by the Board of Trustees (the "Board") of the Trust organizing the
business of the Trust, all as amended to date, and various pertinent proceedings
we deem material.
The Trust Agreement empowers the Board to designate additional
series or Sub-Trusts of the Trust and to allocate shares to such series. We have
examined Amendment Number 6 to the Trust Agreement establishing the "Equity T
Fund" as a Sub- Trust of the Trust. The Trust is authorized by Amendment Number
6 to issue an unlimited number of shares of beneficial interest of the Equity T
Fund.
We have also examined the registration statement of the Trust
(the "Registration Statement") registering the Trust as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
registering securities of the Trust for offering and sale under the Securities
Act of 1933, as amended (the "1933 Act"), as well as such other items as we deem
<PAGE> 2
Frank Russell Investment Company
April 17, 1996
Page 2
material to this opinion. The Registration Statement registers an indefinite
number of shares of beneficial interest of the Trust pursuant to the provisions
of Rule 24f-2 under the Investment Company Act.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Post-effective Amendment to its Registration
Statement relating to the creation and operation of the Equity T Sub-Trust.
You have advised us that each year hereafter the Trust will
timely file with the Commission a notice pursuant to, and as required by, Rule
24f-2 perfecting the registration of the shares sold by the Trust during each
fiscal year during which its election to register an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust will be
sold in accordance with the Trust's usual method of distributing its registered
shares, under which prospectuses are made available for delivery to offerees and
purchasers of such shares in accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, it is
our opinion that the Trust is a valid and subsisting business trust under the
laws of the Commonwealth of Massachusetts, and that the election to register an
indefinite number of shares of the Trust is proper, and such shares of the Trust
when issued for the consideration set by the Board pursuant to the Trust
Agreement, and subject to compliance with Rule 24f- 2, will be legally
outstanding, fully-paid, and non-assessable shares of beneficial interest, and
the holders of such shares will have all the rights provided for with respect to
such holding by the Trust Agreement. Under the laws of some states the
beneficial shareholders of a trust, under certain circumstances, may be held
personally liable for acts or obligations of the trust. The Declaration of Trust
of this Trust contains an express disclaimer of shareholder liability for acts
or obligations of the Trust, and requires that notice of such disclaimer be
inserted in any contract, order, or instrument made by the Trust.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement of the Trust, covering the registration of the shares
of the Trust under the Securities Act and the applications and registration
statements, and amendments thereto, filed in accordance with the securities laws
of the several states in which shares of the Trust are offered, and we further
consent to reference in the Prospectus of the Trust to
<PAGE> 3
Frank Russell Investment Company
April 17, 1996
Page 3
the fact that this opinion concerning the legality of the issue has been
rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY:/s/ Steven M. Felsenstein
----------------------------------------
Steven M. Felsenstein
SMF/nlk
<PAGE> 1
EXHIBIT 99.11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Frank Russell Investment Company:
We consent to the incorporation by reference in Post-Effective Amendment
No. 32 to the Registration Statement of Frank Russell Investment Company on Form
N-1A of our reports dated February 12, 1996, on our audits of the financial
statements and financial highlights of the Fund (comprised of Equity I Fund,
Equity II Fund, Equity III Fund, Equity Q Fund, International Fund, Emerging
Markets Fund, Fixed Income I Fund, Fixed Income II Fund, Fixed Income III Fund,
Money Market Fund, Diversified Equity Fund, Special Growth Fund, Equity Income
Fund, Quantitative Equity Fund, International Securities Fund, Real Estate
Securities Fund, Diversified Bond Fund, Volatility Constrained Bond Fund,
Multistrategy Bond Fund, Limited Volatility Tax Free Fund, U.S. Government
Money Market Fund and Tax Free Money Market Fund) which reports are included in
the Annual Reports to the shareholders for the year ended December 31, 1995,
which are incorporated by reference in the Registration Statement. We also
consent to the references to our Firm under the captions "Financial Highlights"
and "Additional Information" in the Prospectuses, and "Independent Accountants"
in the Statement of Additional Information.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 29, 1996
<PAGE> 1
EXHIBIT 99.16
SCHEDULE OF COMPUTATIONS
The following illustrates the current yield calculation for the seven day base
periods for the Money Market Funds of Frank Russell Investment Company.
<TABLE>
<CAPTION>
MONEY MARKET FUND
<S> <C>
12/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001118191
Net change in account value ..................................... .001118191
Annualized Current Net Yield
[.001118191 x (365/7)] ..................................... 5.83%
Annualized Effective Net Yield
(365/7)
[(.001118191 + 1) ]-1 ............................... 6.00%
09/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001141036
Net change in account value ..................................... .001141036
Annualized Current Net Yield
[.001141036 x (365/7)] ..................................... 5.95%
Annualized Effective Net Yield
(365/7)
[(.001141036 + 1) ]-1 ............................... 6.13%
06/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001177536
Net change in account value ..................................... .001177536
Annualized Current Net Yield
[.001177536 x (365/7)] ..................................... 6.14%
Annualized Effective Net Yield
(365/7)
[(.001177536 + 1) ]-1 ............................... 6.33%
03/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001187734
Net change in account value ..................................... .001187734
Annualized Current Net Yield
[.001187734 x (365/7)] ..................................... 6.19%
Annualized Effective Net Yield
(365/7)
[(.001187734 + 1) ]-1 ............................... 6.39%
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
U.S.GOVERNMENT MONEY MARKET FUND
<S> <C>
12/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001105584
Net change in account value ..................................... .001105584
Annualized Current Net Yield
[.001105584 x (365/7)] ..................................... 5.76%
Annualized Effective Net Yield
(365/7)
[(.001105584 + 1) ]-1 ............................... 5.93%
09/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001105970
Net change in account value ..................................... .001105970
Annualized Current Net Yield
[.001105970 x (365/7)] ..................................... 5.77%
Annualized Effective Net Yield
(365/7)
[(.001105970 + 1) ]-1 ............................... 5.93%
06/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001147602
Net change in account value ..................................... .001147602
Annualized Current Net Yield
[.001147602 x (365/7)] ..................................... 5.98%
Annualized Effective Net Yield
(365/7)
[(.001147602 + 1) ]-1 ............................... 6.16%
03/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.001112391
Net change in account value ..................................... .001112391
Annualized Current Net Yield
[.001112391 x (365/7)] ..................................... 5.80%
Annualized Effective Net Yield
(365/7)
[(.001112391 + 1) ]-1 ............................... 5.97%
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
TAX FREE MONEY MARKET FUND
<S> <C>
12/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.000785454
Net change in account value ..................................... .000785454
Annualized Current Net 7 Day Yield
[.000785454 x (365/7)] ..................................... 4.10%
Annualized Current 7 Day Tax Equivalent Yield
4.10%/ (1-39.6%) ........................................... 6.78%
Annualized Effective Net 7 Day Yield
(365/7)
[(.000785454 + 1) ]-1 ............................... 4.18%
Annualized Effective 7 Day Tax Equivalent Yield
4.18%/ (1-39.6%) ........................................... 6.92%
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the thirty-day base period** ................. 1.003070515
Net change in account value ..................................... .003070515
Annualized Current Net 30 Day Yield
[.003070515 x (365/30)] .................................... 3.74%
Annualized Current 30 Day Tax Equivalent Yield
3.74%/ (1-39.6%) ........................................... 6.19%
Annualized Effective Net 30 Day Yield
(365/30)
[(.003070515 + 1) ]-1 .............................. 3.80%
Annualized Effective 30 Day Tax Equivalent Yield
3.80%/ (1-39.6%) ........................................... 6.29%
09/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.000712424
Net change in account value ..................................... .000712424
Annualized Current Net 7 Day Yield
[.000712424 x (365/7)] ..................................... 3.71%
Annualized Current 7 Day Tax Equivalent Yield
3.71%/ (1-39.6%) ........................................... 6.15%
Annualized Effective Net 7 Day Yield
(365/7)
[(.000712424 + 1) ]-1 ............................... 3.78%
Annualized Effective 7 Day Tax Equivalent Yield
3.78%/ (1-39.6%) ........................................... 6.26%
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the thirty-day base period** ................. 1.002938027
Net change in account value ..................................... .002938027
Annualized Current Net 30 Day Yield
[.002938027 x (365/30)] .................................... 3.57%
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Annualized Current 30 Day Tax Equivalent Yield
3.57%/ (1-39.6%) ........................................... 5.92%
Annualized Effective Net 30 Day Yield
(365/30)
[(.002938027 + 1) ]-1 .............................. 3.63%
Annualized Effective 30 Day Tax Equivalent Yield
3.63%/ (1-39.6%) ........................................... 6.02%
06/30/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.000754383
Net change in account value ..................................... .000754383
Annualized Current Net 7 Day Yield
[.000754383 x (365/7)] ..................................... 3.93%
Annualized Current 7 Day Tax Equivalent Yield
3.93%/ (1-39.6%) ........................................... 6.51%
Annualized Effective Net 7 Day Yield
(365/7)
[(.000754383 + 1) ]-1 ............................... 4.01%
Annualized Effective 7 DayTax Equivalent Yield
4.01%/ (1-39.6%) ........................................... 6.64%
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the thirty-day base period** ................. 1.00300991
Net change in account value ..................................... .00300991
Annualized Current Net 30 Day Yield
[.00300991 x (365/30)] ..................................... 3.66%
Annualized Current 30 Day Tax Equivalent Yield
3.66%/ (1-39.6%) ........................................... 6.06%
Annualized Effective Net 30 Day Yield
(365/30)
[(.00300991 + 1) ]-1 ............................... 3.72%
Annualized Effective 30 Day Tax Equivalent Yield
3.72%/ (1-39.6%) ........................................... 6.17%
03/31/95
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the seven-day base period** .................. 1.000761357
Net change in account value ..................................... .000761357
Annualized Current Net 7 Day Yield
[.000761357 x (365/7)] ..................................... 3.97%
Annualized Current 7 Day Tax Equivalent Yield
3.97%/ (1-39.6%) ........................................... 6.57%
Annualized Effective Net 7 Day Yield
(365/7)
[(.000761357 + 1) ]-1 ............................... 4.05%
Annualized Effective 7 Day Tax Equivalent Yield
4.05%/ (1-39.6%) ............................................ 6.71%
Value of hypothetical pre-existing account with exactly
one share at the beginning of the base period .............. $1.000000000
Value of the same account (excluding capital changes)
at the end of the thirty-day base period** ................. 1.003151541
Net change in account value ..................................... .003151541
Annualized Current Net 30 Day Yield
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
[.003151541 x (365/30)] .................................... 3.83%
Annualized Current 30 Day Tax Equivalent Yield
3.83%/ (1-39.6%) ........................................... 6.35%
Annualized Effective Net 30 Day Yield
(365/30)
[(.003151541 + 1) ]-1 .............................. 3.90%
Annualized Effective 30 Day Tax Equivalent Yield
3.90%/ (1-39.6%) ........................................... 6.46%
</TABLE>
- -------------------------------
** This value includes the value of additional shares purchased with
dividends from the original share, and the dividends declared on both
the original share and any such additional shares.
<PAGE> 6
SCHEDULE OF CURRENT YIELD COMPUTATION
FOR THE PERIOD ENDED 12/31/95
(NON-MONEY MARKET FUNDS)
The following is the yield calculation based on a 30-day period computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
a_b 6
YIELD = 2[(------ +1) _1]
cd
Where: a = dividends and interest earned during the 30 day period.
b = expenses accrued for the 30 day period (net of
reimbursements).
c = the average daily number of shares outstanding that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
FIXED INCOME I
3,432,263.93 _ 213,298.52 6
YIELD = 2[(-------------------------------- +1) _1] = 6.09%
29,769,950.95 x 21.59
FIXED INCOME II
955,386.04 _ 107,308.75 6
YIELD = 2[(----------------------------------+1) _1] = 5.68%
9,764,870.339 x 18.55
FIXED INCOME III
1,411,159.11 _ 156,362.22 6
YIELD = 2[(----------------------------------+1) _1] = 6.15%
23,990,052.786 x 10.34
DIVERSIFIED BOND
2,775,256.37 _ 247,974.26 6
YIELD = 2[(----------------------------------+1) _1] = 5.96%
21,729,483.032 x 23.69
VOLATILITY CONSTRAINED BOND
1,018,512.75 _ 112,275.14 6
YIELD = 2[(----------------------------------+1) _1] = 5.94%
9,643,553.773 x 19.21
<PAGE> 7
LIMITED VOLATILITY TAX FREE
241,558.44 _ 38,459.74 6
YIELD = 2[(----------------------------------+1) _1] = 3.90%
2,968,201.518 x 21.24
Tax Equivalent Yield = Yield/(1-Tax Rate)
Tax Equivalent Yield = 3.90%/(1-39.6%) = 6.45%
MULTISTRATEGY BOND
1,277,687.26 _ 152,221.15 6
YIELD = 2[(----------------------------------+1) _1] = 6.23%
21,419,237.324 x 10.25
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/95
The following are the average annual total returns for the Frank Russell
Investment Company Funds, computed by finding the average compounded rates of
return over the periods that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EQUITY I FUND
<S> <C> <C>
14.21
14.21 years $1,000 (1 + 15.21) = $7,478
10
10 years $1,000 (1 + 14.49) = $3,870
5
5 years $1,000 (1 + 16.94) = $2,187
1
1 year $1,000 (1 + 35.94) = $1,359
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY II FUND
<S> <C> <C>
14.01
14.01 years $1,000 (1 + 13.68) = $6,027
10
10 years $1,000 (1 + 13.37) = $3,507
5
5 years $1,000 (1 + 18.73) = $2,359
1
1 year $1,000 (1 + 28.67) = $1,287
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY III FUND
<S> <C> <C>
14.09
14.09 years $1,000 (1 +16.67) = $8,779
10
10 years $1,000 (1 +14.23) = $3,783
5
5 years $1,000 (1 +17.81) = $2,269
1
1 year $1,000 (1 +35.96) = $1,360
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY Q FUND
<S> <C> <C>
8.59
8.59 years $1,000 (1 +12.60) = $2,771
5
5 years $1,000 (1 +18.15) = $2,302
1
1 year $1,000 (1 +37.91) = $1,379
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL FUND
<S> <C> <C>
12.92
12.92 years $1,000 (1 +16.67) = $7,330
10
10 years $1,000 (1 +14.47) = $3,863
5
5 years $1,000 (1 +10.99) = $1,684
1
1 year $1,000 (1 +10.71) = $1,107
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
<S> <C> <C>
2.92
2.92 years $1,000 (1 + 7.23) = $1,226
1
1 year $1,000 (1 +-8.21) = $ 918
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
FIXED INCOME I FUND
<S> <C> <C>
14.21
14.21 years $1,000 (1 +12.02) = $5,018
10
10 years $1,000 (1 + 9.60) = $2,501
5
5 years $1,000 (1 + 9.49) = $1,574
1
1 year $1,000 (1 + 18.03) = $1,180
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME II FUND
<S> <C> <C>
14.17
14.17 years $1,000 (1 +9.70) = $3,713
10
10 years $1,000 (1 +7.56) = $2,073
5
5 years $1,000 (1 +6.47) = $1,368
1
1 year $1,000 (1 +9.95) = $1,100
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME III FUND
<S> <C> <C>
2.92
2.92 years $1,000 (1 + 7.94) = $1,250
1
1 year $1,000 (1 +17.99) = $1,180
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED EQUITY FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 +15.06) = $4,253
10
10 years $1,000 (1 +13.76) = $3,630
5
5 years $1,000 (1 +16.22) = $2,120
1
1 year $1,000 (1 +35.17) = $1,352
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SPECIAL GROWTH
<S> <C> <C>
10.32
10.32 years $1,000 (1 +13.69) = $3,759
10
10 years $1,000 (1 +12.34) = $3,201
5
5 years $1,000 (1 +18.13) = $2,300
1
1 year $1,000 (1 +28.52) = $1,285
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 +13.79) = $3,793
10
10 years $1,000 (1 +12.93) = $3,374
5
5 years $1,000 (1 +16.91) = $2,184
1
1 year $1,000 (1 +34.76) = $1,348
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY FUND
<S> <C> <C>
8.63
8.63 years $1,000 (1 +12.55) = $2,774
5
5 years $1,000 (1 +17.31) = $2,222
1
1 year $1,000 (1 +37.69) = $1,377
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 +14.36) = $3,994
10
10 years $1,000 (1 +13.33) = $3,495
5
5 years $1,000 (1 + 9.95) = $1,607
1
1 year $1,000 (1 +10.20) = $1,102
--------------------------------------------
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND
<S> <C> <C>
6.43
6.43 years $1,000 (1 +10.13) = $1,860
5
5 years $1,000 (1 +17.55) = $2,244
1
1 year $1,000 (1 +10.87) = $1,109
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BOND FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 + 9.37) = $2,520
10
10 years $1,000 (1 + 8.90) = $2,346
5
5 years $1,000 (1 + 9.01) = $1,539
1
1 year $1,000 (1 +17.76) = $1,178
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY CONSTRAINED BOND FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 +7.10) = $2,030
10
10 years $1,000 (1 +7.04) = $1,975
5
5 years $1,000 (1 +6.06) = $1,342
1
1 year $1,000 (1 +9.89) = $1,099
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MULTISTRATEGY BOND FUND
<S> <C> <C>
2.92
2.92 years $1,000 (1 + 7.24) = $1,226
1
1 year $1,000 (1 +17.92) = $1,179
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIMITED VOLATILITY TAX FREE FUND
<S> <C> <C>
10.32
10.32 years $1,000 (1 +5.78) = $1,786
10
10 years $1,000 (1 +5.74) = $1,747
5
5 years $1,000 (1 +5.42) = $1,302
1
1 year $1,000 (1 +7.81) = $1,078
--------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 1
<NAME> EQUITY I FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 266357
<INVESTMENTS-AT-VALUE> 288819
<RECEIVABLES> 4500
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<PAID-IN-CAPITAL-COMMON> 270967
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<PAID-IN-CAPITAL-COMMON> 186932
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<OVERDISTRIBUTION-NII> 226
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 7919
<ACCUM-APPREC-OR-DEPREC> (6114)
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<EXPENSES-NET> 2540
<NET-INVESTMENT-INCOME> 1277
<REALIZED-GAINS-CURRENT> (7310)
<APPREC-INCREASE-CURRENT> (5133)
<NET-CHANGE-FROM-OPS> (11166)
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<DISTRIBUTIONS-OF-INCOME> 687
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<NUMBER-OF-SHARES-SOLD> 8377
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<SHARES-REINVESTED> 90
<NET-CHANGE-IN-ASSETS> 57656
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<OVERDISTRIB-NII-PRIOR> 903
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<GROSS-ADVISORY-FEES> 1381
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<GROSS-EXPENSE> 2602
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<PER-SHARE-NAV-BEGIN> 12.25
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<PER-SHARE-NAV-END> 11.16
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<MULTIPLIER> 1000
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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<INVESTMENTS-AT-COST> 224552
<INVESTMENTS-AT-VALUE> 229287
<RECEIVABLES> 4384
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<TOTAL-ASSETS> 240844
<PAYABLE-FOR-SECURITIES> 14996
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7083
<TOTAL-LIABILITIES> 22079
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 214352
<SHARES-COMMON-STOCK> 21348
<SHARES-COMMON-PRIOR> 18622
<ACCUMULATED-NII-CURRENT> 14
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (614)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5013
<NET-ASSETS> 218765
<DIVIDEND-INCOME> 2133
<INTEREST-INCOME> 12446
<OTHER-INCOME> 0
<EXPENSES-NET> 1662
<NET-INVESTMENT-INCOME> 12917
<REALIZED-GAINS-CURRENT> 5322
<APPREC-INCREASE-CURRENT> 13815
<NET-CHANGE-FROM-OPS> 32054
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13105
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9709
<NUMBER-OF-SHARES-REDEEMED> 8042
<SHARES-REINVESTED> 1058
<NET-CHANGE-IN-ASSETS> 26781
<ACCUMULATED-NII-PRIOR> 96
<ACCUMULATED-GAINS-PRIOR> (5932)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1271
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1746
<AVERAGE-NET-ASSETS> 195545
<PER-SHARE-NAV-BEGIN> 9.29
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> .97
<PER-SHARE-DIVIDEND> .66
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 10.25
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
N-30D Table of Contents
Frank Russell Investment Company Fund Name N-30D Page
- ------------------------------------------ ----------
External Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Equity I. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Equity II . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Equity III. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Equity Q. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
International . . . . . . . . . . . . . . . . . . . . . . . . 55
Fixed Income I. . . . . . . . . . . . . . . . . . . . . . . . 76
Fixed Income II . . . . . . . . . . . . . . . . . . . . . . . 91
Fixed Income III. . . . . . . . . . . . . . . . . . . . . . . 100
Money Market. . . . . . . . . . . . . . . . . . . . . . . . . 112
Notes to Financial Statements . . . . . . . . . . . . . . . . 118
Additional Information . . . . . . . . . . . . . . . . . . . 128
Manager and Money Managers . . . . . . . . . . . . . . . . . 129
Internal Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Diversified Equity. . . . . . . . . . . . . . . . . . . . . . 133
Special Growth. . . . . . . . . . . . . . . . . . . . . . . . 145
Equity Income . . . . . . . . . . . . . . . . . . . . . . . . 162
Quantitative Equity . . . . . . . . . . . . . . . . . . . . . 171
International Securities. . . . . . . . . . . . . . . . . . . 183
Diversified Bond. . . . . . . . . . . . . . . . . . . . . . . 203
Volatility Constrained Bond . . . . . . . . . . . . . . . . . 218
Multistrategy Bond. . . . . . . . . . . . . . . . . . . . . . 227
Notes to Financial Statements . . . . . . . . . . . . . . . . 239
Additional Information . . . . . . . . . . . . . . . . . . . 248
Manager and Money Managers . . . . . . . . . . . . . . . . . 249
Specialty Funds . . . . . . . . . . . . . . . . . . . . . . . . . 250
Real Estate Securities. . . . . . . . . . . . . . . . . . . . 253
Emerging Markets. . . . . . . . . . . . . . . . . . . . . . . 260
Limited Volatility Tax Free . . . . . . . . . . . . . . . . . 273
US Government Money Market. . . . . . . . . . . . . . . . . . 284
Tax Free Money Market . . . . . . . . . . . . . . . . . . . . 290
Notes to Financial Statements . . . . . . . . . . . . . . . . 300
Additional Information . . . . . . . . . . . . . . . . . . . 306
Manager and Money Managers . . . . . . . . . . . . . . . . . 307
<PAGE> 2
FRANK RUSSELL INVESTMENT COMPANY
Frank Russell Investment Company is a "series mutual fund" with 22 different
investment portfolios. These financial statements report on nine Funds, each
of which has distinct investment objectives and strategies.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
Responsible for overall management and administration of the Funds.
FRANK RUSSELL COMPANY
Consultant to Frank Russell Investment Management Company.
<PAGE> 3
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . 2
EQUITY I FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 3
EQUITY II FUND. . . . . . . . . . . . . . . . . . . . . . . . . . 15
EQUITY III FUND . . . . . . . . . . . . . . . . . . . . . . . . . 33
EQUITY Q FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 43
INTERNATIONAL FUND. . . . . . . . . . . . . . . . . . . . . . . . 55
FIXED INCOME I FUND . . . . . . . . . . . . . . . . . . . . . . . 77
FIXED INCOME II FUND. . . . . . . . . . . . . . . . . . . . . . . 93
FIXED INCOME III FUND . . . . . . . . . . . . . . . . . . . . . . 103
MONEY MARKET FUND . . . . . . . . . . . . . . . . . . . . . . . . 115
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 121
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 131
MANAGER AND MONEY MANAGERS. . . . . . . . . . . . . . . . . . . . 132
FRANK RUSSELL INVESTMENT COMPANY - EXTERNAL FEE FUNDS
Copyright-C- Frank Russell Company 1996. All rights reserved. This material
is proprietary and may not be reproduced, transferred, or distributed in any
form without prior written permission from Frank Russell Company. It is
delivered on an "as is" basis without warranty. The Russell logo is a
trademark and service mark of Frank Russell Company. Frank Russell Company
and Standard & Poor's Corporation are the owners of the trademarks, service
marks, and copyrights related to their respective indexes. This material must
be accompanied or preceded by a current Frank Russell Investment Company
Prospectus containing complete information concerning the investment
objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance as of April 1, 1995 is reported gross of investment advisory
fees. For periods thereafter, performance and yields are reported net of
investment advisory fees but gross of investment services fees, descriptions
of which can be obtained from the investment advisor. Investment services
fees and other account expenses will reduce performance (e.g. an investment
services fee of 0.2% of average managed assets will reduce a 10.0% annual
return to 9.8%). The performance quoted represents past performance and,
except for a money market fund, the investment return and principal value of
an investment will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost. An investment in a money market fund is
neither insured nor guaranteed by the US government. There can be no assurance
that a money market fund will be able to maintain a stable net asset value of
$1.00 per share. Investments in securities of non-US issuers and foreign
currencies involve investment risks different than those of US issuers; the
Prospectus contains further information and details regarding these risks.
Russell Fund Distributors, Inc., is the distributor of Frank Russell Investment
Company.
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Equity I, Equity II, Equity III, Equity
Q, International Fixed Income I, Fixed Income II, Fixed Income III and Money
Market (the "Funds")), as of December 31, 1995, and the related statements
of operations, the statements of changes in net assets and the financial
highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
the Funds enumerated above as of December 31, 1995, the results of their
operations, the changes in their net assets and the financial highlights for
each of the periods indicated therein in conformity with generally accepted
accounting principles.
Boston, Massachusetts
February 12, 1996
/s/ Coopers & Lybrand LLP
<PAGE> 5
EQUITY I FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- --------
<S> <C> <C>
COMMON STOCKS - 93.7%
BASIC INDUSTRIES - 6.6%
Air Products & Chemicals, Inc. 13,200 $ 696
Alco Standard Corp. 15,500 707
Allegheny Ludlum Corp. 16,200 300
Aluminum Co. of America 97,500 5,155
Bethlehem Steel Corp. (a) 50,700 710
Cyprus Amax Minerals Co. 18,800 491
De Beers Consolidated Mines, Ltd. - ADR 12,100 363
Dow Chemical Co. 50,400 3,547
Engelhard Corp. 11,750 256
Ethyl Corp. 29,900 374
Ferro Corp. 13,300 309
Fuller (H.B.) Co. 8,800 306
Goodrich (B.F.) Co. 36,500 2,487
Grace (W.R.) & Co. 20,600 1,218
Great Lakes Chemical Corp. 63,400 4,565
Illinois Tool Works, Inc. 13,000 767
IMC Global, Inc. 53,600 2,191
International Paper Co. 28,400 1,076
International Specialty Products (a) 53,000 576
J & L Specialty Steel, Inc. 20,300 381
James River Corp. of Virginia 26,000 627
Kimberly-Clark Corp. 71,682 5,932
Lawter International, Inc. 27,000 314
Loctite Corp. 3,400 162
Lone Star Technologies, Inc. (a) 60,000 660
Lukens, Inc. 10,100 290
Minnesota Mining & Manufacturing Co. 41,500 2,749
Monsanto Co. 18,000 2,205
NCH Corp. 5,900 341
P.H. Glatfelter Co. 16,000 274
Phelps Dodge Corp. 5,600 349
Potlatch Corp. 10,000 400
PPG Industries, Inc. 7,700 352
Praxair, Inc. 46,000 1,547
Precision Castparts Corp. 36,600 1,455
Reynolds Metals Co. 18,200 1,031
Rhone Poulenc SA - ADR 22,191 474
Rio Algom, Ltd. 16,900 308
Sequa Corp. (a) 31,100 949
Sonoco Products Co. 13,600 357
Union Carbide Corp. 24,200 907
Wellman, Inc. 15,600 354
Willamette Industries, Inc. 10,300 576
Witco Chemical Corp. 11,300 330
--------
49,418
--------
CAPITAL GOODS - 3.9%
Alcatel Alsthom Compagnie
Generale d'Electricite - ADR 55,100 964
Ball Corp. 6,300 173
Boston Scientific Corp. (a) 24,300 1,191
Briggs & Stratton Corp. 10,000 434
CBI Industries, Inc. 38,000 1,249
Cooper Industries, Inc. 22,077 811
Crane Co. 9,100 336
Culligan Water Technologies, Inc. 9,200 223
Cummins Engine Co., Inc. 32,900 1,217
Dover Corp. 8,900 328
Duracell International, Inc. 22,900 1,185
Emerson Electric Co. 4,700 384
Gardner Denver Machinery, Inc. (a) 2,728 50
General Electric Co. 68,300 4,918
General Signal Corp. 7,700 249
Giant Cement Holding, Inc. (a) 32,900 378
Giddings & Lewis, Inc. 30,000 488
Goulds Pumps, Inc. 15,000 373
Grainger (W.W.), Inc. 5,850 388
Harnischfeger Industries, Inc. 12,500 416
Harsco Corp. 6,200 360
Hubbell, Inc. Class B 6,370 419
ITT Industries, Inc. 25,400 610
Johnson Controls, Inc. 18,300 1,258
Kaydon Corp. 11,700 355
Magna International, Inc. Class A 29,700 1,285
National Service Industries, Inc. 11,300 366
SPS Technologies, Inc. (a) 31,700 1,692
Technip SA - ADR (a) 26,400 901
Tecumseh Products Co. Class A 17,300 895
Timken Co. 7,300 279
Varity Corp. (a) 17,900 665
Waste Management International
PLC - ADR (a) 25,000 269
Westinghouse Electric Corp. 46,600 769
WMX Technologies, Inc. 43,300 1,294
Wyman-Gordon Co. (a) 67,300 917
York International Corp. 15,000 705
Zurn Industries, Inc. 16,000 341
--------
29,135
--------
CONSUMER BASICS - 19.6%
Abbott Laboratories NPV 54,000 2,255
Allergan, Inc. 8,000 260
American Brands, Inc. 53,000 2,365
</TABLE>
Equity I Fund 3
<PAGE> 6
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- --------
<S> <C> <C>
American Home Products Corp. 17,000 $ 1,649
American Stores Co. 97,500 2,608
Amgen, Inc. 52,700 3,122
Archer-Daniels-Midland Co. 200,745 3,613
Bard (C.R.), Inc. 11,100 358
Bausch & Lomb, Inc. 13,300 527
Bergen Brunswig Corp. Class A 18,800 468
Black & Decker Corp. 13,600 479
Bristol-Myers Squibb Co. 27,500 2,362
Cadbury Schweppes - ADR 11,600 386
Campbell Soup Co. 7,600 456
Carter-Wallace, Inc. 31,500 358
Chiquita Brands International, Inc. 65,700 903
Church and Dwight Co., Inc. 13,400 248
Clorox Co. 37,900 2,715
Coca-Cola Co. (The) 52,000 3,861
Columbia/HCA Healthcare Corp. 155,300 7,881
Community Psychiatric Centers 26,100 320
ConAgra, Inc. 45,500 1,877
Corning, Inc. 35,000 1,120
CPC International, Inc. 22,900 1,572
Dean Foods Co. 11,800 325
Dial Corp. (The) 47,000 1,392
Dimon, Inc. 40,700 717
Fleming Cos., Inc. 95,000 1,959
Forest Labs, Inc. (a) 9,500 430
Giant Food, Inc. Class A 11,500 362
Gillette Co. 59,400 3,096
Glaxo Holdings PLC - ADR 14,750 417
HealthCare COMPARE (a) 5,100 222
Hillenbrand Industries, Inc. 10,200 346
Hormel (George A.) & Co. 12,900 318
IBP, Inc. 22,600 1,141
International Dairy Queen, Inc. Class A (a) 17,200 391
Interstate Bakeries Corp. 45,000 1,007
Johnson & Johnson 110,300 9,444
Kroger Co. (a) 76,900 2,884
Lance, Inc. 16,600 270
Lilly (Eli) & Co. 85,400 4,804
Lincare Holdings, Inc. (a) 13,200 327
McKesson Corp. New 17,000 861
Medtronic, Inc. 32,100 1,794
Merck & Co., Inc. 139,500 9,172
Mylan Laboratories, Inc. 108,000 2,538
PacifiCare Health Systems, Inc., Class A (a) 6,600 568
PepsiCo, Inc. 208,700 11,661
Pfizer, Inc. 61,400 3,868
Pharmacia & Upjohn, Inc. (a) 88,300 3,422
Philip Morris Cos., Inc. 184,400 16,688
Procter & Gamble Co. 35,200 2,922
Quaker Oats Co. 10,800 373
Rhone Poulenc Rorer, Inc. 8,000 426
RJR Nabisco Holdings Corp. New 13,720 424
Sara Lee Corp. 47,600 1,517
Schering-Plough Corp. 102,100 5,590
Schweitzer-Mauduit International, Inc. 39,500 913
SmithKline Beecham PLC - ADR 51,500 2,858
St. Jude Medical, Inc. 9,600 410
Standard Commercial Corp. 19,998 197
Stanley Works 8,500 438
Tambrands, Inc. 3,600 172
U.S. Bioscience, Inc. (a) 1,126 5
U.S. Healthcare, Inc. 9,950 461
U.S. Surgical Corp. 12,700 271
Unilever NV 6,300 887
United Healthcare Corp. 62,000 4,061
Universal Corp. 31,400 765
UST Corp. 11,100 370
Warner-Lambert Co. 16,200 1,573
Weis Markets, Inc. 11,700 331
Wellpoint Health Networks, Inc. Class A (a) 12,500 402
--------
147,553
--------
CONSUMER DURABLES - 2.2%
Bandag, Inc. 5,400 292
Bassett Furniture Industries, Inc. 11,900 271
Carlisle Cos., Inc. 8,500 343
Donaldson Co., Inc. 12,700 319
Echlin, Inc. 16,700 610
Federal Signal Corp. 15,300 396
Fleetwood Enterprises, Inc. 15,700 404
Ford Motor Co. 123,272 3,575
General Motors Corp. 66,200 3,500
Genuine Parts Co. 8,400 344
Leggett & Platt, Inc. 14,900 361
PACCAR, Inc. 20,200 848
Polaris Industries, Inc. 12,300 361
Strattec Security Corp. 4,700 81
Tomkins PLC - ADR 22,100 395
UNC, Inc. (a) 122,800 738
Whirlpool Corp. 62,800 3,345
--------
16,183
--------
</TABLE>
Equity I Fund 4
<PAGE> 7
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- --------
<S> <C> <C>
CONSUMER NON-DURABLES - 5.2%
Angelica Corp. 11,700 $ 240
Anheuser-Busch Cos., Inc. 25,000 1,672
Blair Corp. 7,800 247
Dayton Hudson Corp. 15,100 1,133
Federated Department Stores, Inc. (a) 106,100 2,918
Gap, Inc. 64,000 2,688
Handleman Co. 31,400 181
Hills Stores Co. New (a) 27,926 276
Jostens, Inc. 15,700 381
K mart Corp. 50,000 363
Kohl's Corp. (a) 4,100 215
Liz Claiborne, Inc. 15,600 433
Lowe's Cos., Inc. 26,600 891
Mattel, Inc. 54,275 1,669
May Department Stores Co. 40,900 1,728
Newell Co. 14,300 370
NIKE, Inc. Class B 8,000 557
Nine West Group, Inc. (a) 25,800 968
Office Depot, Inc. (a) 36,400 719
Penney (J.C.) Co., Inc. 47,000 2,238
Petrie Stores Corp. 14,700 40
Phar-Mor, Inc. New 121,500 957
Polaroid Corp. 15,000 711
Price Costco, Inc. (a) 41,500 633
Rayonier, Inc. 36,000 1,202
Reebok International, Ltd. 16,800 475
Rite Aid Corp. 56,800 1,945
Sears Roebuck & Co. 69,000 2,691
Semi-Tech Corp. Class A 40,000 260
Shaw Industries, Inc. 155,000 2,286
Stride Rite Corp. 36,500 274
SuperValu, Inc. 58,800 1,852
Toys ""R'' Us, Inc. (a) 112,800 2,452
Wal-Mart Stores, Inc. 148,300 3,317
Warnaco Group, Inc. Class A 8,200 204
--------
39,186
--------
CONSUMER SERVICES - 4.3%
AAR Corp. 29,100 640
America West Airlines, Inc. Class B (a) 20,000 340
AMR Corp. (a) 13,600 1,010
Brinker International, Inc. (a) 76,000 1,150
British Airways PLC - ADS 19,000 1,382
Carnival Corp. Class A 82,200 2,004
Delta Air Lines, Inc. 24,100 1,780
Disney (Walt) Co. 106,900 6,307
Harrah's Entertainment, Inc. 8,700 211
ITT Corp. New 64,400 3,413
King World Productions, Inc. (a) 9,100 354
KLM Royal Dutch Airlines 37,429 1,319
McDonald's Corp. 140,500 6,340
Mirage Resorts, Inc. (a) 39,800 1,373
Northwest Airlines Corp. Class A (a) 25,000 1,272
Patriot American Hospitality, Inc. 4,500 116
Royal Caribbean Cruises, Ltd. 12,600 277
UAL Corp. (a) 16,900 3,017
--------
32,305
--------
ENERGY - 7.9%
Amerada Hess Corp. NPV 31,600 1,675
Amoco Corp. 93,000 6,684
Apache Corp. 63,600 1,876
Ashland, Inc. 22,000 773
Atlantic Richfield Co. 11,500 1,274
British Petroleum Co. PLC - ADR 39,101 3,993
Burlington Resources, Inc. 38,500 1,511
Chevron Corp. 43,300 2,273
Diamond Shamrock, Inc. 17,800 461
Enron Oil & Gas Co. 9,800 235
Exxon Corp. 63,200 5,064
Halliburton Co. 7,500 380
Imperial Oil, Ltd. New 9,000 325
Kerr-McGee Corp. 15,200 965
Mesa, Inc. (a) 188,000 705
Mobil Corp. 36,150 4,049
Noble Drilling Corp. (a) 100,000 888
NorAm Energy Corp. 46,100 409
Oryx Energy Co. (a) 61,800 827
Petroleum Heat & Power, Inc. Class A 120,100 931
Questar Corp. 19,500 653
Reading & Bates Corp. New (a) 47,400 711
Renaissance Energy, Ltd. 32,900 819
Rowan Cos., Inc. (a) 13,300 131
Royal Dutch Petroleum Co. - ADR 29,800 4,206
Schlumberger, Ltd. 49,800 3,449
Seagull Energy Corp. (a) 58,000 1,291
Sun Company 3,901 107
Sun Energy Partners, L.P. 47,600 179
Tenneco, Inc. 54,700 2,714
Texaco, Inc. 30,100 2,363
Tosco Corp. New 45,000 1,716
Total Co. SA - ADR 67,698 2,302
</TABLE>
Equity I Fund 5
<PAGE> 8
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- --------
<S> <C> <C>
Transocean AS 13,100 $ 226
Ultramar Corp. 17,800 458
Unocal Corp. 25,000 728
USX-Marathon Group 82,000 1,599
Washington Energy Co. 11,000 204
YPF Sociedad Anonima Class D - ADR 25,000 540
--------
59,694
--------
FINANCE - 16.1%
ACE, Ltd. 23,100 918
Aetna Life & Casualty Co. 27,100 1,877
Allstate Corp. 24,566 1,010
American Express Co. 33,600 1,390
American Financial Group, Inc. 35,200 1,078
American General Corp. 58,900 2,054
American International Group, Inc. 94,425 8,734
Banc One Corp. 21,600 815
Bank of Boston Corp. 42,400 1,961
Bank of New York Co., Inc. 70,400 3,432
BankAmerica Corp. 55,500 3,594
Barnett Banks, Inc. 20,400 1,204
Borg-Warner Security Corp. (a) 36,000 450
Chase Manhattan Corp. 17,300 1,049
Chemical Banking Corp. 129,100 7,585
Chubb Corp. (The) 55,800 5,399
CIGNA Corp. 55,450 5,725
Citicorp 45,100 3,033
Coast Savings Financial, Inc. (a) 42,900 1,485
CoreStates Financial Corp. 49,000 1,856
Countrywide Credit Industries, Inc. 94,200 2,049
Danielson Holding Corp. (a) 66,400 457
Dean Witter, Discover & Co. 55,945 2,629
Equifax, Inc. 20,000 428
Equitable of Iowa Cos. 9,600 308
Federal Home Loan Mortgage Corp. 46,200 3,858
Federal National Mortgage Association 64,700 8,031
First Bank System, Inc. 24,800 1,231
First Chicago NBD Corp. 45,127 1,783
First Interstate Bancorp 6,700 915
Fleet Financial Group, Inc. 15,500 632
General Re Corp. 24,700 3,829
Golden West Financial Corp. 24,200 1,337
Green Tree Financial Corp. 11,200 295
Home Beneficial Corp. Class B 15,500 364
Horace Mann Educators Corp. 12,800 400
ITT Hartford Group, Inc. 25,400 1,229
KeyCorp 7,200 261
Lehman Brothers Holdings, Inc. 44,000 935
Loews Corp. 5,400 423
Long Island Bancorp, Inc. 17,600 464
Marsh & McLennan Cos., Inc. 26,300 2,334
MBNA Corp. 76,800 2,832
Merrill Lynch & Co., Inc. 60,400 3,080
Morgan Stanley Group, Inc. 9,200 742
NationsBank Corp. 40,900 2,848
Norwest Corp. 141,300 4,663
Old Republic International Corp. 22,600 802
Paul Revere Corp. 40,000 830
Pohjola Series B 70,000 901
Provident Life & Accident Insurance Co.
Class B 14,100 409
Raymond James Financial, Inc. 16,800 355
Reliastar Financial Corp. 18,900 839
Southern National Corp. 46,200 1,213
St. Paul Cos., Inc. 25,800 1,435
State Street Boston Corp. 56,500 2,543
Sumitomo Bank of California 17,900 439
SunAmerica, Inc. 9,450 449
SunTrust Banks, Inc. 35,000 2,398
Torchmark Corp. 48,000 2,172
Transatlantic Holdings, Inc. 5,000 367
Travelers, Inc. 12,500 786
Unitrin, Inc. 3,300 155
UNUM Corp. 22,300 1,226
USF & G Corp. 15,700 264
Value Line, Inc. 7,860 288
Wells Fargo & Co. 2,100 453
--------
121,330
--------
GENERAL BUSINESS - 5.2%
Automatic Data Processing, Inc. 83,200 6,178
Block (H&R) Co., Inc. 8,100 328
Capital Cities/ABC, Inc. 15,700 1,937
Cascade Communications Corp. 12,100 1,029
CCH, Inc. Class A 18,100 1,000
Comdisco, Inc. 15,150 343
Computer Sciences Corp. (a) 24,900 1,749
Comsat Corp. Series 1 30,000 559
Cox Communications, Inc. Class A (a) 41,600 811
Deluxe Corp. 20,100 583
Donnelley (R.R.) & Sons Co. 28,500 1,122
Dow Jones & Co., Inc. 9,100 363
</TABLE>
Equity I Fund 6
<PAGE> 9
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- -------
<S> <C> <C>
Dun & Bradstreet Corp. 6,400 $ 414
Figgie International Holdings, Inc.
Class A (a) 55,700 578
First Data Corp. 36,966 2,472
Gannett Co., Inc. 6,000 368
General Motors Corp. Class E 82,100 4,269
Harland (John H.) Co. 16,000 334
Ideon Group, Inc. 81,200 822
Knight-Ridder, Inc. 6,400 400
Lee Enterprises, Inc. 17,200 396
McClatchy Newspapers, Inc. Class A 2,500 57
McGraw-Hill, Inc. 3,200 279
Miller (Herman), Inc. 12,600 378
Moore Corp., Ltd. 15,200 283
New England Business Service, Inc. 17,500 383
New York Times Co. Class A 31,400 930
Ogden Corp. 26,100 558
Pinkerton's, Inc. New (a) 20,200 394
Portugal Telecom SA - ADR (a) 19,100 363
Reuters Holdings PLC Class B - ADR 16,100 890
Service Corp. International 19,700 867
Standard Register Co. 16,400 330
Tele-Communications, Inc. Class A 126,900 2,522
Tele-Communications, Inc.
Series A New (a) 54,375 1,455
Tribune Co. 11,800 721
True North Communications, Inc. 16,600 307
Viacom, Inc. Class B (a) 36,300 1,720
Washington Post Co. Class B 1,200 337
-------
38,829
-------
MISCELLANEOUS - 0.6%
American Real Estate Partners, L.P. 96,242 818
Canadian Pacific, Ltd. 57,000 1,033
Catellus Development Corp. (a) 80,000 480
Koger Equity, Inc. (a) 30,800 327
Newhall Land & Farming Co. 56,000 952
Providian Corp. 9,100 371
Tucker Properties Corp. 47,700 418
-------
4,399
-------
SHELTER - 0.5%
Essex Property Trust 22,000 424
Lafarge Coppee 15,500 291
Louisiana Pacific Corp. 13,700 332
Rayonier Timberlands, L.P. Class A 9,900 265
St. Lawrence Cement Inc. Class A 87,000 462
Standard Pacific Corp. New 22,000 138
Vulcan Materials Co. 6,100 351
Weyerhaeuser Co. 32,200 1,392
-------
3,655
-------
TECHNOLOGY - 11.6%
3Com Corp. 29,600 1,380
Advanced Micro Devices, Inc. 48,800 805
AMP, Inc. 34,600 1,328
Applied Materials, Inc. 107,300 4,212
BE Aerospace, Inc. (a) 105,000 1,116
Boeing Co. 63,200 4,953
CAE, Inc. 115,300 876
Cisco Systems, Inc. (a) 117,300 8,754
COMPAQ Computer Corp. (a) 60,400 2,899
Computer Associates International, Inc. 31,100 1,769
Cray Research, Inc. (a) 13,800 342
Curtiss-Wright Corp. 15,400 828
Diebold, Inc. 7,500 415
Digital Equipment Corp. (a) 8,400 539
EG&G, Inc. 21,700 526
Electronic Arts (a) 31,100 812
Ericsson (LM) Telephone Co.
Class B - ADR 110,570 2,142
FTP Software, Inc. (a) 24,300 705
General Motors Corp. Class H 42,800 2,103
Hewlett-Packard Co. 113,100 9,472
Honeywell, Inc. 17,800 866
Informix Corp. 39,600 1,188
Intel Corp. 182,000 10,329
Intelligent Electronics, Inc. 19,300 116
Intergraph Corp. (a) 28,200 444
International Business Machines Corp. 57,300 5,257
KLA Instruments Corp. 15,400 400
Lockheed Martin Corp. 34,200 2,702
LSI Logic Corp. 21,800 714
McDonnell Douglas Corp. 3,100 285
Micron Technology, Inc. 29,200 1,157
Microsoft Corp. (a) 45,100 3,958
Molex, Inc. Class A 7,200 220
Motorola, Inc. 30,700 1,750
Northrop Grumman Corp. 29,700 1,901
Oracle Systems Corp. 80,600 3,405
Pitney Bowes, Inc. 3,300 155
</TABLE>
Equity I Fund 7
<PAGE> 10
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- -------
<S> <C> <C>
Raytheon Co. 18,800 $ 888
Seagate Technology (a) 28,500 1,354
Stratus Computer, Inc. (a) 9,800 339
Tandy Corp. 6,300 261
Thiokol Corp. 10,500 356
Thomson-CSF - ADR 15,500 349
TRW, Inc. 8,700 674
U.S. Robotics Corp. 2,100 184
United Technologies Corp. 13,800 1,309
Varian Associates, Inc. 6,100 290
-------
86,827
-------
TRANSPORTATION - 1.6%
Alexander & Baldwin, Inc. 13,500 311
American President Cos., Ltd. 14,600 336
BT Shipping, Ltd. - ADR (a) 201,600 680
Canadian National Railway Co. 5,000 75
Conrail, Inc. 28,200 1,974
CSX Corp. 38,600 1,761
Federal Express Corp. 8,400 621
GATX Corp. 11,200 545
Johnstown America Industries, Inc. (a) 57,500 266
Nordic American Tanker Shipping, Ltd.
1997 Warrants (a) 36,200 127
Norfolk Southern Corp. 36,000 2,858
OMI Corp. (a) 40,000 260
Overseas Shipholding Group, Inc. 45,000 855
Roadway Services, Inc. 5,700 279
Teekay Shipping Corp. 10,200 240
Trans World Airlines, Inc. New (a) 71,900 745
XTRA Corp. 3,800 161
Yellow Corp. 17,900 221
-------
12,315
-------
UTILITIES - 8.4%
Airtouch Communications, Inc. (a) 109,000 3,079
AT&T Corp. 168,950 10,940
BCE, Inc. 38,400 1,325
BellSouth Corp. 34,000 1,479
British Telecommunications PLC - ADR 5,600 316
Central Maine Power Co. 44,200 635
Coastal Corp. 7,400 276
Detroit Edison Co. 24,500 845
Dominion Resources, Inc. 30,100 1,242
Empresa Nacional de Electricidad
SA - ADR 6,500 372
Enron Corp. 43,000 1,639
ENSERCH Corp. 32,000 520
FPL Group, Inc. 20,500 951
General Public Utilities Corp. 84,800 2,883
GTE Corp. 87,600 3,854
KU Energy Corp. 12,700 381
Lincoln Telecommunications Co. 10,100 213
MCI Communications Corp. 186,200 4,864
New England Electric System 3,000 119
Niagara Mohawk Power Corp. 219,700 2,115
NIPSCO Industries, Inc. 26,600 1,017
Northeast Utilities 54,500 1,328
NYNEX Corp. 43,600 2,354
Pacific Gas & Electric Co. 71,000 2,015
Pacific Telesis Group 78,443 2,638
SCE Corp. 127,300 2,260
Southern New England
Telecommunications Corp. 17,400 692
Sprint Corp. 73,300 2,923
Talisman Energy, Inc. 31,800 643
Telefonica de Espana SA - ADR 54,000 2,261
Telefonos de Mexico SA Series L - ADR 70,000 2,231
Texas Utilities Co. 45,000 1,851
Unicom Corp. 60,800 1,991
WorldCom, Inc. (a) 20,000 705
-------
62,957
-------
TOTAL COMMON STOCKS
(cost $588,221) 703,786
-------
CONVERTIBLE PREFERRED STOCK - 0.4%
Boise Cascade Corp. Series G 20,000 573
Continental Airlines Finance Trust 9,300 495
Elsag Bailey Financing Trust 15,200 762
Glendale Federal Bank Series E 22,100 1,000
Sun, Inc. Series A 8,699 241
-------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $2,799) 3,071
-------
PREFERRED STOCKS - 0.3%
Nokia Corp. - ADR 65,800 2,558
-------
TOTAL PREFERRED STOCKS
(cost $3,203) 2,558
-------
</TABLE>
8 Equity I Fund
<PAGE> 11
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.9%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 37,001 $ 37,001
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $37,001) 37,001
--------
TOTAL INVESTMENTS
(identified cost $631,224)(c) - 99.3% 746,416
OTHER ASSETS AND LIABILITIES,
NET - 0.7% 5,081
--------
NET ASSETS - 100.0% $751,497
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was $637,977
and net unrealized appreciation for all securities was $108,439. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $127,731 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $19,292.
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- ------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 119 $ (304)
-----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (Section) $ (304)
-----------
-----------
</TABLE>
(Section) At December 31, 1995, United States Treasury Notes, due 12/31/95,
valued at $4,250 were held as collateral by the custodian in
connection with futures contracts purchased by the Fund. The
settlement amount of these matured notes is included in Receivable for
Investments Sold on the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
Equity I Fund 9
<PAGE> 12
EQUITY I FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $631,223,828)(Note 2) . . . . . . . . . . . . . . . . $746,416,336
Foreign currency holdings (identified cost $3,421) . . . . . . . . . . . . . . . . . . . . . 3,421
Foreign currency exchange spot contracts (cost $223,196)(Notes 2 and 6). . . . . . . . . . . 223,642
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,788,697
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,473,015
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,283,269
Daily variation margin on futures contracts (Notes 2 and 3). . . . . . . . . . . . . . . . 46,247
------------
760,234,627
LIABILITIES
Payables:
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 896,540
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . 4,445,858
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 2,665,954
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . . . 6,151
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . . 378,240
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . . 29,884
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 92,117
Foreign currency exchange spot contracts (cost $223,196)(Notes 2 and 6). 223,196 8,737,940
--------------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $751,496,687
------------
------------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,480,154
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,192,430
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (304,482)
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,411
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,860,174
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $751,496,687
------------
------------
Net asset value, offering and redemption price per share
($751,496,687 divided by 26,841,064 shares of $.01 par value
shares of beneficial interest outstanding). . . . . . . . . . . . . . . . . . . . . . . . $ 28.00
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 Equity I Fund
<PAGE> 13
EQUITY I FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Income:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,559,600
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . 1,968,839
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,372
-------------
16,028,811
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,021,465
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,166
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . 185,714
Bookkeeping service fees. . . . . . . . . . . . . . . . . . . . . . . . 25,946
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,717
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,851
Trustees' fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,510
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,329 3,778,698
------------ -------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,250,113
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,868,574
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,303,306
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,036,237
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,440,790
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (304,482)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (281,884)
------------
Net gain (loss) on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,062,541
------------
Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . $ 193,312,654
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity I Fund 11
<PAGE> 14
EQUITY I FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,250,113 $ 13,433,380
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,868,574 21,157,547
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,303,306 --
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,036,237 1,493,832
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,440,790 (32,567,886)
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . (304,482) --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . (281,884) (24,441)
------------- -------------
Net increase (decrease) in net assets resulting from operations. . . . . . 193,312,654 3,492,432
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . (12,344,719) (13,483,931)
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . (73,241,302) (20,143,817)
In excess of net realized gain on investments. . . . . . . . . . . . . . -- (5,132,320)
Increase (decrease) in net assets from Fund share transactions. . . . . . . 96,528,353 68,153,245
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . 204,254,986 32,885,609
Net assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . 547,241,701 514,356,092
------------- -------------
NET ASSETS AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . $ 751,496,687 $ 547,241,701
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . 8,042,540 $ 218,753,104 7,318,044 $ 179,274,536
Fund shares issued to shareholders . .
in reinvestments of distributions . . 2,917,909 80,302,078 1,508,847 35,449,732
Fund shares redeemed . . . . . . . . .(7,584,655) (202,526,829) (6,007,113) (146,571,023)
---------- ------------- --------- -------------
Net increase (decrease). . . . . . . . 3,375,794 $ 96,528,353 2,819,778 $ 68,153,245
---------- ------------- --------- -------------
---------- ------------- --------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 Equity I Fund
<PAGE> 15
EQUITY I FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . .52 .62 .60 .61 .75
Net realized and unrealized gain (loss) on investments . . . . 7.71 (.41) 2.18 1.54 5.61
-------- -------- -------- -------- --------
Total Income From Investment Operations. . . . . . . . . . . . 8.23 .21 2.78 2.15 6.36
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . (.52) (.62) (.60) (.62) (.75)
Net realized gain on investments . . . . . . . . . . . . . . . (3.03) (.94) (2.11) (1.70) (1.57)
In excess of net realized gain on investments. . . . . . . . . -- (.24) (.16) -- --
-------- -------- -------- -------- --------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . (3.55) (1.80) (2.87) (2.32) (2.32)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (%)(a). . . . . . . . . . . . . . . . . . . . . . . 35.94 0.79 11.61 9.02 31.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (a) . . . . . . . . . .59 .12 .14 .15 .19
Net investment income to average net assets (a). . . . . . . . 1.91 2.52 2.36 2.53 3.14
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . 92.04 75.02 91.87 71.14 119.55
Net assets, end of year ($000 omitted) . . . . . . . . . . . . 751,497 547,242 514,356 410,170 330,507
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
Equity I Fund 13
<PAGE> 16
EQUITY I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS RUSSELL 1000
ENDED DECEMBER 31 EQUITY I -REGISTERED TRADEMARK- **
- ----------------- -------- -------------------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $11,623 $11,787
1987 $12,317 $12,134
1988 $14,341 $14,225
1989 $18,756 $18,551
1990 $17,699 $17,780
1991 $23,225 $23,652
1992 $25,321 $25,789
1993 $28,261 $28,407
1994 $28,482 $28,515
1995 $38,718 $39,285
</TABLE>
Equity I Fund
<TABLE>
<CAPTION>
PERIODS ENDED 12/31/95 GROWTH OF $10,000 TOTAL RETURN
- ---------------------- ----------------- ------------
<S> <C> <C>
1 Year $ 13,594 35.94%
5 Years $ 21,876 16.94%
10 Years $ 38,718 14.49%
</TABLE>
Russell 1000-Registered Trademark- Index
<TABLE>
<CAPTION>
PERIODS ENDED 12/31/95 GROWTH OF $10,000 TOTAL RETURN
- ---------------------- ----------------- ------------
<S> <C> <C>
1 Year $ 13,777 37.77%
5 Years $ 22,095 17.18%***
10 Years $ 39,285 14.66%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 1000 Index includes the 1,000 largest companies
in the Russell 3000-Registered Trademark- Index, the
smallest of which is valued at about $450 million. The
Russell 1000 Index represents the universe of stocks
from which most active money managers typically select.
*** Annualized.
EQUITY I FUND returned 35.9% during 1995, trailing the Russell
1000-Registered Trademark- Index return of 37.8%. The portfolio was managed
in a manner consistent with its design to serve as a core investment for
those investors whose objectives include long-term growth or long-term
protection against inflation. The Fund uses a multi-style, multi-manager
strategy intended to achieve higher returns with moderate risk.
The dominance of large cap stocks during the year detracted from the Fund's
performance. Technology stocks led other sectors by a wide margin during the
first half of the year; but the market rotated to interest rate-sensitive
issues during the second and third quarters and defensive sectors (health
care, energy, and utilities) during the last four months. Consumer stocks
suffered through most of the year in response to a slowing economy and
employment fears driven by corporate restructurings. Although consumer
staples gained strength as investors sought the stocks of stable growth
companies, a weak holiday sales season strained an already weak retail
sector. Good technology stock selection gave the fund a strong boost early
in the year on top of the sector's generally strong start. However, the tech
sector slumped for most of the second half of 1995, taking the Fund's
technology holdings down with it. The Fund also lost ground in the fourth
quarter due to its underweighting in utilities versus the index.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
14 Equity I Fund
<PAGE> 17
EQUITY II FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
COMMON STOCKS - 95.6%
BASIC INDUSTRIES - 5.0%
ABS Industries, Inc. 16,000 $ 120
AK Steel Holding Corp. 7,400 254
Albemarle Corp. 10,200 198
Allegheny Ludlum Corp. 14,800 274
Alumax, Inc. (a) 8,100 248
ASARCO, Inc. 8,900 285
Bio-Rad Laboratories, Inc. Class A (a) 1,900 81
Birmingham Steel Corp. 6,200 92
Boise Cascade Corp. 7,000 242
Brockway Standard Holdings Corp. (a) 12,000 186
Cambrex Corp. 6,000 248
Carpenter Technology Corp. 13,400 551
CasTech Aluminum Group, Inc. (a) 6,600 89
Chesapeake Corp. 4,000 119
Cleveland-Cliffs, Inc. 2,000 82
Commercial Metals Co. 40,500 1,002
Commonwealth Aluminum Corp. 7,600 117
Crompton & Knowles Corp. 7,100 94
Cyprus Amax Minerals Co. 25,500 666
Dexter Corp. 46,000 1,087
Dravo Corp. (a) 24,800 298
Easco, Inc. 22,000 173
Eastern Enterprises, Inc. 2,100 74
Ferro Corp. 51,900 1,207
First Brands Corp. 7,800 371
Fort Howard Corp. New (a) 14,000 313
Handy & Harman 25,500 421
Hanna (M.A.) Co. 5,800 162
Hecla Mining Co. (a) 11,800 81
J & L Specialty Steel, Inc. 8,700 163
Lukens, Inc. 4,000 115
Medusa Corp. 1,200 32
Mentor Graphics Corp. (a) 43,700 787
Mississippi Chemical Corp. New 7,200 167
New Jersey Steel Corp. (a) 24,900 212
Northwestern Steel & Wire Co. New (a) 3,800 30
Oregon Steel Mills, Inc. 1,800 25
Penwest, Ltd. 8,000 194
Proler International Corp. (a) 61,500 461
Quanex Corp. 2,600 50
Schnitzer STL Industries, Inc. Class A 900 27
Slater Industries, Inc. 18,000 171
St. Joe Paper Co. 11,900 655
Stone Container Corp. 14,500 208
Texas Industries, Inc. 2,000 106
Universal Stainless & Alloy Products, Inc. (a) 12,000 126
Varlen Corp. 1,100 24
Webco Industries, Inc. (a) 15,000 85
Wellman, Inc. 19,000 432
WHX Corp. (a) 44,700 486
Witco Chemical Corp. 8,100 237
Wolverine Tube, Inc. (a) 2,100 79
-------
14,007
-------
CAPITAL GOODS - 7.9%
Acme-Cleveland Corp. 2,800 53
ADCO Technologies, Inc. 22,000 151
Aetrium, Inc. 1,300 26
AFC Cable Systems, Inc. (a) 12,000 156
Ag-Chem Equipment Co., Inc. 5,000 131
American Buildings Co. New (a) 34,200 752
Ametek, Inc. 3,100 58
ANADIGICS, Inc. 1,200 26
Anixter International, Inc. 3,000 56
Apogee Enterprises, Inc. 61,000 1,037
Aptargroup, Inc. 21,700 811
Arden Industrial Products (a) 12,000 59
Baldor Electric Co. 1,500 30
Ball Corp. 4,800 132
Barnes Group, Inc. 1,400 50
Bel Fuse, Inc. (a) 1,600 17
Blount International, Inc. Class A 2,100 55
BMC West Corp. (a) 11,000 162
Briggs & Stratton Corp. 7,400 321
Cable Design Technologies Corp. (a) 5,000 220
Cascade Corp. 10,000 135
Charter Power Systems, Inc. 1,100 31
Cognex Corp. 25,400 883
Cohu, Inc. 26,000 650
Commercial Intertech Corp. 1,000 18
Core Industries, Inc. 47,000 605
Cummins Engine Co., Inc. 9,400 348
Daniel Industries, Inc. 1,500 21
Defiance, Inc. 23,000 135
Duriron Co., Inc. 72,600 1,688
Eastern Co. 22,900 281
Epic Design Technology, Inc. 1,400 29
Farr Co. (a) 21,000 158
Flow International Corp. (a) 6,000 55
Fluke Corp. 1,000 38
Giant Cement Holding, Inc. (a) 16,000 184
Global Industrial Technologies, Inc. (a) 6,800 128
Graco, Inc. 26,500 808
Harman International Industries, Inc. 1,500 60
Harmon Industries, Inc. New 12,000 171
Heist (C.H.) Corp. (a) 33,600 235
Hughes Supply, Inc. 1,000 28
</TABLE>
Equity II Fund 15
<PAGE> 18
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Hurco Cos., Inc. (a) 26,000 $ 130
IDEX Corp. 30,900 1,259
II-VI, Inc. 2,600 28
Insituform Technologies, Inc. Class A (a) 12,535 143
Inverpower Controls, Ltd. 18,000 158
JLG Industries, Inc. 600 18
Kennametal, Inc. 5,200 165
Keystone International, Inc. 2,800 56
Litton Industries, Inc. (a) 3,300 147
Measurex Corp. 8,000 226
National Service Industries, Inc. 34,500 1,117
NCI Building Systems, Inc. (a) 8,500 207
Nu Horizons Electronics Corp. (a) 2,000 36
Outboard Marine Corp. 6,200 126
Plantronics, Inc. New (a) 8,000 289
Powell Industries, Inc. (a) 30,000 236
Regal-Beloit Corp. 2,000 44
Sanifill, Inc. (a) 22,300 744
Shelter Components Corp. 12,000 197
SIFCO Industries (a) 81,000 435
Sturm, Ruger & Co., Inc. 1,200 33
Symmetricom, Inc. (a) 2,600 35
Synalloy Corp. 1,300 27
Tecumseh Products Co. Class A 11,100 574
Tecumseh Products Co. Class B 4,000 199
TETRA Technologies, Inc. New 29,375 668
Timken Co. 29,500 1,128
U.S. Filter Corp. New (a) 18,800 501
United Waste Systems, Inc. (a) 22,300 820
USA Waste Services, Inc. (a) 11,000 208
Weatherford Enterra, Inc. (a) 9,500 274
Zurn Industries, Inc. 27,800 594
Zycon Corp. 16,000 180
------
21,994
------
CONSUMER BASICS - 15.7%
Advocat, Inc. (a) 12,000 133
Alpharma, Inc. Class A 7,000 183
American Medical Response (a) 11,800 383
American Oncology Resources, Inc. 16,300 791
Apple South 4,900 104
Ballard Medical Products 17,500 313
Ben & Jerry's Homemade, Inc. Class A (a) 1,300 19
Bergen Brunswig Corp. Class A 7,900 197
Beverly Enterprises, Inc. (a) 20,500 218
Bindley Western Industries, Inc. 1,300 22
Biogen, Inc. (a) 10,500 640
Bush Boake Allen, Inc. (a) 27,500 753
Carter-Wallace, Inc. 2,300 26
Central Sprinkler Corp. (a) 4,000 136
Cephalon, Inc. (a) 4,200 171
Church and Dwight Co., Inc. 45,200 836
CNS, Inc. 8,700 129
Coca-Cola Bottling Co. 19,500 675
Coherent, Inc. (a) 3,400 137
Collagen Corp. 8,000 165
Community Care of America, Inc. 9,400 98
Community Psychiatric Centers 8,000 98
Cor Therapeutics, Inc. (a) 9,600 78
Curative Technologies, Inc. (a) 2,200 31
Cytel Corp. (a) 2,900 18
Dean Foods Co. 5,000 138
Duckwall-ALCO Stores, Inc. New (a) 20,000 195
Dura Pharmaceuticals, Inc. (a) 21,300 735
FHP International Corp. (a) 7,400 207
Fleming Cos., Inc. 6,300 130
Flowers Industries, Inc. 94,350 1,144
FPA Medical Management, Inc. 14,900 138
General Nutrition Companies, Inc. 44,600 1,026
Genesis Health Ventures, Inc. (a) 2,800 102
Giant Food, Inc. Class A 37,000 1,165
GranCare, Inc. (a) 11,300 164
Grist Mill Co. New (a) 4,100 30
Health Care & Retirement Corp. (a) 4,900 171
Health Management Associates Class A 38,250 999
Health Management Systems, Inc. 17,400 670
HealthCare COMPARE (a) 15,000 652
Healthdyne Technologies, Inc. (a) 12,711 143
Healthdyne, Inc. 2,600 22
Healthsource, Inc. 20,000 720
HemaSure, Inc. (a) 12,200 151
Horizon/CMS Healthcare Corp. (a) 16,700 422
Hormel (George A.) & Co. 4,500 111
Hosposable Products, Inc. (a) 69,000 449
Hudson Foods, Inc. 5,800 100
IBP, Inc. 8,000 404
ICOS Corp. (a) 4,000 29
ICU Medical, Inc. (a) 1,700 29
Immucor Corp. (a) 16,700 154
Integrated Health Services, Inc. 6,100 153
International Multifoods Corp. 2,000 40
Interneuron Pharmaceuticals, Inc. (a) 22,200 561
Isomedix, Inc. (a) 12,000 173
Lance, Inc. 30,500 496
Lincare Holdings, Inc. (a) 3,400 84
Living Centers of America, Inc. (a) 4,165 146
Mariner Health Group, Inc. (a) 4,200 70
</TABLE>
16 Equity II Fund
<PAGE> 19
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Maxicare Health Plans, Inc. New (a) 1,700 $ 46
Maxxim Medical, Inc. (a) 900 15
McCormick & Co., Inc. 48,500 1,170
Medical Imaging Centers
of America, Inc. New 133 1
MedImmune, Inc. (a) 1,700 34
MediSense, Inc. (a) 11,800 373
Mine Safety Appliances Co. 12,098 578
Minntech Corp. 18,300 357
Multicare Cos., Inc. (a) 7,000 168
Nature's Sunshine Products, Inc. 11,700 287
NBTY, Inc. (a) 30,000 143
Nellcor, Inc. (a) 15,896 922
Northfield Laboratories, Inc. (a) 3,100 57
Northland Cranberries, Inc. Class A 14,000 249
Odwalla, Inc. 1,600 25
OrNda Healthcorp (a) 36,200 842
Orthofix International NV 9,200 64
Outback Steakhouse, Inc. (a) 26,100 936
Owen Healthcare, Inc. 30,400 798
Pacific Physician Services, Inc. (a) 44,300 786
PCI Services, Inc. (a) 57,200 558
Pharmaceutical Marketing Services, Inc. (a) 1,900 28
PhyCor, Inc. 26,650 1,346
Physician Computer Network, Inc. (a) 5,300 47
Physician Sales & Service, Inc. 28,500 798
Physicians Health Services, Inc. Class A (a) 18,700 692
Prime Hospitality Corp. (a) 66,300 663
Protein Design Labs, Inc. (a) 1,700 39
Protocol Systems, Inc. (a) 14,000 145
Pure Pac (a) 14,000 72
Regency Health Services, Inc. (a) 18,420 187
Regeneron Pharmaceuticals, Inc. (a) 3,400 43
Renal Treatment Centers, Inc. (a) 14,100 620
Respironics, Inc. 27,500 564
Ruddick Corp. 74,000 851
Safety 1st, Inc. (a) 13,000 192
Salick Health Care, Inc. 2,500 93
Schultz Sav-O Stores, Inc. 40,500 597
Smithfield Foods, Inc. (a) 1,900 60
Smucker (J.M.) Co. 17,500 385
Smucker (J.M.) Co. Class B 22,000 424
Sola International, Inc. 25,300 639
Somatogen, Inc. (a) 4,400 83
Stanhome, Inc. 31,500 917
Starbucks Corp. 19,100 399
Starrett (L.S.) Co. Class A 23,000 595
Sterling Healthcare Group, Inc. (a) 15,000 159
Strategic Distribution, Inc. 43,260 335
Sun Healthcare Group, Inc. (a) 11,400 154
Sunrise Medical, Inc. (a) 5,200 96
Syncor International Corp. (a) 2,000 14
TheraTx, Inc. (a) 6,400 75
Thermotrex Corp. (a) 7,500 375
Thorn Apple Valley, Inc. 28,500 463
Total Renal Care Holdings, Inc. 14,500 428
U.S. Bioscience, Inc. (a) 256 1
Ultratech Stepper, Inc. 2,300 59
United American Healthcare Corp. (a) 2,000 20
United Dental Care, Inc. 11,400 470
Universal Foods Corp. 43,200 1,733
Universal Health Services, Inc. Class B (a) 5,900 262
Utah Medical Products (a) 15,000 296
Vencor, Inc. (a) 5,300 172
Vivra, Inc. 8,700 219
Watson Pharmaceuticals, Inc. (a) 24,900 1,217
-------
43,913
-------
CONSUMER DURABLES - 2.3%
Arvin Industries, Inc. 3,100 51
Bassett Furniture Industries, Inc. 1,200 27
Borg Warner Automotive, Inc. 3,400 109
Cavalier Homes, Inc. 6,700 139
Coast Distribution Systems (a) 25,000 150
Copart, Inc. (a) 1,300 34
CORT Business Services Corp. 7,800 129
Discount Auto Parts, Inc. (a) 1,000 31
Donaldson Co., Inc. 3,200 80
Excel Industries, Inc. 10,000 140
Federal-Mogul Corp. 21,100 414
Fleetwood Enterprises, Inc. 6,100 157
Flexsteel Industries, Inc. 22,200 228
Kinetic Concepts, Inc. 20,000 238
La-Z-Boy Chair Co. 36,000 1,112
Lear Seating Corp. (a) 2,300 67
National Presto Industries, Inc. 1,000 40
Polaris Industries, Inc. 1,400 41
PRI Automation, Inc. (a) 1,000 35
Pronet, Inc. (a) 9,000 264
Renters Choice, Inc. 1,000 13
Schult Homes Corp. 10,500 184
Simpson Industries, Inc. 14,000 122
Skyline Corp. 1,400 29
Smith (A.O.) Corp. 68,300 1,417
Titan Wheel International, Inc. 10,200 166
West, Inc. 38,000 893
Wynn's International, Inc. 8,000 237
-------
6,547
-------
</TABLE>
Equity II Fund 17
<PAGE> 20
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
CONSUMER NON-DURABLES - 5.7%
American Safety Razor Co. 15,000 $ 118
Baby Superstore, Inc. 1,400 79
Barnes & Noble, Inc. (a) 26,200 760
Block Drug Co., Inc. Class A 12,649 436
Bombay, Inc. (a) 9,100 58
Borders Group, Inc. (a) 12,700 235
Brown Group, Inc. 24,500 349
Cannondale Corp. (a) 1,000 16
Carson Pirie Scott & Co. (a) 1,700 34
Chic By H.I.S., Inc. (a) 61,800 340
Coastcast Corp. (a) 20,000 202
CompUSA, Inc. (a) 4,200 131
Consolidated Stores Corp. (a) 4,900 107
Coors (Adolph) Co. Class B 1,400 31
Daisytek International Corp. 6,000 184
Danskin, Inc. (a) 30,000 124
Department 56, Inc. (a) 4,800 184
Designs, Inc. (a) 5,000 35
Eagle Hardware and Garden, Inc. (a) 4,300 31
Family Dollar Stores, Inc. 6,600 91
Fieldcrest Cannon, Inc. (a) 32,500 540
First Team Sports, Inc. 1,000 15
Guilford Mills, Inc. 36,000 733
Haggar Corp. 29,500 531
Happiness Express, Inc. (a) 2,700 11
Hills Stores Co. New (a) 2,400 24
Innovex, Inc. 3,450 53
Jean Phillippe Fragrances, Inc. New (a) 14,000 114
Johnston Industries, Inc. 29,250 234
Jos. A. Bank Clothiers, Inc. (a) 38,700 73
Kenneth Cole Productions, Inc. Class A 4,200 79
Leslie's Poolmart 13,000 172
Longs Drug Stores Corp. 800 38
MacFrugals Bargains Close Outs, Inc. (a) 3,500 49
Nautica Enterprises, Inc. 24,200 1,041
North American Watch Corp. 41,500 799
Nutramax Products, Inc. New (a) 20,000 175
Office Depot, Inc. (a) 11,775 233
Oxford Industries, Inc. 29,500 494
Paragon Trade Brands, Inc. (a) 2,500 58
PeopleSoft, Inc. 19,800 842
Pete's Brewing Co. (a) 3,300 46
PETsMART, Inc. 13,000 400
Phillips-Van Heusen Corp. 4,100 40
Quaker Fabric Corp. New (a) 20,000 175
Rayonier, Inc. 7,400 247
Redhook Ale Brewery, Inc. 1,200 31
Rex Stores Corp. (a) 2,000 36
Rite Aid Corp. 16,800 575
Robert Mondavi Corp. Class A (a) 2,600 72
Ross Stores, Inc. 6,900 132
Russ Berrie & Co., Inc. 1,300 16
Scholastic Corp. (a) 9,000 700
Score Board, Inc. (a) 30,000 131
Service Merchandise Co., Inc. (a) 11,000 55
Sports Authority, Inc. (a) 4,600 94
Springs Industries, Inc. 2,200 91
Starter Corp. (a) 3,600 25
Systemed, Inc. (a) 30,000 135
Tiffany & Co. 15,700 791
Timberland Co. Class A (a) 3,300 66
TJX Cos., Inc. 15,200 287
Tuesday Morning, Inc. (a) 23,000 127
Value City Department Stores, Inc. (a) 12,500 84
VWR Corp. 18,400 235
Waban, Inc. (a) 43,000 806
Zale Corp. New (a) 47,400 758
-------
16,008
-------
CONSUMER SERVICES - 3.0%
AAR Corp. 1,200 26
Airport Systems International, Inc. (a) 15,600 47
Alaska Air Group, Inc. (a) 5,100 83
AMC Entertainment, Inc. (a) 1,100 26
America West Airlines, Inc. Class B 8,200 139
Amtran, Inc. (a) 18,200 218
Applebee's International, Inc. 26,300 598
Bally Entertainment Group (a) 9,800 137
Brinker International, Inc. (a) 12,000 181
Buffets, Inc. (a) 14,000 196
Callaway Golf Co. 13,200 299
Children's Discovery Centers
of America, Inc. New (a) 20,000 90
Comair Holdings, Inc. 8,100 216
Continental Airlines, Inc. Class B (a) 3,800 165
Equity Inns, Inc. 13,000 149
GC Companies, Inc. (a) 1,000 33
Golf Enterprises, Inc. (a) 16,000 116
Grand Casinos, Inc. 10,800 251
Great Lakes Aviation, Ltd. (a) 29,900 101
Harvey's Casino Resorts 1,200 22
La Quinta Motor Inns, Inc. 44,600 1,221
Lone Star Steakhouse & Saloon (a) 9,700 371
Main Street & Main, Inc. New 35,000 92
Max & Erma's Restaurants, Inc. 20,900 123
Mesa Airlines, Inc. (a) 6,900 61
Monterey Pasta Co. (a) 14,000 68
</TABLE>
18 Equity II Fund
<PAGE> 21
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
O'Charleys, Inc. (a) 15,000 $214
Old Dominion Freight Lines, Inc. (a) 10,000 75
Papa Johns International, Inc. (a) 13,500 547
Penn National Gaming, Inc. (a) 3,100 40
Qantas Airways, Ltd. - ADR 18,100 302
Recoton Corp. (a) 9,700 175
Regal Cinemas, Inc. 11,400 331
Ride, Inc. 2,300 75
Ryan's Family Steak Houses, Inc. (a) 67,500 464
ShoLodge, Inc. (a) 14,000 133
Showboat, Inc. 2,800 74
Shuffle Master, Inc. 3,000 35
Studio Plus America, Inc. 4,800 124
Sunstone Hotel Investors, Inc. 42,300 423
Supertel Hospitality, Inc. (a) 12,000 120
Triarc Companies, Inc. Class A (a) 2,400 26
USAir Group, Inc. (a) 12,900 171
WMS Industries, Inc. (a) 3,800 62
-------
8,420
-------
ENERGY - 4.8%
Alamco, Inc. (a) 15,000 121
Arch Petroleum, Inc. New (a) 52,800 102
Basin Exploration, Inc. (a) 91,100 433
Belden & Blake Corp. (a) 10,000 175
Berry Petroleum Co. Class A 47,500 481
BJ Services Co. (a) 27,750 805
Callon Petroleum Co. (a) 5,600 56
Camco International, Inc. 16,600 465
Chesapeake Energy Corp. 6,300 209
Cliffs Drilling Co. (a) 8,000 118
Coho Energy, Inc. (a) 23,181 113
Cross Timbers Oil Co. 44,100 777
Crown Centennial Petroleum Co.
Class B (a) 26,300 385
Diamond Shamrock, Inc. 25,100 649
Digicon, Inc. New 34,666 277
Dual Drilling Co. (a) 8,000 91
Energen Corp. 1,700 41
Global Industries, Inc. (a) 8,000 238
Harcor Energy, Inc. New (a) 40,000 90
Helmerich & Payne, Inc. 2,500 74
ICO, Inc. New 30,000 146
K N Energy, Inc. 1,300 38
KCS Energy, Inc. 2,100 32
Key Production, Inc. (a) 22,600 121
Laclede Gas Co. 1,100 23
LTV Corp. New (a) 45,300 623
Marine Drilling Co, Inc. (a) 40,000 195
Newfield Exploration Co. (a) 3,400 92
Newpark Resources, Inc. New 7,350 164
Noble Drilling Corp. (a) 120,800 1,072
NorAm Energy Corp. 10,900 97
Nuevo Energy Co. (a) 2,600 58
Oceaneering International, Inc. (a) 4,300 55
Parker & Parsley Petroleum Co. 28,500 627
Petroleum Geo Services AS - ADR (a) 23,300 580
Production Operators Corp. 6,000 198
Quaker State Oil Refining Corp. 6,000 76
Questar Corp. 2,800 94
Reading & Bates Corp. New (a) 18,800 282
Smith International, Inc. (a) 43,500 1,022
Swift Energy Co. (a) 1,800 22
Tesoro Petroleum Corp. (a) 2,900 25
Tide West Oil, Inc. (a) 6,100 79
Ultramar Corp. 37,200 958
United Meridian Corp. (a) 2,800 49
Valero Energy Corp. 4,400 108
Varco International, Inc. (a) 9,700 116
Vintage Petroleum, Inc. 9,900 223
Wiser Oil Co. 35,500 426
World Fuel Services Corp. 2,850 45
-------
13,346
-------
FINANCE - 14.1%
20th Century Industries (a) 2,900 58
Aames Financial Corp. 2,100 59
AlBank Financial Corp. 6,000 180
Alexander & Alexander Services, Inc. 2,700 51
Allmerica Property & Casualty Cos. 30,100 813
Amcast Industrial Corp. 1,100 20
American Bankers Insurance Group, Inc. 21,100 823
American Travellars Corp. (a) 30,100 843
AMRESCO, Inc. 25,000 306
AT&T Capital Corp. 200 8
AVEMCO Corp. 31,000 496
Avondale Financial Corp. 8,000 116
Bankers Corp. 10,800 176
Bankers Life Holding Corp. 800 16
Berkley (W.R.) Corp. 20,000 1,065
BHC Financial, Inc. 12,000 213
California Federal Bank 7,300 115
Calumet Bancorp, Inc. (a) 1,000 28
CDI Corp. (a) 2,500 45
CFI ProServices, Inc. (a) 14,000 203
Charter One Financial, Inc. 28,700 872
CitiFed Bancorp, Inc. 7,000 238
City National Corp. 14,000 196
</TABLE>
Equity II Fund 19
<PAGE> 22
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Coast Savings Financial, Inc. (a) 6,700 $ 232
Collective Bancorp, Inc. 2,400 61
Colonial BancGroup, Inc. 26,500 855
Corporate Express, Inc. 48,550 1,450
Countrywide Credit Industries, Inc. 14,100 307
Cullen Frost Bankers, Inc. 1,000 50
Cyrolife, Inc. (a) 800 12
FFY Financial Corp. 1,100 23
Financial Fed Corp. (a) 10,000 224
FINOVA Group, Inc. 4,000 193
First American Financial Corp. 700 19
First Bell Bancorp, Inc. 8,300 110
First Colony Corp. 2,600 66
First Commerce Corp. 19,200 607
First Financial Caribbean Corp. 8,000 147
First Mortgage Corp. (a) 20,000 115
First Palm Beach Bancorp, Inc. 1,100 23
First Republic Bancorp, Inc. (a) 12,000 158
First Tennessee National Corp. 14,500 874
FirstBank Puerto Rico 1,000 22
Flushing Financial Corp. 10,200 154
Fremont General Corp. 29,400 1,080
Greenpoint Financial Corp. 8,400 223
Hartford Steam Boiler Inspection
& Insurance Co. 900 45
Haven Bancorp 1,200 28
HCC Insurance Holdings, Inc. (a) 1,000 37
Horace Mann Educators Corp. 1,100 34
Imperial Credit Industries, Inc. 28,917 607
Jefferies Group, Inc. Rights 5,100 235
JSB Financial, Inc. 1,300 41
Keystone Financial, Inc. 32,200 950
Leader Financial Corp. 16,500 615
Life Bancorp, Inc. 1,700 25
Life Partners Group, Inc. 4,000 55
Litchfield Financial Corp. 10,000 130
Markel Corp. (a) 12,500 906
Mercury Finance Corp. 38,250 507
MLF Bancorp, Inc. 3,300 73
Money Store, Inc. 21,750 337
National Auto Credit, Inc. 1,500 24
National Re Corp. 20,500 779
North American Mortgage Co. 32,200 684
NS Bancorp, Inc. 4,000 155
Ohio Casualty Corp. 16,000 612
Old Kent Financial Corp. 16,050 656
Old Republic International Corp. 5,500 195
Olympic Financial, Ltd. (a) 11,500 187
ONBANCorp 1,800 60
One Valley Bancorp of West Virginia, Inc. 23,100 719
Orion Capital Corp. 3,300 143
Pace American Group, Inc. (a) 25,000 2
Paul Revere Corp. 900 19
PennCorp Financial Group, Inc. 16,100 473
Peoples Bank 2,700 51
Peoples Heritage Financial Group 29,700 668
Protective Life Corp. 1,000 31
Provident Bankshares Corp. 1,200 35
Queens County Bancorp 6,000 237
Regional Acceptance Corp. 8,600 80
Regions Financial Corp. 25,000 1,075
Reliance Bancorp, Inc. 3,400 48
Reliance Group Holdings, Inc. 10,700 92
Reliastar Financial Corp. 18,800 834
RenaissanceRe Holdings, Ltd. 22,500 672
Resource Bancshares Mortgage Group 13,369 185
Resource Mortgage Capital Corp. 2,100 42
Risk Capital Holdings, Inc. 10,300 237
Robert Half International, Inc. (a) 29,200 1,223
Roosevelt Financial Group, Inc. 8,400 161
Seacor Holdings, Inc. (a) 7,000 188
Security Connecticut Corp. 8,000 217
Silicon Valley Bancshares 1,100 26
Sotheby's Holdings Co., Inc. Class A 2,500 36
SouthTrust Corp. 26,500 679
Standard Financial, Inc. (a) 3,700 54
State Auto Financial Corp. 7,000 178
SunAmerica, Inc. 20,000 950
T R Financial Corp. 3,800 97
TCF Financial Corp. 12,100 401
TFC Enterprises, Inc. (a) 2,800 16
Titan Holdings, Inc. 12,400 178
Transatlantic Holdings, Inc. 13,000 954
Transnational Re Corp. Class A 24,500 600
Trenwick Group, Inc. Rights 10,700 599
Union Bank 100 5
Union Planters Corp. 44,670 1,424
United Fire & Casualty Co. 17,050 699
US Facilities Corp. 32,900 691
USLIFE Corp. 2,600 78
Vesta Insurance Group, Inc. 9,200 501
Washington National Corp. 1,100 30
Westco Bancorp, Inc. 8,000 216
Westcorp, Inc. 10,527 195
World Acceptance Corp. 3,400 36
Zenith National Insurance Corp. 24,000 513
Zions Bancorp 11,500 923
-------
39,433
-------
</TABLE>
20 Equity II Fund
<PAGE> 23
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
GENERAL BUSINESS - 9.9%
AccuStaff, Inc. 12,400 $ 536
Active Voice Corp. (a) 1,000 26
Advo Systems, Inc. 1,700 44
Alternative Resources Corp. 20,500 605
American Business Information, Inc. 10,500 197
American Business Products, Inc. 1,200 34
American Radio Systems Corp. Class A 23,950 653
Applied Voice Technology, Inc. (a) 2,500 33
Ascend Communications, Inc. 29,900 2,426
BISYS Group, Inc. New (a) 8,000 242
Bowne & Co., Inc. 1,600 32
CACI International, Inc. Class A (a) 2,000 23
Cascade Communications Corp. 5,600 476
Catalina Marketing Corp. (a) 1,100 69
Central Newspapers, Inc. Class A 25,500 800
CIDCO, Inc. (a) 6,900 174
Clear Channel Communications, Inc. 2,400 106
Cognos, Inc. (a) 9,500 424
Coherent Communications Systems Corp. 3,400 64
Comarco, Inc. (a) 16,000 230
Comnet Cellular, Inc. (a) 6,400 185
Comsat Corp. Series 1 6,800 127
Corrections Corp. America 4,800 178
Crawford & Co. 4,500 73
Day Runner, Inc. (a) 1,000 35
Devon Group, Inc. New (a) 1,000 29
DeVRY, Inc. 26,600 718
DSP Communications, Inc. 3,800 164
Duplex Products, Inc. (a) 37,000 301
Effective Management Systems, Inc. (a) 16,000 72
Emmis Broadcasting Corp. Class A (a) 200 6
Ennis Business Forms, Inc. 36,050 442
Franklin Quest Co. (a) 4,500 88
General Communication, Inc. Class A (a) 28,800 140
Gibson Greetings, Inc. (a) 3,600 58
Grey Advertising 4,000 784
GTECH Holdings Corp. (a) 7,800 203
Harvey Entertainment Co. (a) 2,300 17
Houghton Mifflin Co. 14,500 624
Hunt Manufacturing Co. 63,000 1,095
Infinity Broadcasting Corp. 6,000 224
Interim Services, Inc. (a) 3,300 114
International Family Entertainment, Inc.
Class B (a) 1,100 18
Jones Intercable, Inc. Class A (a) 38,500 472
Kronos, Inc. (a) 6,000 285
Lee Enterprises, Inc. 37,000 851
Macromedia, Inc. 22,600 1,172
Mail Boxes Etc (a) 2,500 31
McClatchy Newspapers, Inc. Class A 28,000 640
McGrath RentCorp 12,000 222
Media General, Inc. Class A 24,800 753
META Group, Inc. 2,600 79
Metricom, Inc. (a) 1,300 17
Miller (Herman), Inc. 1,600 48
Mobile Telecommunication
Technologies Corp. (a) 19,000 404
National Media Corp. (a) 3,000 63
Network Equipment Technologies, Inc. (a) 24,300 665
New England Business Service, Inc. 2,100 46
Norrell Corp. 1,200 35
Ortel Corp. (a) 3,300 36
Paging Network, Inc. 18,200 432
Paychex, Inc. 34,800 1,723
PC Service Source, Inc. (a) 12,000 97
PMT Services, Inc. (a) 700 21
QUALCOMM, Inc. (a) 11,200 480
QuickResponse Services, Inc. (a) 17,700 319
Saga Communications Class A 10,000 162
SFX Broadcasting, Inc. Class A (a) 6,000 178
Spelling Entertainment Group, Inc. (a) 2,400 30
SPS Transaction Services, Inc. (a) 1,400 41
Steris Corp. 31,400 1,005
Systems & Computer Technology Corp. (a) 8,000 159
TCSI Corp. (a) 7,700 139
TRM Copy Centers Corp. (a) 26,000 260
True North Communications, Inc. 3,200 59
U.S. Delivery Systems, Inc. (a) 15,900 461
United Video Satellite Group Class A (a) 1,200 32
United Wisconsin Services, Inc. 2,100 46
US Office Products Co. (a) 24,400 546
Vanguard Cellular Systems, Inc. Class A (a) 20,100 402
Viking Office Products, Inc. (a) 30,300 1,409
Wackenhut Corp. 7,300 131
Wackenhut Corrections Corp. (a) 2,000 50
Washington Post Co. Class B 2,400 677
-------
27,567
-------
MISCELLANEOUS - 3.5%
Apollo Group, Inc. Class A 22,200 866
Associated Group, Inc. Class B (a) 28,500 506
Chris Craft Industries, Inc. 31,160 1,348
Citation Corp. (a) 12,000 138
Clarcor, Inc. 1,000 20
Crawford & Co. Class A 21,500 344
Daig Corp. 31,300 720
Eckerd Corp. (a) 19,450 868
Fiberstars, Inc. (a) 25,000 97
FRP Properties, Inc. (a) 6,000 123
</TABLE>
Equity II Fund 21
<PAGE> 24
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Griffon Corp. (a) 59,000 $ 531
Gyrodyne Co. of America, Inc. 4,500 63
Ha-Lo Industries, Inc. (a) 8,000 242
Hirsch International Group Class A 10,937 134
ITT Educational Services, Inc. (a) 10,000 246
Jabil Circuit, Inc. (a) 15,000 161
Landair Services, Inc. (a) 11,600 151
Learning Tree International, Inc. 10,000 155
Leather Factory, Inc. (a) 40,000 97
M.D.C. Holdings, Inc. 25,000 178
Mark VII, Inc. (a) 12,000 186
Mercer International, Inc. (a) 8,500 173
Miller Industries, Inc. (a) 8,000 198
National Wireless Holdings, Inc. (a) 10,000 132
NN Ball & Roller, Inc. 18,000 306
NUMAR Corp. (a) 13,000 145
On Assignment, Inc. (a) 20,400 668
PXRE Corp. 27,700 734
Supreme Industries, Inc. Class A 19,800 166
Texoil, Inc. (a) 65,000 102
Tracor, Inc. New (a) 4,400 64
------
9,862
------
SHELTER - 1.2%
American Woodmark Corp. (a) 15,200 63
Beazer Homes USA, Inc. (a) 1,700 35
Butler Manufacturing Co. 900 35
Cameron Ashley, Inc. (a) 20,000 193
Centex Construction Products, Inc. (a) 16,700 240
Champion Enterprises, Inc. 5,700 176
Continental Homes Holding Corp. 1,300 32
Elcor Chemical Corp. 1,100 24
Fastenal Co. 8,600 363
Granite Construction, Inc. 1,300 41
Lone Star Industries, Inc. 8,000 200
Redman Industries, Inc. New (a) 1,200 40
Ryland Group, Inc. 23,800 333
Smith (Charles E.) Residential Realty, Inc. 29,000 685
Southdown, Inc. (a) 12,000 234
Toll Brothers, Inc. (a) 18,600 428
U.S. Home Corp. New (a) 1,900 55
USG Corp. New (a) 5,600 168
-------
3,345
-------
TECHNOLOGY - 17.8%
Activision, Inc. New 4,700 51
ACX Technologies, Inc. 4,600 70
Adaptec, Inc. (a) 20,400 834
ADC Telecommunications, Inc. 26,900 975
Affiliated Computer Services, Inc.
Class A (a) 1,200 45
Altera Corp. 22,400 1,112
Amdahl Corp. (a) 10,400 88
AmeriData Technologies, Inc. (a) 14,700 141
Amplicon, Inc. 10,000 142
Applied Magnetics Corp. (a) 7,800 145
Applix, Inc. 3,200 86
Artisoft, Inc. (a) 4,000 25
Aseco Corp. (a) 1,400 22
Aspen Technology, Inc. (a) 5,900 199
Atria Software, Inc. 22,800 883
Augat, Inc. 43,700 748
Auspex Systems, Inc. (a) 21,900 394
Avnet, Inc. 7,125 319
Baan Co. NV 7,800 352
Banctec, Inc. (a) 2,800 52
Bell Industries 30,633 689
BI Incorporated Co. New (a) 20,000 152
BMC Industries, Inc. 11,000 256
Boole & Babbage, Inc. 7,500 178
Breed Technologies, Inc. 7,900 146
Brooktree Corp. NPV (a) 3,200 38
Brooktrout Technology, Inc. (a) 2,200 62
Burr-Brown Corp. 2,700 67
Business Objects S.A. - ADR (a) 13,100 629
Cadence Design Systems, Inc. 4,950 208
Cambridge Technology Partners, Inc. (a) 9,000 508
CBT Group PLC - ADR 12,000 624
CDW Computer Centers, Inc. (a) 16,200 644
CEM Corp. (a) 12,000 159
Checkmate Electronics, Inc. New (a) 9,500 140
Cheyenne Software, Inc. (a) 13,100 342
Circon Corp. (a) 31,900 642
Coeur d'Alene Mines Corp. 4,900 84
Computer Horizons Corp. 1,000 37
Computer Products, Inc. (a) 3,600 41
Computervision Corp. New (a) 17,800 274
Compuware Corp. (a) 5,200 96
Comverse Technology, Inc. New (a) 38,600 772
Consilium, Inc. (a) 20,000 237
Control Data Systems, Inc. (a) 2,000 39
CyCare Systems, Inc. (a) 800 20
Data General Corp. (a) 7,100 98
Data Transmission Network Corp. (a) 3,000 145
Datastream Systems, Inc. 2,100 39
Davidson & Associates, Inc. 26,100 561
</TABLE>
22 Equity II Fund
<PAGE> 25
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
DH Technology, Inc. 10,500 $ 239
DSP Group, Inc. (a) 16,400 180
Dynamics Research Corp. (a) 57,222 443
Dynatech Corp. 4,200 71
Edmark Corp. New 1,500 46
EG&G, Inc. 62,000 1,503
Egghead, Inc. (a) 3,200 20
Electro Scientific Industries, Inc. (a) 1,700 48
Electroglas, Inc. 5,400 134
Electromagnetic Sciences, Inc. (a) 15,000 165
Eltron International, Inc. 1,500 53
Enterprise Systems, Inc. (a) 5,300 156
Esterline Corp. (a) 3,000 71
Evans & Sutherland Computer Corp. (a) 22,500 501
Exar Corp. (a) 13,000 192
EXECUTONE Information Systems, Inc. (a) 50,000 116
FORE Systems 7,500 445
Franklin Electronic Publishers, Inc. (a) 1,000 29
FTP Software, Inc. (a) 4,100 119
Fulcrum Technologies, Inc. (a) 2,000 62
Fusion Systems Corp. (a) 1,700 47
Gentex Corp. (a) 1,300 29
Gerber Scientific, Inc. 52,000 845
Glenayre Technologies, Inc. 3,250 202
Global Village Communication (a) 9,000 169
GT Interactive Software Corp. 37,400 519
GTI Corp. 7,600 133
Hadco Corp. (a) 15,200 428
Haemonetics Corp. (a) 2,500 44
HBO & Co. 27,700 2,112
HCIA, Inc. 15,900 731
Hello Direct, Inc. 13,000 88
Hyperion Software Corp. 3,400 71
InaCom Corp. (a) 1,800 25
Information Storage Devices Inc. 1,100 12
Informix Corp. 10,100 303
Input/Output, Inc. (a) 39,800 2,298
Insight Enterprises, Inc. 1,200 15
Integrated Circuit Systems, Inc. (a) 14,200 176
Intelligent Electronics, Inc. 17,613 106
International Rectifier Corp. 24,000 600
Intuit, Inc. 9,400 733
Iomega Corp. (a) 3,700 180
IPC Information Systems, Inc. (a) 2,100 35
Jack Henry & Assocociates, Inc. 1,400 35
Keane, Inc. (a) 1,000 22
Komag, Inc. (a) 3,900 178
Kulicke & Soffa Industries, Inc. 8,600 198
Liberty Technologies, Inc. (a) 25,000 113
Linear Technology Corp. 18,800 738
Littlefuse, Inc. (a) 1,600 58
Loronix Information Systems, Inc. (a) 32,500 83
M-Wave, Inc. (a) 10,700 64
MapInfo Corp. (a) 1,000 20
Marcam Corp. (a) 8,000 118
Marshall Industries (a) 19,100 614
Mattson Technology, Inc. 2,500 38
Maxim Integrated Products, Inc. 16,200 620
McAfee Associates, Inc. 17,500 748
Medic Computer Systems, Inc. (a) 13,000 783
Mercury Interactive Corp. (a) 2,700 48
Merisel, Inc. (a) 17,000 72
Merix Corp. (a) 5,000 147
Metrologic Instruments, Inc. (a) 15,000 143
Micro Linear Corp. (a) 2,100 22
Microchip Technology, Inc. (a) 13,000 475
Microcom, Inc. (a) 4,100 107
Molex, Inc. Class A 19,000 580
Mylex Corp. (a) 3,200 61
National Semiconductor Corp. (a) 35,500 790
NetFRAME Systems, Inc. (a) 3,800 19
NetManage, Inc. 43,500 1,001
Network Computing Devices, Inc. (a) 5,900 41
Network Express, Inc. 2,900 15
Network General Corp. (a) 16,900 556
Oak Technology, Inc. (a) 4,000 169
Optical Data Systems, Inc. 28,100 688
Parametric Technology Corp. (a) 14,800 980
Peak Technologies Group, Inc. (a) 25,350 780
Perceptron, Inc. 2,100 45
Phamis, Inc. (a) 1,600 48
Phoenix Technologies, Ltd. (a) 2,200 34
Photronics, Inc. 1,700 45
Picturetel Corp. New 13,000 557
Pinnacle Micro, Inc. 1,500 22
Pittway Corp. Class A 25,041 1,697
Planar Systems, Inc. (a) 5,900 112
Platinum Technology, Inc. (a) 11,000 202
Pomeroy Computer Resources, Inc. 1,300 17
Premenos Technology Corp. 5,250 138
Project Software & Development, Inc. 1,500 52
Quarterdeck Corp. 4,700 129
Rational Software Corp. New (a) 2,400 54
Saville Systems Ireland PLC - ADR 13,800 195
Scientific Games Holdings Corp. 1,600 60
Security Dynamics Technologies, Inc. 3,500 192
Software Artistry, Inc. 1,000 14
Software Spectrum, Inc. (a) 8,000 168
</TABLE>
Equity II Fund 23
<PAGE> 26
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
SPSS, Inc. (a) 18,700 $ 358
Stac, Inc. (a) 5,100 73
Storage Technology Corp. (a) 10,000 239
Stratus Computer, Inc. (a) 2,900 100
Structural Dynamics Research Corp. (a) 13,600 396
Systemsoft Corp. (a) 5,700 63
Tandem Computers, Inc. (a) 23,400 249
Tech Data Corp. (a) 7,500 112
Tech-Sym Corp. (a) 19,000 606
Teledyne, Inc. 4,800 123
Tellabs, Inc. 9,700 359
Tencor Instruments 22,000 533
Teradyne, Inc. 10,800 270
TGV Software, Inc. 19,600 176
Thiokol Corp. 1,200 41
Three-Five Systems, Inc. (a) 1,700 29
Trident Microsystems, Inc. (a) 11,900 277
Triquint Semiconductor, Inc. (a) 2,900 39
Tylan General, Inc. 2,300 28
Uniphase Corp. (a) 22,100 790
Unisys Corp. (a) 34,100 192
Veeco Instruments, Inc. (a) 1,300 18
Veritas Software Corp. 2,000 74
Viewlogic Systems, Inc. (a) 4,700 47
Wall Data, Inc. (a) 2,400 39
Watkins-Johnson Co. 2,000 87
Westcott Communications, Inc. (a) 14,100 194
Western Digital Corp. (a) 9,500 170
Wind River Systems, Inc. (a) 2,700 78
Zebra Technologies Corp. Class A 2,600 88
Zygo Corp. 1,400 35
-------
49,892
-------
TRANSPORTATION - 2.2%
Air Express International Corp. 7,500 169
Airborne Freight Corp. 4,700 125
Alexander & Baldwin, Inc. 24,000 552
American President Cos., Ltd. 6,100 140
Arnold Industries, Inc. 30,500 530
Covenant Transport, Inc. Class A (a) 10,800 122
Fritz Companies, Inc. 24,300 1,008
GATX Corp. 1,900 92
Hornbeck Offshore Services, Inc. (a) 9,000 177
Knight Transportation, Inc. (a) 10,000 138
Liqui-Box Corp. 2,100 61
M.S. Carriers, Inc. (a) 6,000 117
MTL, Inc. (a) 41,500 560
Navistar International Corp. (a) 17,500 184
Overseas Shipholding Group, Inc. 33,500 637
Tidewater, Inc. 10,200 321
Transport Corp. of America 16,000 178
U.S. Xpress Enterprises, Inc. Class A (a) 14,000 98
Wisconsin Central Transportation Corp. (a) 13,600 889
XTRA Corp. 1,400 59
-------
6,157
-------
UTILITIES - 2.5%
ACC Corp. 1,300 29
Atlanta Gas Light Co. 4,000 79
Atlantic Energy, Inc. 4,000 77
Bangor Hydro-Electric Co. 2,300 26
Boston Edison Co. 3,000 88
Brooklyn Union Gas Co. (The) 3,300 97
C-Tec Corp. (a) 1,200 37
California Energy, Inc. (a) 4,900 96
Cellular Communications
of Puerto Rico, Inc. (a) 23,700 634
Centennial Cellular Corp. Class A (a) 40,500 694
Centerior Energy Corp. 14,300 127
Central Hudson Gas & Electric Corp. 1,000 31
Central Louisiana Electric Co., Inc. 1,000 27
Century Telephone Enterprises, Inc. 20,400 648
CILCORP, Inc. 1,000 42
Citizens Utility Co. Class A 6,604 84
Columbia Gas System, Inc. (a) 6,700 294
Commonwealth Energy System 1,000 45
Delmarva Power & Light Co. 2,800 64
Eastern Utilities Associates 1,100 26
El Paso Natural Gas Co. 6,500 184
Enron Global Power & Pipelines L.L.C. 1,400 35
ENSERCH Corp. 6,000 97
Equitable Resources, Inc. 3,200 100
Frontier Corp. 15,000 450
Hawaiian Electric Industries, Inc. 5,200 202
Idaho Power Co. 2,400 72
Kansas City Power & Light Co. 4,100 107
Long Island Lighting Co. 16,700 273
MCN Corp. 3,900 91
MidAmerican Energy Co. 4,300 72
Minnesota Power & Light Co. 1,700 48
Montana Power Co. 7,000 158
National Fuel & Gas Co. 3,500 118
New Jersey Resources Corp. 1,000 30
New York State Electric & Gas Corp. 8,800 228
NICOR, Inc. 2,100 58
Northwestern Public Service Co. 1,000 28
</TABLE>
24 Equity II Fund
<PAGE> 27
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
ONEOK, Inc. 3,400 $ 78
Pennsylvania Enterprises, Inc. 1,000 38
Peoples Energy Corp. 1,900 60
Piedmont Natural Gas Co., Inc. 1,100 26
Primark Corp. (a) 3,000 90
Public Service Co. of New Mexico (a) 4,400 78
Puget Sound Power & Light Co. 2,200 51
Rochester Gas & Electric Corp. 5,300 120
TNP Enterprises, Inc. 1,400 26
UGI Corp. New 1,600 33
United Illuminating Co. 1,000 37
United States Cellular Corp. (a) 11,600 391
US Long Distance Corp. (a) 3,000 41
UtiliCorp United, Inc. 2,600 76
Washington Gas & Light Co. 1,500 31
Washington Water Power Co. 3,000 52
WPL Holdings, Inc. 1,200 37
WPS Resources Corp. 1,000 34
------
6,895
------
TOTAL COMMON STOCKS
(cost $229,082)
267,386
-------
OPTIONS PURCHASED - 0.1%
Russell 2000-Registered Trademark- Index
Mar 310 Calls (a) 130* $ 195
-------
TOTAL OPTIONS PURCHASED
(cost $189)
195
-------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.1%
Genesis Health Ventures, Inc. (conv.)
6.000% due 11/30/03 $ 100 $ 162
--------
TOTAL LONG-TERM INVESTMENTS
(cost $131) 162
--------
SHORT-TERM INVESTMENTS - 3.8%
Frank Russell Investment Company
Money Market Fund, due on demand (b)
10,764 10,764
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $10,764) 10,764
--------
TOTAL INVESTMENTS
(identified cost $240,166)(c) - 99.6% 278,507
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - 0.4% 1,059
--------
NET ASSETS - 100.0% $279,566
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax
purposes was $240,536 and net unrealized appreciation for all securities
was $37,971. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of
market value over tax cost of $50,417 and aggregate gross
unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $12,446.
* Number of contracts.
The accompanying notes are an integral part of the financial statements.
Equity II Fund 25
<PAGE> 28
EQUITY II FUND
FUTURES AND OPTIONS WRITTEN
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
---------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 400 Midcap Index Futures Contracts
expiration date 03/96 52 $ (80)
Russell 2000-Registered Trademark- Index
Futures Contracts expiration date 03/96 13 10
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (70)
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
CONTRACTS (000)
--------- -------
<S> <C> <C>
PUT OPTIONS WRITTEN
(Notes 2 and 3)
Russell 2000-Registered Trademark- Index
Mar 310 (a) 130 $ 72
------
Total liability for options written
(premiums received $78)(***)
$ 72
------
------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due
12/31/95, valued at $3,250 were held as collateral by the
custodian in connection with options written and futures
contracts purchased by the Fund. The settlement amount of
these matured notes is included in Receivable for Investments
Sold on the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
26 Equity II Fund
<PAGE> 29
EQUITY II FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS,
Investments at market (identified cost $240,166,098)(Note 2). $ 278,506,840
Receivables:
Dividends and interest..................................... 402,413
Investments sold........................................... 4,599,050
Fund shares sold........................................... 1,126,352
Daily variation margin on futures contracts (Notes 2 and 3) 43,844
-------------
284,678,499
LIABILITIES
Payables:
Investments purchased......................... $ 4,604,479
Fund shares redeemed.......................... 161,953
Accrued bookkeeping service fees (Note 4)..... 4,759
Accrued management fees (Note 4).............. 177,770
Accrued transfer agent fees (Note 4).......... 20,558
Other accrued expenses and payables........... 71,533
Options written, at market value
(premiums received $77,607)(Notes 2 and 3).... 71,500 5,112,552
----------- -------------
NET ASSETS....................................... $ 279,565,947
-------------
-------------
NET ASSETS CONSIST OF:
Undistributed net investment income.......................... $ 179,756
Accumulated net realized gain (loss)......................... 6,219,359
Unrealized appreciation (depreciation) on:
Investments................................................ 38,340,740
Futures contracts.......................................... (69,525)
Options written............................................ 6,107
Shares of beneficial interest................................ 96,795
Additional paid-in capital................................... 234,792,715
-------------
NET ASSETS.................................................... $ 279,565,947
-------------
-------------
Net asset value, offering and redemption price per share ,
($279,565,947 divided by 9,679,528 shares of $.01 par value,
shares of beneficial interest outstanding)................... $ 28.88
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial
statements.
Equity II Fund 27
<PAGE> 30
EQUITY II FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends................................................... $ 2,465,144
Dividends from Money Market Fund (Note 5)................... 1,494,861
Interest.................................................... 446,056
------------
4,406,061
Expenses (Notes 2 and 4):
Management fees............................... $ 1,456,132
Custodian fees................................ 352,831
Transfer agent fees........................... 140,015
Bookkeeping service fees...................... 20,268
Professional fees............................. 19,049
Registration fees............................. 30,058
Trustees' fees................................ 4,364
Miscellaneous................................. 14,963 2,037,680
----------- ------------
Net investment income........................... 2,368,381
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................................. 31,405,903
Futures contracts........................................... 807,995
Options written............................................. 2,154,282
Net change in unrealized appreciation or depreciation of:
Investments................................................. 25,733,658
Futures contracts........................................... (69,525)
Options written............................................. (511,087)
-------------
Net gain (loss) on investments................................ 59,521,226
Net increase (decrease) in net assets resulting from operations $ 61,889,607
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial
statements.
28 Equity II Fund
<PAGE> 31
EQUITY II FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income........................ $ 2,368,381 $ 2,702,405
Net realized gain (loss) from:
Investments................................ 31,405,903 189,908
Futures contracts.......................... 807,995 --
Options written............................ 2,154,282 378,412
Net change in unrealized appreciation
or depreciation of:
Investments................................ 25,733,658 (7,895,169)
Futures contracts.......................... (69,525) --
Options written (511,087) 302,629
------------- ------------
Net increase (decrease) in net assets
resulting from operations................... 61,889,607 (4,321,815)
Distributions to shareholders:
Net investment income........................ (2,492,894) (2,305,128)
Net realized gain on investments............. (26,029,358) (1,119,102)
In excess of net realized gain on investments -- (3,032,617)
Increase (decrease) in net assets from
Fund share transactions..................... 43,221,134 42,334,732
------------- -------------
INCREASE (DECREASE) IN NET ASSETS.............. 76,588,489 31,556,070
Net assets at beginning of year................ 202,977,458 171,421,388
------------- -------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $179,756 and $85,930, respectively)....... $ 279,565,947 $ 202,977,458
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Fund Shares Sold...... 3,638,096 $ 101,842,162 3,105,721 $ 79,232,323
Fund Shares Issued to
Shareholders in
Reinvestments of
Distributions........ 938,560 26,562,853 231,579 5,793,421
Fund Shares Redeemed.. (3,015,897) (85,183,881) (1,666,677) (42,691,012)
---------- ------------- ---------- ------------
Net Increase (Decrease) 1,560,759 $ 43,221,134 1,670,623 $ 42,334,732
---------- ------------- ---------- ------------
---------- ------------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity II Fund 29
<PAGE> 32
EQUITY II FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. $25.00 $26.58 $27.71 $26.32 $19.24
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. .27 .36 .32 .30 .41
Net realized and unrealized
gain (loss) on investments....... 6.80 (.86) 3.97 3.13 7.65
------ ------ ------ ------ ------
Total Income From Investment
Operations....................... 7.07 (.50) 4.29 3.43 8.06
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income............. (.29) (.31) (.31) (.30) (.41)
Net realized gain on investments.. (2.90) (.21) (4.72) (1.74) (.57)
In excess of net realized
gain on investments.............. -- (.56) (.39) -- --
------ ------ ------ ------ ------
Total Distributions............... (3.19) (1.08) (5.42) (2.04) (.98)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR....... $28.88 $25.00 $26.58 $27.71 $26.32
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN (%)(a)................ 28.67 (2.60) 16.70 13.31 42.40
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)................... .83 .23 .34 .32 .37
Net investment income to average
net assets (a)................... .97 1.46 1.14 1.10 1.79
Portfolio turnover................ 89.31 58.04 87.25 43.33 42.16
Net assets, end of year
($000 omitted).................. 279,566 202,977 171,421 120,789 101,206
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
30 Equity II Fund
<PAGE> 33
EQUITY II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000
INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS RUSSELL 2500
ENDED DECEMBER 31 EQUITY II -REGISTERED TRADEMARK-**
----------------- --------- ------------------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $11,017 $11,198
1987 $12,153 $10,674
1988 $14,004 $13,100
1989 $17,453 $15,645
1990 $14,876 $13,317
1991 $21,184 $19,537
1992 $24,003 $22,699
1993 $28,012 $26,453
1994 $27,284 $26,173
1995 $35,105 $34,471
</TABLE>
Equity II Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year 12,867 28.67%
5 Years 23,598 18.73%***
10 Years 35,105 13.37%***
Russell 2500-TM- Index
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
1 Year 13,170 31.70%
5 Years 25,884 20.95%***
10 Years 34,471 13.17%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 2500 Index is composed of the bottom 500 stocks in the Russell
1000-Registered Trademark- Index and all the stocks in the Russell 2000-
Registered Trademark- Index. The largest security in this index has a
market capitalization of about $1.3 billion.
*** Annualized.
EQUITY II FUND returned 28.7% during 1995, trailing the Russell 2500-TM-
Index return of 31.7%. The portfolio was managed in a manner consistent with
its objective to maximize total return, primarily through capital
appreciation, by assuming a higher level of volatility than is ordinarily
expected from the Equity I Fund.
The year was a difficult one for small cap investors relative to the strong
gains of large cap stocks. Although the financial services, technology, and
health care sectors of the Russell 2500-TM- all posted returns in excess of
40% for the year, their performance came in bursts with strong rotations
throughout the year. Good technology stock selection added significant value
but was eclipsed by other factors. The Fund's balance of Value and Growth
investment styles was a marked disadvantage, given the outperformance of
stocks of small, rapidly growing companies during the year. A slightly
smaller cap orientation than the index also negatively impacted returns due
to the market's favor for large company stocks. The market's rotation to
defensive sectors (health care, energy, and utilities) in the latter part of
the year also detracted from the Fund's performance.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity II Fund 31
<PAGE> 34
EQUITY III FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------------ -----------
<S> <C> <C>
COMMON STOCKS - 96.1%
BASIC INDUSTRIES - 8.6%
Air Products & Chemicals, Inc. 11,800 $ 622
AK Steel Holding Corp. 6,500 223
Alumax, Inc. (a) 18,800 576
Aluminum Co. of America 7,500 397
ASARCO, Inc. 30,000 960
Bethlehem Steel Corp. (a) 45,300 634
Boise Cascade Corp. 27,000 935
Champion International Corp. 6,300 265
Crown Vantage, Inc. (a) 1,340 18
Cyprus Amax Minerals Co. 36,050 942
Dow Chemical Co. 43,900 3,089
du Pont (E.I.) de Nemours & Co. 7,300 510
Eastman Chemical Co. 6,700 420
Federal Paper Board, Inc. 18,300 949
Goodrich (B.F.) Co. 19,800 1,349
Great Lakes Chemical Corp. 20,200 1,454
International Paper Co. 45,600 1,727
James River Corp. of Virginia 18,400 444
Methanex Corp. (a) 45,500 333
Potlatch Corp. 13,600 544
Reynolds Metals Co. 20,200 1,144
Union Carbide Corp. 6,200 233
USX-U.S. Steel Group 30,700 944
Wellman, Inc. 8,800 200
Willamette Industries, Inc. 6,500 363
-----------
19,275
-----------
CAPITAL GOODS - 3.1%
AGCO Corp. 13,500 689
Ball Corp. 7,000 193
Caterpillar, Inc. 5,000 294
Cummins Engine Co., Inc. 32,000 1,184
Deere & Co. 13,200 465
General Electric Co. 26,800 1,930
Harnischfeger Industries, Inc. 11,500 382
Johnson Controls, Inc. 11,300 777
Tecumseh Products Co. Class A 7,700 398
Timken Co. 9,600 367
Varity Corp. (a) 7,700 285
-----------
6,964
-----------
CONSUMER BASICS - 10.1%
Allergan, Inc. 7,900 257
American Stores Co. 72,600 1,942
Archer-Daniels-Midland Co. 110,150 1,983
Bausch & Lomb, Inc. 11,900 472
Bergen Brunswig Corp. Class A 16,000 398
Black & Decker Corp. 11,600 409
Bristol-Myers Squibb Co. 33,500 2,877
Columbia/HCA Healthcare Corp. 23,500 1,193
Community Psychiatric Centers 32,700 401
Dial Corp. (The) 38,200 1,132
Hanson PLC - ADR 47,800 729
IBP, Inc. 19,400 980
McKesson Corp. 12,900 653
Philip Morris Cos., Inc. 21,500 1,946
RJR Nabisco Holdings Corp. 41,780 1,290
Sara Lee Corp. 42,600 1,358
Schering-Plough Corp. 20,900 1,144
Tenet Healthcare Corp. (a) 42,200 876
U.S. Surgical Corp. 16,300 348
United Healthcare Corp. 12,600 824
Warner-Lambert Co. 14,500 1,407
-----------
22,619
-----------
CONSUMER DURABLES - 3.5%
Federal-Mogul Corp. 30,900 606
Ford Motor Co. 34,200 992
General Motors Corp. 83,500 4,415
PACCAR, Inc. 18,700 785
Whirlpool Corp. 20,300 1,082
-----------
7,880
-----------
CONSUMER NON-DURABLES - 4.8%
Anheuser-Busch Cos., Inc. 21,900 1,465
Burlington Coat Factory Warehouse Corp. (a) 10,600 109
Burlington Industries, Inc. (a) 54,700 718
CML Group, Inc. 45,300 232
Dayton Hudson Corp. 23,800 1,785
Melville Corp. 19,100 587
Michaels Stores, Inc. (a) 19,400 267
Penney (J.C.) Co., Inc. 15,000 714
Pier 1 Imports, Inc. 36,300 413
Price Costco, Inc. (a) 37,000 564
Reebok International, Ltd. 8,200 232
Sears Roebuck & Co. 23,800 928
SuperValu, Inc. 64,700 2,038
Toys "R" Us, Inc. (a) 29,900 650
-----------
10,702
-----------
</TABLE>
Equity III Fund 33
<PAGE> 35
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------------ -----------
<S> <C> <C>
CONSUMER SERVICES - 0.7%
AMR Corp. (a) 12,200 $ 906
Brinker International, Inc. (a) 43,800 662
-----------
1,568
-----------
ENERGY - 12.8%
Amerada Hess Corp. NPV 12,300 652
Amoco Corp. 23,400 1,682
Atlantic Richfield Co. 18,700 2,071
British Petroleum Co. PLC - ADR 9,362 956
Castle Energy Corp. New (a) 7,600 64
Chevron Corp. 25,100 1,318
Diamond Shamrock, Inc. 16,200 419
Exxon Corp. 19,600 1,570
Haliburton Co. 4,600 233
Helmerich & Payne, Inc. 7,800 232
Kerr-McGee Corp. 9,900 629
LTV Corp. New (a) 43,900 604
Mobil Corp. 38,800 4,346
Murphy Oil Corp. 22,900 950
NorAm Energy Corp. 51,700 459
Norsk Hydro AS - ADR 8,400 352
Questar Corp. 18,300 613
Repsol - ADR 21,200 697
Royal Dutch Petroleum Co. - ADR 10,100 1,425
Tenneco, Inc. 41,600 2,064
Texaco, Inc. 27,000 2,120
Total Co. SA - ADR 24,000 816
Unocal Corp. 24,200 705
USX-Marathon Group 76,000 1,482
Valero Energy Corp. 32,800 803
YPF Sociedad Anonima Class D - ADR 53,500 1,156
-----------
28,418
-----------
FINANCE - 18.3%
Aetna Life & Casualty Co. 11,400 789
Allstate Corp. 22,031 906
AMBAC, Inc. 17,500 820
American General Corp. 49,700 1,733
Banc One Corp. 19,400 732
Bank of New York Co., Inc. 18,200 887
BankAmerica Corp. 55,400 3,587
Bankers Trust New York Corp. 23,100 1,536
Barnett Banks, Inc. 18,200 1,074
Beneficial Corp. 12,800 597
Central Fidelity Banks, Inc. 20,600 654
Chase Manhattan Corp. 15,500 940
Chemical Banking Corp. 35,700 2,097
Chubb Corp. (The) 15,700 1,519
Citicorp 26,200 1,762
CoreStates Financial Corp. 41,600 1,576
Countrywide Credit Industries, Inc. 51,100 1,111
Dean Witter, Discover & Co. 26,700 1,255
Federal National Mortgage Association 15,900 1,974
First Bank System, Inc. 28,300 1,404
First Chicago NBD Corp. 35,291 1,394
First Colony Corp. 14,700 373
Fleet Financial Group, Inc. 19,896 811
Golden West Financial Corp. 12,500 691
Great Western Financial Corp. 29,500 752
Life Re Corp. 22,900 573
Loews Corp. 2,800 219
Mid Ocean, Ltd. 25,900 949
NationsBank Corp. 23,100 1,608
North American Mortgage Co. 4,500 96
Old Republic International Corp. 23,200 824
Paine Webber Group, Inc. 19,400 388
PNC Bank Corp. 24,200 780
Prudential Reinsurance Holdings, Inc. 22,000 514
Reliance Group Holdings, Inc. 45,900 396
Southern National Corp. 39,400 1,034
St. Paul Cos., Inc. 3,200 178
TIG Holdings, Inc. 25,100 715
UNUM Corp. 13,900 765
USF & G Corp. 37,900 641
-----------
40,654
-----------
GENERAL BUSINESS - 1.9%
ADT, Ltd. (a) 61,200 918
American Greetings Corp. Class A 8,800 243
Comdisco, Inc. 18,750 424
Comsat Corp. Series 1 22,600 421
McGraw-Hill, Inc. 4,500 392
New York Times Co. Class A 22,700 672
Ogden Corp. 22,100 472
Tribune Co. 10,500 643
-----------
4,185
-----------
MISCELLANEOUS - 1.6%
Chelsea GCA Realty, Inc. 10,300 309
Colonial Properties Trust 17,100 436
Geon Co. 34,400 839
Irvine Apartment Communities, Inc. 30,700 591
34 Equity III Fund
</TABLE>
<PAGE> 36
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------------ -----------
<S> <C> <C>
Macerich Co. 23,000 $ 460
PXRE Corp. 14,200 376
South West Property Trust, Inc. 13,300 180
Stolt-Nielsen SA 9,600 274
-----------
3,465
-----------
SHELTER - 1.2%
Kaufman & Broad Home Corp. 22,600 336
Lafarge Coppee 14,500 272
Louisiana Pacific Corp. 29,300 711
Weyerhaeuser Co. 28,900 1,250
-----------
2,569
-----------
TECHNOLOGY - 7.3%
Advanced Micro Devices, Inc. 26,000 429
Apple Computer, Inc. 12,500 397
Augat, Inc. 18,700 320
Boeing Co. 22,500 1,763
Coltec Industries, Inc. (a) 20,300 236
COMPAQ Computer Corp. (a) 13,100 629
Data General Corp. (a) 35,600 490
Hewlett-Packard Co. 11,600 972
Intel Corp. 23,400 1,328
International Business Machines Corp. 42,500 3,899
Kaman Corp. Class A 15,600 172
Northrop Grumman Corp. 20,500 1,312
Pitney Bowes, Inc. 3,200 150
Raytheon Co. 17,000 803
Seagate Technology (a) 17,100 812
Storage Technology Corp. (a) 36,000 860
Sundstrand Corp. 3,100 218
TRW, Inc. 2,500 194
United Technologies Corp. 12,900 1,223
-----------
16,207
-----------
TRANSPORTATION - 2.6%
Conrail, Inc. 20,300 1,421
CSX Corp. 32,800 1,497
Federal Express Corp. (a) 19,400 1,433
GATX Corp. 8,800 428
Ryder System, Inc. 37,900 938
-----------
5,717
-----------
UTILITIES - 19.6%
AT&T Corp. 9,500 615
BCE, Inc. 63,200 2,180
BellSouth Corp. 30,400 1,322
Boston Edison Co. 23,900 705
CINergy Corp. 12,900 395
Detroit Edison Co. 21,900 756
Dominion Resources, Inc. 26,900 1,110
Entergy Corp. 51,700 1,512
Equitable Resources, Inc. 22,800 713
FPL Group, Inc. 18,400 853
General Public Utilities Corp. 72,200 2,455
GTE Corp. 82,800 3,643
MCI Communications Corp. 48,100 1,257
New England Electric System 21,900 868
New York State Electric & Gas Corp. 20,900 541
Niagara Mohawk Power Corp. 65,700 632
Northeast Utilities 49,900 1,216
NYNEX Corp. 56,700 3,062
Pacific Enterprises 4,500 127
Pacific Gas & Electric Co. 45,900 1,302
Pacific Telesis Group 104,100 3,500
PacifiCorp. 20,600 438
PP&L Resources, Inc. 29,100 728
Public Service Enterprise Group, Inc. 21,800 668
Rochester Gas & Electric Corp. 10,800 244
SCE Corp. 116,600 2,070
Sprint Corp. 94,800 3,780
Texas Utilities Co. 79,200 3,257
U.S. West, Inc. 54,600 1,952
Unicom Corp. 54,400 1,781
-----------
43,682
-----------
TOTAL COMMON STOCKS
(cost $186,042) 213,905
-----------
CONVERTIBLE PREFERRED STOCK - 0.4%
Atlantic Richfield Co. 33,300 783
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $825) 783
-----------
Equity III Fund 35
</TABLE>
<PAGE> 37
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
------------ -----------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.8%
AMR Corp. (conv.)
6.125% due 11/01/24 $ 1,080 $ 1,126
Unisys Corp. (Conv.)
8.250% due 08/01/00 885 788
-----------
TOTAL LONG-TERM INVESTMENTS
(cost $1,883) 1,914
-----------
SHORT-TERM INVESTMENTS - 0.7%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 1,583 1,583
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,583) 1,583
-----------
TOTAL INVESTMENTS
(identified cost $190,333)(c) - 98.0% 218,185
OTHER ASSETS AND LIABILITIES,
NET - 2.0% 4,356
-----------
NET ASSETS - 100.0% $ 222,541
-----------
-----------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes
was $190,842 and net unrealized appreciation for all securities
was $27,343. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of
market value over tax cost of $31,652 and aggregate gross
unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $4,309.
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
------------ --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 7 $ (7)
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (7)
--------------
--------------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes,
due 12/31/95, valued at $3,500 were held as collateral by the
custodian in connection with futures contracts purchased by
the Fund. The settlement amount of these matured notes is
included in Receivable for Investments Sold on the Statement
of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
36 Equity III Fund
<PAGE> 38
EQUITY III FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $190,332,732) (Note 2)...................... $218,184,814
Receivables:
Dividends and interest.......................................................... 841,994
Investments sold................................................................ 4,171,648
Fund shares sold................................................................ 509,972
Daily variation margin on futures contracts (Notes 2 and 3)..................... 11,097
------------
223,719,525
LIABILITIES
Payables:
Investments purchased........................................... $934,097
Fund shares redeemed............................................ 63,369
Accrued bookkeeping service fees (Note 4)....................... 3,000
Accrued management fees (Note 4)................................ 114,827
Accrued transfer agent fees (Note 4)............................ 16,653
Other accrued expenses and payables............................. 47,047 1,178,993
-------- ------------
NET ASSETS............................................................................ $222,540,532
------------
------------
NET ASSETS CONSIST OF:
Undistributed net investment income................................................ $ 29,502
Accumulated net realized gain (loss)............................................... 4,575,413
Unrealized appreciation (depreciation) on:
Investments..................................................................... 27,852,284
Futures contracts............................................................... (6,800)
Shares of beneficial interest...................................................... 76,457
Additional paid-in capital......................................................... 190,013,676
------------
NET ASSETS............................................................................ $222,540,532
------------
------------
Net asset value, offering and redemption price per share
($222,540,532 divided by 7,645,686 shares of $.01 par value
shares of beneficial interest outstanding)......................................... $29.11
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity III Fund 37
<PAGE> 39
EQUITY III FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends.......................................................................... $ 6,214,479
Dividends from Money Market Fund (Note 5).......................................... 509,009
Interest........................................................................... 421,348
------------
7,144,836
Expenses (Notes 2 and 4):
Management fees.................................................... $945,888
Custodian fees..................................................... 182,500
Transfer agent fees................................................ 116,720
Bookkeeping service fees........................................... 12,000
Professional fees.................................................. 17,172
Registration fees.................................................. 18,259
Trustees' fees..................................................... 4,352
Miscellaneous...................................................... 13,727 1,310,618
-------- ------------
Net investment income................................................................. 5,834,218
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................................ 23,476,461
Futures contracts.................................................................. 660,171
Options written.................................................................... 770,438
Net change in unrealized appreciation or depreciation of:
Investments........................................................................ 30,571,095
Futures contracts.................................................................. (6,800)
Options written.................................................................... (96,288)
------------
Net gain (loss) on investments........................................................ 55,375,077
------------
Net increase (decrease) in net assets resulting from operations....................... $ 61,209,295
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
38 Equity III Fund
<PAGE> 40
EQUITY III FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............................................. $ 5,834,218 $ 6,207,725
Net realized gain (loss) from:
Investments.................................................... 23,476,461 13,351,739
Futures contracts.............................................. 660,171 --
Options written................................................ 770,438 442,659
Net change in unrealized appreciation or depreciation of:
Investments.................................................... 30,571,095 (17,624,466)
Futures contracts.............................................. (6,800) --
Options written................................................ (96,288) 27,529
------------ ------------
Net increase (decrease) in net assets resulting from operations...... 61,209,295 2,405,186
Distributions to shareholders:
Net investment income............................................. (5,956,213) (6,118,015)
Net realized gain on investments.................................. (20,008,945) (14,198,014)
In excess of net realized gain on investments..................... -- (765,734)
Increase (decrease) in net assets from Fund share transactions....... 9,489,136 14,853,656
------------ ------------
INCREASE (DECREASE) IN NET ASSETS.................................... 44,733,273 (3,822,921)
Net assets at beginning of year...................................... 177,807,259 181,630,180
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $29,502 and $151,457, respectively)............................ $222,540,532 $177,807,259
------------ ------------
------------ ------------
</TABLE>
FUND SHARE TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Fund shares sold......................... 1,995,925 $55,610,295 1,755,472 $46,981,185
Fund shares issued to shareholders
in reinvestments of distributions....... 841,738 24,119,117 793,254 19,533,671
Fund shares redeeme...................... (2,546,275) (70,240,276) (1,910,090) (51,661,200)
---------- ----------- ---------- -----------
Net increase (decrease).................. 291,388 $ 9,489,136 638,636 $14,853,656
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity III Fund 39
<PAGE> 41
EQUITY III FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................ $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................... .82 .93 .89 .98 1.08
Net realized and unrealized gain (loss) on investments..... 7.73 (.85) 2.99 2.24 5.21
------- ------- ------- ------- -------
Total Income From Investment Operations.................... 8.55 .08 3.88 3.22 6.29
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income...................................... (.83) (.91) (.90) (.99) (1.07)
In excess of net investment income......................... -- -- (.00) -- --
Net realized gain on investments........................... (2.79) (1.94) (2.68) (2.56) (1.44)
In excess of net realized gain on investments.............. -- (.10) -- -- --
------- ------- ------- ------- -------
Total Distributions........................................ (3.62) (2.95) (3.58) (3.55) (2.51)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR.................................. $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)(a)........................................... 35.96 1.16 14.95 12.30 27.86
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (a)............... .65 .17 .16 .20 .25
Net investment income to average net assets (a)............ 2.90 3.39 3.09 3.57 4.05
Portfolio turnover......................................... 103.40 85.92 76.77 84.56 56.99
Net assets, end of year ($000 omitted)..................... 222,541 177,807 181,630 166,782 138,076
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
See Note 4.
40 Equity III Fund
<PAGE> 42
EQUITY III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS RUSSELL 1000
ENDED DECEMBER 31 EQUITY III -REGISTERED TRADEMARK- VALUE **
- ----------------- ---------- -------------------------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $11,474 $11,998
1987 $11,304 $12,058
1988 $13,813 $14,850
1989 $17,690 $18,591
1990 $16,677 $17,088
1991 $21,324 $21,292
1992 $23,946 $24,233
1993 $27,525 $28,625
1994 $27,844 $28,056
1995 $37,858 $38,815
</TABLE>
Equity III Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- --------
<S> <C> <C>
1 Year $13,596 35.96%
5 Years $22,701 17.81%***
10 Years $37,858 14.23%***
</TABLE>
Russell 1000-Registered Trademark- Value Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- --------
<S> <C> <C>
1 Year $13,835 38.35%
5 Years $22,715 17.83%***
10 Years $38,815 14.53%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 1000-Registered Trademark- Value Index includes stocks from the
Russell 1000-Registered Trademark- Index with a less than average growth
orientation. The Index represents the universe of stocks from which most
Value money managers typically select.
*** Annualized.
EQUITY III FUND returned 36% during 1995, trailing the Russell
1000-Registered Trademark- Value Index return of 38.4%. The portfolio was
managed in a manner consistent with its objective to provide exposure to the
value style of investing, utilizing common stocks that typically allow for a
higher level of dividend income than the broader market. The fund employs a
multi-style, multi-manager strategy wherein companies whose market prices are
low relative to earnings are found particularly attractive. Beyond that, the
criteria may vary. Some managers focus on yield while others concentrate on
low price-to-book ratios.
The fund trailed the index for the year, but despite its weak showing in the
fourth quarter, finished ahead of the average Value manager. This year it
was particularly difficult for the fund to keep pace with the index, given
the dominance of large cap stocks. The slowing of the economy also had a
negative impact on the fund's cyclical holdings. Other sources of performance
gains and shortfalls were examples of the sector rotation-driven nature of
the market. Strong gains from good technology stock selection early in the
year were overshadowed by weak returns in the fourth quarter attributable to
underweighted positions in utilities and energy-related issues.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Equity III Fund 41
<PAGE> 43
EQUITY Q FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS - 95.0%
BASIC INDUSTRIES - 6.3%
Air Products & Chemicals, Inc. 11,100 $ 586
Albemarle Corp. 5,300 103
Allegheny Ludlum Corp. 7,700 142
Aluminum Co. of America 33,200 1,755
Arco Chemical Co. 9,700 472
Boise Cascade Corp. 33,100 1,146
Bowater, Inc. 2,900 103
Cabot Corp. 30,900 1,665
Carpenter Technology Corp. 12,500 514
Champion International Corp. 57,400 2,411
Consolidated Papers, Inc. 700 39
Crown Cork & Seal Co., Inc. (a) 15,900 664
Dow Chemical Co. 65,200 4,588
du Pont (E.I.) de Nemours & Co. 40,600 2,837
Eastern Enterprises, Inc. 14,600 515
Eastman Chemical Co. 17,525 1,098
Engelhard Corp. 19,300 420
Federal Paper Board, Inc. 37,300 1,935
Freeport McMoRan Copper &
Gold, Inc. Class B 22,100 622
Georgia Gulf Corp. 2,700 83
Goodrich (B.F.) Co. 1,300 89
IMC Global, Inc. 31,900 1,304
Inland Steel Industries, Inc. 5,400 136
International Paper Co. 49,500 1,875
James River Corp. of Virginia 8,600 207
Kimberly-Clark Corp. 100 8
Lyondell Petrochemical Co. 4,300 98
Mead Corp. 5,600 293
Minnesota Mining &
Manufacturing Co. 200 13
Monsanto Co. 13,600 1,666
Nucor Corp. 11,700 668
Phelps Dodge Corp. 23,700 1,475
Pope & Talbot, Inc. 6,300 83
PPG Industries, Inc. 34,200 1,565
Praxair, Inc. 18,700 629
Premark International, Inc. 5,700 289
Reynolds Metals Co. 7,400 419
Rohm & Haas Co. 3,800 245
Temple-Inland, Inc. 24,800 1,094
Texas Industries, Inc. 18,100 959
Union Carbide Corp. 65,600 2,460
USX-U.S. Steel Group 200 6
Wellman, Inc. 11,000 250
Westvaco Corp. 16,500 458
Willamette Industries, Inc. 7,500 420
Worthington Industries, Inc. 18,600 385
--------
38,792
--------
CAPITAL GOODS - 6.1%
Alliance Semiconductor Corp. 2,500 28
Ametek, Inc. 100 2
Arrow Electronics, Inc. (a) 14,400 621
Atmel Corp. 25,800 571
Boston Scientific Corp. (a) 20,600 1,009
Browning-Ferris Industries, Inc. 37,500 1,106
Caterpillar, Inc. 16,200 952
Cooper Industries, Inc. 9,700 356
Cummins Engine Co., Inc. 1,200 44
Dover Corp. 90,900 3,352
Duracell International, Inc. 10,600 549
Duriron Co., Inc. 15,599 363
Emerson Electric Co. 18,900 1,545
Exide Corp. 3,900 179
Fluor Corp. 13,900 917
General Electric Co. 146,400 10,541
General Signal Corp. 3,500 113
Grainger (W.W.), Inc. 3,600 239
Harnischfeger Industries, Inc. 17,900 595
Harsco Corp. 9,000 523
Ingersoll-Rand Co. 9,100 320
ITT Industries, Inc. 21,400 514
Johnson Controls, Inc. 20,800 1,430
Kaydon Corp. 5,500 167
Kennametal, Inc. 8,100 257
Litton Industries, Inc. (a) 49,300 2,194
Measurex Corp. 1,600 45
Millipore Corp. 200 8
National Service Industries, Inc. 34,200 1,107
Novellus Systems, Inc. (a) 11,200 605
Parker-Hannifin Corp. 32,300 1,106
Pentair, Inc. 5,500 274
Raychem Corp. 23,900 1,359
Tecumseh Products Co. Class A 28,700 1,485
TRINOVA Corp. 1,400 40
Tyco International, Ltd. 28,100 1,001
Varity Corp. (a) 32,000 1,188
Wheelabrator Technologies, Inc. 13,600 228
WMX Technologies, Inc. 22,400 670
--------
37,603
--------
CONSUMER BASICS - 18.5%
Abbott Laboratories NPV 61,100 2,551
ALZA Corp. (a) 9,100 225
American Home Products Corp. 35,800 3,473
Amgen, Inc. 1,900 113
Apria Healthcare Group, Inc. 6,000 170
Archer-Daniels-Midland Co. 114,625 2,063
</TABLE>
Equity Q Fund 43
<PAGE> 44
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Bausch & Lomb, Inc. 7,500 $ 297
Baxter International, Inc. 35,700 1,495
Becton, Dickinson & Co. 32,500 2,438
Black & Decker Corp. 28,300 998
Bristol-Myers Squibb Co. 44,240 3,799
Campbell Soup Co. 11,100 666
Cardinal Health, Inc. 35,000 1,916
Church and Dwight Co., Inc. 7,900 146
Coca-Cola Co. (The) 100,500 7,462
Coca-Cola Enterprises, Inc. 72,400 1,937
Colgate-Palmolive Co. 13,000 913
Columbia/HCA Healthcare Corp. 58,300 2,959
ConAgra, Inc. 36,108 1,489
CPC International, Inc. 26,700 1,832
Dole Food, Inc. 12,700 445
Forest Labs, Inc. (a) 5,000 226
General Nutrition Companies, Inc. 7,300 168
Gillette Co. 3,600 188
Health Care & Retirement Corp.(a) 28,200 987
Health Management Associates Class A 9,300 243
HEALTHSOUTH Rehabilitation Corp. 66,000 1,922
Heinz (H.J.) Co. 54,450 1,804
Hershey Foods Corp. 14,100 917
Humana, Inc. (a) 21,600 591
IBP, Inc. 64,400 3,252
Johnson & Johnson 57,200 4,898
Kroger Co. (a) 37,600 1,410
Lilly (Eli) & Co. 82,300 4,629
Manor Care, Inc. 9,200 322
Medtronic, Inc. 35,500 1,984
Merck & Co., Inc. 120,807 7,943
Nabisco Holdings Corp. Class A 3,500 114
Nash Finch Co. 3,700 66
Outback Steakhouse, Inc. (a) 22,000 789
PepsiCo, Inc. 87,500 4,889
Pfizer, Inc. 52,800 3,326
Philip Morris Cos., Inc. 149,500 13,530
Procter & Gamble Co. 108,200 8,981
Quaker Oats Co. 200 7
Ralston Purina Co. 14,600 911
Rhone Poulenc Rorer, Inc. 25,700 1,369
Safeway, Inc. New (a) 56,400 2,905
Sara Lee Corp. 49,700 1,584
Schering-Plough Corp. 45,800 2,508
Smith's Food & Drug Centers, Inc.
Class B 11,800 298
Snap-On Tools Corp. 14,500 656
Tenet Healthcare Corp. (a) 25,200 523
United Healthcare Corp. 22,500 1,473
Vivra, Inc. 4,600 115
Vons Cos., Inc.(a) 11,200 315
Warner-Lambert Co. 18,500 1,796
--------
115,026
--------
CONSUMER DURABLES - 2.3%
Chrysler Corp. 22,000 1,218
Cooper Tire & Rubber Co. 5,500 135
Dana Corp. 47,400 1,386
Eaton Corp. 18,400 987
Echlin, Inc. 43,700 1,595
Ford Motor Co. 72,300 2,097
General Motors Corp. 60,800 3,215
Goodyear Tire & Rubber Co. 22,100 1,003
La-Z-Boy Chair Co. 17,000 525
Leggett & Platt, Inc. 17,800 432
Modine Manufacturing Co. 3,600 86
National Presto Industries, Inc. 1,600 64
PACCAR, Inc. 4,000 168
Standard Products Co. 14,800 261
Whirlpool Corp. 14,500 772
--------
13,944
--------
CONSUMER NON-DURABLES - 3.8%
Anheuser-Busch Cos., Inc. 22,200 1,485
Avon Products, Inc. 5,300 399
Circuit City Stores, Inc. 8,900 246
Consolidated Stores Corp. (a) 4,300 94
Coors (Adolph) Co. Class B 8,900 197
CPI Corp. 3,800 61
Dayton Hudson Corp. 4,900 368
Eastman Kodak Co. 6,600 442
Fruit of the Loom, Inc. Class A (a) 8,800 215
Gap, Inc. 14,700 617
Home Depot, Inc. (The) 11,100 531
International Flavors &
Fragrances, Inc. 9,900 475
Limited, Inc. (The) 38,900 676
Longs Drug Stores Corp. 24,000 1,149
Lowe's Cos., Inc. 12,000 402
Melville Corp. 11,200 344
Newell Co. 33,700 872
NIKE, Inc. Class B 41,300 2,876
Nine West Group, Inc. (a) 3,200 120
Office Depot, Inc. (a) 65,000 1,284
Penney (J.C.) Co., Inc. 20,700 986
</TABLE>
44 Equity Q Fund
<PAGE> 45
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- -------
<S> <C> <C>
Price Costco, Inc. (a) 14,500 $ 221
Rayonier, Inc. 1,300 43
Rite Aid Corp. 7,500 257
Ross Stores, Inc. 79,100 1,513
Sears Roebuck & Co. 42,400 1,654
Springs Industries, Inc. 300 12
TJX Cos., Inc. 7,400 140
Toys "R" Us, Inc. (a) 25,500 555
V.F. Corp. 12,500 659
Waban, Inc.(a) 22,600 424
Wal-Mart Stores, Inc. 193,700 4,333
Warnaco Group, Inc. Class A 7,300 182
--------
23,832
--------
CONSUMER SERVICES - 2.7%
AMR Corp. (a) 5,400 401
Boyd Gaming Corp. (a) 4,200 49
Brinker International, Inc.(a) 5,100 77
Buffets, Inc. (a) 6,300 88
Callaway Golf Co. 29,400 665
Carnival Corp. Class A 15,900 388
Circus Circus Enterprises, Inc. (a) 13,400 374
Cracker Barrel Old Country Store, Inc. 6,900 119
Delta Air Lines, Inc. 20,600 1,522
Disney (Walt) Co. 69,400 4,095
Harrah's Entertainment, Inc. 10,300 250
International Game Technology 16,800 183
ITT Corp. New 21,400 1,134
King World Productions, Inc. (a) 51,800 2,014
La Quinta Motor Inns, Inc. 35,900 983
Marriot International, Inc. 15,900 608
McDonald's Corp. 17,300 781
MGM Grand, Inc. (a) 100 2
Mirage Resorts, Inc. (a) 17,500 604
Southwest Airlines Co. 8,300 192
UAL Corp. (a) 13,800 2,462
--------
16,991
--------
ENERGY - 7.5%
Amoco Corp. 25,900 1,862
Anadarko Petroleum Corp. 4,700 254
Apache Corp. 1,900 56
Ashland, Inc. 6,300 221
Atlantic Richfield Co. 27,600 3,057
Baker Hughes, Inc. 33,400 814
Burlington Resources, Inc. 100 4
Chevron Corp. 64,800 3,402
Cooper Cameron Corp. (a) 2,778 99
Dresser Industries, Inc. 18,200 444
Exxon Corp. 160,200 12,836
FINA, Inc. Class A 700 35
Halliburton Co. 50,600 2,562
Mobil Corp. 34,700 3,886
Murphy Oil Corp. 200 8
Occidental Petroleum Corp. 54,600 1,167
Oryx Energy Co.(a) 5,300 71
Parker & Parsley Petroleum Co. 100 2
Phillips Petroleum Co. 24,000 819
Pittston Services Group 13,000 408
Royal Dutch Petroleum Co. - ADR 60,200 8,496
Schlumberger, Ltd. 100 7
Sonat Offshore Drilling, Inc. 9,100 407
Sun Company 9,400 257
Tenneco, Inc. 30,000 1,489
Texaco, Inc. 29,800 2,339
Union Texas Petroleum Holdings, Inc. 7,000 136
Unocal Corp. 24,600 716
Valero Energy Corp. 18,100 444
--------
46,298
--------
FINANCE - 15.9%
Aetna Life & Casualty Co. 6,400 443
AFLAC, Inc. 54,625 2,369
Ahmanson (H.F.) & Co. 30,700 814
Allstate Corp. 74,079 3,046
AMBAC, Inc. 1,400 66
American Express Co. 5,400 223
American Financial Group, Inc. 13,100 401
American General Corp. 46,400 1,618
American International Group, Inc. 28,700 2,655
American National Insurance Co. 5,600 370
AT&T Capital Corp. 10,600 405
Banc One Corp. 26,600 1,004
Bank of Boston Corp. 19,746 913
Bank of New York Co., Inc. 76,984 3,753
Bank South Corp. 8,200 249
BankAmerica Corp. 117,300 7,595
Bankers Life Holding Corp. 10,200 207
Bankers Trust New York Corp. 5,400 359
BanPonce Corp. 2,000 78
Barnett Banks, Inc. 13,100 773
BayBanks, Inc. 1,500 147
Bear Stearns Cos., Inc. 135,373 2,691
Beneficial Corp. 3,500 163
Chase Manhattan Corp. 15,300 928
</TABLE>
Equity Q Fund 45
<PAGE> 46
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Chemical Banking Corp. 40,500 $ 2,379
Chubb Corp. (The) 4,400 426
CIGNA Corp. 15,000 1,549
Citicorp 35,800 2,408
CNA Financial Corp. (a) 4,900 556
Comerica, Inc. 6,600 265
CoreStates Financial Corp. 8,200 311
Dean Witter, Discover & Co. 10,600 498
Edwards (A.G.), Inc. 58,900 1,406
Federal National Mortgage Association 33,500 4,158
First Chicago NBD Corp. 129,981 5,134
First Colony Corp. 2,600 66
First Fidelity Bancorp New 6,300 475
First Security Corp. 39,500 1,501
First Tennessee National Corp. 1,700 102
First Union Corp. 10,500 584
First USA, Inc. 14,000 621
First Virginia Banks, Inc. 1,300 54
Firstar Corp. 4,600 182
Fleet Financial Group, Inc. 16,900 689
Fleet Financial Group, Inc. New
1996 Warrants (a) 134 2
General Re Corp. 400 62
Golden West Financial Corp. 3,700 204
Great Western Financial Corp. 9,300 237
Green Tree Financial Corp. 19,600 517
Greenpoint Financial Corp. 29,900 792
Horace Mann Educators Corp. 200 6
Household International Corp. 15,300 905
Huntington Bancshares, Inc. 16,600 394
Integra Financial Corp. 6,900 435
ITT Hartford Group, Inc. 21,400 1,035
Jefferson-Pilot Corp. 15,750 732
Kansas City Life Insurance Co. 800 42
KeyCorp 14,400 522
Lehman Brothers Holdings, Inc. 63,900 1,358
Leucadia National Corp. 200 5
Lincoln National Corp. 51,100 2,747
Loews Corp. 46,800 3,668
MBIA, Inc. 1,700 128
MBNA Corp. 36,700 1,353
Mellon Bank Corp. 200 11
Mercantile Bancorp, Inc. 3,800 175
Mercury Finance Corp. 10,700 142
Mercury General Corp. 10,800 510
Meridian Bancorp, Inc. 23,600 1,097
Merrill Lynch & Co., Inc. 10,800 551
MGIC Investment Corp. 200 11
Midlantic Corp. 9,000 591
Morgan (J.P.) & Co., Inc. 100 8
Morgan Stanley Group, Inc. 17,900 1,443
National City Corp. 25,100 831
NationsBank Corp. 96,005 6,684
Norwest Corp. 46,800 1,544
Old Kent Financial Corp. 11,400 466
Old Republic International Corp. 27,700 983
Paine Webber Group, Inc. 3,900 78
PNC Bank Corp. 28,000 903
Protective Life Corp. 6,100 191
Republic New York Corp. 3,900 242
SAFECO Corp. 6,400 221
Salomon, Inc. 48,100 1,708
Southern National Corp. 6,000 158
SouthTrust Corp. 6,300 161
St. Paul Cos., Inc. 4,300 239
Star Banc Corp. 20,600 1,226
State Street Boston Corp. 4,300 194
Student Loan Marketing Association 11,400 751
TIG Holdings, Inc. 18,200 519
Torchmark Corp. 3,400 154
Transamerica Corp. 3,300 240
Travelers, Inc. 91,200 5,734
UJB Financial Corp. 3,900 139
Union Bank 7,600 409
Unitrin, Inc. 4,800 227
UNUM Corp. 5,200 286
Washington Mutual, Inc. 4,200 120
Washington National Corp. 2,600 72
Wilmington Trust Corp. 1,500 45
--------
98,842
--------
GENERAL BUSINESS - 4.4%
ADT, Ltd. (a) 4,700 71
American Greetings Corp. Class A 44,500 1,229
Ascend Communications, Inc. 4,200 341
BHC Communications, Inc. Class A 3,800 359
Capital Cities/ABC, Inc. 20,000 2,468
Central Newspapers, Inc. Class A 10,900 342
Comcast Corp. Special Class A 19,300 350
Comdisco, Inc. 1,350 31
Cox Communications, Inc. Class A (a) 5,200 101
Donnelley (R.R.) & Sons Co. 16,600 654
Gartner Group, Inc. Class A New (a) 15,300 731
Harcourt General, Inc. 5,300 222
Kelly Services, Inc. Class A 12,200 339
Knight-Ridder, Inc. 2,100 131
Lee Enterprises, Inc. 200 5
</TABLE>
46 Equity Q Fund
<PAGE> 47
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Manpower, Inc. 35,000 $ 984
Miller (Herman), Inc. 1,700 51
New York Times Co. Class A 40,700 1,206
Olsten Corp. 3,600 142
Omnicom Group, Inc. 25,000 931
Paging Network, Inc. 6,800 162
PHH Group, Inc. 35,200 1,646
Pulitzer Publishing Co. 6,400 306
SBC Communications, Inc. 89,350 5,138
Service Corp. International 9,700 427
Staples, Inc. 116,900 2,849
SunGard Data Systems 6,100 169
Tele-Communications, Inc. Class A 66,300 1,318
Time Warner, Inc. 38,400 1,454
Tribune Co. 15,500 947
Turner Broadcasting Systems, Inc. Class B 16,200 421
Viacom, Inc. Class B (a) 2,300 108
Wallace Computer Services, Inc. 1,200 65
Washington Post Co. Class B 4,700 1,324
--------
27,022
--------
MISCELLANEOUS - 0.3%
Castle & Cook, Inc. New 4,233 71
Chris Craft Industries, Inc. 5,964 258
Eckerd Corp. (a) 31,800 1,419
Providian Corp. 5,100 208
Terra Industries, Inc. 3,900 55
--------
2,011
--------
SHELTER - 0.6%
Centex Corp. 2,500 87
Georgia Pacific Corp. 13,400 920
Granite Construction, Inc. 16,700 526
Lennar Corp. 8,200 206
Louisiana Pacific Corp. 9,200 223
Owens-Corning Fiberglas Corp. (a) 7,400 332
Pulte Corp. 18,600 625
USG Corp. New (a) 7,300 219
Weyerhaeuser Co. 17,100 740
--------
3,878
--------
TECHNOLOGY - 12.8%
3Com Corp. 300 14
Adaptec, Inc. (a) 9,900 405
Adobe Systems, Inc. 4,200 260
Advanced Micro Devices, Inc. 9,000 149
AlliedSignal, Inc. 66,400 3,154
Altera Corp. 4,600 228
AMP, Inc. 16,100 618
Amphenol Corp. Class A (a) 19,900 483
Analog Devices, Inc. 47,200 1,670
Apple Computer, Inc. 8,100 257
Applied Materials, Inc. 12,500 491
Autodesk, Inc. 45,000 1,530
Avery Dennison Corp. 13,700 687
Avnet, Inc. 46,900 2,099
Bay Networks, Inc. 14,700 603
Beckman Instruments, Inc. 400 14
Boeing Co. 64,200 5,032
Cabletron Systems, Inc. (a) 6,650 539
Cadence Design Systems, Inc. 4,800 202
Cisco Systems, Inc. (a) 19,400 1,448
Coltec Industries, Inc. (a) 5,900 69
COMPAQ Computer Corp. (a) 22,100 1,061
Computer Associates International, Inc. 11,750 668
Cray Research, Inc. (a) 100 2
Cypress Semiconductor Corp. 34,200 436
Dell Computer Corp. 22,600 783
Diebold, Inc. 3,000 166
Digital Equipment Corp. (a) 16,000 1,026
Electronic Arts (a) 200 5
EMC Corp. (a) 22,500 346
Gateway 2000, Inc. (a) 4,600 112
General Binding Corp. 3,900 77
General Dynamics Corp. 4,400 260
General Instrument Corp. (a) 10,700 250
General Motors Corp. Class H 64,300 3,159
Glenayre Technologies, Inc. 7,900 490
Harris Corp. 2,400 131
Hewlett-Packard Co. 91,000 7,621
Informix Corp. 67,000 2,010
Integrated Device Technology 24,100 310
Intel Corp. 5,400 306
International Business Machines Corp. 104,200 9,560
Komag, Inc. (a) 4,800 219
Lam Research Corp. (a) 12,600 573
Lockheed Martin Corp. 23,100 1,825
Loral Corp. 10,000 354
LSI Logic Corp. 3,900 128
Maxim Integrated Products, Inc. 17,600 673
McDonnell Douglas Corp. 3,400 313
Micro Warehouse, Inc. (a) 8,800 381
Micron Technology, Inc. 19,100 757
Microsoft Corp. (a) 38,300 3,361
Molex, Inc. Class A 1,100 34
</TABLE>
Equity Q Fund 47
<PAGE> 48
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Motorola, Inc. 54,700 $ 3,118
National Semiconductor Corp. (a) 9,800 218
Northern Telecom, Ltd. 8,200 353
Novell, Inc. (a) 32,600 460
Oracle Systems Corp. 64,500 2,725
Parametric Technology Corp. (a) 1,900 126
Quantum Corp. (a) 4,500 73
Raytheon Co. 16,700 789
Read-Rite Corp. (a) 29,900 691
Rockwell International Corp. 25,900 1,369
Scientific-Atlanta, Inc. 1,700 26
Seagate Technology (a) 32,700 1,553
Silicon Graphics, Inc. (a) 11,700 322
Solectron Corp. (a) 11,000 485
Storage Technology Corp. (a) 35,700 852
Sun Microsystems, Inc. 14,000 639
Sybase, Inc. (a) 5,000 179
Symbol Technologies, Inc. (a) 6,100 241
Synopsys, Inc. 5,500 209
Tandem Computers, Inc. (a) 3,900 41
Tandy Corp. 5,100 212
Teradyne, Inc. 15,000 375
Texas Instruments, Inc. 58,100 3,007
Textron, Inc. 22,500 1,519
Thomas & Betts Corp. 1,200 89
TRW, Inc. 11,800 914
Varian Associates, Inc. 20,700 987
Watkins-Johnson Co. 1,600 69
Xerox Corp. 2,500 342
Xilinx, Inc. 4,500 135
--------
79,467
--------
TRANSPORTATION - 0.9%
Burlington Northern, Inc. 15,600 1,217
Conrail, Inc. 15,200 1,064
CSX Corp. 14,200 648
Federal Express Corp. 2,000 148
Florida East Coast Industries, Inc. 200 14
GATX Corp. 5,500 267
Norfolk Southern Corp. 8,200 651
Ryder System, Inc. 27,300 676
Union Pacific Corp. 15,200 1,002
--------
5,687
--------
UTILITIES - 12.9%
Allegheny Power System, Inc. 5,800 166
American Water Works, Inc. 3,500 136
Ameritech Corp. 84,200 4,968
AT&T Corp. 130,000 8,418
Baltimore Gas & Electric Co. 7,300 208
BellSouth Corp. 125,300 5,451
Boston Edison Co. 3,200 94
California Energy, Inc. (a) 2,300 45
Carolina Power & Light Co. 8,500 293
Centerior Energy Corp. 9,700 86
Central & Southwest Corp. 40,400 1,126
Central Maine Power Co. 12,700 183
CILCORP, Inc. 8,500 360
Cincinnati Bell, Inc. 25,400 883
CMS Energy Corp. 5,800 173
Coastal Corp. 100 4
Columbia Gas System, Inc. (a) 2,300 101
Consolidated Edison Co.
of New York, Inc. 96,200 3,078
Consolidated Natural Gas Co. 37,700 1,711
Detroit Edison Co. 30,500 1,052
Dominion Resources, Inc. 11,200 462
DQE, Inc. 1,800 55
Duke Power Co. 8,400 398
El Paso Natural Gas Co. 2,700 77
Enron Corp. 47,800 1,822
Entergy Corp. 99,600 2,913
FPL Group, Inc. 12,100 561
General Public Utilities Corp. 8,300 282
GTE Corp. 244,753 10,769
Houston Industries, Inc. 17,200 417
Illinova Corp. 2,200 66
MCI Communications Corp. 48,600 1,270
National Fuel & Gas Co. 4,900 165
New England Electric System 2,900 115
New York State Electric & Gas Corp. 29,800 771
Niagara Mohawk Power Corp. 6,400 62
Northeast Utilities 9,900 241
Northern States Power Co. 10,900 535
NYNEX Corp. 6,500 351
ONEOK, Inc. 11,900 272
Pacific Enterprises 1,300 37
Pacific Gas & Electric Co. 133,700 3,794
Pacific Telesis Group 31,200 1,049
PacifiCorp. 28,300 601
Panhandle Eastern Corp. 46,600 1,299
Peco Energy Co. 16,200 488
Pinnacle West Capital Corp. 3,800 109
Portland General Electric Co. 23,400 682
Potomac Electric Power Co. 10,000 263
PP&L Resources, Inc. 11,400 285
</TABLE>
48 Equity Q Fund
<PAGE> 49
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Public Service Co. of Colorado 2,400 $ 85
Public Service Enterprise Group, Inc. 53,800 1,648
SCE Corp. 159,900 2,838
Sonat, Inc. 6,300 224
Southern Co. 18,800 463
Southern New England
Telecommunications Corp. 11,800 469
Sprint Corp. 152,250 6,071
Texas Utilities Co. 16,200 666
TransCanada Pipelines, Ltd. 4,500 62
Tucson Electric Power Co. (a) 17,400 57
U.S. West Media Group (a) 50,300 956
U.S. West, Inc. 33,800 1,208
Unicom Corp. 124,100 4,064
Washington Gas & Light Co. 7,600 156
Western Resources, Inc. 34,100 1,138
Williams Cos. (The) 22,600 992
--------
79,844
--------
TOTAL COMMON STOCKS
(cost $480,239) 589,237
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.0%
WMX Technologies, Inc. (conv.)
2.000% due 01/24/05 $ 167 144
--------
TOTAL LONG-TERM INVESTMENTS
(cost $258) 144
--------
SHORT-TERM INVESTMENTS - 4.1%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 25,472 25,472
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $25,472) 25,472
--------
TOTAL INVESTMENTS
(identified cost $505,969)(c) - 99.1% $614,853
OTHER ASSETS AND LIABILITIES,
NET - 0.9% 5,406
--------
NET ASSETS - 100.0% $620,259
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was $507,128
and net unrealized appreciation for all securities was $107,725. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $117,248 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $9,523.
FUTURES CONTRACTS
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 86 $ (60)
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (60)
--------
--------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due 12/31/95, valued
at $6,000 were held as collateral by the custodian in connection with
futures contracts purchased by the Fund. The settlement amount of these
matured notes is included in Receivable for Investments Sold on the
Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
Equity Q Fund 49
<PAGE> 50
EQUITY Q FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $505,968,657)(Note 2) . . . . . . . . . . . . $614,852,562
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,502,884
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,447,926
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852,495
Daily variation margin on futures contracts (Notes 2 and 3). . . . . . . . . . . . 32,399
------------
631,688,266
LIABILITIES
Payables:
Investments purchased. . . . . . . . . . . . . . . . . . . . . . . . $10,231,434
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . 793,038
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . 5,841
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . 311,455
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . 22,148
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 65,747 11,429,663
----------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620,258,603
------------
------------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 16,959,866
Unrealized appreciation (depreciation) on:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,883,902
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,543)
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,015
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494,270,363
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620,258,603
------------
------------
Net asset value, offering and redemption price per share
($620,258,603 divided by 20,401,468 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . $30.40
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
50 Equity Q Fund
<PAGE> 51
EQUITY Q FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,873,093
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . . . . 1,320,380
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,465
------------
13,643,938
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . $2,434,051
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,054
Transfer agent fees. . . . . . . . . . . . . . . . . . . . . . . . . 141,918
Bookkeeping service fees . . . . . . . . . . . . . . . . . . . . . . 23,375
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . 26,248
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . 25,865
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,460
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,716 2,998,687
---------- ------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,645,251
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,195,198
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316,359
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550,868
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,427,252
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,543)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (214,197)
------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . 151,215,937
------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . $161,861,188
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Q Fund 51
<PAGE> 52
EQUITY Q FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,645,251 $ 11,280,726
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,195,198 15,394,913
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316,359 --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550,868 1,017,325
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,427,252 (23,595,261)
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . (59,543) --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . (214,197) 128,010
------------ ------------
Net increase (decrease) in net assets resulting from operations. . . . . . 161,861,188 4,225,713
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . (10,815,119) (11,243,421)
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . (47,298,452) (15,148,864)
In excess of net realized gain on investments. . . . . . . . . . . . . . -- (3,441,395)
Increase (decrease) in net assets from Fund share transactions . . . . . . 85,849,747 73,330,565
------------ ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . 189,597,364 47,722,598
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . 430,661,239 382,938,641
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $37,306 at December 31, 1994) . . . . . . . . . . . . . . . . . . . . $620,258,603 $430,661,239
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS
1995 1994
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . . . . . . 6,435,805 $185,897,050 5,273,653 $134,441,281
Fund shares issued to shareholders
in reinvestments of distributions. . . . . . . . . . 1,857,979 55,099,559 1,141,327 28,032,603
Fund shares redeemed . . . . . . . . . . . . . . . . . (5,522,121) (155,146,862) (3,497,670) (89,143,319)
----------- ------------- ----------- ------------
Net increase (decrease). . . . . . . . . . . . . . . . 2,771,663 $ 85,849,747 2,917,310 $ 73,330,565
----------- ------------- ----------- ------------
----------- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
52 Equity Q Fund
<PAGE> 53
EQUITY Q FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . .59 .69 .66 .67 .75
Net realized and unrealized gain (loss) on investments . . 8.52 (0.41) 2.71 1.73 5.58
------- ------- ------- ------- -------
Total Income From Investment Operations. . . . . . . . . . 9.11 0.28 3.37 2.40 6.33
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . (.61) (.69) (.66) (.68) (.75)
Net realized gain on investments . . . . . . . . . . . . . (2.53) (.97) (1.85) (1.39) (.88)
In excess of net realized gain on investments. . . . . . . -- (.22) (.06) -- --
------- ------- ------- ------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . (3.14) (1.88) (2.57) (2.07) (1.63)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)(a). . . . . . . . . . . . . . . . . . . . . 37.91 .99 13.80 9.97 32.14
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (a) . . . . . . . . .58 .11 .15 .18 .23
Net investment income to average net assets (a). . . . . . . 2.07 2.74 2.50 2.80 3.23
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . 74.00 45.87 54.69 58.35 51.37
Net assets, end of year ($000 omitted) . . . . . . . . . . . 620,259 430,661 382,939 290,357 215,779
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
See Note 4.
Equity Q Fund 53
<PAGE> 54
EQUITY Q FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS RUSSELL 1000
ENDED DECEMBER 31 EQUITY Q -REGISTERED TRADEMARK- **
- ----------------- -------- -------------------------
<S> <C> <C>
INCEPTION* $ 10,000 $ 10,000
1987 $ 8,486 $ 8,636
1988 $ 9,942 $ 10,124
1989 $ 12,637 $ 13,203
1990 $ 12,029 $ 12,654
1991 $ 15,895 $ 16,834
1992 $ 17,478 $ 18,354
1993 $ 19,891 $ 20,218
1994 $ 20,087 $ 20,295
1995 $ 27,702 $ 27,960
</TABLE>
EQUITY Q FUND
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $13,791 37.91%
5 Years $23,030 18.15%***
Inception $27,702 12.60%***
</TABLE>
RUSSELL 1000-REGISTERED TRADEMARK- INDEX
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $13,777 37.77%
5 Years $22,095 17.18%***
Inception $27,960 12.73%***
</TABLE>
* Assumes initial investment on June 1, 1987.
** Russell 1000 Index includes the 1,000 largest companies in the Russell 3000
-Registered Trademark- Index, the smallest of which is valued at about $450
million. The Russell 1000 Index represents the universe of stocks from
which most active money managers typically select.
*** Annualized.
EQUITY Q FUND returned 37.9% during 1995, edging the Russell
1000-Registered Trademark- Index return of 37.8%. The portfolio was managed in
a manner consistent with its objective to provide a total return greater than
the US stock market, as measured by the Russell 1000 Index over a market cycle
of four to six years, while maintaining volatility and diversification similar
to the index.
Historically, no single economic or industrial sector has been consistently
favored by the equity markets. By approximately duplicating the broad market's
structure, an investor can reduce the possibility of being overweighted in an
out-of-favor sector, and by selecting the most attractive stocks within each
sector, an investor can increase the potential for earning a return that is
above the market average.
Despite losing ground during a difficult fourth quarter, the Fund managed to
outperform the index for the year. Good security selection through most of the
year added value over the fund's benchmark. Unlike other Funds that attempted
to add value via sector selection, Equity Q's sector-neutral posture helped it
keep pace with the market which underwent strong rotations among economic
sectors over the course of the year.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
54 Equity Q Fund
<PAGE> 55
INTERNATIONAL FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
COMMON STOCKS - 89.8%
ARGENTINA - 0.2%
Banco de Galicia Y Buenos Aires
Class B New - ADR 7,371 $ 151
Banco Frances del Rio la Plata - ADR 4,238 114
Buenos Aires Embotelladora SA
Class B - ADR 1,686 35
Comercial de Plata (a) 23,620 63
Naviera Perez Companc Class B 39,513 209
Sociedad Comercial del Plata - ADR (a) 1,928 51
Telecom Argentina SA Class B - ADR 1,485 71
Telefonica de Argentina Class B - ADR 13,060 356
Transportadora de Gas Del Sur
Class B - ADR 5,591 72
YPF Sociedad Anonima Class D - ADR 13,560 293
--------
1,415
--------
AUSTRALIA - 3.4%
Amcor, Ltd. 37,000 262
Australia & New Zealand
Bank Group, Ltd. 614,098 2,880
Australian Gas & Light Co. 98,165 369
Australian National Industries, Ltd. 519,483 386
Australian Resources, Ltd. 12,971 13
Australian Tourism Group 14,811 11
Azon Limited 7,691 11
Boral, Ltd. 40,000 101
BRL Hardy, Ltd. 2,716 5
Broken Hill Proprietary Co. 112,703 1,592
BT Property Trust (Units) 13,085 16
Burns Philip & Co., Ltd. 73,239 164
Burswood Property Trust (Units) 16,027 21
Caltex Australia 110,342 435
Coca-Cola Amatil, Ltd. 16,418 131
Coeval Holdings (a)(d) 100,000 0
Coles Myer, Ltd. 129,917 405
Commonwealth Bank of Australia 8,647 69
CSR, Ltd. 228,147 743
Eastern Aluminum 236,000 195
Elders Australia, Ltd. 300,000 381
Eltin, Ltd. 203,977 447
Foodland Associated, Ltd. 6,528 22
Foster's Brewing Group, Ltd. (a) 189,000 310
Gasgoyne Gold Mines NL 2,841 5
George Weston Foods, Ltd. 266 1
Giant Resources (a)(d) 400,000 0
GIO Australia Holdings 332,037 772
Goodman Fielder Wattie 252,938 254
GWA International, Ltd. 9,601 10
Holyman Limited 3,977 8
Lend Lease Corp. 29,602 429
M.I.M. Holdings, Ltd. 32,930 46
Mt. Leyshon Gold Mines, Ltd. 1,058 3
National Australia Bank, Ltd. 132,328 1,190
News Corp. 703,850 3,756
Normandy Poseidon 42,200 61
North Broken Hill Peko 167,614 467
Orion Resources NL 3,977 5
Pacific Dunlop, Ltd. 78,888 185
Pasminco, Ltd. 240,000 294
Pioneer International, Ltd. 172,600 445
Publishing Broadcasting, Ltd. 39,030 136
QCT Resources 16,834 19
QNI Limited 483,480 1,021
RGC Limited 170,531 849
Ross Mining NL 10,376 10
Rothmans Holdings 65,525 268
Santos, Ltd. 314,200 918
Schroders Property Fund 87,604 143
Sea World Property Australia, Ltd. 2,814 2
Simsmetal, Ltd. 4,818 28
Southcorp Holdings, Ltd. 164,600 383
St. Barbara Mines, Ltd. 6,548 4
Stockland Trust Group 55,600 128
Stockland Trust Group New (a) 2,253 5
T N T, Ltd. (a) 279,219 369
Tabcorp. Holdings, Ltd. 60,000 169
Walker Corp., Ltd. 17,294 6
Wesfarmers 50,765 311
Wesfi, Ltd. 1,794 5
Western Mining Corp. 613,342 3,939
Westfield Trust 170,806 307
Westfield Trust New Units (a) 7,375 13
Westpac Banking Corp. 110,674 490
Wills (W.D. & H.O.) 68,000 101
Woodside Petroleum, Ltd. 44,000 225
--------
26,749
--------
AUSTRIA - 0.4%
Austrian Airlines (a) 280 47
Bank Austria AG 3,500 283
Brau-Union Goess AG 2,528 123
BWT AG 2,200 226
Creditanstalt Bankverein 7,488 416
EA-Generali AG 300 90
EVN Energ-Versorg 900 124
Flughafen Wien AG 1,534 103
Interunfall Vericherungs AG 500 78
Lenzing AG 600 51
Leykam-Murzta Papi (a) 1,400 44
</TABLE>
International Fund 55
<PAGE> 56
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Oester Brau Beteil 1,562 $ 71
Oester Elektrizita Class A 9,220 554
OMV AG 2,296 199
Radex-Heraklith 2,375 72
Universale-Bau (a) 750 39
VA Technologie AG (BR) 2,300 292
Wienerberger Baustoff 600 119
Z Landerbank Bank Austria AG 8,460 336
--------
3,267
--------
BELGIUM - 0.6%
Arbed SA NPV (a) 2,546 288
Banque Bruxelles Lambert New 57 9
Banque Bruxelles Lambert NPV 549 95
Barco NV NPV 560 65
Electrabel NPV 4,452 1,059
Generale de Banque NPV 2,380 825
Gevaert Photo-Producten NPV 1,000 62
Groupe Bruxelles Lambert NPV 500 68
Kredietbank NPV 2,961 810
Petrofina SA NPV 1,350 413
Societe Generale de Belgique NPV 876 73
Solvay SA NPV 759 412
Tractebel Investments International NPV 150 62
UCB Capital NV 431 574
--------
4,815
--------
BRAZIL - 0.2%
Cesp Cia Energetic - ADS (a) 4,600 38
Compania Energetica de Minas Gerais (a) 323,649 7
Eletrobras (centrais) NPV 1,003,580 272
Sider Nacional Cia NPV 5,060,000 104
Telecomunicacoes Brasileiras - ADR 20,460 985
Telecomunicacoes Brasileiras NPV 4,826,000 187
Usinas Siderurgicas de Minas - ADR 4,116 33
--------
1,626
--------
CANADA - 0.6%
Abitibi-Price, Inc. 4,300 62
Air Canada, Inc. (a) 12,700 43
Alcan Aluminum, Ltd. 12,800 397
Bank of Montreal 9,800 222
Bank of Nova Scotia Halifax 10,036 219
Barrick Gold Corp. 28,100 741
Brascan, Ltd. Class A 3,700 65
Canadian Imperial Bank of Commerce 10,100 300
Canfor Corp. 4,100 45
Cominco, Ltd. 12,500 256
Domtar, Inc. NPV (a) 14,500 113
Fletcher Challenge Canada, Ltd.
Class A 4,100 65
Imasco, Ltd. IF 6,200 120
Imperial Oil, Ltd. New 14,000 506
Inco, Ltd. 15,700 519
MacMillan Bloedel, Ltd. 9,400 116
National Bank of Canada 9,100 74
Noranda, Inc. 3,200 66
Petro-Canada 12,500 144
Placer Dome, Inc. 31,300 755
Ranger Oil, Ltd. 11,400 71
Royal Bank of Canada 5,040 115
Suncor, Inc. NPV 2,300 72
TransCanada Pipelines, Ltd. 4,100 57
United Dominion Industries, Ltd. 2,400 52
Varity Corp. (a) 20 1
--------
5,196
--------
CHILE - 0.1%
Administradora de Fondos de
Pensiones Provida SA - ADR 1,300 36
Chile Fund, Inc. 10,298 268
Chilectra SA - ADR 3,194 154
Chilgener SA - ADR 4,370 109
Compania de Telefonos (Chile) SA - ADR 1,836 152
Enersis SA - ADR 3,114 89
--------
808
--------
CHINA - 0.1%
Huaneng Power International, Inc.
- ADR Seires N (a) 32,400 466
Yizheng Chemical Fibre Series H 775,000 174
--------
640
--------
DENMARK - 0.6%
Bang & Olufsen Holding Series B 14,000 431
Carlsberg AS Series B 6,000 335
Coloplast AS Class B (Regd) 4,900 433
Den Danske Bank 7,380 509
ISS International Series B 8,800 198
Novo Nordisk AS Class B 14,439 1,977
Sophus Berendsen Class B 2,400 270
Tele Danmark AS Series B 7,200 393
Unidanmark Class A (Regd) 3,300 163
--------
4,709
--------
</TABLE>
56 International Fund
<PAGE> 57
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
FINLAND - 0.5%
America Group Class A 22,800 $ 356
Cultor Oy Series I 2,000 83
Cultor OY Series II 6,350 263
Enso Gutzeit OY Series A 12,000 80
Kymmene Corp. 16,900 447
Merita, Ltd. Series A (a) 206,000 521
Metsa Serla OY Class B 9,000 277
Nokia AB Series A 14,008 551
Nokia AB Series K 9,000 356
Outokumpu OY Class A 36,500 579
Partek AB OY 6,000 69
Rautaruukki OY 58,000 353
Repola OY 6,900 130
Stockmann OY AB Series B 1,300 68
Valmet Corp. Class A 6,000 150
--------
4,283
--------
FRANCE - 5.7%
Accor SA 3,355 435
Alcatel Alsthom 19,345 1,668
Assurances Generales de France 5,565 186
AXA 20,401 1,375
Banque Nationale Paris 44,380 2,002
Bertrand Faure SA 10,000 255
Boiron 1,500 146
Bouygues 4,948 498
Carrefour SA 3,804 2,308
Castorama Dubois 4,582 750
Cetelem 1,300 244
Chargeurs SA 2,414 484
Christian Dior 6,000 647
Cie de St. Gobain 10,854 1,184
Cie de Suez 22,952 947
Cie Finance Paribas Class A (BR) 10,344 567
Clarins 3,657 348
Compagnie Bancaire SA 1,214 136
Credit Commercial de France 10,500 536
Credit Local de France 7,325 586
Credit Lyonnais Cert d'Invest. (a) 6,525 313
Credit National 1,483 109
D.M.C. Dollfuss-Mieg 3,900 159
Eaux (cie Generale) 43,687 4,362
Ecco STE 2,731 413
Erid Beghin-Say 2,048 351
Groupe Danone 3,482 575
GTM - Entrepose 2,700 189
Guilbert SA 1,312 154
Havas 2,975 236
L'Air Liquide 2,320 384
L'Oreal (Societe) 763 204
Lafarge Corp. SA (BR) 11,473 739
Lagardere Groupe (Regd) 11,000 202
Lapeyre (BR) 5,470 273
Legrand 1,900 293
LVMH Moet-Hennessy 5,522 1,150
Michelin (Cie Gen) Class B (Regd) 11,515 459
Moulinex (a) 46,000 629
Pechiney Cert d'Invest. 9,900 374
Pechiney International Class A (a) 7,922 275
Peugeot SA 2,765 365
Pinault-Printemps Redoute SA 3,199 638
Poliet 4,110 334
Primagaz Cie 2,425 193
Primagaz Cie 1998 Warrants (a) 220 2
Promodes 1,700 400
Renault 5,500 158
Rhone Poulenc SA Class A - ADR 13,800 296
Roussel Uclaf 660 112
Sanofi 16,155 1,036
Schneider SA 600 21
SEITA 10,200 370
SGS Thomson Microelectronics (a) 7,400 283
Sidel SA 4,660 1,452
Simco (a) 13 1
Societe Generale 22,521 2,782
Societe Nationale Elf d'Aquitaine 14,094 1,038
Sodexho 1,000 294
Sommer-Allibert 700 186
Synthelabo 7,500 470
Thomson-CSF 29,835 665
Total Co. SA Class B 54,972 3,710
TV Francaise (TFI) 12,373 1,326
Union des Assurances Federales 2,300 275
Union Financiere de France Banque SA 2,100 175
Usinor Sacilor (a) 81,500 1,078
Valeo 10,351 479
Worms & Cie (Regd) 3,150 149
--------
45,433
--------
GERMANY - 4.6%
AEG AG 1,150 117
Allianz AG 1998 Warrants (a) 7,000 430
Allianz AG Holdings 344 671
Altana AG 311 181
AVA ALG Handels VB 1,220 413
Bankgesell Berlin 1,450 369
BASF AG 2,250 501
Bayer AG 10,800 2,850
</TABLE>
International Fund 57
<PAGE> 58
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Bayer Motoren Werk 727 $ 372
Bayerische Hypotheken - und
Wechsel Bank AG 17,390 438
Bayerische Vereinsbank AG 33,500 995
Beiersdorf AG 500 350
Berliner Kraft & Licht 300 90
BHF - Bank AG 17,000 468
Bilfinger & Berger 1,705 645
Buderus AG 1,227 477
Commerzbank AG 2,472 584
Continental AG 22,000 307
Daimler-Benz AG 11,001 5,537
Deutsche Bank AG 36,110 1,711
Deutsche Pfandbrief &
Hypothekenbank AG 11,400 443
Dresdner Bank AG 52,100 1,391
Fag Kugelfischer (a) 1,300 168
Gehe AG 1,390 707
Gehe AG New (a) 437 216
Hoechst AG 10,492 2,845
Hornback Baumarkt AG 1,949 84
M.A.N. AG 990 268
Mannesmann AG 11,546 3,676
Muenchener Rueckversicherungs
- Gesellschaft 540 1,174
Muenchener Rueckversicherungs
- Gesellschaft New (a) 49 105
Praktiker Bau und
Heimwerkemaerkte AG (a) 2,245 69
Preussag AG 450 126
Rhoen - Klinikum AG 4,829 478
RWE AG 1,500 544
SAP AG 4,000 620
Schering AG 5,740 380
Siemens AG 4,297 2,351
Thyssen AG (a) 1,900 345
VEBA AG 39,290 1,668
VEBA International Finance
1998 Warrants (a) 2,700 425
Volkswagen AG 4,115 1,376
Wella AG 1996 Warrants (a) 300 15
--------
36,980
--------
HONG KONG - 3.9%
Allied Properties, Ltd. 148,000 17
Amoy Properties, Ltd. (a) 108,000 107
Cathay Pacific Airways 270,000 412
Cheung Kong Holdings, Ltd. 335,000 2,040
Citic Pacific, Ltd. 226,000 773
Cross Harbour Tunnel Co. 27,000 51
Dairy Farm International Holdings, Ltd. 228,621 210
Dao Heng Bank Group, Ltd. 103,000 370
Dickson Concept International 65,000 61
First Pacific Co. 614,584 684
Great Eagle Holdings 21,510 56
Guangdong Investment 530,000 319
Guangzhou Investment 1,704,000 326
Guoco Group, Ltd. 120,000 579
HSBC Holdings (UK Regd) PLC 59,750 904
Hang Lung Development Co. (a) 76,000 121
Hang Seng Bank 206,000 1,845
Harbour Centre Development 10,000 12
Henderson Investment, Ltd. 88,000 72
Hong Kong & China Gas Co., Ltd. 692 1
Hong Kong & Shanghai Hotel 38,000 55
Hong Kong Aircraft Engineering 16,400 42
Hong Kong Electric 302,500 992
Hong Kong Ferry 44,500 43
Hong Kong Land Holdings, Ltd. 697,203 1,290
Hong Kong Telecommunications 756,000 1,349
Hongkong China, Ltd. 50,000 15
Hopewell Holdings, Ltd. 274,346 158
Hutchison Whampoa, Ltd. 932,000 5,677
Hysan Development 38,000 100
Jardine International Motor 48,000 55
Johnson Electric Holdings, Ltd. 202,000 361
Kowloon Motor Bus 31,200 51
Kumagai Gumi Hong Kong 68,000 49
Lai Sun Development Co., Ltd. 136,000 16
Lai Sun Garment International 34,200 33
Lane, Crawford International Class A 46,000 63
Liu Chong Hing Investment, Ltd. 12,000 12
Maanshan Iron & Steel 776,000 108
Mandarin Oriental International, Ltd. 322,154 390
National Mutual Asia 192,000 174
New Asia Realty & Trust Class A 12,000 23
New World Development Co., Ltd. 638,000 2,781
New World Infrastructure, Ltd. (a) 436 1
Playmates International Holdings 31,661 4
Regal Hotels International 642,519 151
San Miguel Brewery 47,600 20
Shanghai Petrochemical Class H 972,100 280
Shaw Bros. (H.K.), Ltd. 11,000 12
Shun Tak Holdings, Ltd. 66,000 47
Sing Tao 370,000 144
Sino Land Co. 595,718 462
South China Morning Post 138,000 84
Stelux Holdings International 242,639 62
</TABLE>
58 International Fund
<PAGE> 59
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Sun Hung Kai & Co. 34,000 $ 7
Sun Hung Kai Properties, Ltd. 352,900 2,887
Swire Pacific, Ltd. Class A 197,500 1,532
Swire Pacific, Ltd. Class B 37,500 47
Tai Cheung Holdings 53,000 41
Television Broadcast 219,000 780
Top Glory International Holdings, Ltd. 156,000 16
Wharf Holdings 435,224 1,449
Wheelock & Co. 82,000 141
Winsor Industrial Corp., Ltd. 43,500 37
--------
31,001
--------
INDIA - 0.0%
Perusahaan Persero Telekom - ADR (a) 14,000 354
--------
354
--------
IRELAND - 0.1%
Allied Irish Banks 59,000 323
Irish Life PLC 25,000 95
Smurfit (Jefferson) 66,000 157
--------
575
--------
ITALY - 2.6%
Alitalia-Linee Aeree (a) 116,000 48
Alleanza Assicurazioni di Risp 160 1
Assicurazioni Generali SPA 67,558 1,636
Banca Commerciale Italiana 111,124 237
Banca Pop di Bergamo CV 24,000 332
Banco Ambrosiano Veneto di Risp NC 13,000 17
Banco Commerciale Italiana di Risp 43,000 89
Banco di Napoli di Risp (a) 253,000 81
Banco di Roma (a) 221,750 226
Banco Fideuram SPA 94,725 109
Benetton Group SPA 22,000 262
Burgo (Cartiere) SPA 31,500 157
CIR Compagnie Industriali Riunite (a) 203,000 135
Cogefar Inpresit (a) 17,000 14
Credito Italiano 35,000 41
Credito Italiano di Risp NC 87,500 88
Danieli & Co. 3,000 19
Danieli & Co. di Risp NC 20,080 54
Danieli & Co. 1999 Warrants (a) 5,020 3
Edison 157,000 676
Editoriale La Repubblica SPA (a) 125,000 112
Ente Nazionale Idrocarburi SPA (Regd)(a) 44,000 154
Ericsson 1,150 14
Fiat SPA 687,000 2,232
Fiat SPA di Risp NC 77,000 136
Fidis 30,000 58
Finmeccanica SPA (a) 182,000 94
First Banco S. Paolo 45,500 269
I.M.I. 93,068 586
Industria Macchine Automatiche SPA (a) 40,000 270
Industrie Natuzzi SPA - ADR 11,100 504
Istituto National Assicurazioni 328,000 435
Italcementi 29,750 178
Italcementi di Risp NC 10,500 26
Italgas (Soc. Ital.) 60,591 184
La Rinascente 43,500 263
La Rinascente di Risp NC 13,000 37
Magneti Marelli SPA 12,500 15
Marzotto & Figli 5,000 30
Mondadori (Arnoldo) Editore 48,179 417
Montedison SPA (Ferruzzi Agricola)(a) 605,000 405
Olivetti & Cie SPA (a) 5,041,000 4,041
Parmalat Finanziaria SPA 73,000 63
Pirelli & Co. 40,250 51
R.A.S. 3,740 42
Saipem AG 10,000 23
Sasib SPA 31,343 138
Sasib SPA di Risp NC 85,507 209
Sirti SPA 36,500 205
SME (Meridonale di)(a) 30,059 61
SNIA BPD (a) 170,000 142
SOFAP 125,000 140
SOPAF di Risp 195,500 155
Sorin Biomedica Group SPA 8,000 19
Stet 237,910 673
Stet di Risp NC 229,290 468
Telecom Italia SPA 657,150 1,022
Telecom Italia di Risp 380,895 466
Telecom Italia Mobile SPA (a) 1,187,604 2,090
Telecom Italia Mobile SPA - di Risp (a) 15,500 16
Unicem di Risp (a) 12,463 67
--------
20,735
--------
JAPAN - 31.9%
Achilles Corp. 140,000 541
Advantest 3,000 153
Aisin Seiki Co., Ltd. 14,000 184
Aiwa Co. 20,000 468
Ajinomoto Co., Inc. 3,000 33
Alps Electric Co. 56,000 645
Amada Co., Ltd. 78,000 770
Aoki Corp. 85,000 356
Apic Yamada Corp. 12,000 476
</TABLE>
International Fund 59
<PAGE> 60
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Arabian Oil Co. 2,400 $ 99
Asahi Bank 80,000 1,007
Asahi Breweries 8,000 94
Bank of Yokohama 14,000 114
Banyu Pharmaceutical 4,000 49
Brother Industries 104,000 565
Canon Sales Co., Inc. 3,050 81
Canon, Inc. 57,000 1,032
Chiba Bank, Ltd. 13,000 117
Chubu Electric Power Co., Inc. 2,400 56
Chugai Pharmaceutical Co. 88,000 843
Chuo Trust & Banking 70,000 678
Citizen Watch Co., Ltd. 39,000 298
Cosmo Oil Co. 176,000 961
CSK Corp., Ltd. 13,400 419
Dai Ichi Kangyo Bank 30,000 590
Dai Ichi Pharmaceutical Co. 74,000 1,054
Dai Nippon Printing, Ltd. 66,000 1,119
Dai Nippon Screen Manufacturing Co. (a) 91,000 799
Daicel Chemical Industries 45,000 256
Daido Steel Co. 100,000 504
Daiei, Inc. 282,000 3,414
Daifuku Machinery Co. 16,000 226
Daikin Industries 113,000 1,105
Daikyo, Inc. 6,000 45
Daishinku Corp. 71,000 798
Daiwa Bank 240,000 1,941
Daiwa Danchi Co., Ltd. (a) 45,000 241
Daiwa House Industries Co. 55,000 906
Daiwa Kosho Lease Co. Ltd. 65,000 648
Daiwa Securities 273,000 4,178
DDI Corp. 538 4,169
Denny's Japan 1,000 33
Diamond Lease Co. 20,000 271
Dowa Mining Co. 70,000 338
East Japan Railway 540 2,625
Ebara Corp. 50,000 731
Eisai Co. 4,000 70
Familymart, Co. 6,000 271
Fanuc Co. 12,000 520
Fuji Denki Reiki 57,000 762
Fuji Electric Co. 160,000 814
Fuji Fire & Marine Insurance 40,000 211
Fuji Oil Co. 84,000 594
Fuji Photo Film Co. 47,000 1,357
Fujisawa Pharmaceutical 45,000 431
Fujita Corp. 24,000 108
Fujita Kanko, Inc. 3,000 66
Fujitsu Denso 20,000 643
Fujitsu, Ltd. 152,000 1,693
Fukui Bank 160,000 852
Fukuyama Transporting Co. 9,000 85
Futaba Corp. 21,000 962
Gakken Co. (a) 225,000 1,482
General Sekiyu KK 19,000 174
Gunze Limited 15,000 91
Gunze Sangyo, Inc. 80,000 365
Hankyu Corp. 30,000 164
Hanwa Co. (a) 25,000 103
Haseko Corp. 47,000 190
Heiwa Corp. 30,000 782
Heiwa Real Estate 50,000 387
Hitachi Zosen Corp. 86,000 446
Hitachi, Ltd. 386,000 3,888
Hokkai Can Co. 60,000 411
Hokkaido Takushoku Bank, Ltd. 300,000 889
Hokko Chemical Industries 50,000 271
Hokuetsu Bank 90,000 473
Honda Motor Co., Ltd. 89,000 1,836
Hoya Corp. 2,000 69
Hyakugo Bank 80,000 457
Inax Corp. 31,000 294
Industrial Bank of Japan 50,000 1,516
Intec, Inc. 38,000 648
Ishihara Sangyo (a) 39,000 127
Ishikawajima-Harima Heavy Industries 220,000 927
Ishizuka Glass Co. 70,000 354
Ito-Yokado Co., Ltd. 39,000 2,402
Itochu Corp. 27,000 182
Itoham Foods 105,000 793
Izumiya Co. 6,000 96
Japan Airport Terminal 6,000 73
Japan Aviation Electronics (a) 8,000 57
Japan Energy Corp. 61,000 204
Japan Steel Works (a) 15,000 43
Japan Synthetic Rubber 20,000 122
Japan Tobacco, Inc. 101 875
Joshin Denki Co. 6,000 78
Juroku Bank 80,000 415
Kajima Corp. 10,000 99
Kaken Pharmaceutical 35,000 315
Kamigumi Co. 6,000 58
Kaneka Corp. 14,000 88
Kanematsu Corp. 448,000 1,749
Kankaku Securities (a) 32,000 136
Kao Corp. 104,000 1,289
Kawasaki Heavy Industries 450,000 2,070
Kawasaki Kisen (a) 130,000 413
</TABLE>
60 International Fund
<PAGE> 61
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Kawasho Corp. (a) 163,000 $ 682
Keihin Electric Express 16,000 96
Keio Teito Electric Railway 22,000 128
Keisei Electric Railway 10,000 84
Kinden Corp. 3,000 51
Kinki Nippon Railway 59,000 446
Kirin Brewery Co. 20,000 236
Kissei Pharmaceutical Co. 1,000 30
Kitz Corporation 100,000 408
Kiyo Bank 100,000 505
Koa Fire & Marine 60,000 367
Koa Oil Company 50,000 434
Kokuyo Co., Ltd. 22,000 511
Komatsu Forklift Co., Ltd. 87,000 716
Komori Corp. 104,000 2,619
Koyo Seiko Co., Ltd. 5,000 46
Kumagai Gumi Co. 178,000 715
Kumiai Chemical Industry Co. 65,000 373
Kurabo Industries 275,000 1,052
Kuraray Co., Ltd. 62,000 679
Kureha Chemical Industrial Co. 40,000 188
Kyocera Corp. 40,000 2,971
Kyokuto Boeki 58,000 511
Kyowa Hakko Kogyo 44,000 415
Maeda Corp. 10,000 98
Maeda Corp. 1997 Warrants (a) 90 133
Makita Corp. 38,000 607
Marubeni Corp. 163,000 882
Maruetsu, Inc. 33,000 268
Marui Co., Ltd. 54,000 1,124
Matsushita Electric Industrial Co., Ltd. 239,000 3,889
Matsushita Electric Works 10,000 106
Matsuzakaya Co. 64,000 812
Minebea Co., Ltd. 4,000 34
Mitsubishi Cable Industries 50,000 266
Mitsubishi Chemical 80,000 389
Mitsubishi Corp. 27,000 332
Mitsubishi Electric Corp. 147,000 1,058
Mitsubishi Estate Company, Ltd. 59,000 737
Mitsubishi Gas & Chemical 80,000 360
Mitsubishi Heavy Industries 149,000 1,188
Mitsubishi Kakoki 30,000 282
Mitsubishi Material 94,000 487
Mitsubishi Motors Corp. 110,000 896
Mitsubishi Oil Co. 22,000 195
Mitsubishi Paper Mills 47,000 283
Mitsubishi Trust & Banking 141,000 2,349
Mitsubishi Warehouse 4,000 62
Mitsui & Co. 250,000 2,194
Mitsui Fudosan Co., Ltd. 149,000 1,833
Mitsui Mining & Smelting (a) 65,000 261
Mitsui Petrochemical Industry 54,000 442
Mitsui Soko Co. 44,000 353
Mitsui Toatsu Chemical 250,000 1,005
Mitsui Trust and Banking 21,000 230
Mizuno Corp. 55,000 477
Mochida Pharmaceutical Co. 2,000 28
Mori Seiki Co. 5,000 113
Murata Manufacturing Co. 32,000 1,178
Nagasakiya Co. (a) 140,000 601
Nagoya Railroad Co., Ltd. 95,000 478
Namco 32,000 1,066
Nankai Electric Railway 17,000 115
National House Industrial 13,000 238
NEC Corp. 623,000 7,603
New Oji Paper Co. 35,000 317
Nichido Fire & Marine 208,000 1,672
Nichiei Co., Ltd. of Kyoto 89,000 351
Nichimo Co. (a) 88,000 385
Nikko Securities Co., Ltd. 36,000 464
Nikon Corp. 97,000 1,315
Nippon Denso Co. 57,000 1,065
Nippon Express Co. 71,000 684
Nippon Hodo Co. 17,000 288
Nippon Oil Co. 217,000 1,362
Nippon Paper Industries 77,000 535
Nippon Road Co. 85,000 716
Nippon Sheet Glass 105,000 457
Nippon Steel Corp. 1,342,000 4,601
Nippon Suisan (a) 296,000 1,224
Nippon Telegraph & Telephone Corp. 549 4,440
Nippon Zeon Co., Ltd. (a) 65,000 349
Nissan Motor Co., Ltd. 665,000 5,107
Nissan Shatai Co. 65,000 365
Nisshin Steel Co. 190,000 767
Nisshinbo Industries, Inc. 24,000 232
Nissho Electronics Corp. 1,000 24
Nitto Denko Corp. 17,000 263
NKK Corp. (a) 128,000 345
Nomura Securities 280,000 6,102
North Pacific Bank 100,000 512
NSK, Ltd. 110,000 799
NTT Data Communications Systems Corp. 86 2,890
Obayashi Corp. 228,000 1,811
Odakyu Electric Railway 25,000 171
Okamoto Industries, Inc. 8,000 52
Okamura Corp. 50,000 383
Ono Pharmaceutical 9,000 346
</TABLE>
International Fund 61
<PAGE> 62
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Osaka Gas Co. 204,000 $ 705
Pioneer Electronics Corp. 115,000 2,105
Renown, Inc. (a) 63,000 219
Ricoh Co., Ltd. 60,000 657
Royal Co., Ltd. 8,000 130
Ryobi, Ltd. 17,000 87
Sagami Co. 36,000 262
Sagami Railway Co. 14,000 61
Sakura Bank 215,000 2,728
Sanden Corp. 14,000 90
Sangetsu Co. 14,000 353
Sankyo Aluminum 50,000 268
Sankyo Co. 41,000 921
Sankyo Seiko Co. 83,000 756
Sankyu, Inc. 200,000 827
Sanrio Co. 1,000 12
Sanshin Electronics 46,000 775
Sanwa Bank 95,000 1,932
Sanyo Electric Co., Ltd. 138,000 795
Sapporo Breweries 6,000 56
Secom Co. 2,000 139
Sega Enterprises 5,300 293
Seibu Railway Co. 18,000 837
Seino Transportation 5,000 84
Sekisui Chemical Co., Ltd. 95,000 1,399
Sekisui House, Ltd. 98,000 1,253
Settsu Corp. (a) 41,000 129
Seven-Eleven Japan NPV 3,000 212
Sharp Corp. 375,000 5,993
Shikoku Electric Power 41,200 950
Shin-Etsu Chemical Co. 21,000 435
Shionogi & Co. 5,000 42
Shiseido Co., Ltd. 23,000 274
Showa Aircraft Industry 4,000 43
Showa Aluminium Co. 100,000 484
Showa Denko (a) 147,000 461
Showa Shell Sekiyu 48,000 402
Sintokogio 50,000 436
Skylark Co. 2,000 37
Snow Brand Milk 125,000 799
Sony Corp. 141,300 8,471
Sony Music Entertainment, Inc. 18,000 941
Sumitomo Bakelite Co., Ltd. 11,000 87
Sumitomo Bank 213,000 4,518
Sumitomo Corp. 206,000 2,095
Sumitomo Electric Industries 95,000 1,141
Sumitomo Forestry 101,000 1,546
Sumitomo Metal Industries, Ltd. (a) 721,000 2,186
Sumitomo Realty & Development 596,000 4,214
Sumitomo Rubber Industries 90,000 751
Sumitomo Sitix Corp. 70,000 1,275
Sumitomo Trust & Banking 142,000 2,008
Taisei Corp. 16,000 107
Taisho Pharmaceutical Co., Ltd. 5,000 99
Takashimaya Co. 40,000 639
Takeda Chemical Industries 14,000 231
Tanabe Seiyaku Co. 62,000 446
TDK Corp. 19,000 970
Teijin, Ltd. 191,000 977
Teikoku Oil 13,000 88
TOA Corp. 50,000 368
Tobu Railway Co. 84,000 526
Toenec Corp. 30,000 267
Toho Co. 1,700 272
Toho Gas Co. 100,000 323
Tohoku Electric Power 40,400 974
Tokio Marine & Fire 221,000 2,890
Tokyo Broadcasting 82,000 1,350
Tokyo Dome Corp. 4,000 69
Tokyo Electric Co., Ltd. (a) 200,000 984
Tokyo Electronics 11,000 426
Tokyo Kisen Co. 37,000 293
Tokyo Ohka Kogyo 56,200 1,633
Tokyo Steel Manufacturing 25,000 460
Tokyo Tatemono Co., Ltd. 8,000 38
Tokyotokeiba Co. 7,000 29
Tokyu Construction 26,000 125
Tokyu Corp. 45,000 318
Tokyu Land Corp. 17,000 74
Tomen Corp. 155,000 572
Tonen Corp. 34,000 497
Toppan Printing 39,000 514
Toshiba Tungaloy Co. (a) 1,000 6
Tostem Corp. 2,000 66
Toto, Ltd. 3,000 42
Toyo Construction 210,000 1,224
Toyo Trust & Banking 51,000 450
Toyota Motor Corp. 206,000 4,369
Tsubakimoto Chain 50,000 301
UBE Industries (a) 80,000 302
Uni-Charm Corp. 10,000 252
Victor Co. of Japan (a) 33,000 419
Wacoal Corp. 84,000 1,139
Yamaha Motor Co. 213,000 2,854
Yamaichi Securities Co. 111,000 863
Yamanouchi Pharmaceutical 5,000 108
Yamato Transport 14,000 167
Yamazaki Baking Co., Ltd. 44,000 818
</TABLE>
62 International Fund
<PAGE> 63
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Yaskawa Electric Corp. (a) 90,000 $ 425
Yasuda Fire & Marine
Insurance Co., Ltd. (The) 154,000 1,089
Yasuda Trust & Banking 121,000 716
Yokogawa Electric Co. 16,000 151
Yokohama Rubber Co. 70,000 424
Yurtec Corp. 22,000 386
Zexel Corporation 60,000 408
--------
254,291
--------
MALAYSIA - 1.9%
Affin Holdings Berhad 410,000 791
Affin Holdings Berhad 1999 Warrants (a) 98,600 65
Berjaya Sports 138,000 321
Carlsberg Brewery Malaysia Berhad 79,000 370
Commerce Asset Holdings 112,000 565
Commerce Asset Holdings Rights (a) 54,000 139
Faber Group Berhad (a) 132,000 113
Genting Berhad 63,000 526
Golden Hope Plantation 39,000 65
Highlands & Lowlands 43,000 69
Hume Industries Berhad 3,000 14
Idris Hydraulic (a) 55,000 65
Kuala Lumpur Kepong 25,000 79
Magnum CP Berhad 500 1
Malayan Banking Berhad 27,250 223
Malayan Banking Berhad 250 2
Malaysia Mining Corp. 22,000 32
Malaysian Helicopter Services 800 1
MBF Capital Berhad 234,000 237
Multi Purpose Holding 348,000 510
New Straits Times 210,000 703
Perlis Plantations 26,000 81
Petronas Gas Berhad (a) 82,000 279
Renong Berhad 917,000 1,358
Resorts World Berhad 379,000 2,030
Selangor Properties 31,000 30
Sime Darby Berhad (Resident Shares) 687,600 1,827
Sime UEP Properties Berhad 100,000 145
Tan Chong Motor Holdings 432,000 427
Technical Resource Industries Berhad (a) 354,000 1,045
Telekom Malaysia 175,000 1,364
United Engineers Berhad 251,000 1,601
--------
15,078
--------
MEXICO - 0.4%
Cemex SA de CV Class B NPV 39,709 144
Cemex SA de CV NPV 104,790 345
Cifra SA de CV - ADR (a) 431,503 454
Compania Cervecerias Unidas SA - ADR 3,214 74
Empresa Nacional de Electric - ADR 9,929 226
Fomento Economico Mexicano
SA de CV Series B NPV 60,457 136
Gruma SA Series B NPV (a) 29,933 84
Grupo Embotellador de Mexico (a) 144,120 245
Grupo Financiero Banamex AC
Series B NPV 82,052 137
Grupo Financiero Banamex AC
Series L NPV 1,158 2
Grupo Industrial Maseca Series B NPV 172,343 105
Grupo Modelo SA Series C 13,312 63
Grupo Sidek Series B NPV (a) 55,450 24
Grupo Television SA de CV - GDR 11,767 265
Kimberly-Clark, Mexico Class A NPV 11,138 168
Pan American Beverage Class A 6,177 198
Telefonos de Mexico SA Series L - ADR 17,989 573
--------
3,243
--------
NETHERLANDS - 3.5%
ABN AMRO Holdings NV 25,434 1,158
Aegon NV 5,500 243
Ahold-NV 19,672 803
AKZO Nobel NV 1,729 200
Boskalis Westminster CVA 16,073 229
CSM NV CVA 18,609 812
DSM NV (BR) 5,300 436
Elsevier NV 244,392 3,259
Fortis Amev NV 6,185 414
Hagemeyer NV 4,184 218
International Nederlanden CVA 29,775 1,989
KNP BT (Kon) NV 14,900 383
Kon Ptt Nederland 24,597 894
Nedlloyd Groep NV 11,000 250
Nutricia Verenigde Bedrijven CVA 3,510 284
Philips Electronics 18,800 680
Polygram 25,741 1,367
Randstad Holdings NV 10,000 454
Royal Dutch Petroleum Co. (BR) 42,694 5,965
Unilever NV CVA 13,660 1,920
Ver Ned Uitgevers 9,130 1,253
Wolters Kluwer CVA 47,362 4,480
--------
27,691
--------
NEW ZEALAND - 0.4%
Air New Zealand Class B 191,278 650
Brierley Investments, Ltd. 17,642 14
</TABLE>
International Fund 63
<PAGE> 64
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Carter Holt Harvey 246,441 $ 531
Fernz Corp. 3,700 10
Fisher & Paykel 8,216 25
Fletcher Challenge, Ltd. 239,595 553
Fletcher Challenge, Ltd. (Forests Division) 140,894 201
Lion Nathan, Ltd. 241,000 575
Tasman Properties, Ltd. (a) 982,783 424
Telecom Corp. of New Zealand 68,000 293
Wrightson Limited 300,000 228
--------
3,504
--------
NORWAY - 1.1%
Aker AS Series A 2,800 37
Aker AS Series B 21,900 266
Bergesen DY AS Series A 22,320 444
Bergesen DY AS Series B 2,900 56
Den Norske Creditbank AS 38,000 99
Det Norske Luftsfartsverk AS Series B 2,600 115
Dyno Industrier AS 13,200 308
Elkem AS Series A 7,800 88
Hafslund Nycomed AS Series A 4,745 124
Hafslund Nycomed AS Series B 19,063 483
Kvaerner Industries AS 9,590 339
Kvaerner Industries AS Series B 500 17
Leif Hoegh & Co. AS 6,700 99
NCL Holdings AS (a) 8,857 7
Norsk Hydro AS 78,046 3,278
Norske Skogindustrier AS Class A 1,200 35
Olav Thon Eiendomsselskap AS 23,500 390
Orkla AS New 20,889 1,039
Saga Petroleum AS Series A 2,000 27
Saga Petroleum AS Series B 8,070 101
Schibsted AS 69,600 945
Simrad AS Class B 10,100 112
Veidekke AS 6,100 123
--------
8,532
--------
PHILIPPINES - 0.0%
Enron Global Power & Pipelines L.L.C. 2,144 53
--------
53
--------
PORTUGAL - 0.0%
Jeronimo Martins 5,830 323
--------
323
--------
SINGAPORE - 2.4%
Amcol Holdings 53,000 146
Chuan HUP Holdings, Ltd. 134,000 121
City Developments 289,000 2,104
DBS Land 167,000 564
Development Bank (Alien Market) 102,000 1,269
Far East Levingston 51,000 240
First Capital Corp. 105,000 291
Fraser & Neave 102,000 1,298
Hai Sun Hup Group 220,000 148
Haw Par Brothers International, Ltd. 62,100 133
Hotel Properties 63,000 98
Inchcape Berhad 31,000 99
Jardine Matheson Holdings, Ltd. 125,342 859
Jardine Strategic Holdings, Ltd. 619,656 1,896
Jardine Strategic Holdings, Ltd.
1998 Warrants (a) 58,794 19
Jurong Shipyard 36,000 277
Keppel Corp. 176,000 1,568
Lum Chang Holdings 40,000 33
Marco Polo Developments, Ltd. 30,000 46
Natsteel, Ltd. 100,000 205
Neptune Orient Lines, Ltd. 214,000 241
Overseas Chinese Banking (Alien Market) 60,332 755
Overseas Union Bank (Alien Market) 71,500 493
Overseas Union Enterprises 37,000 187
Parkway Holdings 24,000 65
Prima, Ltd. 11,000 42
Robinson & Co., Ltd. 30,000 125
Sembawang Shipyard 102,000 566
Shangri-La Hotel 3,000 12
Singapore Airlines, Ltd. (Alien Market) 51,000 476
Singapore Land 130,000 841
Singapore Press Holdings (Alien Market) 41,600 735
Straits Trading Co. 130,000 305
Times Publishing 29,000 67
Total Access Communication, Ltd. (a) 11,000 72
United Engineers 18,000 36
United Industrial Corp., Ltd. 491,000 482
United Overseas Bank, Ltd. (Alien Market) 134,379 1,292
United Overseas Bank, Ltd. 1997 Warrants (a) 17,618 71
United Overseas Land 248,000 472
WBL Corp., Ltd. 22,000 51
--------
18,800
--------
SOUTH KOREA - 0.3%
Bank of Seoul 14,000 121
Cho Hung Bank 18,000 209
Hanil Bank 12,000 128
Kookmin Bank 8,300 153
Kookmin Bank New (a) 2,281 41
Korea Electric Power Corp. 11,500 457
</TABLE>
64 International Fund
<PAGE> 65
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Pohang Iron & Steel 5,700 $ 373
Samsung Electronics Co. (a) 90 12
Samsung Electronics Co. - GDR (a) 399 33
Samsung Electronics Co. - GDS (a) 7,736 451
Samsung Electronics Co. New (a) 3 1
Samsung Electronics, Ltd. 1,904 346
Yukong, Ltd. 3,971 137
Yukong, Ltd. New (a) 284 10
--------
2,472
--------
SPAIN - 2.6%
Argentaria 17,950 739
Asturiana Del Zinc (a) 10,351 82
Aumar (Aut Del Mar) 8,149 106
Banco Bilbao Vizcaya 32,216 1,160
Banco Central Hispano
Americano SA (Regd) 26,900 545
Banco de Santander SA (Regd) 72,293 3,630
Banco Intercontinental (Regd) 10,000 973
Banco Pastor SA 4,000 211
Banco Popular Espanol (Regd) 6,323 1,166
Banco Zaragozano (Regd) 4,200 69
Bodegas Y Bebidas Series III (BR) 2,500 64
Centros Commerciales Pryca 47,407 995
Conserva Campofrio SA 950 32
Cristale Espanola (BR)(a) 7,024 394
Ebro Agricolas 44,900 470
Empresa Nacional de Celulosas 9,500 154
Empresa Nacional de Electricidad 24,006 1,360
Fab Autom Renault 1,500 25
Fom Construction Y Contra 5,030 386
Fuerzas Electricat Series A 69,323 494
Gas Natural SDG SA 2,738 427
Grupo Anaya SA 1,900 42
Iberdrola SA 184,960 1,693
Koipe SA 1,145 67
Obrascon SA 7,000 85
Prosegur Compania (Regd) 11,000 273
Repsol SA 31,810 1,042
Sarrio SA 19,700 76
Sevillana de Electrica 46,173 359
Sociedad General Azucarera
de Espana SA de CV 10,650 374
Tabacalera SA Series A (Regd) 23,593 895
Tableros de Fibras Series B 14,314 158
Telefonica de Espana 122,987 1,703
Union Electrica Fenosa 28,100 169
Uralita 14,700 133
Vallehermoso SA 4,200 78
Viscofan Envoltura 25,500 303
--------
20,932
--------
SWEDEN - 3.0%
Asea AB Series A 3,730 363
Astra AB Series A 184,085 7,347
Astra AB Series B 59,030 2,338
Atlas Copco AB Series B 21,550 325
Avesta-Sheffield 33,500 295
BT Industries AB (a) 35,000 385
Electrolux AB Series B 15,000 616
Esselte AB Series B 6,430 96
Foreninsbanken Kredit AB Series A (a) 183,000 518
Hennes & Mauritz AB Series B 10,770 600
Hoganas AB B Shares 18,300 535
Hufvudstaden Fast Series A 9,200 67
Incentive AB Series B Free 9,000 393
Investor AB Series A Free 1,400 46
Investor AB Series B Free 14,000 462
Kinnevik Investment Series B 23,400 731
Mo Och Domsjo AB Series B 700 30
Munksjo AB 50,800 333
OM Gruppen AB (a) 41,200 621
Sandvik AB Series B 21,570 378
Scribona AB Series B Free 4,140 44
Skand Enskilda Barken Series A 423,870 3,511
Skanska AB Series B Free 4,800 165
SKF AB Series A Free 16,000 302
Stadshypotek AB Series A 15,000 300
Stora Kopparbergs Series B 18,000 216
Svenska Celluosa Series B Free 20,000 310
Svenska Handelsbank Series A 7,600 158
Telefonaktiebolaget Ericsson (LM)
Series B 58,520 1,146
Trelleborg AB Series B Free 44,500 479
Volvo AB Series A 1,700 35
Volvo AB Series B 25,450 521
--------
23,666
--------
SWITZERLAND - 3.8%
Adia SA (a) 300 49
Baer Holdings AG (BR) 230 257
Baloise Holdings (Regd) 160 333
BBC Brown Boveri (BR) 1,486 1,726
Bil GT Gruppe AG 420 248
Bobst AG 30 47
</TABLE>
International Fund 65
<PAGE> 66
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Ciba Geigy AG (BR) 175 $ 153
Ciba Geigy AG (Regd) 2,722 2,395
CS Holdings (Regd) 20,788 2,131
Elektrowatt AG (BR) 250 91
Fischer (Georg) AG (BR) 300 390
Helvetia Schweizerische Vericherungs
- Gesellschaft (Regd) 250 130
Hilti AG 225 179
Holderbank Financiere Glarus AG (BR) 515 395
Intershop Holding AG (BR) 100 57
Landis & Gyr AG (Regd) 50 41
Merkur Holding AG (Regd) 260 57
Nestle SA (Regd) 2,426 2,684
Phoenix Mecano (BR) 800 401
Richemont Series A (BR) 200 300
Roche Holdings Genusscheine AG NPV 649 5,134
Sandoz AG (Regd) 2,187 2,002
Sarna Kunststoff Holdings AG (Regd) 100 108
Schindler Holding AG 25 26
Schindler Holding AG (Regd) 70 75
Schweiz Bankgesellsch (BR) 1,700 1,842
Schweiz Bankverein (BR) 5,077 2,073
Schweiz Bankverein (Regd) 2,101 429
Schweiz Ruckversicher (Regd) 390 454
SGS Holding (BR) 510 1,012
SMH AG Neuenburg (BR) 240 144
SMH AG Neuenburg (Regd) 4,000 524
Swissair (Regd)(a) 440 320
Winterthur (BR) 240 171
Winterthur (Regd) 1,175 831
Zurich Versicherungsgesellschaft (Regd) 9,900 2,961
--------
30,170
--------
THAILAND - 0.2%
Advanced Information Services
(Alien Market) 15,400 269
Bangkok Bank (Alien Market) 31,700 385
Bank of Ayudhya Public Co., Ltd.
(Alien Market) 27,800 156
Land & House (Alien Market) 5,500 90
Siam Cement Co. (Alien Market) 2,450 136
Siam Commercial Bank (Alien Market) 19,000 250
Thai Farmers Bank (Alien Market) 19,200 194
--------
1,480
--------
UNITED KINGDOM - 14.7%
Abbey National PLC 122,000 1,205
Airtours PLC 135,000 766
Allied Colloids PLC 252,000 521
Amersham International PLC 10,000 138
Amstrad PLC 43,012 131
Argos PLC 78,290 724
Argyll Group PLC 374,863 1,980
ASDA-MFI Group PLC 1,394,059 2,403
Associated British Ports PLC 122,000 548
B.A.T. Industries PLC 232,958 2,051
BAA PLC 21,760 165
Barclays Bank PLC 151,000 1,731
BASS PLC 105,485 1,177
Berisford PLC 10,200 32
BICC PLC 66,000 282
BOC Group PLC 23,000 322
Boots Co. PLC 27,351 248
British Commonwealth Shipping
PLC (a)(d) 30,000 0
British Aerospace PLC 179,020 2,213
British Gas PLC 230,500 909
British Land Co. PLC 21,098 125
British Petroleum Co. PLC 811,528 6,774
British Steel PLC 215,728 545
British Telecommunications PLC 268,707 1,473
BTR PLC 257,866 1,314
Bunzl PLC 19,776 61
Burton Group PLC 170,772 357
Cable & Wireless PLC 193,360 1,384
Cadbury Schweppes PLC 532,428 4,395
Caradon PLC 284,582 864
Carlton Communications PLC 2,460 37
Charter PLC (Regd) 5,079 68
Chubb Security PLC 115,000 569
Coats Viyella PLC 57,000 154
Compass Group PLC 50,000 380
Costain Group PLC (a) 136,502 151
Cowie Group PLC 119,375 534
Dalgety PLC 81,500 513
Dixon Group PLC 22,042 152
E D & F Man Group PLC 140,000 302
East Midlands Electricity PLC 46,880 485
Electrocomponents PLC 31,000 173
English China Clay PLC 25,233 124
First Leisure Corp. PLC 120,000 710
Forte PLC 306,306 1,572
General Electric Co. PLC 238,044 1,309
GKN PLC 12,000 145
Glaxo Wellcome PLC 560,515 7,965
Glynwed International PLC 75,200 373
Granada Group PLC 117,000 1,172
Grand Metropolitan PLC 281,833 2,029
</TABLE>
66 International Fund
<PAGE> 67
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Great Portland Estates PLC 33,962 $ 92
Great University Stores PLC 42,816 455
Greenalls Group PLC 20,553 188
Guardian Royal Exchange PLC 187,000 802
Guinness PLC 194,280 1,429
HSBC Holdings PLC 51,000 796
Hammerson Property PLC 93,531 512
Hanson PLC 323,000 963
Heywood Williams Group PLC 33,666 129
Hillsdown Holdings PLC 306,739 810
Huntingdon International Holdings
PLC - ADR (a) 117,800 648
Imperial Chemical Industries PLC 121,548 1,439
Inchcape PLC 73,000 282
Invesco PLC 273,000 1,075
Kingfisher PLC 182,857 1,539
Ladbroke Group, Ltd. PLC 408,730 930
Laing (John) PLC Class A NV 82,800 354
LASMO PLC 173,240 468
London Clubs International 100,000 655
London Electricity PLC 64,720 576
London International Group PLC 32,600 65
Lonrho PLC 230,287 629
Manchester United PLC 125,000 377
Marks & Spencer PLC 122,323 855
MEPC PLC 97,221 596
MFI Furniture Group PLC 133,100 331
Midlands Electric PLC 6,306 74
National Grid Group PLC (a) 125,722 389
National Power PLC 131,995 921
National Westminster Bank PLC 270,296 2,722
Northern Foods PLC 22,084 59
Ocean Group PLC 9,810 59
Pearson PLC 60,000 581
Pen & Orient DFD PLC 95,808 708
Pilkington Brothers PLC 149,974 470
Pilkington PLC New (a) 37,493 118
Polly Peck International
Holdings PLC (a)(d) 228,423 0
Powergen PLC 40,088 331
Provident Financial PLC 52,000 661
Racal Electronics PLC 256,000 1,131
Rank Organisation PLC 98,750 715
Reckitt & Colman PLC 64,275 711
Redland PLC 15,275 92
Reed International PLC 118,940 1,813
Reuter's Holdings PLC 119,206 1,091
Rexam PLC 65,000 357
Rolls-Royce PLC 255,370 746
Royal Bank of Scotland Group PLC 107,000 974
RTZ Corp. PLC (Regd) 130,000 1,890
Sainsbury (J.) PLC 163,082 994
Scottish Hydro-Electric PLC 60,000 335
Scottish Power PLC 21,253 122
Sears PLC 536,904 867
Securicor Group PLC Class A 4,311 59
Shell Transportation & Trading
PLC (Regd) 188,200 2,489
Smith & Nephew PLC 67,889 197
Smith (David S.) Holdings PLC 96,000 423
SmithKline Beecham PLC Class A 175,898 1,940
SmithKline Beecham/BEC Units PLC 349,192 3,807
South West Water PLC 79,000 637
Spring Ram Corp. PLC 31,777 13
Stagecoach Holdings PLC 140,000 772
Standard Chartered Bank Group PLC 62,000 528
Storehouse PLC 27,200 141
Sun Alliance Group PLC 77,000 447
T & N PLC 130,000 327
Tarmac, Ltd. PLC 452,845 724
Taylor Woodrow PLC 610,794 1,115
Tesco Store Holdings PLC 95,463 440
Thorn EMI PLC 28,374 668
Tomkins PLC 371,500 1,624
Trafalgar House PLC (a) 360,000 155
Trinity Holdings PLC 100,000 551
TSB Group PLC 208,208 1,072
Unilever PLC 30,375 624
United Biscuits PLC 120,587 478
United Newspaper, Ltd. PLC 80,200 691
Vendome PLC 67,000 611
Vickers, Ltd. PLC 97,000 383
Vodafone Group PLC 1,106,500 3,970
Welsh Water PLC 37,333 449
Whitbread & Co. PLC 27,479 290
Willis Corroon Group PLC 128,000 280
Wimpey (George), Ltd. PLC 32,746 73
Wolseley PLC 1,340 9
WPP Group PLC 250,000 637
Yorkshire Electricity PLC 42,300 439
Zeneca Group PLC 17,000 329
--------
117,073
--------
TOTAL COMMON STOCKS
(cost $639,336) 715,894
--------
CONVERTIBLE PREFERRED STOCKS - 0.0%
AUSTRALIA - 0.0%
TNT, Ltd. 17,000 24
--------
24
--------
</TABLE>
International Fund 67
<PAGE> 68
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
UNITED KINGDOM - 0.0%
Trafalgar House PLC (a) 205,000 $ 175
--------
175
--------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $377) 199
--------
PREFERRED STOCKS - 1.0%
AUSTRALIA - 0.2%
News Corp., Ltd. 134,802 630
Sydney Harbour Casino Holdings, Ltd. (a) 704,564 891
--------
1,521
--------
AUSTRIA - 0.0%
Bau Holdings AG 2,200 83
Creditanstalt Bankverein 3,475 179
EA Generali AG 300 48
Z Landerbank Bank Austria 1,681 80
--------
390
--------
BRAZIL - 0.2%
Banco Bradesco SA NPV 35,410,375 310
Banco Itau SA (Regd) 301,000 84
Brahma (cia Cervej) NPV 622,229 256
Brasmotor SA NPV 529,000 105
CEMIG SA 6,778,050 150
Cim Port Itau (Cia) 507,000 121
Coteminas (Cia Tec) NPV 371,000 124
Lojas Americanas NPV 5,224,000 123
Petrol Brasileiros 1,158,000 99
Telec SP Telesp NPV 1,443,753 212
Telecomunicacoes Brasileiras NPV 110,018 5
Uniao de Bancos Brasileiros NPV 2,488,000 97
Usiminas Uni Sd Mg NPV 181,000,000 147
--------
1,833
--------
FRANCE - 0.0%
Legrand 1,450 145
--------
145
--------
GERMANY - 0.5%
Bayer Motoren Werk 900 324
Escada AG 500 87
Fag Kugelfischer (a) 700 87
Fielmann AG 1,348 69
GEA AG 840 258
Henkel 600 226
Hornbach Holding AG 2,890 252
Hugo Boss 250 208
Jungheinrich 900 128
Krones AG NV 1,330 528
Lufthansa AG NV 1,400 183
Porsche AG (a) 1,025 532
RWE AG NV 700 195
SAP AG 1,000 151
Wella AG 750 404
--------
3,632
--------
ITALY - 0.1%
Autostrade Conc. SPA 145,000 159
Fiat SPA (Priv) 232,000 424
--------
583
--------
NETHERLANDS - 0.0%
International Nederlanden CVA 2,901 15
--------
15
--------
TOTAL PREFERRED STOCKS
(cost $8,417) 8,119
--------
<CAPTION>
PRINICPAL
AMOUNT
(000)
---------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.8%
BELGIUM - 0.0%
Kredietbank (conv.)
5.750% due 12/31/03 BEF 1,500 60
--------
60
--------
FRANCE - 0.0%
Michelin (Cie Gle)(conv.)
2.500% due 01/01/01 FRF 235 126
--------
126
--------
ITALY - 0.0%
Danieli & Co.
7.250% due 01/01/00 ITL 30,120 17
--------
17
--------
JAPAN - 0.7%
Bank of Tokyo - Cayman Finance, Ltd.
(Perpetual Maturity)
4.250% due 12/31/99 JPY 300,000 4,010
</TABLE>
68 International Fund
<PAGE> 69
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
------ ------
<S> <C> <C>
Hitachi, Ltd. (conv.)
2.700% due 03/31/97 50,000 $ 620
Izumiya Co. (conv.)
0.800% due 08/31/99 40,000 453
Yamanouchi Pharmacutical (conv.)
1.250% due 03/31/14 30,000 335
--------
5,418
--------
SWITZERLAND - 0.1%
Sandoz Capital (conv.)
1.250% due 10/23/02 CHF 755 740
--------
740
--------
TOTAL LONG-TERM INVESTMENTS
(cost $5,689) 6,361
--------
SHORT-TERM INVESTMENTS - 6.5%
UNITED STATES - 6.5%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $51,392 51,392
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $51,392) 51,392
--------
TOTAL INVESTMENTS
(identified cost $705,211)(c) - 98.1% 781,965
Other Assets and Liabilities,
Net - 1.9% 14,812
--------
Net Assets - 100.0% $796,777
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was $709,031
and net unrealized appreciation for all securities was $72,934. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $112,683 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $39,749.
(d) Securities are currently undergoing bankruptcy proceedings and present
negligible market value.
The accompanyng notes are an integral part of the financial statements.
International Fund 69
<PAGE> 70
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- -------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
All-Ordinaries Index
Futures Contracts (Australia)
expiration date 03/96 53 $ (8)
CAC - 40 Index
Futures Contracts (France)
expiration date 03/96 45 48
DAX - 30 Index
Futures Contracts (Germany)
expiration date 03/96 22 (42)
FTSE - 100 Index
Futures Contracts (UK)
expiration date 03/96 108 191
Hang Seng Index
Futures Contracts (Hong Kong)
expiration date 01/96 30 33
TOPIX Index
Futures Contracts (Japan)
expiration date 03/96 169 1,112
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $1,334
--------
--------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due 12/31/95, valued
at $5,500 were held as collateral by the custodian in connection with
futures contracts purchased by the Fund. The settlement amount of these
matured notes is included in Receivable for Investments Sold on the
Statement of Assets and Liabilities.
<TABLE>
<CAPTION>
% OF MARKET
NET VALUE
INDUSTRY DIVERSIFICATION ASSETS (000)
- --------------------------------------------- ------ ------
<S> <C> <C>
Basic Industries 7.7% $ 62,361
Capital Goods 8.3 66,115
Consumer Basics 11.4 90,951
Consumer Durable Goods 6.7 54,052
Consumer Non-Durables 6.1 48,481
Consumer Services 2.2 17,499
Energy 4.7 37,099
Finance 17.5 139,252
General Business 5.4 42,870
Miscellaneous 6.6 52,726
Shelter 3.0 23,661
Technology 3.8 30,005
Transportation 1.6 12,624
Utilities 5.8 46,516
Long-Term Investments 0.8 6,361
Short-Term Investments 6.5 51,392
----- --------
Total Investments 98.1 781,965
Other Assets and Liabilities, Net 1.9 14,812
----- --------
NET ASSETS 100.0% $796,777
----- --------
----- --------
<CAPTION>
% OF MARKET
NET VALUE
GEOGRAPHIC DIVERSIFICATION ASSETS (000)
- --------------------------------------------- ------ ------
<S> <C> <C>
Japan 32.6% $259,709
Europe 29.8 237,819
United Kingdom 14.7 117,248
Pacific Basin 12.7 101,322
Latin America 1.1 8,925
Other 0.7 5,550
Short-Term Investments 6.5 51,392
----- --------
Total Investments 98.1 781,965
Other Assets and Liabilities, Net 1.9 14,812
----- --------
NET ASSETS 100.0% $796,777
----- --------
----- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
70 International Fund
<PAGE> 71
INTERNATIONAL FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $705,211,065)(Note 2) . . . . . . . . . . . . . . . . . . . . . $781,964,629
Foreign currency holdings (identified cost $9,106,291) . . . . . . . . . . . . . . . . . . . . . . . . 9,103,186
Closed forward foreign currency exchange contracts (Notes 2) . . . . . . . . . . . . . . . . . . . . . 197,762
Forward foreign currency exchange contracts (cost $79,426,839)(Notes 2 and 6). . . . . . . . . . . . . 79,164,344
Foreign currency exchange spot contracts (cost $1,346,275)(Notes 2 and 6). . . . . . . . . . . . . . . 1,346,318
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491,584
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,985,698
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,641,999
Foreign taxes recoverable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,795
Short-term investments held as collateral for securities loaned, at market (Note 3). . . . . . . . . . 3,002,656
------------
LIABILITIES 886,716,971
Payables:
Investments purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,733,232
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912,177
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . . . . . 17,420
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . 497,365
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . . . . . 29,250
Other accrued expenses and payables. . . . . . . . . . . . . . . . . . . . . 346,864
Daily variation margin on futures contracts (Notes 2 and 3). . . . . . . . . 42,052
Forward foreign currency exchange contracts
(cost $79,426,839)(Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . 79,012,309
Foreign currency exchange spot contracts
(cost $1,346,275)(Notes 2 and 6). . . . . . . . . . . . . . . . . . . . . . . 1,346,275
Collateral on securities loaned, at market (Note 3). . . . . . . . . . . . . . 3,002,656 89,939,600
----------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $796,777,371
------------
------------
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income . . . . . . . . . . . . . . . . . . . . . $ (1,712,195)
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,767,904
Unrealized appreciation (depreciation) on:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,753,564
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333,509
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,391
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,723
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717,248,475
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $796,777,371
------------
------------
Net asset value, offering and redemption price per share
($796,777,371 divided by 21,972,311 shares of $.01 par value
shares of beneficial interest outstanding). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36.26
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Fund 71
<PAGE> 72
INTERNATIONAL FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,086,070
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,486,830
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596,498
Less foreign taxes withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,929,738)
-----------
16,239,660
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,112,338
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,707,729
Transfer agent fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,515
Bookkeeping service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,632
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,770
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,980
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,563
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,351
-----------
Expenses before waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,332,878
Expenses waived by Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,558) 6,247,320
----------- -----------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,992,340
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,276,750
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053,963
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,258
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,783,487
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333,509
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,806
-----------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,072,773
-----------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . . . . . . . . $76,065,113
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72 International Fund
<PAGE> 73
INTERNATIONAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,992,340 $ 10,243,257
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,276,750 68,826,701
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053,963 --
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . 145,258 (3,059,016)
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,783,487 (45,373,352)
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333,509 --
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . 479,806 (1,153,948)
------------ ------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . 76,065,113 29,483,642
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,261,547) (5,968,486)
In excess of net investment income . . . . . . . . . . . . . . . . . . . . . . . . (1,712,195) --
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . (19,789,300) (71,880,739)
In excess of net realized gain on investments. . . . . . . . . . . . . . . . . . . -- (4,442,348)
Increase (decrease) in net assets from Fund share transactions . . . . . . . . . . . 81,295,220 164,491,211
------------ ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 122,597,291 111,683,280
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 674,180,080 562,496,800
------------ ------------
NET ASSETS AT END OF YEAR
(including accumulated distributions in excess of net
investment income of $1,712,195 and undistributed
net investment income of $453,074, respectively) . . . . . . . . . . . . . . . . . $796,777,371 $674,180,080
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
FUND SHARE TRANSACTIONS
Fund shares sold . . . . . . . . . . . . . . 7,634,975 $268,170,784 6,138,023 $236,514,257
Fund shares issued to shareholders
in reinvestments of distributions . . . . . 885,952 31,552,805 2,266,373 76,306,494
Fund shares redeemed . . . . . . . . . . . . (6,215,446) (218,428,369) (3,802,087) (148,329,540)
---------- ------------- ---------- -------------
Net increase (decrease). . . . . . . . . . . 2,305,481 $ 81,295,220 4,602,309 $ 164,491,211
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Fund 73
<PAGE> 74
INTERNATIONAL FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . .48 .61 .58 .67 .73
Net realized and unrealized gain (loss) on investments (a) . . . . . . . 3.16 .65 9.63 (2.62) 3.16
------- ------- ------- ------- -------
Total Income From Investment Operations. . . . . . . . . . . . . . . . . 3.64 1.26 10.21 (1.95) 3.89
------- ------- ------- ------- -------
DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . (.64) (.36) (.57) (.67) (.80)
In excess of net investment income . . . . . . . . . . . . . . . . . . . (.08) -- (.16) -- --
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . (.94) (3.73) (1.06) (.42) (.31)
In excess of net realized gain on investments. . . . . . . . . . . . . . -- (.23) -- -- --
------- ------- ------- ------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . (1.66) (4.32) (1.79) (1.09) (1.11)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.71 5.38 35.56 (6.11) 13.47
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net to average net assets (b) . . . . . . . . . . . . .88 .32 .39 .45 .48
Operating expenses gross to average net assets (b) . . . . . . . . . . . .89 .34 .41 .46 .48
Net investment income to average net assets (b). . . . . . . . . . . . . 1.41 1.63 1.83 2.46 2.61
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.78 71.09 62.04 48.99 53.13
Net assets end of year ($000 omitted). . . . . . . . . . . . . . . . . . 796,777 674,180 562,497 348,869 252,828
Per share amount of fees waived ($ omitted). . . . . . . . . . . . . . . .0041 .0093 .0091 .0030 --
</TABLE>
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
74 International Fund
<PAGE> 75
INTERNATIONAL FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 INTERNATIONAL MSCI EAFE **
- ----------------- ------------- ------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $16,005 $16,994
1987 $18,312 $21,231
1988 $21,999 $27,301
1989 $27,292 $30,249
1990 $22,942 $23,233
1991 $26,033 $26,136
1992 $24,444 $23,039
1993 $33,136 $30,629
1994 $34,919 $33,097
1995 $38,657 $36,921
</TABLE>
International Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- -------- -------
<S> <C> <C>
1 Year $11,071 10.71%
5 Years $16,850 10.99% ***
10 Years $38,657 14.47% ***
</TABLE>
MSCI EAFE Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- -------- -------
<S> <C> <C>
1 Year $11,155 11.55%
5 Years $15,892 9.71% ***
10 Years $36,921 13.95% ***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Morgan Stanley Capital International Europe, Australia, Far East Index is
an index composed of an arithmetic, market value-weighted average of the
performance of over 1,100 securities listed on the stock exchanges of the
countries of Europe, Australia, and the Far East. The index is calculated
on a total-return basis, which includes reinvestment of gross dividends
before deduction of withholding taxes.
*** Annualized.
INTERNATIONAL FUND returned 10.7% for 1995, trailing the Morgan Stanley Capital
International Europe, Australia, Far East (MSCI EAFE) Index return of 11.6%. The
portfolio was managed in a manner consistent with its objective to provide
favorable total return with reduced volatility using a multi-style,
multi-manager strategy. The Fund offers a high degree of diversification among
countries and currencies, which typically results in a low correlation with US
equities and reduced portfolio volatility.
Non-US markets lagged the US market by a wide margin in most cases during 1995.
The Swiss market was the one notable exception, with a return of over 42%,
including a 14% appreciation of the Swiss franc over the dollar. Japan was the
weakest market, down over 1% for the year, as it continued to struggle with an
economic recession and banking sector woes. The Fund was underweighted in Swiss
stocks for most of 1995 and also underweighted in large Japanese banks late in
the year. Both were factors in the Fund trailing the index.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
International Fund 75
<PAGE> 76
FIXED INCOME I FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
LONG-TERM INVESTMENTS - 97.0%
ASSET-BACKED SECURITIES - 6.5%
Advanta Home Equity Loan Trust
9.000% due 02/25/06 $107 $111
Case Equipment Loan Trust
Series 1995-B Class A3
6.150% due 09/15/02 2,950 2,981
Chevy Chase Auto Receivables Trust
Series 1995-2 Class A
5.800% due 06/15/02 1,265 1,268
Contimortgage Home Equity Loan Trust
Mortgage Pass-thru Certificate
Series 1995-1 Class A2-A
8.600% due 06/15/25 625 652
Daimler-Benz Auto Grantor Trust
Series 1995-A Class A
5.850% due 05/15/02 798 801
Discover Card Trust
Series 1991 Class F-A
7.850% due 11/21/00 765 804
Series 1992-B Class A
6.800% due 06/16/00 115 118
DR Structured Finance Corp.
Series 1994-K1 Class A-1
7.600% due 08/15/07 710 447
Federal Housing Authority: Project Citi 68
Mortgage Pass-thru Certificate
7.430% due 06/27/21 1,707 1,731
First Chicago Master Trust II Credit Card
Certificates Series 1994-L
7.150% due 04/15/01 3,895 4,090
Green Tree Financial Corp.
Series 1994-7 Class A-2
7.600% due 03/15/20 3,390 3,458
Series 1995-A Class A
7.250% due 07/15/05 600 608
Greenwich Capital Acceptance, Inc.
Mortgage Pass-thru Certificate
Series 1993 Class LB-1
7.460% due 04/25/23 (c) 1,470 1,482
Lehman Pass-thru Securities, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 189 194
Premier Auto Trust
Series 1994-4 Class A-5
6.650% due 08/15/00 2,570 2,618
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-C2 Class A-1
9.000% due 10/25/22 $83 $85
Series 1992-M2 Class A-4
8.465% due 03/25/20 56 56
Series 1994-C1 Class D
8.000% due 06/25/26 428 437
Series 1994-C2 Class D
8.000% due 04/25/25 293 299
Series 1995-C1 Class C
6.900% due 02/25/27 (c) 400 397
Salomon Brothers
Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class
7.790% due 11/25/24 (c) 3,785 3,884
Sears Mortgage Securities Corp.
Series 1992 Class A
7.587% due 10/25/22 (c) 3,976 4,016
Sears Savings Bank
Mortgage Pass-thru Certificate
Series 1992-A Class A
8.700% due 05/25/32 (c) 1,258 1,257
Standard Credit Card Master Trust I
Series 1995-10 Class A
5.900% due 02/07/01 2,215 2,236
Series 1995-8 Class A
6.700% due 09/07/02 4,330 4,415
Wal Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 360 427
World Omni Automobile
Lease Securitization Trust
Series 1995-A Class A
6.050% due 11/25/01 2,675 2,691
---------
41,563
---------
CORPORATE BONDS AND NOTES - 15.9%
American Brands, Inc.
8.625% due 11/15/21 500 603
American Express Co.
8.500% due 08/15/01 45 51
</TABLE>
Fixed Income I Fund 77
<PAGE> 77
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
American General Finance Corp.
8.250% due 01/15/98 $ 705 $ 740
7.250% due 03/01/98 365 377
8.500% due 08/15/98 375 401
AMR Corp.
9.500% due 05/15/01 250 283
Analog Devices, Inc.
6.625% due 03/01/00 225 228
Appalachian Power Co. (MTN)
8.500% due 12/01/22 330 400
Aristar, Inc.
6.300% due 07/15/00 190 193
Associates Corp. of North America
6.250% due 03/15/99 1,520 1,544
AT&T Corp.
8.625% due 12/01/31 440 512
Atlantic Richfield Co.
9.125% due 08/01/31 310 407
AVCO Financial Services, Inc.
7.250% due 07/15/99 415 434
8.500% due 10/15/99 655 712
Bank of New York, Inc.
7.875% due 11/15/02 500 550
Bank One, Columbus, Ohio
7.375% due 12/01/02 195 206
BankAmerica Corp.
6.850% due 03/01/03 425 442
Barnett Bank, Inc.
6.900% due 09/01/05 475 495
Bear Stearns Co., Inc.
6.750% due 08/15/00 775 797
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 645 810
BellSouth Telecommunications
7.625% due 05/15/35 155 165
Beneficial Corp.
8.400% due 05/15/08 757 924
C.I.T. Group Holdings, Inc. (MTN)
7.000% due 09/30/97 1,030 1,055
Case Corp.
7.250% due 08/01/05 395 417
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 80 100
Central Fidelity Banks, Inc.
8.150% due 11/15/02 280 309
Champion International Corp.
7.700% due 12/15/99 655 694
Chemical Banking Corp.
10.375% due 03/15/99 260 292
10.125% due 11/01/00 250 293
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 405 507
Chevron Corp. Profit Sharing
Savings Plan Trust Fund
8.110% due 12/01/04 385 427
Chrysler Financial Corp.
9.500% due 12/15/99 445 500
Citicorp
7.125% due 06/01/03 75 79
9.500% due 02/01/02 195 228
Coastal Corp.
10.375% due 10/01/00 195 228
Coca-Cola Enterprises, Inc.
8.500% due 02/01/22 450 539
Commercial Credit Group, Inc.
5.750% due 07/15/00 255 254
8.700% due 06/15/10 795 987
Commonwealth Edison Co. Series 85
7.375% due 09/15/02 1,120 1,184
Connecticut Light & Power Co.
7.875% due 10/01/24 775 894
Consolidated Natural Gas Co.
8.625% due 12/01/11 345 364
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 614 632
CoreStates Capital Corp.
5.875% due 10/15/03 290 281
CSFB Finance Co., Ltd.
Series 1995-A Class A
7.000% due 11/15/05 450 449
Dayton Hudson Corp. (MTN)
9.350% due 06/16/20 485 589
Discover Credit Corp. (MTN)
8.350% due 04/27/99 465 497
Dole Food Co., Inc.
6.750% due 07/15/00 280 283
Duke Power Co.
7.000% due 07/01/33 1,030 1,041
</TABLE>
78 Fixed Income I Fund
<PAGE> 78
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Eaton Corp.
7.000% due 04/01/11 $ 545 $ 543
Equitable Life Assurance Society
6.950% due 12/01/05 925 939
7.700% due 12/01/15 975 992
ERP Operating, L.P.
8.500% due 05/15/99 725 768
Evans Whitycombe Trust
Series 1994 Class A-1
7.980% due 08/01/01 500 539
Federal Express Corp.
Series 1993 Class B1
6.680% due 01/01/08 725 727
First Chicago Corp.
8.875% due 03/15/02 600 683
First Fidelity Bancorp
9.625% due 08/15/99 415 466
First Interstate Bancorp (MTN)
9.375% due 01/23/02 225 259
First National Bank of Boston
8.375% due 12/15/02 750 839
First Union Corp.
6.550% due 10/15/35 1,950 2,028
First USA Bank
5.750% due 01/15/99 975 972
Fleet Financial Group, Inc.
8.125% due 07/01/04 675 754
Ford Motor Credit Co.
7.750% due 10/01/99 1,870 1,986
Ford Motor Credit Co. (MTN) CMS Floater
4.820% due 07/12/96 (c) 375 373
Franchise Finance Corp.
7.000% due 11/30/00 750 753
General Electric Capital Corp.
8.300% due 09/20/09 470 561
General Motors Acceptance Corp.
6.625% due 10/01/02 1,845 1,896
General Motors Acceptance Corp. (MTN)
8.000% due 12/05/96 5,000 5,113
Georgia-Pacific Corp.
7.375% due 12/01/25 460 459
Goldman Sachs Group, L.P.
6.875% due 09/15/99 825 844
6.375% due 06/15/00 415 420
6.200% due 12/15/00 725 727
Hanson America, Inc. (conv.)
2.390% due 03/01/01 725 602
Hertz Corp.
7.000% due 04/15/01 850 888
9.000% due 11/01/09 390 481
Household Finance Corp.
6.375% due 06/30/00 750 764
Integra Financial Corp.
6.500% due 04/15/00 850 867
International Lease Finance Corp.
5.750% due 01/15/99 685 686
International Paper Co.
9.400% due 06/01/02 600 706
ITT Financial Corp.
7.400% due 11/15/25 640 672
ITT Financial Corp. New
6.250% due 11/15/00 420 424
Liberty Mutual Insurance Co.
8.200% due 05/04/07 750 833
Martin Marietta Corp.
7.000% due 03/15/11 325 325
Merry Land & Investment, Inc.
6.875% due 11/01/03 175 178
7.250% due 06/15/05 800 824
Minnesota Mutual Life Insurance Co.
8.250% due 09/15/25 800 872
Motorola, Inc.
7.500% due 05/15/25 375 423
Nabisco, Inc.
6.700% due 06/15/02 325 331
NationsBank Corp.
6.625% due 01/15/98 250 255
New England Mutual Life Insurance Co.
7.875% due 02/15/24 750 775
New England Power Co. Series U
8.000% due 08/01/22 115 125
New England Telephone & Telegraph Co.
7.875% due 11/15/29 430 506
News America Holdings, Inc.
7.700% due 10/30/25 1,250 1,278
Noranda, Inc.
8.625% due 07/15/02 115 130
Northwestern Bell Telephone Co.
7.750% due 05/01/30 330 372
Norwest Corp. (MTN)
6.375% due 09/15/02 650 664
Norwest Financial, Inc.
6.250% due 11/01/02 425 432
</TABLE>
Fixed Income I Fund 79
<PAGE> 79
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
NWA Trust Series B
10.230% due 06/21/14 $ 634 $ 740
NYNEX Corp.
9.550% due 05/01/10 655 769
Occidental Petroleum Corp.
10.125% due 11/15/01 255 305
Occidental Petroleum Corp. (MTN)
8.500% due 11/09/01 295 331
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,200 1,252
Pennzoil Co.
10.125% due 11/15/09 215 272
PepsiCo, Inc.
7.625% due 12/18/98 360 380
Philip Morris Cos., Inc.
8.750% due 06/01/01 865 968
Phillips Petroleum Co.
9.375% due 02/15/11 90 113
Pitney Bowes Credit Corp.
8.550% due 09/15/09 780 943
Praxair, Inc.
6.850% due 06/15/05 680 706
Procter & Gamble Co.
8.000% due 10/26/29 220 263
Procter & Gamble Co.
Sharing ESOP Series A
9.360% due 01/01/21 450 575
Ralston Purina Co.
7.875% due 06/15/25 720 784
Republic New York Corp.
9.750% due 12/01/00 130 151
8.250% due 11/01/01 240 267
RJR Nabisco, Inc.
8.625% due 12/01/02 805 839
Rockwell International Corp.
8.875% due 09/15/99 300 331
Salomon, Inc.
7.000% due 01/20/98 850 860
Salomon, Inc. (MTN)
6.360% due 04/01/98 575 576
6.820% due 07/26/99 100 101
Seagram Co., Ltd.
8.350% due 01/15/22 740 862
Shopping Center Associates
6.750% due 01/15/04 750 748
SKW Real Estate, L.P. Class C
7.450% due 04/15/03 775 778
Smith Barney Holdings, Inc.
7.980% due 03/01/00 775 831
Southern California Edison Co.
Series 1986-C
8.625% due 04/15/19 405 427
System Energy Resources, Inc.
6.000% due 04/01/98 800 801
Taubman Realty Group, L.P.
8.000% due 06/15/99 725 760
Tenneco, Inc.
10.000% due 03/15/08 525 675
Texaco Capital, Inc.
9.750% due 03/15/20 225 308
8.875% due 09/01/21 440 561
Texas Utilities Electric Co.
9.500% due 08/01/99 1,370 1,511
Time Warner Entertainment Co., L.P.
10.150% due 05/01/12 400 496
8.375% due 07/15/33 5,625 6,003
Time Warner, Inc.
6.835% due 08/15/00 (c) 750 754
7.975% due 08/15/04 450 477
8.110% due 08/15/06 900 958
8.180% due 08/15/07 900 967
Transamerica Financial Corp.
8.375% due 02/15/98 360 380
Transamerica Financial Corp. (MTN)
8.900% due 02/15/96 685 687
U.S. Bancorp of Oregon
7.000% due 03/15/03 90 94
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 710 790
Union Oil Co. (MTN)
9.400% due 02/15/11 390 490
United Airlines, Inc.
10.250% due 07/15/21 3,000 3,754
United Technologies Corp.
8.750% due 03/01/21 445 555
US West Communications, Inc.
7.250% due 10/15/35 715 745
Virginia Electric & Power Co.
8.750% due 04/01/21 335 400
Wachovia Corp. New
6.800% due 06/01/05 280 292
Weyerhaeuser Co.
8.500% due 01/15/25 625 768
Whirlpool Corp.
9.500% due 06/15/00 400 455
---------
101,304
---------
</TABLE>
80 Fixed Income I Fund
<PAGE> 80
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES - 36.6%
Citicorp Mortgage Securities, Inc.
Series 1987-2 Class A-1
8.500% due 04/01/02 $ 3,515 $ 3,597
Federal Home Loan Mortgage Corp.
Participation Certificate
Group #14-1607 8.000% due 08/01/18 82 84
Group #17-0164 9.000% due 05/01/16 191 202
Group #17-0170 9.000% due 06/01/16 173 183
Group #17-0171 9.000% due 06/01/16 358 378
Group #17-0181 9.000% due 08/01/16 90 95
Group #17-0195 9.000% due 10/01/16 425 449
Group #17-0196 9.000% due 10/01/16 272 287
Group #17-0197 9.000% due 10/01/16 559 590
Group #17-0204 9.000% due 11/01/16 128 135
Group #17-0208 9.000% due 12/01/16 134 142
Group #26-0607 12.000% due 06/01/14 247 279
Group #27-8582 9.000% due 10/01/16 48 51
Group #28-4634 9.000% due 01/01/17 2 3
Group #30-0025 12.500% due 04/01/16 418 478
Group #30-5382 9.000% due 12/01/17 116 122
Group #A0-0690 9.000% due 02/01/20 2,236 2,375
Group #C0-0413 8.000% due 08/01/25 133 137
Group #D5-2246 7.000% due 04/01/24 267 269
Group #D5-3905 7.500% due 06/01/24 300 307
Group #D6-0224 9.000% due 05/01/25 175 184
Group #D6-0678 8.000% due 06/01/25 1,832 1,898
Group #D6-1491 8.000% due 06/01/25 1,999 2,072
Group #D6-1887 8.000% due 07/01/25 1,804 1,869
Group #D6-2110 8.000% due 07/01/25 2,031 2,105
Group #D6-2114 8.000% due 07/01/25 362 375
Group #D6-2134 8.000% due 07/01/25 892 924
Group #D6-2156 8.000% due 07/01/25 1,821 1,887
Group #D6-2913 8.000% due 08/01/25 2,001 2,074
Group #D6-3976 7.000% due 09/01/25 444 448
Group #E0-0333 8.000% due 08/01/09 288 299
Group #E2-0123 7.500% due 08/01/09 328 338
Group #E2-0145 7.500% due 11/01/09 (c) 248 255
Group #E2-0153 8.000% due 01/01/10 101 104
Group #E4-7089 7.000% due 05/01/08 237 242
Group #E4-8842 7.000% due 07/01/08 282 287
Group #E5-6830 6.500% due 02/01/09 431 434
Group #E5-6953 6.500% due 02/01/09 65 66
Group #E5-9472 7.500% due 08/01/09 148 152
Group #E5-9494 7.000% due 08/01/09 532 543
Group #E5-9512 7.500% due 08/01/09 185 190
Group #E5-9554 7.500% due 08/01/09 803 826
Group #E5-9577 7.500% due 09/01/09 542 557
Group #E5-9921 7.500% due 11/01/09 125 128
Group #E5-9923 7.500% due 11/01/09 424 437
Group #E5-9926 7.500% due 11/01/09 146 150
Group #E5-9932 7.500% due 11/01/09 323 332
Group #E6-0172 8.000% due 02/01/10 642 665
Group #E6-0173 8.000% due 02/01/10 341 353
Group #E6-0194 8.000% due 03/01/10 243 251
Group #G1-0239 7.000% due 07/01/09 22 23
Group #M1-1773 7.500% due 03/01/97 425 431
Group #M1-3104 7.000% due 03/01/97 181 184
Group #M1-3357 7.500% due 04/01/97 605 612
Group #M1-3486 7.500% due 04/01/97 104 105
Group #M1-4825 7.000% due 08/01/97 18 19
Group #M1-9003 7.000% due 04/01/97 336 342
Group #M1-9073 7.500% due 11/01/97 270 274
Pool # E60386 8.000% due 04/01/10 111 115
Federal Home Loan Mortgage Corp.
Series K Class K-5
7.760% due 05/01/12 2,677 2,677
Federal Home Loan Mortgage Corp.
7.500% 7 Year TBA (b) 490 502
6.500% 15 Year TBA (b) 9,710 9,762
7.000% 30 Year TBA (b) 26,820 27,063
7.500% 30 Year TBA (b) 6,855 7,029
8.000% 30 Year TBA (b) 10,140 10,508
Federal National Mortgage Association
Pool #040208 8.000% due 01/01/02 3 3
Pool #040403 8.000% due 01/01/02 6 6
Pool #040841 8.000% due 01/01/02 101 104
Pool #041060 8.000% due 02/01/02 185 192
Pool #042014 8.000% due 03/01/02 10 11
Pool #042675 8.000% due 02/01/02 11 11
Pool #043467 8.000% due 03/01/02 14 14
Pool #046329 8.000% due 04/01/02 7 7
Pool #047205 8.000% due 05/01/02 65 67
Pool #047293 8.000% due 05/01/02 52 54
Pool #047565 8.000% due 07/01/02 91 94
Pool #047690 8.000% due 05/01/02 9 10
Pool #048419 8.000% due 06/01/02 78 80
Pool #048902 8.000% due 06/01/02 130 135
Pool #049385 8.000% due 06/01/02 13 13
Pool #049441 8.000% due 06/01/02 5 5
Pool #050656 7.500% due 11/01/22 608 623
Pool #050752 7.000% due 05/01/00 608 619
Pool #050758 7.000% due 06/01/00 174 178
Pool #050762 6.500% due 07/01/08 549 551
Pool #050974 6.500% due 01/01/09 1,152 1,158
</TABLE>
Fixed Income I Fund 81
<PAGE> 81
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Pool #051057 8.000% due 06/01/02 $ 102 $ 106
Pool #053628 8.000% due 07/01/02 89 92
Pool #053865 8.000% due 07/01/02 38 39
Pool #061217 8.000% due 05/01/03 19 19
Pool #065408 8.000% due 09/01/18 (c) 421 436
Pool #067922 8.000% due 07/01/03 408 423
Pool #070424 8.000% due 06/01/02 15 16
Pool #076261 8.000% due 12/01/03 245 254
Pool #087274 8.000% due 08/01/04 148 154
Pool #120778 8.000% due 03/01/17 83 87
Pool #124542 7.000% due 11/01/99 913 929
Pool #125335 7.500% due 06/01/24 289 296
Pool #153690 8.000% due 07/01/02 295 306
Pool #156065 8.000% due 09/01/02 399 413
Pool #156799 8.000% due 03/01/05 197 204
Pool #178066 7.000% due 09/01/99 440 448
Pool #183514 8.000% due 08/01/22 324 336
Pool #187852 10.500% due 08/01/10 11 12
Pool #190506 6.500% due 12/01/08 810 814
Pool #190962 6.500% due 07/01/09 492 495
Pool #207010 6.500% due 04/01/09 35 35
Pool #208101 6.500% due 05/01/00 99 100
Pool #211454 7.000% due 05/01/00 190 193
Pool #216515 6.500% due 06/01/08 56 57
Pool #220817 6.500% due 06/01/08 29 29
Pool #223595 6.500% due 07/01/08 101 101
Pool #224716 6.500% due 07/01/23 230 228
Pool #231502 7.000% due 10/01/23 410 414
Pool #234968 6.500% due 09/01/08 230 231
Pool #235710 7.000% due 11/25/23 505 509
Pool #238372 7.000% due 11/25/23 1,786 1,800
Pool #239803 7.000% due 11/25/23 285 287
Pool #244216 7.500% due 02/01/24 715 733
Pool #244286 7.000% due 05/01/24 350 353
Pool #244370 7.000% due 11/25/23 966 974
Pool #246161 7.000% due 11/25/23 92 93
Pool #246197 7.000% due 11/25/23 545 550
Pool #247337 7.000% due 11/01/23 946 953
Pool #248444 6.500% due 05/01/09 201 202
Pool #250009 6.500% due 04/01/09 922 926
Pool #250030 7.000% due 05/01/24 429 433
Pool #250155 8.500% due 12/01/24 300 313
Pool #250179 7.500% due 11/01/24 678 695
Pool #250345 7.000% due 08/01/01 2,006 2,023
Pool #250350 7.500% due 10/01/25 1,772 1,816
Pool #263021 6.500% due 05/01/09 58 58
Pool #266371 6.500% due 01/01/01 389 394
Pool #269791 6.500% due 05/01/09 389 391
Pool #270990 6.500% due 02/01/01 49 49
Pool #270992 6.500% due 02/01/01 297 300
Pool #271758 7.500% due 09/01/23 876 898
Pool #275276 7.500% due 06/01/24 327 335
Pool #275277 7.500% due 06/01/24 430 440
Pool #275290 7.000% due 06/01/24 436 439
Pool #276075 6.500% due 04/01/09 632 635
Pool #277550 6.500% due 04/01/09 344 346
Pool #278623 8.500% due 08/01/24 965 1,008
Pool #279004 7.000% due 04/01/24 246 248
Pool #279137 6.500% due 05/01/09 505 507
Pool #280352 6.500% due 05/01/09 277 278
Pool #280980 6.500% due 05/01/09 46 46
Pool #280984 6.500% due 05/01/09 1,813 1,822
Pool #281297 6.500% due 05/01/09 447 449
Pool #281298 6.500% due 05/01/09 287 289
Pool #281439 6.500% due 04/01/09 292 293
Pool #282305 7.000% due 05/01/24 660 665
Pool #283040 6.500% due 05/01/09 447 449
Pool #283486 6.500% due 05/01/09 487 489
Pool #283947 7.500% due 06/01/24 234 240
Pool #284279 7.000% due 05/01/24 485 489
Pool #284451 6.500% due 05/01/09 467 469
Pool #284577 6.500% due 05/01/09 824 828
Pool #285147 7.000% due 06/01/24 830 837
Pool #286112 7.000% due 06/01/24 1,906 1,921
Pool #286978 7.000% due 06/01/24 452 456
Pool #287464 6.500% due 06/01/09 432 434
Pool #287716 7.500% due 09/01/24 710 727
Pool #289234 6.500% due 06/01/09 695 698
Pool #289660 7.500% due 08/01/24 214 219
Pool #290876 7.500% due 07/01/24 751 769
Pool #295187 6.500% due 09/01/09 60 61
Pool #299256 8.500% due 12/01/24 231 242
Pool #303555 7.000% due 09/01/25 2,008 2,025
Pool #304260 8.500% due 01/01/25 378 394
Pool #305563 8.500% due 01/01/25 70 73
Pool #306227 8.500% due 02/01/25 203 212
Pool #312495 7.000% due 07/01/25 697 703
Pool #316786 7.000% due 07/01/25 737 743
Pool #316938 7.000% due 07/01/25 345 348
Pool #319622 7.000% due 08/01/25 806 813
Pool #319647 7.000% due 08/01/25 252 254
Pool #319761 7.000% due 08/01/25 629 634
Pool #320080 7.000% due 08/01/25 2,003 2,019
Pool #324205 7.000% due 09/01/25 2,267 2,285
</TABLE>
82 Fixed Income I Fund
<PAGE> 82
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Federal National Mortgage Association
7.500% 7 Year TBA (b) $ 455 $ 466
7.000% 30 Year TBA (b) 1,255 1,265
GTD REMIC Trust 1991-48 Class G
7.800% due 12/25/04 548 549
Principal Only Strip
Zero Coupon due 03/25/04 298 237
REMIC Trust Series 1992-G36 Class A
7.000% due 04/25/15 915 925
REMIC Trust Series 1993-89 Class Z
7.000% due 06/25/23 3,572 3,218
Government National Mortgage Association
Pool #008528 6.500% due 10/20/24 (c) 4,677 4,774
Pool #139796 9.500% due 03/15/16 128 138
Pool #146110 9.500% due 05/15/16 34 36
Pool #148211 9.500% due 02/15/16 140 151
Pool #148618 8.500% due 08/15/16 21 23
Pool #152577 9.000% due 10/15/16 97 104
Pool #152837 9.000% due 10/15/16 50 54
Pool #154592 9.000% due 04/15/16 280 299
Pool #157439 9.000% due 05/15/16 232 247
Pool #157532 8.500% due 07/15/16 57 60
Pool #161209 9.000% due 08/15/16 209 223
Pool #161412 9.000% due 05/15/16 51 55
Pool #161598 9.000% due 06/15/16 137 147
Pool #164705 9.000% due 09/15/16 496 529
Pool #165541 8.500% due 07/15/16 158 167
Pool #168336 9.000% due 08/15/20 28 30
Pool #170864 8.500% due 01/15/17 19 20
Pool #173346 9.000% due 10/15/16 141 151
Pool #174110 8.500% due 11/15/16 407 432
Pool #174840 9.000% due 10/15/16 234 250
Pool #175753 9.000% due 10/15/16 120 128
Pool #177139 9.000% due 11/15/16 121 129
Pool #177163 9.000% due 10/15/16 75 80
Pool #179721 10.500% due 09/15/20 66 74
Pool #181250 9.000% due 11/15/16 139 149
Pool #183409 8.500% due 10/15/16 229 242
Pool #183690 8.500% due 01/15/17 139 148
Pool #186658 9.000% due 11/15/16 327 349
Pool #188014 9.000% due 12/15/16 172 184
Pool #188459 8.500% due 05/15/17 128 136
Pool #188531 8.500% due 05/15/17 118 125
Pool #193313 9.000% due 11/15/16 247 263
Pool #194421 8.500% due 01/15/17 164 174
Pool #194842 9.000% due 11/15/16 12 13
Pool #195538 9.000% due 11/15/16 59 63
Pool #195910 8.500% due 12/15/16 89 94
Pool #196528 8.500% due 02/15/17 299 317
Pool #197003 8.500% due 02/15/17 108 114
Pool #197387 8.500% due 01/15/17 555 589
Pool #198202 8.500% due 01/15/17 194 205
Pool #199668 8.500% due 02/15/17 262 277
Pool #199686 8.000% due 03/15/17 178 187
Pool #201206 8.500% due 02/15/17 220 233
Pool #201795 8.500% due 02/15/17 162 172
Pool #204153 8.500% due 01/15/17 173 184
Pool #204268 8.500% due 02/15/17 173 184
Pool #213265 8.500% due 03/15/17 209 221
Pool #213365 8.000% due 04/15/17 31 33
Pool #225968 8.500% due 07/15/17 231 245
Pool #266892 7.000% due 06/15/23 344 348
Pool #273024 10.500% due 08/15/20 106 118
Pool #285402 10.500% due 05/15/20 53 60
Pool #286050 9.000% due 09/15/20 25 27
Pool #290338 10.500% due 06/15/20 1,175 1,315
Pool #290680 10.500% due 08/15/20 83 93
Pool #294919 10.500% due 09/15/20 23 26
Pool #295408 10.500% due 08/15/20 66 74
Pool #297998 10.500% due 11/15/20 146 164
Pool #299159 10.500% due 11/15/20 188 211
Pool #299683 10.500% due 11/15/20 42 48
Pool #300795 10.500% due 12/15/20 91 102
Pool #301683 10.500% due 01/15/21 147 165
Pool #303754 9.000% due 12/15/21 776 825
Pool #310003 9.000% due 07/15/21 26 27
Pool #321967 7.000% due 05/15/23 335 340
Pool #329174 7.500% due 05/15/07 130 134
Pool #332559 7.000% due 04/15/23 127 128
Pool #334930 7.500% due 08/15/23 771 793
Pool #336092 7.000% due 09/15/23 132 133
Pool #336136 7.000% due 04/15/23 117 118
Pool #336166 7.000% due 02/15/23 294 298
Pool #336917 7.000% due 05/15/23 709 718
Pool #337344 7.000% due 08/15/23 341 345
Pool #337419 7.000% due 06/15/23 478 484
Pool #337470 7.000% due 07/15/23 91 92
Pool #338364 7.500% due 12/15/22 45 47
Pool #339059 7.000% due 10/15/23 339 343
Pool #339637 7.500% due 04/01/23 540 556
Pool #342398 7.000% due 06/15/23 492 499
Pool #342805 7.000% due 06/15/23 115 117
Pool #343557 7.000% due 05/15/23 343 347
Pool #343608 7.000% due 05/15/23 250 253
Pool #343620 7.000% due 06/15/23 548 555
Pool #343632 7.000% due 07/15/23 346 351
</TABLE>
Fixed Income I Fund 83
<PAGE> 83
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Pool #345984 7.000% due 12/15/23 $ 90 $ 91
Pool #346058 7.000% due 01/15/24 798 808
Pool #346836 7.000% due 10/15/23 122 123
Pool #347706 7.000% due 12/15/23 121 122
Pool #348651 7.500% due 05/15/23 231 238
Pool #348875 7.000% due 07/15/23 339 343
Pool #348895 7.000% due 07/15/23 452 458
Pool #349383 7.000% due 06/15/23 106 107
Pool #350138 7.500% due 03/15/23 99 102
Pool #351270 7.000% due 07/15/23 91 93
Pool #352023 7.000% due 11/15/23 543 549
Pool #352050 7.000% due 10/15/23 557 564
Pool #352510 7.000% due 10/15/23 549 555
Pool #352789 7.000% due 10/15/23 340 345
Pool #353020 7.000% due 06/15/24 990 1,002
Pool #355230 7.000% due 09/15/23 478 484
Pool #356127 7.000% due 10/15/23 106 107
Pool #356693 7.000% due 08/15/23 369 373
Pool #356952 7.000% due 06/15/23 549 555
Pool #357351 7.000% due 11/15/23 341 345
Pool #358427 7.000% due 09/15/23 353 357
Pool #358519 7.000% due 12/15/23 498 504
Pool #358542 7.000% due 07/15/23 469 475
Pool #358565 7.000% due 05/15/23 478 484
Pool #359935 7.000% due 11/15/23 86 88
Pool #360181 7.000% due 08/15/23 135 136
Pool #360418 7.000% due 10/15/23 339 343
Pool #361056 6.500% due 08/15/08 207 209
Pool #362703 7.000% due 10/15/23 366 371
Pool #363166 7.000% due 11/15/23 119 120
Pool #364136 7.000% due 08/15/23 140 142
Pool #364600 7.000% due 08/15/23 181 183
Pool #366219 7.000% due 11/15/23 499 505
Pool #366912 9.000% due 11/15/24 329 349
Pool #368782 7.000% due 10/15/23 420 425
Pool #368988 6.500% due 03/15/09 247 249
Pool #370096 7.000% due 11/15/23 490 496
Pool #370280 7.000% due 11/15/23 352 357
Pool #370996 7.000% due 12/15/23 547 554
Pool #371085 7.000% due 10/15/23 80 81
Pool #371874 7.500% due 06/15/24 1,319 1,357
Pool #372850 7.000% due 01/15/24 703 711
Pool #373788 7.000% due 10/15/23 392 397
Pool #373794 7.000% due 10/15/23 96 97
Pool #374718 7.000% due 11/15/23 377 381
Pool #377593 6.500% due 10/15/10 207 208
Pool #378011 7.000% due 06/15/24 837 847
Pool #80163 7.000% due 12/15/23 121 122
Pool #390783 9.000% due 07/15/24 876 928
Pool #394904 6.500% due 06/15/09 462 466
Pool #395148 6.500% due 04/15/09 210 212
Pool #402850 9.000% due 01/15/25 207 219
Pool #404874 9.000% due 12/15/24 32 34
Pool #405929 9.000% due 04/15/25 445 472
Pool #407106 9.000% due 11/15/24 497 526
Pool #413246 9.000% due 07/15/25 31 33
Pool #413886 7.500% due 08/15/25 692 712
Pool #414098 7.500% due 08/15/25 38 39
Pool #418359 7.000% due 12/15/25 941 952
Pool #780029 9.000% due 11/15/24 1,301 1,393
Government National Mortgage Association
7.000% 15 Year TBA (b) 1,045 1,069
6.500% 30 Year TBA (b) 15,000 14,878
7.000% 30 Year TBA (b) 3,455 3,496
8.000% 30 Year TBA (b) 10,000 10,419
8.500% 30 Year TBA (b) 1,630 1,725
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.060% due 06/15/21 969 998
Mid-St Trust II Class A-3 CMO
9.350% due 04/01/98 633 678
PNC Mortgage Securities Corp.
Series 1994-3 Class A-1
7.500% due 06/18/10 1,466 1,468
United States Department
of Veteran Affairs
REMIC Series 1992-1 Class 2-E
7.750% due 03/15/16 775 810
---------
233,392
---------
NON-US BONDS - 1.8%
Canada, Government of
8.750% due 12/01/05 CAD 3,000 2,457
Germany, Republic of
7.500% due 11/11/04 DEM 5,000 3,839
6.250% due 01/04/24 7,700 5,000
--------
11,296
--------
UNITED STATES GOVERNMENT
AGENCIES - 4.6%
Federal National Mortgage Association
8.200% due 03/10/16 $3,360 4,055
Federal National Mortgage
Association (MTN)
7.640% due 06/16/04 570 589
</TABLE>
84 Fixed Income I Fund
<PAGE> 84
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Government Backed Trust Certificates
Class 1-C
9.250% due 11/15/01 $12,825 $14,247
Series 2-E
9.400% due 05/15/02 (c) 2,415 2,694
Series T-3
9.625% due 05/15/02 (c) 2,855 3,176
Resolution Funding Corp.
8.875% due 07/15/20 2,275 3,016
8.625% due 01/15/21 1,200 1,560
8.625% due 01/15/30 240 316
---------
29,653
---------
UNITED STATES GOVERNMENT
TREASURIES - 30.1%
United States Treasury Bonds
10.750% due 08/15/05 12,855 17,662
12.750% due 11/15/10 2,455 3,739
13.875% due 05/15/11 4,620 7,520
10.375% due 11/15/12 1,780 2,463
7.250% due 05/15/16 2,500 2,855
7.500% due 11/15/16 550 645
8.750% due 05/15/17 3,310 4,377
8.875% due 08/15/17 960 1,286
8.125% due 08/15/19 18,910 23,776
7.875% due 02/15/21 6,780 8,349
8.125% due 08/15/21 150 190
7.250% due 08/15/22 1,075 1,243
6.250% due 08/15/23 320 329
United States Treasury Notes
4.375% due 11/15/96 6,905 6,854
6.750% due 02/28/97 3,585 3,646
6.875% due 02/28/97 1,490 1,517
6.625% due 03/31/97 65 66
6.500% due 04/30/97 170 173
6.500% due 05/15/97 10,665 10,843
8.500% due 05/15/97 605 631
6.500% due 08/15/97 8,170 8,333
8.750% due 10/15/97 165 175
5.750% due 10/31/97 6,355 6,417
8.875% due 11/15/97 175 186
5.625% due 01/31/98 570 575
5.125% due 02/28/98 415 414
5.125% due 03/31/98 2,390 2,386
5.375% due 05/31/98 4,290 4,304
5.125% due 06/30/98 $1,805 $1,801
8.250% due 07/15/98 985 1,054
5.250% due 07/31/98 1,970 1,971
9.250% due 08/15/98 60 66
4.750% due 08/31/98 550 544
5.125% due 11/30/98 7,995 7,969
5.875% due 03/31/99 480 489
6.500% due 04/30/99 1,035 1,073
6.750% due 06/30/99 550 575
6.375% due 07/15/99 4,890 5,066
6.875% due 07/31/99 2,290 2,405
6.875% due 08/31/99 325 342
6.000% due 10/15/99 80 82
7.750% due 11/30/99 2,140 2,319
6.375% due 01/15/00 9,075 9,422
7.750% due 01/31/00 9,245 10,042
7.125% due 02/29/00 795 846
6.250% due 08/31/00 7,550 7,814
7.500% due 11/15/01 3,975 4,378
6.375% due 08/15/02 2,000 2,097
6.250% due 02/15/03 5,760 6,009
5.750% due 08/15/03 315 319
7.250% due 05/15/04 3,000 3,330
United States Treasury
Zero Coupon due 11/15/99 325 265
Zero Coupon due 11/15/21 4,675 953
--------
192,185
--------
YANKEE BONDS - 1.5%
African Development Bank
8.800% due 09/01/19 535 677
Alberta, Province of
9.250% due 04/01/00 265 300
Asian Development Bank
8.500% due 05/02/01 295 332
British Columbia Hydro & Power
15.500% due 07/15/11 220 246
European Investment Bank
10.125% due 10/01/00 320 377
Inter-American Development Bank
7.000% due 06/15/25 1,385 1,474
Manitoba, Province of
9.250% due 04/01/20 335 440
New Brunswick, Province of
9.750% due 05/15/20 320 428
</TABLE>
Fixed Income I Fund 85
<PAGE> 85
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
<S> <C> <C>
Newfoundland, Province of
10.000% due 12/01/20 $150 $202
Nova Scotia, Province of
9.125% due 05/01/21 585 727
Quebec, Province of
7.500% due 07/15/23 900 944
7.125% due 02/09/24 875 880
Saskatchewan, Province of
6.625% due 07/15/03 100 102
8.000% due 07/15/04 1,290 1,438
St. George Bank, Ltd.
7.150% due 10/15/05 975 1,009
--------
9,576
--------
TOTAL LONG-TERM INVESTMENTS
(cost $591,901) 618,969
--------
NUMBER
OF
SHARES
-------
PREFERRED STOCKS - 0.9%
Australia & New Zealand
Banking Group, Ltd. 13,400 365
Banco Bilbao Vizcaya International - ADR 10,000 279
ConAgra Capital LC Series B (c) 15,000 321
Credit Lyonnais Capital - ADR 22,600 562
Credit Lyonnais Capital S.C.A. - ADR 100,000 2,400
Lasalle National Corp. Series K 17,000 892
Texaco Capital Series B (c) 18,000 378
TIG Holdings, Inc. 7,500 801
--------
TOTAL PREFERRED STOCKS (cost $6,443) 5,998
--------
SHORT-TERM INVESTMENTS - 14.2%
Federal Home Loan Mortgage Corp.
Discount Notes
5.740% due 01/16/96 (a) $2,825 $2,818
Frank Russell Investment Company
Money Market Fund due on demand (a) 87,276 87,276
United States Treasury Bills
6.337% due 04/04/96 750 740
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $90,834) 90,834
--------
TOTAL INVESTMENTS
(identified cost $689,178)(d) - 112.1% 715,801
OTHER ASSETS AND LIABILITIES
NET - (12.1%) (77,484)
--------
NET ASSETS - 100.0% $638,317
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate security.
(d) At December 31, 1995, the cost for federal income tax purposes was $689,671
and net unrealized appreciation for all securities was $26,130. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $27,758 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $1,628.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
86 Fixed Income I Fund
<PAGE> 86
FIXED INCOME I FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $689,177,676) (Note 2). . . . . . . . . . . . . . $ 715,801,469
Forward foreign currency exchange contracts (cost $18,521,556)(Notes 2 and 6) . . . . . . 18,541,592
Receivables:,
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,378,951
Investments sold (regular settlement). . . . . . . . . . . . . . . . . . . . . . . . . . 9,249,463
Investments sold (delayed settlement). . . . . . . . . . . . . . . . . . . . . . . . . . 8,333,250
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305,926
-------------
761,610,651
LIABILITIES
Payables:
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,431
Investments purchased (regular settlement) . . . . . . . . . . . . . . . 9,384,414
Investments purchased (delayed settlement) . . . . . . . . . . . . . . . 95,122,777
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . 229,826
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . . . 8,179
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . . . 163,361
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . . . 24,790
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 75,253
Forward foreign currency exchange contracts
(cost $18,521,556)(Notes 2 and 6). . . . . . . . . . . . . . . . . . . 18,262,607 123,293,638
----------- --------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 638,317,013
--------------
--------------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233,747
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . (12,913,856)
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,623,793
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . . . . . 272,168
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,704
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623,805,457
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $638,317,013
------------
------------
Net asset value, offering and redemption price per share
($638,317,013 divided by 29,570,412 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . . . $ 21.59
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 87
<PAGE> 87
FIXED INCOME I FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,124,302
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . . . . . . . . 3,280,664
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573,221
------------
39,978,187
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,330,021
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311,021
Transfer agent fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,410
Bookkeeping service fees . . . . . . . . . . . . . . . . . . . . . . . . . 52,174
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,666
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,210
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,487
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,035 1,945,024
---------- ----------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,033,163
----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,181
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 122,658
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,912,005
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 272,168
------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,972,012
------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . $ 91,005,175
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
88 Fixed Income I Fund
<PAGE> 88
FIXED INCOME I FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,033,163 $35,839,298
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,181 (20,124,615)
Foreign currency-related transactions. . . . . . . . . . . . . . . . . 122,658 2,274
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,912,005 (31,162,485)
Foreign currency-related transactions. . . . . . . . . . . . . . . . . 272,168 --
------------ -----------
Net increase (decrease) in net assets resulting from operations. . . . . . 91,005,175 (15,445,528)
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . (38,659,290) (35,367,734)
In excess of net realized gain on investments. . . . . . . . . . . . . . -- (1,318,765)
Increase (decrease) in net assets from Fund share transactions . . . . . . 89,932,896 14,474,759
------------ ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . 142,278,781 (37,657,268)
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . 496,038,232 533,695,500
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $233,747 and $322,119, respectively). . . . . . . . . . . . . . . . . $638,317,013 $496,038,232
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
----------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . . . . . . 13,120,392 $272,492,800 7,398,287 $152,608,961
Fund shares issued to shareholders
in reinvestments of distributions. . . . . . . . . . 1,572,860 32,941,373 1,552,275 31,130,208
Fund shares redeemed . . . . . . . . . . . . . . . . . (10,440,155) (215,501,277) (8,182,615) (169,264,410)
------------ ---------- --------- -------------
Net increase (decrease). . . . . . . . . . . . . . . . 4,253,097 $89,932,896 767,947 $14,474,759
----------- ---------- --------- ------------
----------- ---------- --------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 89
<PAGE> 89
FIXED INCOME I FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . $19.59 $21.74 $21.61 $22.29 $20.86
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.42 1.46 1.50 1.63 1.71
Net realized and unrealized gain (loss) on investments . . . . . . . . . . 2.02 (2.06) .72 (.07) 1.49
------ ----- ----- ----- -----
Total Income From Investment Operations. . . . . . . . . . . . . . . . . . 3.44 (.60) 2.22 1.56 3.20
------ ------ ----- ------ -----
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . (1.44) (1.44) (1.50) (1.62) (1.69)
In excess of net investment income . . . . . . . . . . . . . . . . . . . . -- -- (.01) -- --
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . -- -- (.58) (.62) (.08)
In excess of net realized gain on investments. . . . . . . . . . . . . . . -- (.11) -- -- --
------ ------ ------ ------ -----
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.44) (1.55) (2.09) (2.24) (1.77)
------ ------ ------ ------ -----
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . $21.59 $19.59 $21.74 $21.61 $22.29
----- ------ ------ ------ ------
----- ------ ------ ------ ------
TOTAL RETURN (%)(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.03 (2.97) 10.46 7.26 16.01
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (a) . . . . . . . . . . . . . . . .35 .10 .09 .10 .10
Net investment income to average net assets (a). . . . . . . . . . . . . . 6.82 7.06 6.71 7.45 8.08
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138.05 173.97 173.27 211.26 121.91
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . . . . . . . 638,317 496,038 533,696 530,857 458,201
</TABLE>
(a) For periods prior to April 1, 1995, fund performance operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
90 Fixed Income I Fund
<PAGE> 90
FIXED INCOME I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 FIXED I LB AGGREGATE **
- ----------------- -------- -------------------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $11,694 $11,526
1987 $11,868 $11,844
1988 $12,908 $12,779
1989 $14,631 $14,636
1990 $15,889 $15,947
1991 $18,434 $18,499
1992 $19,772 $19,869
1993 $21,839 $21,806
1994 $21,190 $21,170
1995 $25,011 $25,081
</TABLE>
Fixed Income I Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $11,803 18.03%
5 Years $15,741 9.49%***
10 Years $25,011 9.60%***
</TABLE>
Lehman Brothers Aggregate Bond Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $11,848 18.48%
5 Years $15,727 9.48%***
10 Years $25,081 9.63%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
*** Annualized.
THE FIXED INCOME I FUND returned 18% for 1995, trailing the Lehman Brothers
Aggregate Bond Index return of 18.5%. The portfolio was managed in a manner
consistent with its objective to reduce risk and provide exposure to multiple
strategies for adding value by employing managers with separate and distinct
assignments. The Fund seeks to provide investors a conservative vehicle to meet
the traditional bond investing objectives of core fixed income exposure and
diversification against equities.
While interest rates fell throughout 1995, bond investors experienced an
eventful year. Bond markets reacted disapprovingly to the US budget impasse in
Washington, but soon resumed their bullish form. By year end, investors bid the
30-year treasury bond yield down to 5.94%, a two-year low. For the year, the
Fund trailed the index, largely due to the negative impact of falling interest
rates on its mortgage-backed securities holdings. Duration was an important
factor in returns for most of the year, with long maturity bonds up more than
30%. Corporate bonds led other sectors for most of 1995.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Fixed Income I Fund 91
<PAGE> 91
FIXED INCOME II FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 86.9%
ASSET-BACKED SECURITIES - 7.9%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 246 $ 244
ALPS Pass-thru Trust
Series 1994-1 Class A-2
7.150% due 11/15/97 (c) 333 338
Chase Manhattan Grantor Trust
Series 1995-B Class A
5.900% due 11/15/01 774 778
Daimler-Benz Auto Grantor Trust
Series 1995-A Class A
5.850% due 05/15/02 1,730 1,738
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 79 77
Ford Credit Grantor Trust
Series 1994-B Class A
7.300% due 10/15/99 1,023 1,043
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 258 252
Green Tree Financial Corp.
Series 1992-2 Class A-2
7.050% due 01/15/18 66 67
Series 1994-1 Class A-1
5.600% due 04/15/19 659 658
Series 1995-A Class A
7.250% due 07/15/05 289 293
Series 1995-D Class A2
6.250% due 09/15/25 800 806
NationsBank Auto Grantor Trust
Series 1995-A Class A
5.850% due 06/15/02 1,687 1,695
Nissan Auto Receivables Grantor Trust
Series 1995-A Class A
6.100% due 08/15/01 1,980 1,997
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 425 438
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-CHF Class B
7.150% due 12/25/20 808 816
Series 1992-M2 Class A-4
8.465% due 03/25/20 26 26
Series 1992-M3 Class A-1
7.750% due 07/25/30 102 104
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 187 191
TMS Home Equity Loan Trust
Series 1993-D Class A-1
5.675% due 12/15/08 2,032 1,978
Series 1994-C Class A-1
6.775% due 09/15/07 610 610
UCFC Home Equity Loan Trust
Series 1994-B Class A-6
7.100% due 06/10/23 259 266
--------
14,415
--------
CORPORATE BONDS AND NOTES - 24.5%
Ahmanson (H.F.)
9.875% due 11/15/99 375 425
Associates Corp. of North America
6.000% due 03/15/00 400 403
Avalon Properties, Inc.
7.375% due 09/15/02 375 387
Bank of Boston Corp.
9.500% due 08/15/97 995 1,055
Bear Stearns Co., Inc.
6.750% due 08/15/00 1,275 1,311
BP America, Inc.
10.150% due 03/15/96 250 252
Capital One Bank (MTN)
8.125% due 02/27/98 1,150 1,201
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 1,250 1,262
Chase Manhattan Corp.
7.500% due 12/01/97 950 982
5.938% due 12/05/09 (c) 200 194
Chemical Banking Corp.
10.375% due 03/15/99 250 281
10.125% due 11/01/00 259 304
CIT Group Holdings, Inc. (MTN)
5.500% due 02/28/97 425 426
Continental Bank Corp.
9.875% due 06/15/96 175 178
Enterprise Rent-A-Car USA
Finance Co. (MTN)
7.875% due 03/15/98 1,100 1,150
ERP Operating, L.P.
6.625% due 12/22/97 (c) 700 704
8.500% due 05/15/99 625 662
First Union Corp.
6.750% due 01/15/98 750 764
</TABLE>
Fixed Income II Fund 93
<PAGE> 92
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
First USA Bank
8.200% due 02/15/98 $ 250 $ 260
5.750% due 01/15/99 875 872
Fleet Financial Group, Inc.
7.250% due 10/15/97 1,025 1,054
Ford Motor Credit Co. (MTN)
9.125% due 06/20/96 1,500 1,523
Ford Motor Credit Co. CMS Floater (MTN)
4.820% due 07/08/96 (c) 2,000 1,992
Franchise Finance Corp.
7.000% due 11/30/00 575 578
General Motors Acceptance Corp. (MTN)
8.250% due 08/29/96 400 407
7.850% due 05/08/97 350 360
6.625% due 03/22/99 725 743
Georgia Pacific Corp.
9.850% due 06/15/97 675 712
Goldman Sachs Group, L.P.
7.625% due 05/29/97 550 563
6.375% due 06/15/00 325 329
6.200% due 12/15/00 275 277
Greyhound Financial Corp.
9.670% due 07/01/97 750 790
GTE Corp.
10.750% due 09/15/17 1,150 1,288
Health & Rehabilitation Properties Trust
6.345% due 07/13/99 (c) 725 721
Hertz Corp.
9.500% due 05/15/98 675 729
Huntington Bancshares, Inc.
Series A (MTN)
6.150% due 10/15/98 1,500 1,520
International Lease Finance Corp.
5.500% due 04/01/97 1,000 997
ITT Corp. New
6.250% due 11/15/00 1,200 1,211
Merrill Lynch & Co., Inc.
9.000% due 05/01/98 900 962
Midlantic Corp.
9.250% due 09/01/99 375 416
Morgan Stanley Group, Inc.
8.000% due 10/15/96 450 457
Occidental Petroleum Corp.
9.625% due 07/01/99 650 661
Occidental Petroleum Corp. (MTN)
5.950% due 11/09/98 1,225 1,231
Salomon, Inc.
6.700% due 12/01/98 500 502
Salomon, Inc. CMT Floater (MTN)
5.767% due 04/05/99 (c) 1,100 1,045
Shawmut Corp.
8.875% due 04/01/96 600 604
8.125% due 02/01/97 533 547
Smith Barney Holdings, Inc.
6.000% due 03/15/97 650 653
7.875% due 10/01/99 675 719
7.980% due 03/01/00 765 820
System Energy Resources, Inc.
7.625% due 04/01/99 1,500 1,556
Taubman Realty Group, L.P.
8.000% due 06/15/99 350 367
Tennessee Gas Pipeline Co.
9.250% due 05/15/96 450 455
9.000% due 01/15/97 450 464
Time Warner, Inc.
9.625% due 05/01/02 1,175 1,361
Transamerica Corp.
9.875% due 01/01/98 775 837
USF&G Corp.
7.000% due 05/15/98 2,350 2,402
Wells Fargo & Co.
8.200% due 11/01/96 100 103
--------
45,029
--------
EURODOLLAR BONDS - 0.5%
Chrysler Financial Corp.
9.500% due 04/12/96 275 277
Goldman Sachs Group, L.P.
5.000% due 08/23/96 700 696
--------
973
--------
MORTGAGE-BACKED SECURITIES - 24.2%
FDIC REMIC Trust
Series 1994-C1 Class 2A-1
6.300% due 09/25/25 61 61
Series 1994-C1 Class 2A-2
7.850% due 09/25/25 700 721
Federal Home Loan Mortgage Corp.
Participation Certificates
Group # 23-0114 7.375% due 03/01/06 (c) 365 373
Group # 25-1211 6.250% due 06/01/07 255 253
Group # 84-6187 7.557% due 04/01/24 (c) 45 45
Group # 84-6188 6.786% due 12/01/99 (c) 1,056 1,079
Group # 84-6190 7.358% due 04/01/29 (c) 770 796
</TABLE>
94 Fixed Income II Fund
<PAGE> 93
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Group # 85-0105 9.000% due 09/01/05 $ 442 $ 462
Group # D2-9159 7.500% due 10/01/07 621 639
Group # D3-2311 8.500% due 12/01/17 975 1,025
Group # G0-0238 8.500% due 07/01/24 1,156 1,216
Group # G5-0215 8.000% due 08/01/97 2,904 2,924
Group # G5-0238 8.000% due 01/01/00 829 835
Group # G5-0249 8.500% due 03/01/00 909 914
Group # G5-0258 7.500% due 05/01/00 2,409 2,439
Group # G5-0297 7.500% due 10/01/00 191 193
Group # G5-0307 7.500% due 08/01/00 441 452
Group # L7-3024 8.000% due 12/01/99 177 178
Group # L7-3057 8.000% due 01/01/00 30 30
Group # L7-3072 8.000% due 01/01/00 113 113
Group # L7-3123 8.000% due 03/01/00 332 334
Group # L9-0165 8.500% due 03/01/00 460 462
Group # L9-0166 7.500% due 05/01/00 581 588
Group # M9-0380 8.500% due 01/01/00 230 232
Group # M9-0386 8.000% due 02/01/00 629 634
Series 1357 Class E Inverse Floater
3.667% due 08/15/97 (c) 548 536
Series 1442 Class S Inverse Floater
4.920% due 12/15/97 543 538
Federal National Mortgage Association
Pool # 040063 8.500% due 12/01/08 203 212
Pool # 116591 7.248% due 01/01/21 (c) 512 516
Pool # 124940 7.943% due 07/01/23 (c) 715 730
Pool # 149168 10.000% due 04/01/20 553 608
Pool # 250229 9.500% due 02/01/25 898 957
Pool # 300695 9.500% due 12/01/24 483 515
Pool # 303172 7.523% due 12/01/24 (c) 720 740
Pool # 303453 9.500% due 05/01/25 1,119 1,192
Pool # 303599 6.565% due 10/01/24 (c) 1,432 1,480
Pool # 305054 9.500% due 03/01/25 834 889
Pool # 305160 9.500% due 02/01/25 327 349
Pool # 305620 9.500% due 02/01/25 720 767
Pool # 306250 9.500% due 02/01/25 363 387
Federal National Mortgage Association
REMIC Trust Series 1995-W2 Class 1A
7.610% due 05/25/22 660 674
Government National Mortgage Association
Pool # 002626 7.250% due 01/15/04 299 313
Pool # 007192 7.250% due 05/15/05 158 165
Pool # 007397 7.250% due 07/15/05 149 156
Pool # 008000 7.375% due 06/20/22 (c) 2,008 2,047
Pool # 008334 7.250% due 10/15/05 329 344
Pool # 008348 7.000% due 12/20/23 (c) 1,185 1,213
Pool # 008597 7.500% due 02/20/25 (c) 569 579
Pool # 008623 7.500% due 04/20/25 370 377
Pool # 008633 7.500% due 05/20/25 (c) 24 25
Pool # 008638 6.000% due 06/20/25 (c) 494 502
Pool # 008644 7.500% due 06/20/25 (c) 899 917
Pool # 038360 10.000% due 11/15/09 67 74
Pool # 262217 10.000% due 11/15/18 10 11
Pool # 269081 10.000% due 03/15/19 183 202
Pool # 270351 10.000% due 10/15/19 325 357
Pool # 278723 10.000% due 08/15/19 371 408
Pool # 294892 10.000% due 08/15/20 177 195
Pool # 302208 10.000% due 01/15/21 248 273
Pool # 361934 9.000% due 01/15/25 374 397
Pool # 378520 9.000% due 10/15/24 618 655
Pool # 385922 9.000% due 10/15/24 82 87
Pool # 390595 9.000% due 08/15/24 348 368
Pool # 393733 9.000% due 03/15/25 353 374
Pool # 393743 9.000% due 02/15/25 396 420
Pool # 394228 9.000% due 05/15/25 322 341
Pool # 404124 9.000% due 07/15/25 676 716
Pool # 404834 9.000% due 01/15/25 27 29
Pool # 404985 9.000% due 04/15/25 90 95
Pool # 405350 9.000% due 11/15/24 197 209
Pool # 405540 9.000% due 12/15/25 644 682
Pool # 407358 9.000% due 04/15/25 381 404
Pool # 407720 9.000% due 07/15/25 215 228
Pool # 407985 9.500% due 03/15/25 235 252
Pool # 410067 9.500% due 07/15/25 790 848
Pool # 780285 9.500% due 11/15/25 877 941
Government National Mortgage Association
9.000% 30 Year TBA (b) 400 424
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.293% due 06/15/21 373 384
Resolution Trust Corp.
Series 1995-2 Class C1
7.450% due 05/25/29 338 335
--------
44,435
--------
UNITED STATES GOVERNMENT
AGENCIES - 1.5%
Federal Farm Credit Bank (MTN)
6.260% due 10/15/98 1,000 1,011
Federal National Mortgage Association
CMT Floater (MTN)
4.820% due 04/29/96 (c) 950 936
Resolution Funding Corp.
Interest Only Strips
Zero Coupon due 10/15/98 850 734
--------
2,681
--------
</TABLE>
Fixed Income II Fund 95
<PAGE> 94
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
UNITED STATES GOVERNMENT
Treasuries - 24.3%
United States Treasury
Interest Only Strips
Zero Coupon due 08/15/98 $ 1,175 $ 1,026
Zero Coupon due 11/15/98 5,600 4,826
United States Treasury Notes
7.500% due 12/31/96 2,200 2,248
6.875% due 02/28/97 6,025 6,136
6.750% due 05/31/97 2,900 2,960
6.375% due 06/30/97 2,000 2,033
5.375% due 11/30/97 3,255 3,266
7.250% due 02/15/98 2,950 3,068
6.125% due 05/15/98 7,000 7,140
5.375% due 05/31/98 700 702
5.250% due 07/31/98 725 725
5.125% due 11/30/98 4,075 4,062
7.750% due 12/31/99 2,550 2,766
6.250% due 08/31/00 1,010 1,045
6.125% due 09/30/00 1,250 1,288
5.625% due 11/30/00 1,345 1,357
--------
44,648
--------
YANKEE BONDS - 4.0%
Ford Capital BV
9.000% due 08/15/98 1,000 1,079
Forte
7.750% due 12/19/96 1,220 1,239
Household International
5.250% due 10/15/98 1,150 1,134
Ontario, Province of
17.000% due 11/05/11 945 1,090
11.500% due 03/10/13 1,585 1,837
Quebec, Province of
13.000% due 10/01/13 830 1,012
--------
7,391
--------
TOTAL LONG-TERM INVESTMENTS
(cost $159,410) 159,572
--------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
--------- --------
<S> <C> <C>
PREFERRED STOCKS - 0.8%
ConAgra Capital LC Series B (c) 39,000 834
Texaco Capital Series B (c) 28,000 588
--------
TOTAL PREFERRED STOCKS
(cost $1,675) 1,422
--------
<CAPTION> PRINCIPAL
AMOUNT
(000)
---------
<S> <C>
SHORT-TERM INVESTMENTS - 11.3%
Frank Russell Investment Company
Money Market Fund, due on demand (a) $ 20,803 20,803
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $20,803) 20,803
--------
TOTAL INVESTMENTS
(identified cost $181,888)(d) - 99.0% 181,797
OTHER ASSETS AND LIABILITIES
NET - 1.0% 1,780
--------
NET ASSETS - 100.0% $183,577
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate securities.
(d) At December 31, 1995, the cost for federal income tax purposes was $181,925
and net unrealized depreciation for all securities was $128. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $1,545 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $1,673.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
96 Fixed Income II Fund
<PAGE> 95
FIXED INCOME II FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified
cost $181,888,188)(Note 2) . . . . . . . . . . . . $ 181,796,979
Receivables:
Dividends and interest . . . . . . . . . . . . . . 2,161,996
Investments sold . . . . . . . . . . . . . . . . . 10,527
Fund shares sold . . . . . . . . . . . . . . . . . 354,668
-------------
184,324,170
LIABILITIES
Payables:
Investments purchased (delayed
settlement)(Note 2) . . . . . . . . $427,625
Fund shares redeemed . . . . . . . . 170,314
Accrued bookkeeping service
fees (Note 4) . . . . . . . . . . . 5,124
Accrued management fees (Note 4). . . 76,807
Accrued transfer agent fees (Note 4). 14,850
Other accrued expenses and payables . 52,384 747,104
-------- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 183,577,066
-------------
-------------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . $ 409,452
Accumulated net realized gain (loss) . . . . . . . . (5,292,179)
Unrealized appreciation (depreciation)
on investments . . . . . . . . . . . . . . . . . . (91,209)
Shares of beneficial interest . . . . . . . . . . . 98,980
Additional paid-in capital . . . . . . . . . . . . . 188,452,022
-------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 183,577,066
-------------
-------------
Net asset value, offering and redemption price
per share ($183,577,066 divided by 9,898,023 shares
of $.01 par value shares of beneficial interest
outstanding) . . . . . . . . . . . . . . . . . . . . $18.55
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 97
<PAGE> 96
FIXED INCOME II FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 10,126,400
Dividends from Money Market Fund (Note 5) . . . . . . . 1,060,764
Dividends . . . . . . . . . . . . . . . . . . . . . . . 114,344
------------
11,301,508
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . $ 626,548
Custodian fees . . . . . . . . . . . . 135,762
Transfer agent fees . . . . . . . . . . 98,621
Bookkeeping service fees . . . . . . . 21,739
Professional fees . . . . . . . . . . . 22,016
Registration fees . . . . . . . . . . . 23,472
Trustees' fees . . . . . . . . . . . . 4,338
Miscellaneous . . . . . . . . . . . . . 9,176 941,672
------------
Net investment income . . . . . . . . . . . . . . . . . . 10,359,836
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . (84,433)
Options written . . . . . . . . . . . . . . . . . . . . (12,969)
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . 4,916,070
Options written . . . . . . . . . . . . . . . . . . . . (424)
------------
Net gain (loss) on investments . . . . . . . . . . . . . 4,818,244
------------
Net increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . $ 15,178,080
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
98 Fixed Income II Fund
<PAGE> 97
FIXED INCOME II FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . $ 10,359,836 $ 9,571,414
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . (84,433) (4,240,414)
Options written . . . . . . . . . . . (12,969) 22,750
Net change in unrealized appreciation
or depreciation of:
Investments . . . . . . . . . . . . . 4,916,070 (4,068,419)
Options written . . . . . . . . . . . (424) 424
------------- -------------
Net increase (decrease) in net assets
resulting from operations . . . . . . . 15,178,080 1,285,755
Distributions to shareholders from net
investment income . . . . . . . . . . . (10,433,057) (9,088,740)
Increase (decrease) in net assets from
Fund share transactions . . . . . . . . 34,801,870 13,213,872
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . 39,546,893 5,410,887
Net assets at beginning of year . . . . . 144,030,173 138,619,286
------------- -------------
NET ASSETS AT END OF YEAR
(including undistributed net
investment income of $409,452
and $482,674, respectively) . . . . . . $ 183,577,066 $ 144,030,173
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . 5,221,430 $ 96,387,044 4,162,933 $ 76,778,267
Fund shares issued to shareholders
in reinvestments of distributions . . . 498,074 9,137,877 413,748 7,543,865
Fund shares redeemed . . . . . . . . . . (3,831,364) (70,723,051) (3,866,382) (71,108,260)
------------- ------------- ------------- -------------
Net increase (decrease) . . . . . . . . . 1,888,140 $ 34,801,870 710,299 $ 13,213,872
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 99
<PAGE> 98
FIXED INCOME II FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . 1.16 1.21 .84 1.35 1.52
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . .59 (1.07) .44 (.83) .72
-------- -------- -------- -------- --------
Total Income From Investment Operations . . . 1.75 .14 1.28 .52 2.24
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . (1.18) (1.15) (.71) (1.36) (1.50)
Net realized gain on investments . . . . . -- -- -- (.28) --
Tax return of capital . . . . . . . . . . . -- -- (.14) -- --
-------- -------- -------- -------- --------
Total Distributions . . . . . . . . . . . . (1.18) (1.15) (.85) (1.64) (1.50)
NET ASSET VALUE, END OF YEAR . . . . . . . . $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (%)(a) . . . . . . . . . . . . . 9.95 .82 6.98 2.74 12.31
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets (a). . . . . . . . . . . . . . . . .58 .19 .16 .19 .13
Net investment income to average net
assets (a). . . . . . . . . . . . . . . . 6.41 6.52 6.16 7.21 8.06
Portfolio turnover. . . . . . . . . . . . . 269.31 233.75 229.07 330.58 188.30
Net assets, end of year ($000 omitted). . . 183,577 144,030 138,619 182,735 156,685
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to
the Manager or money managers. For periods thereafter, they are reported
net of investment management fees but gross of any investment services
fees. See Note 4.
100 Fixed Income II Fund
<PAGE> 99
FIXED INCOME II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 FIXED II ML 1-2.99 **
- ----------------- -------- ------------
<S> <C> <C>
Inception* $10,000 $10,000
1986 $10,934 $11,035
1987 $11,504 $11,658
1988 $12,447 $12,384
1989 $13,815 $13,730
1990 $15,156 $15,065
1991 $17,022 $16,824
1992 $17,489 $17,885
1993 $18,710 $18,852
1994 $18,863 $18,959
1995 $20,739 $21,045
</TABLE>
Fixed Income II Fund
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ ------------ ------------
<S> <C> <C>
1 Year $ 10,995 9.95%
5 Years $ 13,684 6.47%***
10 Years $ 20,739 7.56%***
</TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ ------------ ------------
<S> <C> <C>
1 Year $ 11,100 11.00%
5 Years $ 13,969 6.91%***
10 Years $ 21,045 7.72%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing
US Treasury debt. Issues must carry a term to maturity of at least one
year, and par amounts outstanding must be no less than $10 million at
the start and at the close of the performance measurement periods.
*** Annualized.
FIXED INCOME II FUND returned 10% in 1995, trailing the Merrill Lynch 1-2.99
Years Treasury Index return of 11%. The portfolio was managed in a manner
consistent with its objective to maximize total return, limit price
volatility, and provide a consistent level of current income. The Fund seeks
to reduce risk and provide exposure to a variety of total-return and
income-producing strategies by employing the services of two bond managers,
each with a separate and distinct assignment.
During the year, short-term bond investors saw rates fall by over 200 basis
points in the one- to five-year segment of the market. The Fund lagged the
index in 1995 by 105 basis points. For most of the year, widening interest
rate spreads had a negative impact on the mortgage sector relative to the
index. This was partially offset by the income advantage of the sector and
good performance from corporate bond holdings.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Fixed Income Fund 101
<PAGE> 100
FIXED INCOME III FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 76.5%
ASSET-BACKED SECURITIES - 5.4%
American Airlines, Inc.
Series 1990-P
10.600% due 03/04/09 $ 1,013 $ 1,295
Drexel Burnham Lambert CMO Trust
8.900% due 06/01/16 121 121
Equicon Home Equity Loan Trust
Series 1993-1 Class A
5.850% due 11/18/12 48 48
Fleetwood Credit Corp. Grantor Trust
Series 1994-B Class A
6.750% due 03/15/10 582 593
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 172 168
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 600 608
Series 1995-6 Class A3
6.650% due 11/15/25 900 921
Series 1995-7 Class A2
6.150% due 11/15/25 1,150 1,159
Series 1995-8 Class A2
6.150% due 12/15/26 950 964
Series 1995-A Class A
7.250% due 07/15/05 444 451
Greenwich Capital Acceptance, Inc.
Series 1994 Class A-1
7.650% due 11/25/24 (c) 1,341 1,368
Kearny Street Real Estate, L.P.
Series 1995-1 Class B
6.600% due 10/15/02 1,500 1,508
Olympic Automobile Receivables Trust
Series 1995-C Class A2
6.200% due 06/15/02 843 853
Prudential Home Mortgage Securities Co.
Mortgage Pass-thru Series 189
10.000% due 11/01/19 35 35
Series 1992-51 Class A-8
8.000% due 02/25/23 500 505
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1994-1 Class M-2
7.750% due 09/25/29 455 459
Series 1995-1 Class 2-C
7.500% due 10/25/28 (c) 325 330
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1995-C1 Class C
6.900% due 02/25/27 (c) 300 298
Salomon Brothers Mortgage
Securities VII, Inc. Mortgage
Pass-thru Certificate
Series 1994-16 Class A
7.790% due 11/25/24 (c) 1,514 1,553
UCFC Home Equity Loan Trust
Series 1994-B Class A-6
7.100% due 06/10/23 296 303
--------
13,540
--------
CORPORATE BONDS AND NOTES - 21.7%
Acme Metals, Inc. Step Up Bond
13.500% due 08/01/04 370 304
Adelphia Communications Corp.
PIK Series B
9.500% due 02/15/04 803 626
ADT Operations, Inc.
8.250% due 08/01/00 375 396
American Airlines Class A-1
9.710% due 01/02/07 379 439
American Standard, Inc.
10.875% due 05/15/99 375 412
AMR Corp. (MTN)
9.950% due 03/07/01 1,000 1,131
Anchor Bancorp, Inc.
8.937% due 07/09/03 150 148
Arkla, Inc. (MTN)
8.780% due 07/19/96 1,000 1,012
Armco, Inc.
9.375% due 11/01/00 265 262
Bally's Casino Holdings, Inc.
Zero Coupon due 06/15/98 230 185
Banesto Delaware, Inc.
8.250% due 07/28/02 1,000 1,093
BellSouth Telecommunications, Inc.
5.850% due 11/15/45 1,100 1,112
Berkeley Federal Bank & Trust
12.000% due 06/15/05 325 335
Cablevision Industries Co.
9.250% due 04/01/08 380 407
Capital One Bank
8.625% due 01/15/97 325 334
</TABLE>
Fixed Income III Fund 103
<PAGE> 101
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Chevy Chase Savings Bank
9.250% due 12/01/05 $ 500 $ 510
Citicorp (MTN)
6.750% due 10/15/07 380 389
Clark Oil & Refining Corp.
9.500% due 09/15/04 200 207
Cleveland Electric Illum Co.
9.375% due 03/01/17 1,000 997
Cleveland Electric Illum Co. (MTN)
9.110% due 07/22/96 1,000 1,010
Cleveland Electric Illum Co. Series B
9.500% due 05/15/05 130 135
CMS Energy Corp.
9.500% due 10/01/97 1,000 1,035
Coast Federal Bank
13.000% due 12/31/02 250 284
Coast Savings Financial, Inc.
10.000% due 03/01/00 275 288
Columbia Gas Systems, Inc.
Series A
6.390% due 11/28/00 58 59
Series B
6.610% due 11/28/02 51 52
Series C
6.800% due 11/28/05 51 52
Series D
7.050% due 11/28/07 51 52
Series E
7.320% due 11/28/10 51 52
Series F
7.420% due 11/28/15 51 52
Series G
7.620% due 11/28/25 51 52
Columbia/HCA Health Care Corp.
6.630% due 07/15/45 550 568
Companhia Petroleo Ipiranga
8.625% due 02/25/02 (c) 650 634
Continental Cablevision, Inc.
8.500% due 09/15/01 100 104
8.625% due 08/15/03 125 130
8.300% due 05/15/06 750 753
Cott Corp.
9.375% due 07/01/05 475 474
CTC Mansfield Funding Corp.
10.250% due 03/30/03 1,000 1,014
Delta Air Lines, Inc.
10.375% due 02/01/11 195 244
Dime Bancorp, Inc.
10.500% due 11/15/05 395 435
EnviroSource, Inc.
9.750% due 06/15/03 570 502
Exide Corp.
10.750% due 12/15/02 250 271
Exide Corp. Step Up Bond
12.250% due 12/15/04 580 487
Falcon Holdings Group, L.P. PIK Series B
11.000% due 09/15/03 424 403
Federal Realty Investment Trust
8.875% due 01/15/00 725 786
First Nationwide Holdings, Inc.
12.250% due 05/15/01 425 484
First USA Bank
8.200% due 02/15/98 475 495
Ford Motor Credit Co. CMS Floater (MTN)
4.820% due 07/12/96 (c) 200 199
Gaylord Container Corp. Step Up Bond
12.750% due 05/15/05 165 163
General Medical Corp. of Virginia PIK
12.125% due 08/15/05 1,139 1,164
General Motors Acceptance Corp.
8.625% due 06/15/99 270 293
General Motors Acceptance Corp. (MTN)
5.480% due 07/19/96 (c) 2,000 2,001
7.375% due 04/15/99 1,000 1,048
Goldman Sachs Group, L.P.
6.375% due 06/15/00 1,050 1,062
Grancare, Inc.
9.375% due 09/15/05 775 787
Grancare, Inc. (conv.)
6.500% due 01/15/03 200 173
Grupo Industrial Durango SA de CV
12.000% due 07/15/01 625 548
Hanson America, Inc. (conv.)
2.390% due 03/01/01 550 457
Inland Steel Industries, Inc.
12.750% due 12/15/02 325 366
Koppers Industries, Inc.
8.500% due 02/01/04 550 528
Liberty Mutual Insurance Co.
8.200% due 05/04/07 575 639
Long Island Lighting Co.
6.250% due 07/15/01 190 182
8.900% due 07/15/19 200 202
</TABLE>
104 Fixed Income III Fund
<PAGE> 102
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Nabisco, Inc.
8.000% due 01/15/00 $ 2,000 $ 2,126
New England Mutual Life Insurance Co.
7.875% due 02/15/24 400 413
News America Holdings, Inc.
8.875% due 04/26/23 375 434
7.700% due 10/30/25 325 332
Niagara Mohawk Power Corp.
7.375% due 08/01/03 190 178
5.875% due 09/01/02 260 232
NWA Trust
13.875% due 06/21/08 90 105
Owens-Illinois, Inc.
11.000% due 12/01/03 700 791
PDV America, Inc.
7.875% due 08/01/03 830 778
PennCorp. Financial Group, Inc.
9.250% due 12/15/03 775 787
Peters (JM), Co.
12.750% due 05/01/02 280 256
Pueblo Xtra International
9.500% due 08/01/03 255 238
Purity Supreme, Inc. Series B
11.750% due 08/01/99 350 383
Revlon Worldwide Corp. Series B
Zero Coupon due 03/15/98 290 215
Riggs National Corp. Washington, D.C.
9.650% due 06/15/09 875 1,015
Salomon, Inc.
9.375% due 04/15/98 250 266
6.700% due 12/01/98 450 452
7.125% due 08/01/99 425 429
Smith Barney Holdings, Inc.
7.980% due 03/01/00 325 348
6.500% due 10/15/02 275 280
Southland Corp. Series A
4.500% due 06/15/04 593 463
Stone Container Corp.
9.875% due 02/01/01 800 778
Stop & Shop Cos., Inc.
9.750% due 02/01/02 375 413
Summit Communications Group, Inc.
10.500% due 04/15/05 390 435
Swiss Bank Corp.
6.750% due 07/15/05 420 439
Taubman Realty Group, L.P.
8.000% due 06/15/99 450 472
Tenet Healthcare Corp.
8.625% due 12/01/03 775 814
Time Warner, Inc.
6.835% due 08/15/00 (c) 625 629
7.975% due 08/15/04 375 397
8.110% due 08/15/06 1,140 1,214
8.180% due 08/15/07 750 806
9.125% due 01/15/13 575 648
9.150% due 02/01/23 1,540 1,746
Toledo Edison Co.
8.700% due 09/01/02 500 460
Toledo Edison Co. (MTN)
8.000% due 12/31/98 500 497
Transco Energy Co.
9.375% due 08/15/01 500 574
U.S. West Communications, Inc.
7.200% due 11/10/26 400 412
UCC Investors Holding, Inc.
Step Up Bond
12.000% due 05/01/05 230 175
United Companies Financial Corp.
9.350% due 11/01/99 375 398
United Technologies Corp.
8.875% due 11/15/19 170 212
USF&G Corp.
8.375% due 06/15/01 250 274
Viacom, Inc.
7.750% due 06/01/05 650 689
Wellsford Residential Property Trust
9.375% due 02/01/02 475 532
Westpoint Stevens, Inc.
8.750% due 12/15/01 300 299
--------
54,852
--------
EURODOLLAR BONDS - 1.8%
Argentina, Republic of Series L
6.813% due 03/31/05 (c) 2,000 1,425
Bulgaria, Republic of Series A
6.750% due 07/28/24 (c) 550 292
Credit Lyonnais
6.844% due 09/19/49 (f) 230 209
Fifth Mexican Acceptance Corp. Class A
8.000% due 12/15/98 800 320
Hong Kong & Shanghai Bank
6.250% due 08/29/49 (f) 625 499
Indah Kiat Paper & Pulp
8.875% due 11/01/00 155 145
</TABLE>
Fixed Income III Fund 105
<PAGE> 103
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Mexico (United Mexican States)
6.766% due 12/31/19 (c) $ 2,000 $ 1,445
Midland Bank
6.063% due 12/31/49 (f) 170 137
--------
4,472
--------
MORTGAGE-BACKED SECURITIES - 27.5%
Asset Securitization Corp.
Series 1995-MD4 Class A1
7.100% due 08/13/29 699 729
Collateralized Mortgage Securities Corp.
Series J Class J-5 CMO
7.985% due 05/01/17 1,485 1,514
FDIC REMIC Trust
Series 1994-C1 Class 2A-2
7.850% due 09/25/25 500 515
Federal Home Loan Mortgage Corp
8.000% 30 Year TBA (e) 5,550 5,751
Participation Certificates
Series 1014 Class E
7.950% due 02/15/20 1,100 1,128
Series 1037 Class Z
9.000% due 02/15/21 1,542 1,655
Federal National Mortgage Association
Pool #024193 7.000% due 09/01/25 986 994
Pool #024205 7.000% due 09/01/25 986 994
Pool #050714 7.500% due 04/01/23 70 72
Pool #050748 7.500% due 06/01/23 76 78
Pool #050766 7.500% due 07/01/23 673 690
Pool #050796 7.500% due 09/01/23 451 463
Pool #050996 7.500% due 02/01/24 658 674
Pool #124032 10.000% due 02/01/05 515 542
Pool #190218 7.500% due 04/01/23 293 301
Pool #213445 7.500% due 07/01/23 84 86
Pool #228620 7.500% due 07/01/23 22 23
Pool #229089 7.500% due 07/01/23 515 528
Pool #242008 7.500% due 12/01/23 84 86
Pool #250329 7.000% due 08/01/25 295 298
Pool #250359 7.000% due 10/01/25 494 498
Pool #265289 7.000% due 05/01/24 96 96
Pool #265560 5.671% due 01/01/24 (c) 3,583 3,647
Pool #275296 7.000% due 07/01/24 507 512
Pool #280365 7.000% due 05/01/24 716 722
Pool #303016 6.000% due 10/01/01 1,388 1,386
Pool #303555 7.000% due 09/01/25 2,184 2,202
Pool #307564 7.000% due 06/01/25 860 867
Pool #312494 7.000% due 07/01/25 456 459
Pool #316260 7.500% due 07/01/25 937 960
Pool #316651 7.000% due 08/01/25 1,992 2,008
Pool #316681 7.000% due 07/01/25 931 939
Pool #317262 7.000% due 07/01/25 352 355
Pool #319580 7.000% due 08/01/25 122 123
Pool #319640 7.000% due 08/01/25 457 461
Pool #320186 7.500% due 08/01/25 691 709
Pool #321182 7.500% due 09/01/25 63 64
Federal National Mortgage Association
6.500% 7 Year TBA (e) 1,750 1,768
7.000% 15 Year TBA (e) 2,700 2,750
REMIC
9.100% due 12/25/12 21 21
REMIC Series 1994-3 Class SA
Inverse Floater
3.450% due 01/25/24 (c) 425 184
REMIC Trust Series 1994-79 Class Z
7.000% due 04/25/24 2,776 2,576
Government National Mortgage Association
Pool #008346 6.500% due 12/20/23 (c) 946 964
Pool #008288 7.250% due 09/20/23 (c) 834 847
Pool #008528 6.500% due 10/20/24 (c) 4,677 4,774
Pool #297864 9.000% due 10/15/21 139 148
Pool #330255 7.500% due 07/15/23 84 86
Pool #342022 7.500% due 05/15/23 97 100
Pool #345644 7.500% due 03/15/24 83 86
Pool #346746 7.000% due 09/15/23 606 613
Pool #348193 7.500% due 07/15/23 553 570
Pool #352050 7.000% due 10/15/23 1,020 1,032
Pool #352129 9.000% due 08/15/24 726 769
Pool #352542 7.000% due 01/15/24 239 242
Pool #360592 7.500% due 07/15/25 455 468
Pool #361036 7.500% due 07/15/23 141 145
Pool #362183 7.000% due 01/15/24 101 103
Pool #367356 7.000% due 01/15/24 25 25
Pool #369166 7.500% due 10/15/23 334 344
Pool #371259 7.000% due 01/15/24 115 116
Pool #372591 7.500% due 11/15/23 501 515
Pool #373789 7.500% due 10/15/23 414 427
Pool #376352 7.500% due 12/15/23 449 462
Pool #380708 9.000% due 01/15/25 276 292
Pool #380893 7.500% due 03/15/24 378 389
Pool #385312 9.000% due 11/15/24 599 635
Pool #389622 9.000% due 10/15/24 431 456
Pool #390005 7.000% due 04/15/24 861 871
Pool #394467 7.500% due 08/15/25 133 137
Pool #403241 9.000% due 02/15/25 948 1,005
Pool #403995 9.000% due 11/15/24 66 70
Pool #405540 9.000% due 12/15/25 520 551
Pool #418666 7.500% due 09/15/25 559 575
Pool #780023 7.000% due 09/15/24 735 744
Pool #780029 9.000% due 11/15/24 399 427
</TABLE>
106 Fixed Income III Fund
<PAGE> 104
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Government National Mortgage Association
7.000% 30 Year TBA (e) $ 7,475 $ 7,563
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.060% due 06/15/21 (c) 770 792
Paine Webber Mortgage Acceptance Corp. IV
Series 1995-M1 Class A
6.700% due 01/15/07 720 733
Ryland Mortgage Securities Corp. CMO
Series 1993-8 Class A
7.870% due 09/25/23 (c) 1,003 1,018
--------
69,522
--------
MUNICIPAL BONDS - 0.6%
Atlanta Water & Sewer Revenue
4.750% due 01/01/23 350 321
Atlanta, Georgia, General Obligation
5.600% due 12/01/18 270 274
Salt River Project, Arizona,
Agricultural Improvement
& Power District Series B
5.250% due 01/01/19 290 285
South Carolina, Public Service
Authority Series C
5.000% due 01/01/25 650 617
--------
1,497
--------
NON-US BONDS - 3.5%
Canada, Government of
8.750% due 12/01/05 CD 1,000 819
Cemex SA (MTN)
8.500% due 08/31/00 $ 1,000 885
Germany, Republic of
6.250% due 01/04/24 DM 9,800 6,364
Italy, Republic of
6.875% due 09/27/23 $ 475 464
Poland, Government of
6.875% due 10/27/24 (c) 465 351
--------
8,883
--------
UNITED STATES GOVERNMENT
AGENCIES - 0.4%
Tennessee Valley Authority
6.235% due 07/15/45 1,100 1,139
--------
1,139
--------
UNITED STATES GOVERNMENT
TREASURIES - 11.4%
United States Treasury Bonds
7.500% due 11/15/16 2,250 2,638
8.125% due 08/15/19 2,510 3,156
7.875% due 02/15/21 4,365 5,375
7.125% due 02/15/23 1,776 2,031
United States Treasury Notes
5.375% due 05/31/98 2,500 2,508
6.750% due 05/31/99 3,900 4,074
6.750% due 06/30/99 1,150 1,202
6.875% due 08/31/99 3,100 3,258
6.375% due 01/15/00 460 478
7.125% due 02/29/00 900 958
5.875% due 02/15/04 500 509
5.875% due 11/15/05 1,285 1,314
United States Treasury Principal Only Strip
Zero Coupon due 11/15/99 650 530
Zero Coupon due 11/15/21 3,800 773
--------
28,804
--------
YANKEE BONDS - 4.2%
Bombril SA
8.000% due 08/26/98 400 363
Brazil, Federal Republic of
6.688% due 01/01/01 (c) 475 409
Christiana Bank
6.063% due 11/30/49 (c) 40 32
Czech National Bank
7.000% due 04/06/96 1,000 1,001
Den Norske Creditbank AS
6.125% due 11/30/49 (f) 210 166
Doman Industries, Ltd.
8.750% due 03/15/04 500 474
Domtar, Inc.
11.750% due 03/15/99 200 224
12.000% due 04/15/01 500 591
Ecuador, Republic of
3.000% due 02/28/25 (c) 1,850 668
Fairfax Financial Holdings, Ltd.
7.750% due 12/15/03 350 368
Lloyds Bank
6.063% due 12/31/99 (f) 290 241
Methanex Corp.
7.750% due 08/15/05 900 955
Mexico (United Mexican States)
6.250% due 12/31/19 750 488
6.609% due 12/31/19 (c) 1,000 723
</TABLE>
Fixed Income III Fund 107
<PAGE> 105
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
National Westminster Bank PLC
6.125% due 12/31/99 (c) $ 220 $ 185
Santander Finnish Issuances
6.775% due 09/30/49 (c) 500 450
St. George Bank, Ltd.
7.150% due 10/15/05 775 802
Standard Chartered Bank Group PLC
5.775% due 12/31/99 (c) 250 189
Telewest Communications PLC
Step Up Bond
11.000% due 10/01/07 1,725 1,041
Tembec Finance Corp.
9.875% due 09/30/05 700 695
Trizec Finance
10.875% due 10/15/05 375 384
Videotron Holdings PLC Step Up Bond
11.000% due 08/15/05 210 131
--------
10,580
--------
TOTAL LONG-TERM INVESTMENTS
(cost $188,271) 193,289
--------
OPTIONS PURCHASED - 0.1%
United States Treasury Bond
Feb 98.50 Call (b) 5,000* 155
--------
TOTAL OPTIONS PURCHASED
(cost $145) 155
--------
<CAPTION>
NUMBER
OF
SHARES
---------
<S> <C> <C>
PREFERRED STOCKS - 0.6%
Australia & New Zealand
Banking Group, Ltd. 7,200 196
California Federal Bank
of Los Angeles Series B 4,500 488
Credit Lyonnais Capital S.C.A. - ADR 3,500 87
Equity Residential Property Trust 2,000 51
Lasalle National Corp. Series K 3,000 158
Newscorp Overseas, Ltd. 10,000 223
Texaco Capital Series B 4,000 84
Wellsford Residential Property Trust Series B 5,600 144
--------
TOTAL PREFERRED STOCKS
(cost $1,423) 1,431
--------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 27.8%
Federal Home Loan Mortgage Corp.
Discount Notes
4.215% due 01/16/96 (a)(h) $ 2,475 $ 2,469
Frank Russell Investment Company
Money Market Fund, due on demand (a) 49,586 49,586
Mexico (United Mexican States)
Structured Note
Zero Coupon due 11/27/96 650 662
United States Treasury Bills
5.340% due 02/08/96 (a)(g)(h) 120 119
5.265% due 02/15/96 (a)(g)(h) 180 179
5.305% due 02/22/96 (a)(g)(h) 130 129
United States Treasury Notes
7.875% due 07/15/96 5,000 5,068
6.125% due 07/31/96 5,000 5,026
4.375% due 08/15/96 7,000 6,965
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $70,172) 70,203
--------
TOTAL INVESTMENTS
(identified cost $260,011)(d) - 105.0% 265,078
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - (5.0%) (12,613)
--------
NET ASSETS - 100.0% $252,465
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Nonincome-producing security.
(c) Adjustable or floating rate security.
(d) At December 31, 1995, the cost for federal income tax purposes was $259,862
and net unrealized appreciation for all securities was $5,216. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $7,034 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $1,818.
(e) Forward Commitment. See Note 2.
(f) Perpetual floating rate note.
(g) Held as collateral by the custodian in connection with futures contracts
and put options written.
(h) Rate noted is yield-to-maturity (unaudited).
(MTN) represents Medium Term Note.
* Number of contracts.
The accompanying notes are an integral part of the financial statements.
108 Fixed Income III Fund
<PAGE> 106
FIXED INCOME III FUND
FUTURES AND OPTIONS WRITTEN
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
German 10 Year Bund
Futures Contracts
expiration date 03/96 40 $ 59
UK Long Gilt
Futures Contracts
expiration date 03/96 30 30
United States Treasury 5 Year Note
Futures Contracts
expiration date 03/96 120 68
United States Treasury 10 Year Note
Futures Contracts
expiration date 03/96 45 68
United States Treasury 30 Year Bond
Futures Contracts
expiration date 03/96 102 83
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (*) $ 308
--------
--------
</TABLE>
(*) At December 31, 1995, United States Treasury Bills valued at $422 were held
as collateral by the custodian in connection with futures contracts
purchased by the Fund.
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
CONTRACTS (000)
--------- --------
<S> <C> <C>
PUT OPTIONS WRITTEN
(Notes 2 and 3)
Eurodollar Futures Contracts
strike price 91.75
expiration date 03/96 19 $ 1
--------
Total Liability for Put Options Written
(premiums received $7)(++) $ 1
--------
--------
</TABLE>
(++) At December 31, 1995, United States Treasury Bills valued at $5 were held
as collateral by the custodian in connection with put options written.
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 109
<PAGE> 107
FIXED INCOME III FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $260,010,601)(Note 2). . . . . . . . . . . . . . . . . . . . . $265,078,302
Foreign currency holdings (identified cost $408,972). . . . . . . . . . . . . . . . . . . . . . . . . 412,247
Forward foreign currency exchange contracts (cost $6,746,595)(Notes 2 and 6). . . . . . . . . . . . . 6,746,595
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,699,398
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532,670
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,052,016
Daily variation margin on futures contracts (Note 2 and 3) . . . . . . . . . . . . . . . . . . . . 78,108
Deferred organization expenses (Notes 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,593
------------
277,611,929
LIABILITIES
Payables:
Investments purchased (regular settlement). . . . . . . . . . . . . . . . . . . $ 550,599
Investments purchased (delayed settlement)(Note 2). . . . . . . . . . . . . . . 17,632,223
Fund shares redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,563
Accrued bookkeeping service fees (Note 4) . . . . . . . . . . . . . . . . . . . 5,306
Accrued management fees (Note 4). . . . . . . . . . . . . . . . . . . . . . . . 115,204
Accrued transfer agent fees (Note 4). . . . . . . . . . . . . . . . . . . . . . 13,441
Other accrued expenses and payables . . . . . . . . . . . . . . . . . . . . . . 45,973
Forward foreign currency exchange contracts
(cost $6,746,595)(Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . . . 6,760,332
Options written, at market value
(premiums received $6,536)(Notes 2 and 3). . . . . . . . . . . . . . . . . . . . 475 25,147,116
----------- ------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $252,464,813
------------
------------
NET ASSETS CONSIST OF:
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,680
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,760,415)
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,067,701
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,602
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,061
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,048)
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,278
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,546,954
------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $252,464,813
------------
------------
Net asset value, offering and redemption price per share,
($252,464,813 divided by 24,427,830 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.34
------------
------------
</TABLE>
110 Fixed Income III Fund
The accompanying notes are an integral part of the financial statements.
<PAGE> 108
FIXED INCOME III FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,706,084
Dividends from Money Market Fund (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . 2,369,188
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,612
--------------
15,214,884
EXPENSES (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 892,253
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,351
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,116
Bookkeeping service fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,990
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,510
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,829
Trustees' fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,348
Amortization of deferred organization expenses. . . . . . . . . . . . . . . . 6,048
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,793 1,246,238
----------- --------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,968,646
--------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578,603
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,037,656
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,327
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,339
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,808,353
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,992
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,948
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,048)
--------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,392,170
--------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . . . $ 33,360,816
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 111
<PAGE> 109
FIXED INCOME III FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . $ 13,968,646 11,005,887
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . 578,603 (5,459,340)
Futures contracts . . . . . . . . . . . . . . . . . . . 3,037,656 (1,308,048)
Options written . . . . . . . . . . . . . . . . . . . . 379,327 68,997
Foreign currency-related transactions . . . . . . . . . 242,339 --
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . 14,808,353 (10,220,115)
Futures contracts . . . . . . . . . . . . . . . . . . . 315,992 (30,619)
Options written . . . . . . . . . . . . . . . . . . . . 43,948 (37,887)
Foreign currency-related transactions . . . . . . . . . (14,048) 615
------------ ------------
Net increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . 33,360,816 (5,980,510)
Distributions to shareholders:
Net investment income . . . . . . . . . . . . . . . . . . (14,094,063) (10,933,568)
In excess of net realized gain on investments . . . . . . -- (62,326)
Increase (decrease) in net assets from Fund share
transactions . . . . . . . . . . . . . . . . . . . . . . 66,578,025 59,362,071
------------ ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . 85,844,778 42,385,667
Net Assets at Beginning of Year . . . . . . . . . . . . . . 166,620,035 124,234,368
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $66,680 and $49,136, respectively) . . . . . . . . . . $252,464,813 $166,620,035
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . 10,309,335 $102,755,822 9,007,408 $90,528,942
Fund shares issued to shareholders
in reinvestments of distributions . . . . 1,373,663 13,707,352 1,124,930 10,786,542
Fund shares redeemed . . . . . . . . . . . (5,030,481) (49,885,149) (4,260,253) (41,953,413)
----------- ------------ ----------- ------------
Net increase (decrease) . . . . . . . . . . 6,652,517 $ 66,578,025 5,872,085 $59,362,071
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
112 Fixed Income III Fund
<PAGE> 110
FIXED INCOME III FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993++
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $ 9.37 10.44 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . .67 .66 .49
Net realized and unrealized gain (loss) on investments. .97 (1.07) .52
-------- -------- --------
Total Income From Investment Operations . . . . . . . . 1.64 (.41) 1.01
-------- -------- --------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . . . . . . . (.67) (.66) (.48)
Net realized gain on investments . . . . . . . . . . . -- -- (.08)
In excess of net realized gain on investments . . . . . -- (.00) (.01)
-------- -------- --------
Total Distributions . . . . . . . . . . . . . . . . . . (.67) (.66) (.57)
-------- -------- --------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $10.34 9.37 10.44
-------- -------- --------
-------- -------- --------
TOTAL RETURN (%)(a)(c) . . . . . . . . . . . . . . . . . . 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c) . . .61 .20 .20
Operating expenses, gross, to average net assets (b)(c) . .61 .20 .40
Net investment income to average net assets (b)(c). . . . 6.83 7.02 6.30
Portfolio turnover (b) . . . . . . . . . . . . . . . . . 141.37 134.11 181.86
Net assets, end of year ($000 omitted) . . . . . . . . . 252,465 166,620 124,234
Per share amount of fees waived ($ omitted) . . . . . . . -- -- .0003
Per share amount of fees reimbursed ($ omitted) . . . . . -- -- .0154
</TABLE>
++ For the period January 29, 1993 (commencement of operations) to
December 31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the periods ended December 31, 1993 are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
See Note 4.
Fixed Income III Fund 113
<PAGE> 111
FIXED INCOME III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 FIXED III LB AGGREGATE **
- ----------------- -------- -------------------------
<S> <C> <C>
Inception* $10,000 $10,000
1993 $11,022 $10,768
1994 $10,593 $10,454
1995 $12,499 $12,386
</TABLE>
Fixed Income III Fund
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ ------------ ------------
<S> <C> <C>
1 Year $ 11,799 17.99%
Inception $ 12,499 7.94%***
</TABLE>
Lehman Brothers Aggregate Bond Index
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ ------------ ------------
<S> <C> <C>
1 Year $ 11,848 18.48%
Inception $ 12,386 7.61%***
</TABLE>
* Assumes initial investment on February 1, 1993.
** Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage
of the original investment. Indexes are rebalanced monthly by market
capitalization.
*** Annualized.
FIXED INCOME III FUND returned 18% in 1995, which lagged the Lehman Brothers
Aggregate Bond Index return of 18.5%. The portfolio was managed in a manner
consistent with its objective to provide maximum total return, primarily
through capital appreciation and by assuming a higher level of volatility than
is ordinarily expected from broad fixed income market portfolios. The Fund
seeks to diversify risk and provide exposure to a variety of total return
strategies by employing the services of three bond managers, each with a
separate and distinct assignment.
With the US bond market up dramatically in 1995, the Fund's foreign holdings
lagged through most of the year before contributing strong returns in the
fourth quarter. Domestic mortgage-backed securities and high yield bonds also
lagged for the greater part of the year which impacted Fund performance
negatively. Corporate and Treasury holdings performed well and were enhanced
by good security selection to help offset some of the underperformance caused
by other factors.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
114 Fixed III Income Fund
<PAGE> 112
MONEY MARKET FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
--------- ------ --------- -------
<S> <C> <C> <C> <C>
DOMESTIC COMMERCIAL PAPER - 39.5%
Associates Corp. of North America $ 27,000 5.690% 02/09/96 $26,834
Budget Funding Corp. 12,000 5.760 01/24/96 11,956
Budget Funding Corp. 9,800 5.700 02/05/96 9,746
CIT Group Holdings, Inc. 14,180 5.770 01/22/96 14,132
First Deposit Master Trust 10,000 5.700 02/15/96 9,929
First Deposit Master Trust 17,000 5.700 02/26/96 16,849
Ford Motor Credit Co. 15,000 5.700 02/05/96 14,917
Ford Motor Credit Co. 10,000 5.690 03/01/96 9,905
General Electric Capital Services, Inc. 10,000 5.700 02/06/96 9,943
General Motors Acceptance Corp. 20,000 5.780 02/02/96 19,897
IBM Credit Corp. 15,000 5.700 01/29/96 14,934
Merrill Lynch & Co., Inc. 7,000 5.730 01/31/96 6,967
PHH Corp. 12,000 5.700 01/26/96 11,953
Philip Morris 15,000 5.675 01/19/96 14,957
Redwood Receivable Corp. 18,000 5.850 01/31/96 17,911
--------
TOTAL DOMESTIC COMMERCIAL PAPER (cost $210,830) 210,830
--------
CORPORATE BONDS AND NOTES - 10.3%
First National Bank of Illinois (a) 10,000 5.200 02/16/96 9,999
Goldman Sachs Group L.P. (a) 20,000 5.540 08/26/96 20,000
Merrill Lynch & Co., Inc. (a) 20,000 5.740 04/04/96 20,000
Wachovia Bank 5,000 4.650 02/26/96 4,990
--------
TOTAL CORPORATE BONDS AND NOTES (cost $54,989) 54,989
--------
EURODOLLAR CERTIFICATES OF DEPOSIT - 2.6%
Abby National PLC 10,000 5.750 01/02/96 10,000
Mitsubishi Bank 4,000 5.830 03/08/96 4,000
--------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(cost $14,000) 14,000
--------
EURODOLLAR TIME DEPOSITS - 10.8%
Bank of Montreal 24,000 5.875 01/31/96 24,000
Banque Nationale de Paris 1,470 5.844 01/02/96 1,470
Canadian Imperial Bank 5,000 5.875 01/25/96 5,000
Canadian Imperial Bank 22,000 5.843 01/31/96 22,000
Mitsubishi Bank 5,000 6.125 01/18/96 5,000
--------
TOTAL EURODOLLAR TIME DEPOSITS (cost $57,470) 57,470
--------
YANKEE BANKERS ACCEPTANCE - 2.2%
Sanwa Bank, Ltd. 7,000 5.700 02/20/96 6,945
Sanwa Bank, Ltd. 5,000 5.770 05/29/96 4,880
--------
TOTAL YANKEE BANKERS ACCEPTANCE (cost $11,825) 11,825
--------
</TABLE>
Money Market Fund 115
<PAGE> 113
MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
--------- ------ --------- --------
<S> <C> <C> <C> <C>
YANKEE CERTIFICATES OF DEPOSIT - 11.6%
Bank of Tokyo, Ltd. $ 8,000 6.350% 01/25/96 $ 8,000
Commerzbank AG 10,000 5.760 12/06/96 10,000
Mitsubishi Bank, Ltd., New York 14,000 5.800 04/15/96 14,001
National Westminster Bank PLC 4,000 5.810 01/25/96 4,000
Sanwa Bank, Ltd. 10,000 6.170 02/20/96 10,000
Sanwa Bank, Ltd. 8,000 6.230 02/23/96 7,999
Westdeutsche Landesbank 8,000 6.100 05/13/96 8,005
--------
TOTAL YANKEE CERTIFICATES OF DEPOSIT (cost $62,005) 62,005
--------
UNITED STATES GOVERNMENT AGENCIES - 9.6%
Aid to Chile Guaranteed Note (A) 14,477 5.750 06/01/05 14,494
Aid to INH Portugal Guaranteed Note (A) 12,500 5.817 12/01/17 12,734
Federal National Mortgage ASSOCIATION MTN (A) 12,000 5.210 04/04/97 11,946
Secondary Market Services 7,583 5.770 01/26/96 7,553
Secondary Market Services 4,646 5.750 02/12/96 4,615
--------
TOTAL UNITED STATES GOVERNMENT AGENCIES (cost $51,342) 51,342
--------
YANKEE COMMERCIAL PAPER - 13.5%
Beta Finance, Inc. 19,000 5.670 02/07/96 18,889
Bishopsgate 10,000 5.860 01/19/96 9,971
Cosco Co., Ltd. 15,000 5.710 02/13/96 14,898
Glaxo PLC 23,000 5.720 01/23/96 22,920
Hitachi Credit America Corp. 5,000 5.700 02/23/96 4,957
--------
TOTAL YANKEE COMMERCIAL PAPER (cost $71,635) 71,635
--------
TOTAL INVESTMENTS (amortized cost $534,096)(b) - 100.1% 534,096
--------
OTHER ASSETS AND LIABILITIES, NET - ( 0.1%) (453)
--------
NET ASSETS - 100.0% $533,643
--------
--------
</TABLE>
* The interest rate for all securities with a maturity greater than thirteen
months has an automatic reset feature resulting in an effective maturity of
thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
116 Money Market Fund
<PAGE> 114
MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at amortized cost which
approximates market (Note 2) . . . . . . . . . . . . $ 534,095,768
Interest receivable. . . . . . . . . . . . . . . . . . 2,450,356
-------------
536,546,124
LIABILITIES
Payables:
Bank overdraft . . . . . . . . . . . $ 110,792
Dividends. . . . . . . . . . . . . . 2,747,187
Accrued transfer agent fees (Note 4) . 7,850
Other accrued expenses . . . . . . . . 37,415 2,903,244
----------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 533,642,880
-------------
-------------
NET ASSETS CONSIST OF:
Shares of beneficial interest . . . . . . . . . . . . $ 5,336,429
Additional paid-in capital . . . . . . . . . . . . . . 528,306,451
-------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 533,642,880
-------------
-------------
Net asset value, offering and redemption price
per share ($533,642,880 divided by
533,642,880 shares of $.01 par value, shares of
beneficial interest outstanding) . . . . . . . . . . $1.00
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Money Market Fund 117
<PAGE> 115
MONEY MARKET FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 30,202,917
ExpenseS (Notes 2 AND 4):
Management fees . . . . . . . . . . . $ 980,668
Custodian fees . . . . . . . . . . . 164,528
Transfer agent fees . . . . . . . . . 51,453
Professional fees . . . . . . . . . . 10,764
Registration fees . . . . . . . . . . 40,881
Trustees' fees . . . . . . . . . . . 4,295
Miscellaneous . . . . . . . . . . . . 7,267
----------
EXPENSES BEFORE WAIVER . . . . . . . . . 1,259,856
EXPENSES WAIVED BY MANAGER (NOTE 4). . . (980,668) 279,188
----------- ------------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . 29,923,729
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . $ 29,923,729
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
118 Money Market Fund
<PAGE> 116
MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income and net increase
in net assets resulting from
operations . . . . . . . .. . . . . $ 29,923,729 $ 24,321,508
Distributions to shareholders from
net investment income . . . . . . . . . (29,923,729) (24,321,508)
Increase (decrease) in net assets from
Fund share transactions . . . . . . . . 31,341,062 86,303,556
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . 31,341,062 86,303,556
Net assets at beginning of year . . . . 502,301,818 415,998,262
------------- -------------
NET ASSETS AT END OF YEAR . . . . . . . $ 533,642,880 $ 502,301,818
------------- -------------
------------- -------------
FUND SHARE TRANSACTIONS
(ON A CONSTANT DOLLAR BASIS):
Fund shares sold . . . . . . . . . . . 4,628,769,576 4,935,462,045
Fund shares issued to shareholders
in reinvestments of distributions . . 1,601,278 1,365,204
Fund shares redeemed . . . . . . . . . (4,599,029,792) (4,850,523,693)
------------- -------------
Net increase (decrease). . . . . . . . 31,341,062 86,303,556
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Money Market Fund 119
<PAGE> 117
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . .0601 .0447 .0342 .0403 .0618
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . (.0601) (.0447) (.0342) (.0403) (.0618)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR . . . . . . . $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (%)(a) . . . . . . . . . . . 6.19 4.57 3.48 4.11 6.38
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
daily net assets (a) . . . . . . . . . . .06 .05 .07 .08 .07
Operating expenses, gross, to average
daily net assets (a) . . . . . . . . . . .26 .05 .07 .08 .07
Net investment income to average
daily net assets (a) . . . . . . . . . . 6.01 4.49 3.38 4.04 6.13
Net assets, end of year ($000 omitted) . . 533,643 502,302 415,998 347,464 316,426
Per share amount of fees
waived ($ omitted)(b) . . . . . . . . . .0020 -- -- -- --
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or any managers. For periods thereafter, they are reported net of
investment advisory fees but gross of investment service fees. See Note 4.
(b) See Note 4.
120 Money Market Fund
<PAGE> 118
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 22 different investment portfolios referred to as "Funds."
These financial statements report on 9 Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional
shares of beneficial interest at a $.01 par value.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies, which
require the use of estimates made by management. Such policies are
consistently followed by the Funds in the preparation of these financial
statements.
SECURITY VALUATION: United States equity and fixed-income securities
listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sale, at the
closing bid price, on the primary exchange on which the security is
traded. United States over-the-counter equity and fixed-income securities
and options are valued on the basis of the closing bid price. Futures
contracts are valued on the basis of the last sale price. Many
fixed-income securities do not trade each day and, thus, last sale or bid
prices are frequently not available. Fixed-income securities, therefore,
may be valued using prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis
of the mean of bid prices. In the absence of a last sale or mean bid
price, respectively, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the
fair market value of such securities.
The Money Market Fund's portfolio investments are valued on the basis of
"amortized cost," a method by which each portfolio instrument is initially
valued at cost, and thereafter a constant accretion/amortization to
maturity of any discount or premium is assumed. The Money Market Fund is
permitted to utilize the amortized cost valuation method in accordance
with an exemptive order granted to the Investment Company by the
Securities and Exchange Commission, pursuant to which the Board of
Trustees of the Investment Company has agreed to adhere to certain
conditions. Money market instruments maturing within 60 days of the
valuation date held by Funds other than the Money Market Fund are also
valued at amortized cost unless the Board of Trustees determines that
amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. The Funds may lend portfolio securities with a value of up to
50% of their total assets. The Funds will receive cash, U.S. government
treasuries or U.S. government agency securities as collateral. The Funds
will retain most rights of beneficial ownership, including dividends,
interest or other distributions on the loaned securities. Realized gains
and losses from securities transactions are recorded on the basis of
identified cost incurred by each money manager.
CHANGE IN ACCOUNTING PRINCIPLE: Effective January 1, 1995, the Funds
changed their method of accounting for the cost of investments from the
average cost method to the specific identification method. The new method
of accounting for the cost of investments was adopted because it better
matches specific costs with proceeds from sales of securities and more
closely conforms realized gains with related distributions. The change in
accounting principle had no effect on the Funds' net assets, net asset
values per share, their net increases (decreases) in net assets resulting
from operations, or their distributions. The effect of the change was to
increase (decrease) accumulated net realized gain (loss) on investments
and increase (decrease) net unrealized appreciation (depreciation) on
investments previously reported through December 31, 1994 by the following:
<TABLE>
<S> <C> <C> <C>
Equity I $6,021,086 International $4,898,083
Equity II 1,004,621 Fixed Income I 231,487
Equity III 393,732 Fixed Income II 11,434
Equity Q 5,939,266 Fixed Income III (259,599)
</TABLE>
Notes to Financial Statements 121
<PAGE> 119
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date
and interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting
purposes. All short-term premiums/discounts are amortized/accreted for
both tax and financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company
and distribute all of its taxable income. No federal income tax provision
was required for the year ended December 31, 1995. From November 1, 1995
to December 31, 1995, the Fixed Income II Fund incurred net realized
capital losses of $122,411. As permitted by tax regulations, the Fixed
Income II Fund intends to elect to defer these losses and treat them as
arising in the year ending December 31, 1996.
At December 31, 1995, certain Funds had net tax basis capital loss
carryforwards which may be applied against any net realized taxable gains
in each succeeding year or until their respective expiration dates,
whichever occurs first. Available capital loss carryforwards and
expiration dates are as follows:
<TABLE>
<CAPTION>
12/31/01 12/31/02 12/31/03 TOTALS
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fixed Income I $ -- $(12,046,548) $ -- $(12,046,548)
Fixed Income II (948,478) (3,534,633) (698,949) (5,182,060)
Fixed Income III -- (2,010,657) -- (2,010,657)
Money Market -- -- (42,377) (42,377)
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For all Funds, income
dividends and capital gain distributions, if any, are recorded on the
ex-dividend date. Dividends are generally declared and paid quarterly,
except for the International Fund, which generally declares and pays
dividends annually, and the Money Market Fund, which declares and records
dividends daily and pays monthly. Capital gain distributions are generally
declared and paid annually. An additional distribution may be paid by the
Funds to avoid imposition of federal income tax on any remaining
undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from generally accepted accounting principles ("GAAP").
As a result, net investment income and net realized gain (or loss) on
investment and foreign currency-related transactions for a reporting
period may differ significantly from distributions during such period. The
differences between tax regulations and GAAP primarily relate to
investments in options, futures, forward contracts, passive foreign
investment companies, foreign-denominated investments, mortgage-backed
securities, and certain securities sold at a loss. Accordingly, a Fund may
periodically make a reclassification among certain of its capital accounts
without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1995:
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
-------------- ------------ ---------------
<S> <C> <C> <C>
EQUITY I $ 94,606 $ (375,426) $ 280,820
EQUITY II 218,339 (91,467) (126,872)
EQUITY III 40 49,290 (49,330)
EQUITY Q 132,562 (301,978) 169,416
INTERNATIONAL 2,816,132 (2,374,503) (441,629)
FIXED INCOME I 537,755 (256,008) (281,747)
FIXED INCOME II -- 40,426 (40,426)
FIXED INCOME III 142,961 1,481 (144,442)
</TABLE>
122 Notes to Financial Statements
<PAGE> 120
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
EXPENSES: Expenses such as management, custodian, transfer agent,
bookkeeping, printing, and registration fees are charged directly to the
individual Funds; while indirect expenses, such as administrative,
insurance, and professional fees are allocated among all Funds principally
based on their relative net assets.
DEFERRED ORGANIZATION EXPENSES: Organization and initial registration
costs of the Fixed Income III Fund has been deferred and is being
amortized over 60 months on a straight-line basis.
REPURCHASE AGREEMENTS: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of the underlying securities. Each Fund's Money Manager
will monitor repurchase agreements daily to determine that the market
value (including accrued interest) at Fedwire closing time of the
underlying securities remains at least equal to 102% of the repurchase
price. The Money Manager will notify the Seller to immediately increase
the collateral on the repurchase agreement to 102% of the repurchase price
if collateral value falls below 102%.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts and transactions of
the Funds are translated into U.S. dollars on the following basis:
(a) Market value of investment securities, other assets and liabilities at
the closing rate of exchange on the valuation date.
(b) Purchases and sales of investment securities and income at the
closing rate of exchange prevailing on the respective trade dates of
such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities;
sales of foreign currencies; currency gains or losses realized between the
trade and settlement dates on securities transactions; the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books; and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized gains or losses from
foreign currency-related transactions arise from changes in the value of
assets and liabilities, other than investments in securities, at year-end,
resulting from changes in the exchange rates.
It is not practical to isolate that portion of the results of operations
of the International, Fixed Income I, Fixed Income II and Fixed Income III
Funds that arise as a result of changes in exchange rates from that
portion that arise from changes in market prices of investments during the
year. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, for federal income tax purposes
these Funds do isolate the effects of changes in foreign exchange rates
from the fluctuations arising from changes in market prices for realized
gain (or loss) on debt obligations.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement
of Additional Information, the Funds may participate in various
derivative-based transactions. Derivative securities are instruments or
agreements whose value is derived from an underlying security or index.
They include options, futures, swaps, forwards, structured notes and
stripped securities. These instruments offer unique characteristics and
risks that assist the Funds in meeting their investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with a Fund's excess and liquidity reserve cash
balances. Hedging is used by some funds to limit or control risks, such as
adverse movements in exchange rates and interest rates. Return enhancement
can be accomplished through the use of derivatives in a Fund. By
purchasing certain instruments, a Fund may more effectively achieve the
desired portfolio characteristics that allow the Fund to meet its
investment objectives. Depending on how the derivatives are utilized and
their structure, the risks associated with them may vary widely. These
risks are generally categorized as market risk, liquidity risk and
counterparty or credit risk.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: In connection with portfolio
purchases and sales of securities denominated in a foreign currency,
certain Funds may enter into foreign currency exchange spot contracts and
forward foreign currency exchange contracts ("contracts"). The
International Fund may enter into foreign currency forward overlays on
liquidity reserve balances. Additionally, from time to time the
International, Fixed Income I, Fixed Income II and Fixed Income III Funds
may enter into contracts to hedge certain foreign currency-denominated
assets. Contracts are recorded at market value. Certain risks may
Notes to Financial Statements 123
<PAGE> 121
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts. Realized gains or
losses arising from such transactions are included in net realized gain
(or loss) from foreign currency-related transactions.
FORWARD COMMITMENTS: The Funds may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (not to
exceed 120 days)(i.e., a "forward commitment" or "delayed settlement"
transaction, e.g., to be announced ("TBA")) consistent with a Fund's
ability to manage its investment portfolio and meet redemption requests.
The price of the underlying securities and the date when the securities
will be delivered and paid for are fixed at the time the transaction is
negotiated. The Funds may dispose of a forward commitment transaction
prior to settlement if it is appropriate to do so and realize short-term
gains (or losses) upon such sale. When effecting such transactions, cash
or liquid high grade debt obligations of the Fund in a dollar amount
sufficient to make payment for the portfolio securities to be purchased
will be segregated on the Fund's records at the trade date and maintained
until the transaction is settled. A forward commitment transaction
involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
OPTIONS: The Funds, other than the Money Market Fund, may purchase and
sell (write) call and put options on securities and securities indices,
provided such options are traded on a national securities exchange or in
an over-the-counter market. These Funds may also purchase and sell put and
call options on foreign currencies. The domestic equity Funds utilize
options to equitize liquidity reserve balances.
When a Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current
market value of the option written. The Fund receives a premium on the
sale of a call option but gives up the opportunity to profit from any
increase in stock value above the exercise price of the option, and when
the Fund writes a put option it is exposed to a decline in the price of
the underlying security. If an option which the Fund has written either
expires on its stipulated expiration date or the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss, if the
cost of a closing purchase transaction exceeds the premium received when
the option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
extinguished. If a call option which the Fund has written is exercised,
the Fund realizes a capital gain or loss from the sale of the underlying
security, and the proceeds from such sale are increased by the premium
originally received. When a put option which a Fund has written is
exercised, the amount of the premium originally received will reduce the
cost of the security which a Fund purchases upon exercise of the option.
The Funds' use of written options involves, to varying degrees, elements
of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The face or contract amounts of these instruments
reflect the extent of the Funds' exposure to off balance sheet risk. The
risks may be caused by an imperfect correlation between movements in the
price of the instrument and the price of the underlying securities and
interest rates. The Funds' activities in written options are conducted
through regulated exchanges, which do not result in counterparty credit
risks.
FUTURES: The domestic and international equity Funds utilize futures to
equitize liquidity reserve balances. Fixed Income III Fund may utilize
futures contracts (i.e., interest rate, foreign currency and index futures
contracts) to a limited extent. The face or contract amounts of these
instruments reflect the extent of the Funds' exposure to off balance sheet
risk. The primary risks associated with the use of futures contracts are
an imperfect correlation between the change in market value of the
securities held by the Fund and the prices of futures contracts, and the
possibility of an illiquid market. Changes in the initial settlement
values of futures contracts are accounted for as unrealized appreciation
(depreciation) until the contracts are terminated, at which time realized
gains and losses are recognized.
124 Notes to Financial Statements
<PAGE> 122
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1995, purchases and sales
of investment securities (excluding U.S. Government and Agency
obligations, short-term investments, options, futures and repurchase
agreements) were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES PURCHASES SALES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Equity I $608,950,313 $568,370,006 International $324,537,922 $250,093,104
Equity II 248,882,093 203,675,235 Fixed Income I 96,399,855 107,879,184
Equity III 173,373,654 161,914,796 Fixed Income II 60,334,182 59,769,199
Equity Q 422,771,768 367,241,460 Fixed Income III 94,770,957 74,122,088
</TABLE>
Purchases and sales of U.S. Government and Agency obligations (excluding
repurchase agreements, options, futures and other short-term securities)
were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Fixed Income I $805,012,473 $678,951,736
Fixed Income II 384,656,567 346,788,465
Fixed Income III 230,124,452 201,536,418
</TABLE>
Money Market purchases, sales and maturities of securities (excluding U.S.
Government and Agency obligations and repurchase agreements) were
$11,415,010,523, $45,011,094 and $11,322,298,567, respectively. Purchases,
sales and maturities of U.S. Government and Agency obligations (excluding
repurchase agreements) were $139,607,010, $881,025 and $163,700,000,
respectively.
OPTIONS WRITTEN AND FUTURES CONTRACTS: Fund transactions in written put
options and futures contract purchases for the year ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
EQUITY I WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS (1)
--------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 605 $ 756,172 -- $ --
Opened 1,568 1,360,418 327 98,431,544
Closed (2,173) (2,116,590) (208) (61,329,287)
--------- ----------- --------- -------------
Outstanding December 31, 1995 -- $ -- 119 $ 37,102,257
--------- ----------- --------- -------------
--------- ----------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY II WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS (1)
--------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 1,180 $ 1,145,694 -- $ --
Opened 2,075 1,231,698 365 51,962,388
Closed (3,125) (2,299,785) (300) (44,149,088)
--------- ----------- --------- -------------
Outstanding December 31, 1995 130 $ 77,607 65 $ 7,813,300
--------- ----------- --------- -------------
--------- ----------- --------- -------------
</TABLE>
Notes to Financial Statements 125
<PAGE> 123
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
EQUITY III WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS (1)
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 330 $ 387,351 -- --
Opened 560 468,023 103 $ 31,030,969
Closed (890) (855,374) (96) (28,859,594)
--------- ---------- --------- -------------
Outstanding December 31, 1995 -- $ -- 7 $ 2,171,375
--------- ---------- --------- -------------
--------- ---------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY Q WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS (1)
--------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 545 $ 668,072 -- --
Opened 1,195 966,076 247 $ 73,852,616
Closed (1,740) (1,634,148) (161) (47,199,723)
--------- ----------- --------- -------------
Outstanding December 31, 1995 -- $ -- 86 $ 26,652,893
--------- ----------- --------- -------------
--------- ----------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
--------- -------------
<S> <C> <C>
Outstanding December 31, 1994 -- --
Opened 898 $ 104,114,416
Closed (471) (53,120,462)
--------- -------------
Outstanding December 31, 1995 427 $ 50,993,954
--------- -------------
--------- -------------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME II WRITTEN PUT OPTIONS
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
<S> <C> <C>
Outstanding December 31, 1994 56,000 $ 30,874
Opened -- --
Closed (56,000) (30,874)
--------- ----------
Outstanding December 31, 1995 -- $ --
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME III WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS (1)
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 67 $ 58,763 169 $ 19,367,750
Opened 769 377,288 1,442 202,932,018
Closed (717) (381,677) (1,274) (184,197,407)
Expired (100) (47,838) -- --
--------- ---------- --------- -------------
Outstanding December 31, 1995 19 $ 6,536 337 $ 38,102,361
--------- ---------- --------- -------------
--------- ---------- --------- -------------
</TABLE>
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
126 Notes to Financial Statements
<PAGE> 124
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SECURITIES LENDING: The International Fund may loan securities with a
value up to 50% of its total assets to certain brokers. The Fund receives
cash (U.S. currency) and securities issued or guaranteed by the U.S.
Government or its agencies as collateral against the loaned securities. To
the extent that a loan is secured by cash collateral, such collateral
shall be invested by State Street Bank and Trust Company ("State Street")
in short-term instruments, short-term investment funds maintained by State
Street, money market mutual funds, and such other short-term investments
as State Street may from time to time select, provided the investments
meet certain quality and diversification requirements. Income generated
from the investment of cash collateral, less negotiated rebate fees paid
to participating brokers, is divided between the Fund and State Street
Bank and is included as interest income for the Fund. To the extent that a
loan is secured by non-cash collateral, brokers pay the Fund negotiated
lenders' fees, which are divided between the Fund and State Street, and
are included as interest income for the Fund. All collateral received will
be in an amount at least equal to 100% of the market value of the loaned
securities at the inception of each loan. This collateral must be
maintained at not less than 100% of the market value of the loaned
securities during the period of the loan. Should the borrower of the
securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are
made only to borrowers which are deemed to be of good financial standing.
On December 7, 1995, the Fund suspended its securities lending program.
All outstanding loans were recalled over the following two months. As of
December 31, 1995, the value of outstanding securities on loan and the
value of collateral amounted to $2,277,384 and $3,002,656, respectively.
4. RELATED PARTIES
Frank Russell Investment Management Company ("FRIMCo" or "Manager")
operates and administers all of the Funds which comprise the Investment
Company, and manages the Money Market and the U.S. Government Money Market
Funds (the U.S. Government Money Market Fund is a series of the Investment
Company that is not presented here). FRIMCo is a wholly owned subsidiary
of Frank Russell Company, which researches and recommends to FRIMCo, and
to the Investment Company, one or more investment management organizations
to manage the portfolio of each of the other Funds.
On January 16, 1995 and March 28, 1995, the Investment Company's Board of
Trustees and shareholders, respectively, approved amendments to the
Investment Company's Management Agreement with the FRIMCo to (i) provide
for an annual management fee to be paid to the Manager by each Fund based
on the Fund's average daily net assets; and (ii) clarify the agency
relationship between the Investment Company and the Manager with respect
to fees paid to the money managers selected to manage the Investment
Company's assets. The amendments became effective April 1, 1995.
Prior to April 1, 1995, the Funds paid no management or advisory fees.
Rather, each shareholder entered into a written Asset Management Services
Agreement with the Manager, pursuant to which the shareholder paid an
asset management service fee directly to the Manager, which in turn,
acting as a fiduciary for the Funds, compensated the money managers.
Effective April 1, 1995, as approved by shareholders on March 28, 1995,
the Funds began incurring a management fee based on a percentage of their
average daily net assets as shown in the table below:
<TABLE>
<CAPTION>
ANNUAL RATE ANNUAL RATE
----------- -----------
<S> <C> <C> <C>
Equity I 0.60% Fixed Income I 0.30%
Equity II 0.75 Fixed Income II 0.50
Equity III 0.60 Fixed Income III 0.55
Equity Q 0.60 Money Market 0.25
International 0.75
</TABLE>
Notes to Financial Statements 127
<PAGE> 125
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
For the year ended December 31, 1995, the management fee paid to FRIMCo,
in accordance with the Investment Company's Management Agreement with that
firm, amounted to $15,799,364 before waivers. Such fee is payable monthly
and is equal to the annual rate, by Fund, shown in the table above, of the
average daily net assets of the applicable Fund.
Prior to April 1, 1995, the Management Agreement provided that Fixed
Income III Fund expenses (exclusive of interest and taxes) exceeding 0.20%
of the Fund's average daily net assets, on an annual basis, would be paid
by FRIMCo. Effective April 1, 1995, the amendment to the management
contract, as approved by shareholders on March 28, 1995, provides that
Fixed Income III Fund expenses (exclusive of interest and taxes) exceeding
0.75% of its average daily net assets on an annual basis will be paid by
FRIMCo. There were no reimbursements for the year ended December 31, 1995.
Effective April 1, 1995 through December 31, 1995, the Manager voluntarily
agreed to waive its 0.25% management fee for the Money Market Fund, which
amounted to $980,668.
Additionally, effective April 1, 1995, as approved by shareholders on
March 28, 1995, each shareholder continues to enter into a written Asset
Management Services Agreement with the Manager, pursuant to which the
shareholder agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net
assets in the Funds. In addition, a shareholder may pay additional fees,
expressed as fixed dollar amounts, for the other services or reports
provided by the Manager to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to the Manager.
Fees for bookkeeping services provided to the Funds are paid or accrued to
Frank Russell Company, an affiliate of the Investment Company. Frank
Russell Company provides its Portfolio Verification System ("PVS") to the
Funds, except the Money Market Fund, pursuant to a written Service
Agreement. The PVS computerized data base system records detailed
transactions data for each of the Funds necessary to prepare various
financial and Internal Revenue Service accounting reports. The Funds' fees
for the year ended December 31, 1995, were $349,124 before waivers. The
Manager voluntarily agreed to waive $85,558 of these fees for the
International Fund.
The Funds have a contract with FRIMCo to provide transfer agent services
to the Investment Company. Total fees for the year ended December 31, 1995
were $1,162,482.
The Funds also paid brokerage commissions for trades executed through
Frank Russell Securities, Inc., an affiliate of the Frank Russell
Investment Management Company. These commissions are net of a refund (up
to 70%) paid back to the Fund effecting such transactions after
reimbursement for research services provided to FRIMCo. Amounts retained
by Frank Russell Securities, Inc. for the year ended December 31, 1995
were as follows:
<TABLE>
<S> <C> <C> <C>
Equity I $76,563 Equity Q $ 134
Equity II 67 International 53,217
Equity III 30,213
</TABLE>
The Investment Company was paying each of its Trustees not affiliated with
FRIMCo a retainer of $16,000 per year plus out-of-pocket expenses.
Effective April 28, 1995, the annual retainer was increased to $20,000.
Total trustee expenses were $96,696 for the year ended December 31, 1995
and were allocated to each Fund on a pro rata basis, including 13
affiliated funds not represented here.
Russell Fund Distributors, Inc. (the "Distributor"), a wholly owned
subsidiary of FRIMCo, is the principal Distributor for Investment Company
shares. The Distributor receives no compensation from the Investment
Company for its services.
5. MONEY MARKET FUND
The Funds are permitted to invest their cash reserves (i.e., monies
awaiting investment in portfolio securities suitable for the Funds'
objectives) in the Money Market Fund. These investments are reflected as
purchases and redemptions of shares of the Money Market Fund. The interest
earned by the Money Market Fund related to these investments is reflected
as dividends paid (or payable) on such shares. As of December 31, 1995,
$283,877,000 of the Money Market Fund's net assets represents investments
by these Funds and $208,055,000 represents the investment of other
affiliated Funds not presented here.
128 Notes to Financial Statements
<PAGE> 126
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS
As of December 31, 1995, the Equity I, International, Fixed Income I, and
Fixed Income III Funds have entered into various forward foreign currency
exchange and foreign currency exchange spot contracts which contractually
obligate the Funds to deliver or receive currencies at specified future
dates. Open contracts were as follows:
<TABLE>
<CAPTION>
EQUITY I FUND
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- --------------- --------------- --------------
<S> <C> <C> <C>
USD 65,989 NOK 417,976 01/02/96 $ (1)
USD 82,797 NOK 526,836 01/03/96 378
USD 74,410 NOK 471,761 01/04/96 69
--------------
$ 446
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
USD 2,162,535 AUD 2,900,000 03/29/96 $ (16,423)
USD 7,132,115 DEM 10,200,000 03/29/96 10,492
USD 3,814,735 FRF 18,800,000 03/29/96 29,964
USD 15,850,110 GBP 10,200,000 03/29/96 (43,288)
USD 28,694,834 JPY 2,900,000,000 03/29/96 (243,239)
DEM 7,246,000 USD 5,096,930 03/21/96 24,888
FRF 32,640,000 USD 6,638,194 03/21/96 (36,086)
GBP 850,000 USD 1,298,630 06/03/96 (16,714)
JPY 578,220,000 USD 6,000,000 01/08/96 391,650
JPY 274,300,000 USD 2,738,755 03/21/96 50,791
--------------
$ 152,035
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
USD 37,025 AUD 50,000 01/02/96 $ 139
USD 170,809 AUD 229,427 01/08/96 (282)
USD 23,853 CHF 27,469 01/04/96 (39)
USD 13,758 FIM 60,000 01/02/96 37
USD 174,878 GBP 112,745 01/08/96 218
USD 755,190 SEK 5,014,838 01/04/96 91
USD 170,762 SGD 241,372 01/04/96 $ (121)
--------------
43
--------------
--------------
</TABLE>
Notes to Financial Statements 129
<PAGE> 127
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
FIXED INCOME I FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
USD 4,815,062 DEM 6,933,690 01/04/96 $ 20,035
DEM 6,933,690 USD 4,999,055 01/04/96 163,958
DEM 5,403,208 USD 3,844,908 01/11/96 115,638
DEM 6,933,690 USD 4,882,530 02/05/96 (20,646)
--------------
$ 278,985
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME III FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
DEM 4,317,000 USD 3,014,665 01/18/96 $ 1,988
DEM 591,840 USD 420,565 12/09/96 1,333
DEM 4,698,000 USD 3,311,366 12/13/96 (17,058)
--------------
$ (13,737)
--------------
--------------
</TABLE>
The related net unrealized appreciation (depreciation) is reflected in the
preceding Funds' financial statements.
130 Notes to Financial Statements
<PAGE> 128
FRANK RUSSELL INVESTMENT COMPANY
ADDITIONAL INFORMATION
December 31, 1995 (Unaudited)
On January 22, 1996, a special meeting of the shareholders of the Funds
was held for the purpose of voting on the following matter:
To approve the Investment Company's operation in accordance with the
exemptive order granted on June 27, 1995 to the Investment Company and
the Manager by the Securities and Exchange Commission.
The exemptive order permits the Manager to engage and terminate
unaffiliated money managers for each Fund without holding shareholder
meetings and to disclose in the Investment Company's prospectus, with
respect to each Fund, only the aggregate fees paid to that Fund's
money managers and the net advisory fees retained by the Manager
with respect to that Fund.
The results of the vote on the proposal for the 22 Funds, on which 9
are reported in these financial statements, were as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF OUTSTANDING % OF SHARES
VOTE SHARES SHARES VOTED
----------- ----------- ---------------- -----------
<S> <C> <C> <C>
Affirmative 349,878,731 68.5% 99.9%
Against 226,716 -- 0.1%
Abstain 15,879 -- --
----------- ---------------- -----------
Total 350,121,326 68.5% 100.0%
----------- ---------------- -----------
----------- ---------------- -----------
</TABLE>
TAX INFORMATION
Pursuant to Section 852 of the Internal Revenue Code, the Funds
designate the following amounts as capital gain dividends for their
taxable year ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Equity I $48,198,431
Equity II 15,617,795
Equity III 11,820,825
Equity Q 31,289,032
International 20,031,392
</TABLE>
Please consult a tax advisor for questions about federal or state
income tax laws.
Additional Information 131
<PAGE> 129
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(206) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary
MANAGER
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 - One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
EQUITY I
Alliance Capital Management L.P., Minneapolis, MN
Systematic Financial Management, L.P., Fort Lee, NJ
Columbus Circle Investors, Stamford, CT
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Wellington Management Company, Boston, MA
EQUITY II
Delphi Management, Inc., Boston, MA
Fiduciary International, Inc., New York, NY
GlobeFlex Capital, L.P., San Diego, CA
(added on 01/08/96)
Jacobs Levy Equity Management, Inc., Roseland, NJ
Mitchell Hutchins Institutional Investors, New York, NY
(replaced on 12/21/95)
Sirach Capital Management, Inc., Seattle, WA
Wellington Management Company, Boston, MA
EQUITY III
Brandywine Asset Management, Inc., Wilmington, DE
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
EQUITY Q
BZW Barclays Global Fund Advisors, San Francisco, CA
Franklin Portfolio Associates Trust, Boston, MA
J.P. Morgan Investment Management Inc., New York, NY
INTERNATIONAL
Grantham, Mayo, Van Otterloo & Co., Boston, MA
J.P. Morgan Investment Management Inc., New York, NY
Marathon Asset Management Limited, London, England
Oechsle International Advisors, Boston, MA
Rowe Price-Fleming International, Inc., Baltimore, MD
FIXED INCOME I
Lincoln Capital Management Company, Chicago, IL
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
FIXED INCOME II
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
FIXED INCOME III
BEA Associates, New York, NY
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
MONEY MARKET
Frank Russell Investment Management Co., Tacoma, WA
THIS REPORT IS PREPARED FROM THE BOOKS AND RECORDS OF THE FUNDS AND IS
SUBMITTED FOR THE GENERAL INFORMATION OF SHAREHOLDERS AND IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY
AN EFFECTIVE PROSPECTUS. NOTHING HEREIN CONTAINED IS TO BE CONSIDERED AN
OFFER OF SALE OR A SOLICITATION OF AN OFFER TO BUY SHARES OF FRANK RUSSELL
INVESTMENT COMPANY. SUCH OFFERING IS MADE ONLY BY PROSPECTUS, WHICH INCLUDES
DETAILS AS TO OFFERING PRICE AND OTHER MATERIAL INFORMATION.
132 Manager and Money Managers
<PAGE> 130
FRANK RUSSELL INVESTMENT COMPANY
Frank Russell Investment Company is a "series mutual fund" with 22 different
investment portfolios. These financial statements report on eight Funds, each
of which has distinct investment objectives and strategies.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
Responsible for overall management and administration of the Funds.
FRANK RUSSELL COMPANY
Consultant to Frank Russell Investment Management Company.
<PAGE> 131
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . 2
DIVERSIFIED EQUITY FUND. . . . . . . . . . . . . . . . . . . . . . . . 3
SPECIAL GROWTH FUND. . . . . . . . . . . . . . . . . . . . . . . . . . 15
EQUITY INCOME FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 33
QUANTITATIVE EQUITY FUND . . . . . . . . . . . . . . . . . . . . . . . 43
INTERNATIONAL SECURITIES FUND. . . . . . . . . . . . . . . . . . . . . 55
DIVERSIFIED BOND FUND. . . . . . . . . . . . . . . . . . . . . . . . . 75
VOLATILITY CONSTRAINED BOND FUND . . . . . . . . . . . . . . . . . . . 91
MULTISTRATEGY BOND FUND. . . . . . . . . . . . . . . . . . . . . . . . 101
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 113
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 122
MANAGER AND MONEY MANAGERS . . . . . . . . . . . . . . . . . . . . . . 123
FRANK RUSSELL INVESTMENT COMPANY -- INTERNAL FEE FUNDS
Copyright-C- Frank Russell Company 1996. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance quoted represents past performance and,
except for a money market fund, the investment return and principal value of an
investment will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. An investment in a money market fund is neither
insured nor guaranteed by the US government. There can be no assurance that a
money market fund will be able to maintain a stable net asset value of $1.00 per
share. Investments in securities on non-US issuers and foreign currencies
involve investment risks different than those of US issuers; the Prospectus
contains further information and details regarding these risks. Income from
tax-free funds may be subject to an alternative minimum tax. Russell Fund
Distributors, Inc., is the distributor of Frank Russell Investment Company.
<PAGE> 132
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Diversified Equity, Special Growth, Equity
Income, Quantitative Equity, International Securities, Diversified Bond,
Volatility Constrained Bond, and Multistrategy Bond, (the "Funds")), as of
December 31, 1995, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds enumerated above as of December 31, 1995, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 12, 1996
/s/ COOPERS & LYBRAND L.L.P.
<PAGE> 133
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
COMMON STOCKS - 94.5%
BASIC INDUSTRIES - 6.6%
Air Products & Chemicals, Inc. 5,900 $ 311
Alco Standard Corp. 11,000 502
Allegheny Ludlum Corp. 10,100 187
Aluminum Co. of America 68,100 3,601
Bethlehem Steel Corp. (a) 36,500 511
Boise Cascade Corp. 10,000 346
CalMat Co. 11,800 215
Cyprus Amax Minerals Co. 14,000 366
De Beers Consolidated Mines, Ltd. - ADR 10,300 309
Dow Chemical Co. 36,300 2,555
du Pont (E.I.) de Nemours & Co. 6,100 426
Engelhard Corp. 11,550 251
Ethyl Corp. 18,700 234
Ferro Corp. 8,300 193
Fuller (H.B.) Co. 6,400 222
Goodrich (B.F.) Co. 24,900 1,696
Grace (W.R.) & Co. 14,600 863
Great Lakes Chemical Corp. 43,700 3,146
Illinois Tool Works, Inc. 10,300 608
IMC Global, Inc. 36,800 1,504
International Paper Co. 21,800 826
J & L Specialty Steel, Inc. 15,100 283
Kimberly-Clark Corp. 52,998 4,386
Lawter International, Inc. 16,600 193
Loctite Corp. 5,000 238
Lone Star Technologies, Inc. (a) 40,000 440
Lukens, Inc. 8,000 230
Minnesota Mining & Manufacturing Co. 24,000 1,590
Monsanto Co. 13,000 1,593
NCH Corp. 5,100 295
P.H. Glatfelter Co. 12,600 216
Phelps Dodge Corp. 4,300 268
Potash Corp. of Saskatchewan, Inc. 9,300 659
Potlatch Corp. 8,300 332
PPG Industries, Inc. 6,400 293
Praxair, Inc. 31,600 1,063
Precision Castparts Corp. 21,400 851
Reynolds Metals Co. 13,000 736
Rhone Poulenc SA - ADR 18,714 400
Rio Algom, Ltd. 13,400 245
Sequa Corp. (a) 21,000 641
Sonoco Products Co. 9,765 256
Wellman, Inc. 23,700 538
Willamette Industries, Inc. 7,700 430
Witco Chemical Corp. 6,900 201
---------
35,249
---------
CAPITAL GOODS - 3.6%
Alcatel Alsthom Compagnie
Generale d'Electricite - ADR 41,200 721
Ball Corp. 5,100 140
Boston Scientific Corp. (a) 18,300 897
Briggs & Stratton Corp. 6,300 273
CBI Industries, Inc. 31,900 1,049
Cooper Industries, Inc. 13,300 489
Crane Co. 8,200 302
Culligan Water Technologies, Inc. 6,700 162
Cummins Engine Co., Inc. 26,500 981
Dover Corp. 8,360 308
Duracell International, Inc. 16,200 838
Emerson Electric Co. 3,500 286
Gardner Denver Machinery, Inc. (a) 152 3
General Electric Co. 48,600 3,499
General Signal Corp. 5,900 191
Giant Cement Holding, Inc. (a) 15,900 183
Goulds Pumps, Inc. 9,400 234
Grainger (W.W.), Inc. 3,300 219
Harnischfeger Industries, Inc. 6,700 223
Harsco Corp. 5,000 291
Hubbell, Inc. Class B 4,095 269
ITT Industries, Inc. 19,000 456
Johnson Controls, Inc. 13,300 914
Kaydon Corp. 9,300 282
Magna International, Inc. Class A 21,700 939
National Service Industries, Inc. 8,000 259
SPS Technologies, Inc. (a) 14,200 758
Technip SA - ADR (a) 25,938 885
Tecumseh Products Co. Class A 14,100 730
Timken Co. 8,200 314
Varity Corp. (a) 5,800 215
Weatherford Enterra, Inc. (a) 4,647 134
Westinghouse Electric Corp. 34,900 576
WMX Technologies, Inc. 24,000 717
Wyman-Gordon Co. (a) 6,300 86
Zurn Industries, Inc. 12,400 265
---------
19,088
---------
CONSUMER BASICS - 19.4%
Abbott Laboratories NPV 38,300 1,599
Allergan, Inc. 18,800 611
American Brands, Inc. 36,000 1,607
American Home Products Corp. 12,600 1,222
American Stores Co. 58,935 1,577
Amgen, Inc. 39,300 2,329
Archer-Daniels-Midland Co. 144,573 2,602
</TABLE>
Diversified Equity Fund 3
<PAGE> 134
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Bard (C.R.), Inc. 8,100 $ 261
Bausch & Lomb, Inc. 10,900 432
Bergen Brunswig Corp. Class A 13,700 341
Black & Decker Corp. 8,700 307
Bristol-Myers Squibb Co. 21,050 1,808
Cadbury Schweppes - ADR 7,300 243
Campbell Soup Co. 5,400 324
Carter-Wallace, Inc. 23,400 266
Chiquita Brands International, Inc. 43,600 600
Church and Dwight Co., Inc. 8,200 152
Clorox Co. 25,600 1,834
Coca-Cola Co. (The) 33,100 2,458
Columbia/HCA Healthcare Corp. 111,600 5,664
Community Psychiatric Centers 16,000 196
ConAgra, Inc. 32,100 1,324
Corning, Inc. 20,000 640
CPC International, Inc. 15,500 1,064
Dean Foods Co. 7,100 195
Dial Corp. (The) 33,700 998
Dimon, Inc. 35,000 617
Fleming Cos., Inc. 66,000 1,361
Forest Labs, Inc. (a) 7,300 330
Giant Food, Inc. Class A 9,900 312
Gillette Co. 41,900 2,184
Glaxo Holdings PLC - ADR 9,900 280
HealthCare COMPARE (a) 3,600 157
Hillenbrand Industries, Inc. 6,200 210
Hormel (George A.) & Co. 9,400 231
IBP, Inc. 16,300 823
International Dairy Queen, Inc.
Class A (a) 12,300 280
Johnson & Johnson 75,600 6,473
Kroger Co. (a) 54,200 2,033
Lance, Inc. 11,300 184
Lilly (Eli) & Co. 61,800 3,476
Lincare Holdings, Inc. (a) 9,900 245
McKesson Corp. New 12,200 618
Medtronic, Inc. 24,200 1,352
Merck & Co., Inc. 96,500 6,345
Mylan Laboratories, Inc. 74,000 1,739
PacifiCare Health Systems, Inc.,
Class A (a) 4,700 404
PepsiCo, Inc. 146,500 8,186
Pfizer, Inc. 46,800 2,948
Pharmacia & Upjohn, Inc. (a) 55,200 2,139
Philip Morris Cos., Inc. 124,825 11,297
Procter & Gamble Co. 24,900 2,067
Quaker Oats Co. 6,200 214
Rhone Poulenc Rorer, Inc. 3,700 197
RJR Nabisco Holdings Corp. New 10,543 326
Sara Lee Corp. 34,400 1,097
Schering-Plough Corp. 69,300 3,794
Schweitzer-Mauduit International, Inc. 29,700 687
SmithKline Beecham PLC - ADR 37,300 2,070
St. Jude Medical, Inc. 9,750 417
Standard Commercial Corp. 15,513 153
Stanley Works 5,300 273
Tambrands, Inc. 2,600 124
U.S. Bioscience, Inc. (a) 1,501 7
U.S. Healthcare, Inc. 6,150 285
U.S. Surgical Corp. 13,800 295
Unilever NV 4,500 633
United Healthcare Corp. 34,100 2,234
Universal Corp. 29,500 719
UST Corp. 6,600 220
Vons Cos., Inc. (a) 17,700 499
Warner-Lambert Co. 11,700 1,135
Weis Markets, Inc. 8,400 236
Wellpoint Health Networks, Inc.
Class A (a) 7,800 250
---------
102,810
---------
CONSUMER DURABLES - 2.1%
Bandag, Inc. 3,900 211
Bandag, Inc. Class A 1,300 69
Bassett Furniture Industries, Inc. 7,300 166
Carlisle Cos., Inc. 6,600 266
Donaldson Co., Inc. 10,200 256
Echlin, Inc. 10,000 365
Federal Signal Corp. 11,100 287
Fleetwood Enterprises, Inc. 9,300 239
Ford Motor Co. 87,593 2,540
General Motors Corp. 40,624 2,148
Genuine Parts Co. 6,000 246
Leggett & Platt, Inc. 11,600 281
PACCAR, Inc. 15,400 647
Polaris Industries, Inc. 9,300 273
Strattec Security Corp. 1,260 22
Tomkins PLC - ADR 15,100 270
UNC, Inc. (a) 112,200 674
Whirlpool Corp. 44,400 2,365
---------
11,325
---------
</TABLE>
4 Diversified Equity Fund
<PAGE> 135
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
CONSUMER NON-DURABLES - 5.3%
Angelica Corp. 8,600 $ 176
Anheuser-Busch Cos., Inc. 17,900 1,197
Blair Corp. 4,600 145
Dayton Hudson Corp. 11,000 825
Eastman Kodak Co. 11,000 737
Federated Department Stores, Inc. (a) 79,100 2,175
Gap, Inc. 35,700 1,499
Handleman Co. 19,100 110
Hills Stores Co. New (a) 17,926 177
Jostens, Inc. 21,200 514
K mart Corp. 35,000 254
Kohl's Corp. (a) 2,900 152
Liz Claiborne, Inc. 9,900 275
Lowe's Cos., Inc. 18,800 630
Mattel, Inc. 38,193 1,174
May Department Stores Co. 28,900 1,221
Newell Co. 11,972 310
NIKE, Inc. Class B 6,000 418
Nine West Group, Inc. (a) 21,200 795
Office Depot, Inc. (a) 25,400 502
Penney (J.C.) Co., Inc. 32,500 1,548
Petrie Stores Corp. 7,400 20
Phar-Mor, Inc. New 98,500 776
Price Costco, Inc. (a) 29,900 456
Rayonier, Inc. 13,000 434
Reebok International, Ltd. 11,600 328
Rite Aid Corp. 40,100 1,373
Salant Corp. (a) 125,700 487
Sears Roebuck & Co. 47,700 1,860
Semi-Tech Corp. Class A 30,000 195
Shaw Industries, Inc. 100,000 1,475
Stride Rite Corp. 24,300 182
SuperValu, Inc. 41,100 1,295
Toys "R" Us, Inc. (a) 79,240 1,723
Wal-Mart Stores, Inc. 104,900 2,347
Warnaco Group, Inc. Class A 5,800 146
---------
27,931
---------
CONSUMER SERVICES - 4.2%
America West Airlines, Inc. Class B (a) 16,000 272
AMR Corp. (a) 9,800 728
Brinker International, Inc. (a) 51,600 780
British Airways PLC - ADS 12,500 909
Carnival Corp. Class A 58,700 1,431
Continental Airlines, Inc. Class B (a) 8,800 383
Delta Air Lines, Inc. 17,000 1,256
Disney (Walt) Co. 78,100 4,608
Harrah's Entertainment, Inc. 6,200 150
ITT Corp. New 46,500 2,465
King World Productions, Inc. (a) 5,600 218
KLM Royal Dutch Airlines 27,956 985
McDonald's Corp. 92,900 4,192
Mirage Resorts, Inc. (a) 28,000 966
Northwest Airlines Corp. Class A (a) 15,700 799
Patriot American Hospitality, Inc. 3,500 90
Royal Caribbean Cruises, Ltd. 8,600 189
VAL Corp. (a) 10,850 1,937
---------
22,358
---------
ENERGY - 8.0%
Amerada Hess Corp. NPV 35,000 1,855
Amoco Corp. 64,300 4,622
Apache Corp. 41,900 1,236
Ashland, Inc. 14,300 502
Atlantic Richfield Co. 10,400 1,152
Basin Exploration, Inc. (a) 81,400 387
British Petroleum Co. PLC - ADR 28,237 2,884
Burlington Resources, Inc. 22,700 891
Chevron Corp. 26,048 1,368
Diamond Shamrock, Inc. 13,100 339
Enron Oil & Gas Co. 6,900 166
Exxon Corp. 41,400 3,317
Halliburton Co. 6,200 314
Imperial Oil, Ltd. New 6,500 235
Kerr-McGee Corp. 6,800 432
Mesa, Inc. (a) 70,000 263
Mobil Corp. 28,330 3,173
Murphy Oil Corp. 15,000 623
Noble Drilling Corp. (a) 90,000 799
NorAm Energy Corp. 55,300 491
Oryx Energy Co. (a) 38,000 508
Petroleum Heat & Power, Inc. Class A 79,100 613
Questar Corp. 6,100 204
Reading & Bates Corp. New (a) 45,600 684
Renaissance Energy, Ltd. 23,700 590
Royal Dutch Petroleum Co. - ADR 20,130 2,841
Schlumberger, Ltd. 39,600 2,742
Seagull Energy Corp. (a) 35,700 794
Sun Company 1,933 53
Sun Energy Partners, L.P. 25,700 96
Tenneco, Inc. 35,500 1,762
Texaco, Inc. 21,400 1,680
Tosco Corp. New 20,000 763
Total Co. SA - ADR 44,005 1,496
</TABLE>
Diversified Equity Fund 5
<PAGE> 136
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
--------- ---------
<S> <C> <C>
Transocean AS 9,700 $ 167
Unocal Corp. 22,000 640
USX-Marathon Group 62,400 1,216
Washington Energy Co. 22,000 409
---------
42,307
---------
FINANCE - 16.5%
ACE, Ltd. 14,800 588
Aetna Life & Casualty Co. 22,700 1,572
Allstate Corp. 16,408 675
American Express Co. 27,600 1,142
American Financial Group, Inc. 41,900 1,283
American General Corp. 42,100 1,468
American International Group, Inc. 68,462 6,333
Banc One Corp. 15,600 589
Bank of Boston Corp. 29,700 1,374
Bank of New York Co., Inc. 38,500 1,877
BankAmerica Corp. 46,700 3,024
Barnett Banks, Inc. 14,700 867
Borg-Warner Security Corp. (a) 14,800 185
California Federal Bank 40,000 630
California Federal Bank (a) 2,400 11
Central Fidelity Banks, Inc. 7,700 244
Chase Manhattan Corp. 12,500 758
Chemical Banking Corp. 95,600 5,617
Chubb Corp. (The) 39,300 3,802
CIGNA Corp. 38,850 4,011
Citicorp 31,700 2,132
Coast Savings Financial, Inc. (a) 24,900 862
CoreStates Financial Corp. 32,600 1,235
Countrywide Credit Industries, Inc. 69,300 1,507
Dean Witter, Discover & Co. 39,500 1,857
Equifax, Inc. 18,000 385
Equitable of Iowa Cos. 6,700 215
Federal Home Loan Mortgage Corp. 33,900 2,831
Federal National Mortgage Association 43,800 5,437
First Bank System, Inc. 23,800 1,181
First Chicago NBD Corp. 32,486 1,283
First Interstate Bancorp 4,700 642
Fleet Financial Group, Inc. 11,600 473
General Re Corp. 17,960 2,784
Golden West Financial Corp. 19,300 1,066
Green Tree Financial Corp. 7,600 200
Home Beneficial Corp. Class B 11,200 263
Horace Mann Educators Corp. 10,000 313
ITT Hartford Group, Inc. 19,000 919
Lehman Brothers Holdings, Inc. 28,000 595
Loews Corp. 4,400 345
Long Island Bancorp, Inc. 15,400 406
Marsh & McLennan Cos., Inc. 18,500 1,642
MBNA Corp. 55,500 2,047
Merrill Lynch & Co., Inc. 42,400 2,162
Morgan Stanley Group, Inc. 5,600 452
NationsBank Corp. 28,000 1,950
Norwest Corp. 90,700 2,993
Old Republic International Corp. 34,500 1,225
Onex Corp. 37,000 403
Paul Revere Corp. 22,200 461
Pohjola Series B 15,000 193
Provident Life & Accident
Insurance Co. Class B 8,900 258
Raymond James Financial, Inc. 12,700 268
Signet Banking Corp. 16,800 399
Southern National Corp. 30,800 809
St. Paul Cos., Inc. 24,500 1,363
Standard Federal Bancorporation 5,400 213
State Street Boston Corp. 36,000 1,620
SunAmerica, Inc. 8,550 406
SunTrust Banks, Inc. 24,500 1,678
Torchmark Corp. 36,000 1,629
Transatlantic Holdings, Inc. 3,700 271
Travelers, Inc. 7,400 465
Unitrin, Inc. 3,200 151
UNUM Corp. 16,400 902
USF & G Corp. 23,000 387
Value Line, Inc. 5,300 194
---------
87,522
---------
GENERAL BUSINESS - 5.3%
Automatic Data Processing, Inc. 57,275 4,253
Block (H&R) Co., Inc. 6,600 267
Capital Cities/ABC, Inc. 11,300 1,394
Cascade Communications Corp. 9,100 774
CCH, Inc. Class A 12,300 680
Comdisco, Inc. 15,750 356
Computer Sciences Corp. (a) 20,500 1,440
Cox Communications, Inc. Class A (a) 22,900 447
Deluxe Corp. 16,300 473
Donnelley (R.R.) & Sons Co. 14,700 579
Dow Jones & Co., Inc. 6,700 267
Dun & Bradstreet Corp. 3,600 233
Figgie International Holdings, Inc.
Class A (a) 27,000 280
First Data Corp. 30,059 2,010
</TABLE>
6 Diversified Equity Fund
<PAGE> 137
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
--------- ---------
<S> <C> <C>
Flightsafety International, Inc. 9,900 $ 497
Gannett Co., Inc. 4,200 258
General Motors Corp. Class E 57,700 3,000
Harland (John H.) Co. 10,000 209
Ideon Group, Inc. 63,900 647
Knight-Ridder, Inc. 4,100 256
Lee Enterprises, Inc. 13,600 313
McClatchy Newspapers, Inc. Class A 2,500 57
Miller (Herman), Inc. 8,700 261
Moore Corp., Ltd. 11,200 209
New England Business Service, Inc. 11,500 252
New York Times Co. Class A 36,400 1,078
Ogden Corp. 20,800 445
Pinkerton's, Inc. New (a) 12,900 252
Portugal Telecom SA - ADR (a) 17,600 334
Reuters Holdings PLC Class B - ADR 11,300 624
Service Corp. International 16,200 713
Standard Register Co. 10,100 203
Tele-Communications, Inc. Class A 73,300 1,457
Tele-Communications, Inc. Series A
New (a) 42,575 1,139
Tribune Co. 8,500 520
True North Communications, Inc. 11,600 215
Viacom, Inc. Class B (a) 27,300 1,292
Washington Post Co. Class B 900 253
---------
27,937
---------
MISCELLANEOUS - 0.5%
American Real Estate Partners, L.P. 64,426 548
Canadian Pacific, Ltd. 16,700 303
Home State Holdings, Inc. (a) 33,000 305
Koger Equity, Inc. (a) 37,500 398
Newhall Land & Farming Co. 47,900 814
Providian Corp. 6,500 265
---------
2,633
---------
SHELTER - 0.5%
Essex Property Trust 13,000 250
Lafarge Coppee 12,800 240
Louisiana Pacific Corp. 10,600 257
Rayonier Timberlands, L.P. Class A 6,000 161
St. Lawrence Cement Inc. Class A 58,200 309
Standard Pacific Corp. New 35,000 219
Vulcan Materials Co. 4,200 242
Weyerhaeuser Co. 23,300 1,007
---------
2,685
---------
TECHNOLOGY - 11.9%
3Com Corp. 22,100 1,030
Advanced Micro Devices, Inc. 35,000 578
AMP, Inc. 28,900 1,109
Applied Materials, Inc. 76,400 2,999
BE Aerospace, Inc. (a) 75,000 797
Boeing Co. 52,200 4,091
CAE, Inc. 95,000 722
Cisco Systems, Inc. (a) 83,200 6,209
COMPAQ Computer Corp. (a) 42,800 2,054
Computer Associates International, Inc. 24,450 1,391
Cray Research, Inc. (a) 9,900 245
Diebold, Inc. 5,400 299
Digital Equipment Corp. (a) 8,700 558
EG&G, Inc. 14,000 340
Electronic Arts (a) 25,100 656
Ericsson (LM) Telephone Co.
Class B - ADR 84,870 1,644
FTP Software, Inc. (a) 18,300 531
General Motors Corp. Class H 31,800 1,562
Hewlett-Packard Co. 80,500 6,742
Honeywell, Inc. 13,600 661
Informix Corp. 29,100 873
Intel Corp. 129,400 7,343
Intelligent Electronics, Inc. 12,300 74
Intergraph Corp. (a) 22,100 348
International Business Machines Corp. 42,200 3,872
KLA Instruments Corp. 12,700 330
Lockheed Martin Corp. 21,500 1,699
LSI Logic Corp. 16,500 540
McDonnell Douglas Corp. 1,600 147
Micron Technology, Inc. 21,800 864
Microsoft Corp. (a) 33,500 2,940
Molex, Inc. Class A 5,100 156
Motorola, Inc. 21,700 1,237
Northrop Grumman Corp. 23,200 1,485
Oracle Systems Corp. 59,200 2,501
Pitney Bowes, Inc. 2,700 127
Raytheon Co. 13,700 647
Seagate Technology (a) 23,900 1,135
Stratus Computer, Inc. (a) 7,500 260
Tandy Corp. 6,000 249
Textron, Inc. 1,900 128
Thomson-CSF - ADR 11,500 259
TRW, Inc. 6,300 488
U.S. Robotics Corp. 1,600 140
United Technologies Corp. 8,900 844
Varian Associates, Inc. 7,200 343
---------
63,247
---------
</TABLE>
Diversified Equity Fund 7
<PAGE> 138
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
--------- ---------
<S> <C> <C>
TRANSPORTATION - 1.8%
Alexander & Baldwin, Inc. 10,000 $ 230
American President Cos., Ltd. 9,000 207
BT Shipping, Ltd. - ADR (a) 155,000 523
Canadian National Railway Co. 3,700 56
Conrail, Inc. 20,400 1,428
CSX Corp. 28,050 1,280
Federal Express Corp. 5,000 369
GATX Corp. 8,900 433
Johnstown America Industries, Inc. (a) 85,000 393
Laidlaw, Inc. Class B 65,000 666
Nordic American Tanker
Shipping, Ltd. 1997 Warrants (a) 28,400 99
Norfolk Southern Corp. 23,900 1,897
OMI Corp. (a) 38,600 251
Overseas Shipholding Group, Inc. 19,100 363
Roadway Services, Inc. 3,500 171
Teekay Shipping Corp. 9,400 222
Trans World Airlines, Inc. New (a) 59,000 612
XTRA Corp. 2,700 115
Yellow Corp. 10,600 132
---------
9,447
---------
UTILITIES - 8.8%
Airtouch Communications, Inc. (a) 81,200 2,294
AT&T Corp. 123,700 8,010
BCE, Inc. 43,000 1,484
BellSouth Corp. 24,590 1,070
British Telecommunications PLC - ADR 3,500 198
Centerior Energy Corp. 13,500 120
Central Maine Power Co. 46,400 667
Coastal Corp. 5,300 197
Detroit Edison Co. 17,700 611
Dominion Resources, Inc. 21,800 899
Empresa Nacional de Electricidad
SA - ADR 5,100 292
Enron Corp. 28,800 1,098
ENSERCH Corp. 21,000 341
FPL Group, Inc. 14,800 686
General Public Utilities Corp. 51,000 1,734
GTE Corp. 73,000 3,212
KU Energy Corp. 8,100 243
Lincoln Telecommunications Co. 14,200 300
MCI Communications Corp. 136,300 3,561
New England Electric System 4,700 186
Niagara Mohawk Power Corp. 166,600 1,604
NIPSCO Industries, Inc. 17,700 677
Northeast Utilities 43,700 1,065
NYNEX Corp. 29,700 1,604
Pacific Gas & Electric Co. 61,600 1,748
Pacific Telesis Group 54,500 1,833
SCE Corp. 71,850 1,275
Southern New England
Telecommunications Corp. 14,000 557
Sprint Corp. 42,200 1,683
Talisman Energy, Inc. 23,100 467
Telefonica de Espana SA - ADR 38,000 1,591
Telefonos de Mexico SA Series L - ADR 55,000 1,753
Texas Utilities Co. 32,600 1,341
Unicom Corp. 43,800 1,434
WorldCom, Inc. (a) 19,537 688
---------
46,523
---------
TOTAL COMMON STOCKS
(cost $415,813) 501,062
---------
CONVERTIBLE PREFERRED STOCK - 0.5%
Boise Cascade Corp. Series G 32,000 916
Continental Airlines Finance Trust (144A) 5,000 266
Elsag Bailey Financing Trust (144A) 11,100 556
Glendale Federal Bank Series E 22,100 1,000
Sun, Inc. Series A 5,867 163
---------
Total Convertible Preferred Stocks
(cost $2,590) 2,901
---------
PREFERRED STOCKS - 0.4%
Cooper Industries, Inc. 34,000 468
Nokia Corp. - ADR 46,000 1,788
---------
TOTAL PREFERRED STOCKS
(cost $2,752) 2,256
---------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 3.3%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 17,607 17,607
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $17,607) 17,607
---------
</TABLE>
8 Diversified Equity Fund
<PAGE> 139
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
TOTAL INVESTMENTS
(identified cost $438,762)(c) - 98.7% $ 523,826
OTHER ASSETS AND LIABILITIES,
NET - 1.3% 6,819
---------
NET ASSETS - 100.0% $ 530,645
---------
---------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was $443,656
and net unrealized appreciation for all securities was $80,170. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $94,568 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $14,398.
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- ------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 60 $ (160)
----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (160)
----------
----------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due 12/31/95, valued
at $4,250 were held as collateral by the custodian in connection with
futures contracts purchased by the Fund. The settlement amount of these
matured notes is included in Receivable for Investments Sold on the
Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
Diversified Equity Fund 9
<PAGE> 140
DIVERSIFIED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $438,762,253)(Note 2) . . . . . . . . . . . . . . . . . . $ 523,825,793
Foreign currency holdings (identified cost $1,711) . . . . . . . . . . . . . . . . . . . . . . . 1,711
Foreign currency exchange spot contracts (cost $166,102)(Notes 2 and 6). . . . . . . . . . . . . 166,445
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,279,388
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,074,541
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,757,583
Daily variation margin on futures contracts (Notes 2 and 3). . . . . . . . . . . . . . . . . . 21,000
--------------
535,126,461
LIABILITIES
Payables:
Investments purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,147,466
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . 621,866
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . . . . 6,254
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . . . . 351,418
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . . . . 38,371
Other accrued expenses and payables. . . . . . . . . . . . . . . . . . . . 149,507
Foreign currency exchange spot contracts
(cost $166,102)(Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . 166,102 4,480,984
-------------- --------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 530,645,477
--------------
--------------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,714,811
Unrealized appreciation (depreciation) on:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,063,519
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (160,438)
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,420
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,890,165
--------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 530,645,477
--------------
--------------
Net asset value, offering and redemption price per share
($530,645,477 divided by 13,741,952 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38.62
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 Diversified Equity Fund
<PAGE> 141
DIVERSIFIED EQUITY FUND
STATEMENT OF OPERATIONS
December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,471,549
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,406,414
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,387
-------------
12,378,350
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,842,471
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408,204
Transfer agent fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293,066
Bookkeeping service fees . . . . . . . . . . . . . . . . . . . . . . . . . . 25,080
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,741
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,277
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,453
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,720 4,679,012
------------ -------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,699,338
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,416,347
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,332,925
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,735,415
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,149,433
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (160,438)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (221,411)
-------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . 139,252,271
-------------
Net increase (decrease) in net assets resulting from operations. . . . . . . .
$ 146,951,609
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Equity Fund 11
<PAGE> 142
DIVERSIFIED EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,699,338 $ 7,002,428
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,416,347 15,198,932
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,332,925 --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,735,415 1,794,598
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,149,433 (24,528,128)
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . (160,438) --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . (221,411) (8,888)
-------------- -------------
Net increase (decrease) in net assets resulting from operations. . . . . . 146,951,609 (541,058)
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . (7,795,700) (7,065,524)
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . (53,844,603) (21,049,116)
In excess of net realized gain on investments. . . . . . . . . . . . . . -- (2,943,524)
Increase (decrease) in net assets from Fund share transactions . . . . . . 31,298,027 57,215,430
-------------- -------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . 116,609,333 25,616,208
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . 414,036,144 388,419,936
-------------- -------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $3,804 at December 31, 1994). . . . . . . . . . . . . . . . . . . . . $ 530,645,477 $ 414,036,144
-------------- -------------
-------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>>
Fund shares sold . . . . . . . . . . . . . . 4,083,541 $150,019,014 4,843,591 $165,116,498
Fund shares issued to shareholders
in reinvestments of distributions. . . . . 1,155,887 44,249,578 634,408 20,718,465
Fund shares redeemed . . . . . . . . . . . . (4,330,675) (162,970,565) (3,781,553) (128,619,533)
---------- ------------- ----------- ------------
Net increase (decrease). . . . . . . . . . . 908,753 $ 31,298,027 1,696,446 $ 57,215,430
---------- ------------- ----------- ------------
---------- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 Diversified Equity Fund
<PAGE> 143
DIVERSIFIED EQUITY FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . $ 32.26 34.88 $ 35.60 36.36 30.66
-------- ------- ------ -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . .60 .58 .56 .60 .81
Net Realized and Unrealized Gain (Loss) on Investments . . . . . 10.63 (.49) 3.03 2.30 8.36
-------- ------- ------ -------- -------
Total Income From Investment Operations. . . . . . . . . . . . . 11.23 .09 3.59 2.90 9.17
-------- ------- ------ -------- -------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . (.60) (.58) (.55) (.61) (.82)
Net Realized Gain on Investments . . . . . . . . . . . . . . . . (4.27) (1.87) (3.76) (3.05) (2.65)
In Excess of Net Realized Gain on Investments. . . . . . . . . . -- (.26) -- -- --
-------- ------- ------ -------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . (4.87) (2.71) (4.31) (3.66) (3.47)
-------- ------- ------ -------- -------
NET ASSET VALUE END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 38.62 32.26 34.88 $ 35.60 36.36
-------- ------- ------ -------- -------
-------- ------- ------ -------- -------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . 35.17 (0.01) 10.53 8.32 31.05
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets . . . . . . . . . . . . .95 .95 .96 .98 .98
Net investment income to average net assets. . . . . . . . . . . 1.56 1.73 1.54 1.69 2.28
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . 92.53 57.53 99.80 77.02 116.53
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . 530,645 414,036 388,420 337,549 325,746
</TABLE>
Diversified Equity Fund 13
<PAGE> 144
DIVERSIFIED EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 DIVERSIFIED EQUITY RUSSELL 1000-Registered Trademark-** LIPPER-C- GROWTH & INCOME++
- ----------------- ------------------ ------------------------------------ ---------------------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1986 $11,463 $11,787 $11,608
1987 $12,259 $12,134 $11,842
1988 $14,266 $14,225 $13,610
1989 $18,412 $18,551 $16,663
1990 $17,121 $17,780 $15,915
1991 $22,436 $23,652 $20,500
1992 $24,302 $25,789 $22,198
1993 $26,863 $28,407 $24,688
1994 $26,860 $28,515 $24,434
1995 $36,307 $39,285 $31,912
</TABLE>
Diversified Equity Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- ------------ ------------
<S> <C> <C>
1 Year $13,517 35.17%
5 Years $21,206 16.22%***
10 Years $36,307 13.76%***
</TABLE>
Russell 1000-Registered Index- Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- ------------ ------------
<S> <C> <C>
1 Year $13,777 37.77%
5 Years $22,095 17.18%***
10 Years $39,285 14.66%***
</TABLE>
Lipper Growth & Income Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- ------------ ------------
<S> <C> <C>
1 Year $13,060 30.60%
5 Years $20,052 14.93%***
10 Years $31,912 12.30%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 1000 Index includes the 1,000 largest companies in the Russell
3000-Registered Trademark- Index, the smallest of which is valued at about
$450 million. The Russell 1000 Index represents the universe of stocks from
which most active money managers typically select.
++ Lipper-C- Growth & Income Funds Average is the average total return for the
universe of funds within the Growth and Income Funds investment objective.
The total return for the funds reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
*** Annualized.
DIVERSIFIED EQUITY FUND returned 35.2% during 1995, trailing the Russell
1000-Registered Trademark- Index return of 37.8%. The portfolio was managed
in a manner consistent with its design to serve as a core investment for
those investors whose objectives include long-term growth or long-term
protection against inflation. The Fund uses a multi-style, multi-manager
strategy intended to achieve higher returns with moderate risk by employing
the services of nine managers with three separate and distinct assignments.
The dominance of large cap stocks during the year detracted significantly from
the Fund's performance. Technology stocks led other sectors by a wide margin
during the first half of the year; but the market rotated to interest
rate-sensitive issues during the second and third quarters and defensive sectors
(health care, energy, and utilities) during the last four months. Consumer
stocks suffered through most of the year in response to a slowing economy and
employment fears driven by corporate restructurings. Although consumer staples
gained strength as investors sought the stocks of stable growth companies, a
weak holiday sales season strained an already weak retail sector. Good
technology stock selection gave the Fund a strong boost early in the year on top
of the sector's generally strong start. However, the tech sector slumped for
most of the second half of 1995, taking the Fund's technology holdings down with
it. The Fund also lost ground in the fourth quarter due to its underweighting in
utilities versus the index.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
14 Diversified Equity Fund
<PAGE> 145
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ --------
<S> <C> <C>
COMMON STOCKS - 90.7%
BASIC INDUSTRIES - 5.0%
ABS Industries, Inc. 16,000 $ 120
AK Steel Holding Corp. 8,600 295
Albemarle Corp. 10,100 196
Allegheny Ludlum Corp. 16,300 302
Alumax, Inc. (a) 8,200 251
ASARCO, Inc. 9,100 291
Bio-Rad Laboratories, Inc. Class A (a) 1,300 55
Birmingham Steel Corp. 6,300 94
Boise Cascade Corp. 7,300 253
Brockway Standard Holdings Corp. (a) 12,000 186
Cambrex Corp. 6,000 248
Carpenter Technology Corp. 29,200 1,201
CasTech Aluminum Group, Inc. (a) 6,800 92
Chesapeake Corp. 4,400 130
Cleveland-Cliffs, Inc. 2,200 90
Commercial Metals Co. 41,766 1,034
Commonwealth Aluminum Corp. 7,700 118
Crompton & Knowles Corp. 7,200 95
Cyprus Amax Minerals Co. 27,500 718
Dexter Corp. 46,000 1,087
Dravo Corp. (a) 25,700 308
Easco, Inc. 22,000 173
Eastern Enterprises, Inc. 2,200 78
Ferro Corp. 52,000 1,209
First Brands Corp. 9,200 438
Fort Howard Corp. New (a) 28,000 627
Handy & Harman 26,200 432
Hanna (M.A.) Co. 6,300 176
Hecla Mining Co. (a) 8,800 61
J & L Specialty Steel, Inc. 8,800 165
Lukens, Inc. 3,100 89
Medusa Corp. 1,300 34
Mentor Graphics Corp. (a) 49,000 882
Mississippi Chemical Corp. New 7,300 170
New Jersey Steel Corp. (a) 28,000 238
Northwestern Steel & Wire Co. New (a) 3,900 31
Oregon Steel Mills, Inc. 2,300 32
Penwest, Ltd. 8,000 194
Proler International Corp. (a) 73,500 551
Quanex Corp. 1,800 35
Schnitzer STL Industries, Inc. Class A 800 24
Slater Industries, Inc. 18,000 171
St. Joe Paper Co. 12,400 682
Stone Container Corp. 15,800 227
Texas Industries, Inc. 2,200 117
Universal Stainless & Alloy Products, Inc. (a) 15,500 163
Varlen Corp. 1,100 24
Webco Industries, Inc. (a) 18,000 102
Wellman, Inc. 24,500 557
WHX Corp. (a) 56,900 619
Witco Chemical Corp. 7,900 231
Wolverine Tube, Inc. (a) 1,900 71
------
15,767
------
CAPITAL GOODS - 7.3%
Acme-Cleveland Corp. 4,000 75
ADCO Technologies, Inc. 21,300 146
AFC Cable Systems, Inc. (a) 13,000 169
Ag-Chem Equipment Co., Inc. 5,000 131
American Buildings Co. New (a) 31,200 686
Ametek, Inc. 3,500 66
ANADIGICS, Inc. 1,200 26
Anixter International, Inc. 4,600 86
Apogee Enterprises, Inc. 56,500 960
Aptargroup, Inc. 19,000 710
Arden Industrial Products (a) 15,000 73
Baldor Electric Co. 2,400 48
Ball Corp. 8,100 223
Barnes Group, Inc. 1,800 65
Blount International, Inc. Class A 1,800 47
BMC West Corp. (a) 9,000 133
Briggs & Stratton Corp. 8,200 356
Cable Design Technologies Corp. (a) 5,000 220
Cascade Corp. 11,600 157
Charter Power Systems, Inc. 1,100 31
Cognex Corp. 23,600 820
Cohu, Inc. 28,000 700
Commercial Intertech Corp. 1,000 18
Cummins Engine Co., Inc. 9,500 352
Daniel Industries, Inc. 1,700 24
Defiance, Inc. 25,000 147
Duriron Co., Inc. 74,700 1,737
Eastern Co. 24,400 299
Epic Design Technology, Inc. 3,600 74
Farr Co. (a) 22,800 171
Flow International Corp. (a) 6,000 55
Fluke Corp. 1,000 38
Giant Cement Holding, Inc. (a) 16,000 184
Global Industrial Technologies, Inc. (a) 6,300 119
Graco, Inc. 30,300 924
Harmon Industries, Inc. New 8,000 114
Heist (C.H.) Corp. (a) 33,900 237
Hughes Supply, Inc. 1,000 28
Hurco Cos., Inc. (a) 30,700 154
IDEX Corp. 33,000 1,345
II-VI, Inc. 2,800 30
Insituform Technologies, Inc. Class A (a) 10,235 116
</TABLE>
Special Growth Fund 15
<PAGE> 146
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ --------
<S> <C> <C>
Inverpower Controls, Ltd. 21,000 $ 185
JLG Industries, Inc. 1,000 29
Kennametal, Inc. 6,500 206
Keystone International, Inc. 3,200 64
Litton Industries, Inc. (a) 3,600 160
Measurex Corp. 8,900 251
Monarch Machine Tool Co. 44,000 550
National Service Industries, Inc. 34,500 1,117
NCI Building Systems, Inc. (a) 10,500 256
Nu Horizons Electronics Corp. (a) 2,600 46
Outboard Marine Corp. 6,000 122
Plantronics, Inc. New (a) 8,000 289
Powell Industries, Inc. (a) 22,000 173
Regal-Beloit Corp. 2,500 54
Sanifill, Inc. (a) 22,100 738
Shelter Components Corp. 12,850 210
SIFCO Industries (a) 88,000 473
Symmetricom, Inc. (a) 3,000 41
Synalloy Corp. 1,300 27
Tecumseh Products Co. Class A 13,600 704
Tecumseh Products Co. Class B 4,000 199
TETRA Technologies, Inc. New 31,500 717
Timken Co. 33,100 1,266
U.S. Filter Corp. New (a) 20,300 540
United Waste Systems, Inc. (a) 23,100 849
USA Waste Services, Inc. (a) 11,200 211
Weatherford Enterra, Inc. (a) 10,450 302
Zurn Industries, Inc. 32,800 701
Zycon Corp. 16,000 180
------
22,754
------
CONSUMER BASICS - 13.9%
Advocat, Inc. (a) 14,000 156
Alpharma, Inc. Class A 7,000 183
American Medical Response (a) 9,900 322
American Oncology Resources, Inc. 12,000 582
Ballard Medical Products 15,500 277
Bergen Brunswig Corp. Class A 8,900 221
Beverly Enterprises, Inc. (a) 20,800 221
Bindley Western Industries, Inc. 1,500 26
Biogen, Inc. (a) 17,000 1,037
Bush Boake Allen, Inc. (a) 25,000 684
Carter-Wallace, Inc. 2,300 26
Central Sprinkler Corp. (a) 4,000 136
Church and Dwight Co., Inc. 45,600 844
CNS, Inc. 8,800 131
Coca-Cola Bottling Co. 21,000 727
Coherent, Inc. (a) 3,700 150
Collagen Corp. 8,000 165
Community Care of America, Inc. 9,300 96
Community Health Systems, Inc. (a) 2,400 86
Community Psychiatric Centers 8,300 102
Cor Therapeutics, Inc. (a) 9,800 80
Cytel Corp. (a) 2,000 12
Dean Foods Co. 5,600 154
Duckwall-ALCO Stores, Inc. New (a) 17,200 168
Dura Pharmaceuticals, Inc. (a) 22,000 759
FHP International Corp. (a) 8,300 232
Fleming Cos., Inc. 9,100 188
Flowers Industries, Inc. 94,800 1,149
FPA Medical Management, Inc. 14,000 130
General Nutrition Companies, Inc. 46,000 1,058
Genesis Health Ventures, Inc. (a) 3,700 135
Giant Food, Inc. Class A 43,000 1,355
GranCare, Inc. (a) 8,000 116
Grist Mill Co. New (a) 1,800 13
Health Care & Retirement Corp. (a) 4,900 172
Health Management Associates Class A 33,150 866
Health Management Systems, Inc. 15,000 578
HealthCare COMPARE (a) 16,300 709
Healthdyne Technologies, Inc. (a) 11,062 124
Healthdyne, Inc. 2,600 22
Healthsource, Inc. 20,000 720
HemaSure, Inc. (a) 21,000 260
Horizon/CMS Healthcare Corp. (a) 17,100 432
Hormel (George A.) & Co. 5,000 123
Hudson Foods, Inc. 3,700 64
IBP, Inc. 7,400 374
ICOS Corp. (a) 4,200 30
ICU Medical, Inc. (a) 2,100 36
Immucor Corp. (a) 15,000 139
Integrated Health Services, Inc. 6,200 155
International Multifoods Corp. 2,200 44
Interneuron Pharmaceuticals, Inc. (a) 28,100 710
Isomedix, Inc. (a) 10,200 147
Lance, Inc. 35,000 569
Lincare Holdings, Inc. (a) 3,300 82
Living Centers of America, Inc. (a) 4,300 151
Mariner Health Group, Inc. (a) 2,300 39
Maxxim Medical, Inc. (a) 1,200 20
McCormick & Co., Inc. 48,500 1,170
MedImmune, Inc. (a) 900 18
MediSense, Inc. (a) 12,000 380
Mine Safety Appliances Co. 12,000 573
Minntech Corp. 18,600 363
Multicare Cos., Inc. (a) 9,000 216
Nature's Sunshine Products, Inc. 12,066 296
</TABLE>
16 Special Growth Fund
<PAGE> 147
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ --------
<S> <C> <C>
NBTY, Inc. (a) 30,000 $ 143
Nellcor, Inc. (a) 16,072 932
Northfield Laboratories, Inc. (a) 3,100 57
Northland Cranberries, Inc. Class A 14,000 249
Odwalla, Inc. 1,600 25
OrNda Healthcorp (a) 38,200 888
Orthofix International NV 9,300 65
Outback Steakhouse, Inc. (a) 27,300 979
Owen Healthcare, Inc. 25,000 656
Pacific Physician Services, Inc. (a) 47,000 834
Pharmaceutical Marketing Services, Inc. (a) 2,000 30
PhyCor, Inc. 29,375 1,483
Physician Computer Network, Inc. (a) 5,400 48
Physician Sales & Service, Inc. 30,400 851
Physicians Health Services, Inc. Class A (a) 20,400 755
Prime Hospitality Corp. (a) 67,200 672
Protein Design Labs, Inc. (a) 2,600 59
Protocol Systems, Inc. (a) 14,000 145
Pure Pac (a) 16,000 82
Regency Health Services, Inc. (a) 21,360 216
Regeneron Pharmaceuticals, Inc. (a) 3,500 44
Renal Treatment Centers, Inc. (a) 15,400 678
Respironics, Inc. 29,800 611
Ruddick Corp. 86,000 989
Safety 1st, Inc. (a) 8,800 130
Salick Health Care, Inc. 2,500 92
Schultz Sav-O Stores, Inc. 43,500 642
Smithfield Foods, Inc. (a) 2,400 76
Smucker (J.M.) Co. 19,000 418
Smucker (J.M.) Co. Class B 22,000 423
Snap-On Tools Corp. 1,600 72
Sofamor/Danek Group, Inc. (a) 2,900 82
Sola International, Inc. 21,600 545
Somatogen, Inc. (a) 4,600 87
Stanhome, Inc. 31,500 917
Starbucks Corp. 37,700 787
Starrett (L.S.) Co. Class A 24,500 634
Sterling Healthcare Group, Inc. (a) 15,000 159
Strategic Distribution, Inc. 36,050 279
Sun Healthcare Group, Inc. (a) 11,700 158
Sunrise Medical, Inc. (a) 5,300 98
Syncor International Corp. (a) 2,700 18
TheraTx, Inc. (a) 5,600 66
Thermotrex Corp. (a) 7,700 385
Total Renal Care Holdings, Inc. 16,000 472
U.S. Bioscience, Inc. (a) 264 1
Ultratech Stepper, Inc. 2,300 59
United Dental Care, Inc. 11,900 491
Universal Foods Corp. 42,700 1,713
Universal Health Services, Inc.
Class B (a) 3,400 151
Utah Medical Products (a) 14,000 276
Vencor, Inc. (a) 6,600 214
Vivra, Inc. 6,600 166
Watson Pharmaceuticals, Inc. (a) 26,600 1,300
------
43,705
------
CONSUMER DURABLES - 2.5%
Arrow Automotive Industries, Inc. (a) 44,000 275
Arvin Industries, Inc. 3,100 51
Bassett Furniture Industries, Inc. 1,200 27
Borg Warner Automotive, Inc. 3,200 102
Cavalier Homes, Inc. 6,700 139
Coachmen Industries, Inc. 32,100 698
Coast Distribution Systems (a) 21,000 126
Copart, Inc. (a) 1,400 37
CORT Business Services Corp. 7,700 127
Discount Auto Parts, Inc. (a) 1,600 50
Donaldson Co., Inc. 4,000 100
Excel Industries, Inc. 7,000 98
Federal-Mogul Corp. 23,800 467
Fleetwood Enterprises, Inc. 6,200 160
Flexsteel Industries, Inc. 27,112 278
Kinetic Concepts, Inc. 23,000 273
La-Z-Boy Chair Co. 36,000 1,112
Lear Seating Corp. (a) 3,100 90
National Presto Industries, Inc. 1,000 40
Polaris Industries, Inc. 2,000 59
PRI Automation, Inc. (a) 1,400 49
Pronet, Inc. (a) 10,000 294
Renters Choice, Inc. 1,400 18
Schult Homes Corp. 12,000 210
Simpson Industries, Inc. 12,000 105
Skyline Corp. 1,300 27
Smith (A.O.) Corp. 72,500 1,504
Titan Wheel International, Inc. 8,850 144
West, Inc. 38,000 893
Wynn's International, Inc. 6,000 178
------
7,731
------
CONSUMER NON-DURABLES - 5.5%
American Safety Razor Co. 12,000 95
Baby Superstore, Inc. 4,400 250
Barnes & Noble, Inc. (a) 26,800 777
Block Drug Co., Inc. Class A 13,751 474
Bombay, Inc. (a) 9,200 59
</TABLE>
Special Growth Fund 17
<PAGE> 148
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ --------
<S> <C> <C>
Borders Group, Inc. (a) 12,900 $ 239
Brown Group, Inc. 24,500 349
Cannondale Corp. (a) 1,300 20
Carson Pirie Scott & Co. (a) 1,700 34
Chic By H.I.S., Inc. (a) 1,800 10
Claire's Stores, Inc. 4,800 85
Coastcast Corp. (a) 20,000 203
CompUSA, Inc. (a) 4,400 137
Consolidated Stores Corp. (a) 5,800 126
Coors (Adolph) Co. Class B 1,400 31
Daisytek International Corp. 6,000 184
Danskin, Inc. (a) 45,000 186
Department 56, Inc. (a) 2,500 96
Designs, Inc. (a) 6,300 44
Eagle Hardware and Garden, Inc. (a) 4,400 32
Family Dollar Stores, Inc. 6,700 92
Fieldcrest Cannon, Inc. (a) 36,500 607
First Team Sports, Inc. 1,300 19
Guilford Mills, Inc. 37,000 754
Haggar Corp. 31,090 560
Happiness Express, Inc. (a) 2,600 11
Hills Stores Co. New (a) 2,100 21
Innovex, Inc. 3,500 53
Jean Phillippe Fragrances, Inc. New (a) 10,000 81
Johnston Industries, Inc. 30,500 244
Jos. A. Bank Clothiers, Inc. (a) 38,700 73
Kenneth Cole Productions, Inc. Class A 2,400 45
Leslie's Poolmart 13,000 172
Longs Drug Stores Corp. 1,000 48
MacFrugals Bargains Close Outs, Inc. (a) 3,600 50
Nautica Enterprises, Inc. 25,700 1,105
North American Watch Corp. 45,000 866
Nutramax Products, Inc. New (a) 20,000 175
Office Depot, Inc. (a) 22,725 449
Oxford Industries, Inc. 31,500 528
Paragon Trade Brands, Inc. (a) 2,800 65
PeopleSoft, Inc. 18,800 799
Pete's Brewing Co. (a) 3,400 48
PETsMART, Inc. 15,000 461
Phillips-Van Heusen Corp. 4,200 41
Quaker Fabric Corp. New (a) 20,000 175
Rayonier, Inc. 7,900 264
Redhook Ale Brewery, Inc. 1,300 34
Rex Stores Corp. (a) 2,000 35
Rite Aid Corp. 19,200 658
Robert Mondavi Corp. Class A (a) 3,100 85
Ross Stores, Inc. 7,000 134
Russ Berrie & Co., Inc. 1,300 16
Scholastic Corp. (a) 11,100 863
Score Board, Inc. (a) 30,000 131
Service Merchandise Co., Inc. (a) 11,900 59
Sports Authority, Inc. (a) 4,700 96
Springs Industries, Inc. 2,100 87
Systemed, Inc. (a) 30,000 135
Tiffany & Co. 14,800 745
Timberland Co. Class A (a) 3,400 68
TJX Cos., Inc. 14,900 281
Tranzonic Cos. Class B 24,200 336
Tuesday Morning, Inc. (a) 20,000 110
Value City Department Stores, Inc. (a) 12,500 84
VWR Corp. 21,814 278
Waban, Inc. (a) 45,800 859
Zale Corp. New (a) 49,800 797
------
17,128
------
CONSUMER SERVICES - 2.9%
Airport Systems International, Inc. (a) 21,200 64
Alaska Air Group, Inc. (a) 6,100 99
AMC Entertainment, Inc. (a) 1,100 26
America West Airlines, Inc. Class B 8,300 141
Amtran, Inc. (a) 16,000 192
Applebee's International, Inc. 29,500 671
Bally Entertainment Group (a) 10,000 140
Brinker International, Inc. (a) 10,000 151
Buffets, Inc. (a) 15,400 216
Callaway Golf Co. 13,400 303
Children's Discovery Centers
of America, Inc. New (a) 20,000 90
Comair Holdings, Inc. 9,750 260
Continental Airlines, Inc. Class B (a) 3,800 165
Equity Inns, Inc. 14,000 161
Falcon Cable Systems Co. L.P. 53,700 591
GC Companies, Inc. (a) 700 23
Golf Enterprises, Inc. (a) 14,000 102
Grand Casinos, Inc. 11,100 258
Great Lakes Aviation, Ltd. (a) 22,300 75
Harvey's Casino Resorts 1,000 18
La Quinta Motor Inns, Inc. 53,500 1,465
Lone Star Steakhouse & Saloon (a) 10,200 390
Main Street & Main, Inc. New 35,000 92
Max & Erma's Restaurants, Inc. 19,800 116
Mesa Airlines, Inc. (a) 7,800 69
Monterey Pasta Co. (a) 18,000 88
O'Charleys, Inc. (a) 15,000 214
Old Dominion Freight Lines, Inc. (a) 8,000 60
Papa Johns International, Inc. (a) 14,500 587
Penn National Gaming, Inc. (a) 2,800 36
</TABLE>
18 Special Growth Fund
<PAGE> 149
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ -------
<S> <C> <C>
Recoton Corp. (a) 9,600 $ 173
Regal Cinemas, Inc. 9,500 275
Ride, Inc. 1,100 36
Ryan's Family Steak Houses, Inc. (a) 76,000 522
ShoLodge, Inc. (a) 15,333 146
Showboat, Inc. 3,700 97
Shuffle Master, Inc. 3,000 35
Studio Plus America, Inc. 4,800 124
Sunstone Hotel Investors, Inc. 43,300 433
Supertel Hospitality, Inc. (a) 12,000 120
Triarc Companies, Inc. Class A (a) 1,000 11
USAir Group, Inc. (a) 13,100 174
WMS Industries, Inc. (a) 1,300 21
------
9,030
------
ENERGY - 4.9%
Alamco, Inc. (a) 8,000 64
Arch Petroleum, Inc. New (a) 61,800 120
Basin Exploration, Inc. (a) 110,000 522
Belden & Blake Corp. (a) 10,000 175
Berry Petroleum Co. Class A 54,200 549
BJ Services Co. (a) 23,550 683
Callon Petroleum Co. (a) 5,600 56
Camco International, Inc. 19,300 540
Chesapeake Energy Corp. 10,800 359
Cliffs Drilling Co. (a) 9,000 133
Coho Energy, Inc. (a) 104,480 509
Cross Timbers Oil Co. 47,300 834
Crown Centennial Petroleum Co.
Class B (a) 36,600 535
Diamond Shamrock, Inc. 27,900 722
Digicon, Inc. New 29,333 235
Dual Drilling Co. (a) 8,000 91
Energen Corp. 1,900 46
Equity Oil Co. (a) 105,000 591
Global Industries, Inc. (a) 8,000 238
Harcor Energy, Inc. New (a) 38,000 86
Helmerich & Payne, Inc. 3,000 89
ICO, Inc. New 30,000 146
K N Energy, Inc. 1,300 38
KCS Energy, Inc. 1,500 23
Key Production, Inc. (a) 13,900 75
LTV Corp. New (a) 48,400 666
Marine Drilling Co, Inc. (a) 40,000 195
Maynard Oil Co. (a) 90,500 611
Newfield Exploration Co. (a) 2,000 54
Newpark Resources, Inc. New 9,450 210
Noble Drilling Corp. (a) 130,500 1,158
NorAm Energy Corp. 11,100 99
Nuevo Energy Co. (a) 2,500 56
Oceaneering International, Inc. (a) 4,300 55
Parker & Parsley Petroleum Co. 31,000 682
Petroleum Geo Services AS - ADR (a) 23,000 572
Production Operators Corp. 6,000 198
Quaker State Oil Refining Corp. 6,200 78
Questar Corp. 3,200 107
Reading & Bates Corp. New (a) 19,100 287
Smith International, Inc. (a) 45,900 1,079
Swift Energy Co. (a) 2,700 32
Tesoro Petroleum Corp. (a) 2,900 25
Tide West Oil, Inc. (a) 6,100 79
Ultramar Corp. 41,100 1,058
United Meridian Corp. (a) 2,900 50
Valero Energy Corp. 4,800 118
Wiser Oil Co. 37,500 450
World Fuel Services Corp. 3,300 52
------
15,430
------
FINANCE - 13.3%
20th Century Industries (a) 2,200 44
Aames Financial Corp. 2,100 59
AlBank Financial Corp. 7,000 210
Alexander & Alexander Services, Inc. 3,500 67
Allmerica Property & Casualty Cos. 34,000 918
Amcast Industrial Corp. 1,300 24
American Bankers Insurance Group, Inc. 23,500 917
American Travellars Corp. (a) 31,900 893
AMRESCO, Inc. 12,500 153
AT&T Capital Corp. 1,400 54
AVEMCO Corp. 33,000 528
Avondale Financial Corp. 10,000 145
Bankers Corp. 10,800 176
Bankers Life Holding Corp. 1,300 26
Berkley (W.R.) Corp. 19,000 1,012
BHC Financial, Inc. 14,000 249
California Federal Bank 7,500 118
CFI ProServices, Inc. (a) 14,000 203
Charter One Financial, Inc. 24,900 756
CitiFed Bancorp, Inc. 7,000 238
City National Corp. 5,500 77
Coast Savings Financial, Inc. (a) 7,500 260
Collective Bancorp, Inc. 2,400 61
Colonial BancGroup, Inc. 29,500 951
Corporate Express, Inc. 63,600 1,900
Countrywide Credit Industries, Inc. 14,200 309
Cullen Frost Bankers, Inc. 1,000 50
</TABLE>
Special Growth Fund 19
<PAGE> 150
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
FFY Financial Corp. 1,000 $ 21
Financial Fed Corp. (a) 9,000 201
FINOVA Group, Inc. 4,100 198
First American Financial Corp. 1,300 35
First Bell Bancorp, Inc. 6,900 91
First Colony Corp. 3,000 76
First Commerce Corp. 22,100 699
First Financial Caribbean Corp. 10,000 184
First Mortgage Corp. (a) 30,000 172
First Palm Beach Bancorp, Inc. 1,400 30
First Republic Bancorp, Inc. (a) 14,000 184
First Tennessee National Corp. 16,000 964
Flushing Financial Corp. 10,300 156
Fremont General Corp. 29,850 1,097
Greenpoint Financial Corp. 9,300 246
Hartford Steam Boiler Inspection
& Insurance Co. 1,400 70
Haven Bancorp 1,200 28
HCC Insurance Holdings, Inc. (a) 1,000 37
Horace Mann Educators Corp. 1,200 37
Imperial Credit Industries, Inc. 31,692 666
Jefferies Group, Inc. Rights 9,800 451
JSB Financial, Inc. 1,500 47
Keystone Financial, Inc. 32,450 957
Leader Financial Corp. 20,400 760
Life Bancorp, Inc. 1,800 27
Life Partners Group, Inc. 3,600 49
Litchfield Financial Corp. 10,000 130
Markel Corp. (a) 9,500 689
Mercury Finance Corp. 41,850 555
MLF Bancorp, Inc. 3,400 76
Money Store, Inc. 23,250 360
National Auto Credit, Inc. 1,500 24
National Re Corp. 18,400 699
North American Mortgage Co. 33,700 716
NS Bancorp, Inc. 5,000 193
Ohio Casualty Corp. 17,000 650
Old Kent Financial Corp. 17,300 707
Olympic Financial, Ltd. (a) 12,500 203
ONBANCorp 1,800 60
One Valley Bancorp
of West Virginia, Inc. 24,500 763
Orion Capital Corp. 4,200 182
Pace American Group, Inc. (a) 25,000 2
Paul Revere Corp. 1,000 21
PennCorp Financial Group, Inc. 17,000 499
Peoples Bank 2,800 53
Peoples Heritage Financial Group 31,500 709
Protective Life Corp. 1,000 31
Provident Bankshares Corp. 2,000 59
Queens County Bancorp 7,000 276
Regional Acceptance Corp. 8,700 80
Regions Financial Corp. 26,000 1,118
Reliance Bancorp, Inc. 3,800 54
Reliance Group Holdings, Inc. 10,900 94
Reliastar Financial Corp. 20,000 887
RenaissanceRe Holdings, Ltd. 22,000 657
Resource Bancshares Mortgage Group 16,044 223
Resource Mortgage Capital Corp. 2,600 52
Risk Capital Holdings, Inc. 20,300 467
Robert Half International, Inc. (a) 31,000 1,298
Roosevelt Financial Group, Inc. 8,500 163
Seacor Holdings, Inc. (a) 7,000 188
Security Connecticut Corp. 8,000 217
Selective Insurance Group, Inc. 15,500 550
Sotheby's Holdings Co., Inc. Class A 2,500 36
SouthTrust Corp. 29,500 756
Standard Financial, Inc. (a) 4,300 63
State Auto Financial Corp. 8,000 204
SunAmerica, Inc. 18,000 855
T R Financial Corp. 3,000 76
TCF Financial Corp. 16,000 530
TFC Enterprises, Inc. (a) 2,800 16
Titan Holdings, Inc. 12,200 175
Transatlantic Holdings, Inc. 9,000 660
Transnational Re Corp. Class A 26,000 637
Trenwick Group, Inc. Rights 11,000 616
Union Planters Corp. 47,950 1,528
United Fire & Casualty Co. 19,300 791
US Facilities Corp. 36,900 775
USLIFE Corp. 2,800 84
Vesta Insurance Group, Inc. 9,500 518
Washington National Corp. 1,400 39
Westco Bancorp, Inc. 5,000 135
Westcorp, Inc. 9,530 176
Zenith National Insurance Corp. 25,800 551
Zions Bancorp 13,000 1,043
------
41,850
------
GENERAL BUSINESS - 9.2%
AccuStaff, Inc. 12,800 554
Active Voice Corp. (a) 800 21
Advo Systems, Inc. 1,900 49
Alternative Resources Corp. 20,300 599
American Business Information, Inc. 9,000 169
American Business Products, Inc. 1,200 34
American Radio Systems Corp. Class A 23,050 628
</TABLE>
20 Special Growth Fund
<PAGE> 151
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Applied Voice Technology, Inc. (a) 2,200 $ 29
Ascend Communications, Inc. 26,000 2,109
BISYS Group, Inc. New (a) 6,000 182
Bowne & Co., Inc. 1,600 32
CACI International, Inc. Class A (a) 2,100 24
Cascade Communications Corp. 4,600 391
Catalina Marketing Corp. (a) 1,300 82
Central Newspapers, Inc. Class A 29,000 910
CIDCO, Inc. (a) 7,600 192
Cognos, Inc. (a) 11,100 495
Coherent Communications Systems Corp. 3,600 68
Comarco, Inc. (a) 16,000 230
Comnet Cellular, Inc. (a) 8,100 234
Comsat Corp. Series 1 7,000 130
Corrections Corp. America 4,800 178
Crawford & Co. 4,500 73
Day Runner, Inc. (a) 1,000 35
Devon Group, Inc. New (a) 1,000 29
DeVRY, Inc. 20,300 548
DSP Communications, Inc. 3,900 169
Duplex Products, Inc. (a) 42,500 345
Effective Management Systems, Inc. (a) 20,000 90
Emmis Broadcasting Corp. Class A (a) 500 15
Ennis Business Forms, Inc. 36,650 449
Franklin Quest Co. (a) 12,200 238
General Communication, Inc. Class A (a) 30,000 146
Gibson Greetings, Inc. (a) 3,700 59
Grey Advertising 4,400 862
GTECH Holdings Corp. (a) 7,500 195
Harvey Entertainment Co. (a) 2,400 18
Houghton Mifflin Co. 15,500 667
Hunt Manufacturing Co. 61,000 1,060
Infinity Broadcasting Corp. 12,000 447
Interim Services, Inc. (a) 2,400 83
International Family Entertainment, Inc.
Class B (a) 1,600 26
Jones Intercable, Inc. Class A (a) 44,000 539
Kronos, Inc. (a) 6,000 285
Lee Enterprises, Inc. 40,000 920
Macromedia, Inc. 23,500 1,219
Mail Boxes Etc (a) 3,000 38
McClatchy Newspapers, Inc. Class A 29,500 675
McGrath RentCorp 9,000 167
Media General, Inc. Class A 27,800 844
META Group, Inc. 2,800 85
Metricom, Inc. (a) 2,200 29
Miller (Herman), Inc. 1,600 48
Mobile Telecommunication
Technologies Corp. (a) 37,100 788
National Media Corp. (a) 3,100 65
Network Equipment Technologies, Inc. (a) 26,300 720
New England Business Service, Inc. 2,100 46
Norrell Corp. 1,400 41
Olsten Corp. 4,900 194
Paging Network, Inc. 28,700 682
Paychex, Inc. 32,450 1,606
PC Service Source, Inc. (a) 15,000 122
PMT Services, Inc. (a) 1,300 39
QUALCOMM, Inc. (a) 9,100 390
QuickResponse Services, Inc. (a) 16,900 304
Saga Communications Class A 11,250 183
SFX Broadcasting, Inc. Class A (a) 8,000 238
Spelling Entertainment Group, Inc. (a) 2,400 30
SPS Transaction Services, Inc. (a) 1,600 47
Steris Corp. 29,700 950
Systems & Computer Technology Corp. (a) 8,000 159
TCSI Corp. (a) 8,300 149
TRM Copy Centers Corp. (a) 30,000 300
True North Communications, Inc. 2,000 37
U.S. Delivery Systems, Inc. (a) 20,500 595
United Video Satellite Group Class A (a) 1,000 27
United Wisconsin Services, Inc. 2,100 46
US Office Products Co. (a) 25,200 564
Vanguard Cellular Systems, Inc.
Class A (a) 28,000 560
Viking Office Products, Inc. (a) 29,500 1,372
Wackenhut Corp. 10,000 180
Wackenhut Corrections Corp. (a) 1,800 45
Washington Post Co. Class B 2,700 761
------
28,983
------
MISCELLANEOUS - 3.2%
Apollo Group, Inc. Class A 19,200 749
Associated Group, Inc. Class B (a) 30,000 532
Chris Craft Industries, Inc. 32,379 1,400
Citation Corp. (a) 10,000 115
Crawford & Co. Class A 21,400 342
Daig Corp. 35,000 805
Eckerd Corp. (a) 22,000 982
Fiberstars, Inc. (a) 23,000 89
FRP Properties, Inc. (a) 9,000 184
Griffon Corp. (a) 66,000 594
Gyrodyne Co. of America, Inc. 4,975 70
Ha-Lo Industries, Inc. (a) 8,000 242
Hirsch International Group Class A 10,937 134
ITT Educational Services, Inc. (a) 9,000 222
Jabil Circuit, Inc. (a) 15,000 161
</TABLE>
Special Growth Fund 21
<PAGE> 152
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Landair Services, Inc. (a) 11,000 $ 143
Learning Tree International, Inc. 10,000 155
Leather Factory, Inc. (a) 40,000 98
M.D.C. Holdings, Inc. 25,000 178
Mark VII, Inc. (a) 12,000 186
Mercer International, Inc. (a) 8,600 175
Miller Industries, Inc. (a) 10,000 248
National Wireless Holdings, Inc. (a) 10,000 132
NN Ball & Roller, Inc. 18,000 306
NUMAR Corp. (a) 13,000 145
On Assignment, Inc. (a) 18,300 599
PXRE Corp. 27,000 716
Supreme Industries, Inc. Class A 22,000 184
Texoil, Inc. (a) 65,000 102
Tracor, Inc. New (a) 4,400 64
------
10,052
------
SHELTER - 1.3%
American Woodmark Corp. (a) 18,700 77
Beazer Homes USA, Inc. (a) 1,600 33
Butler Manufacturing Co. 1,500 59
Cameron Ashley, Inc. (a) 20,000 192
Centex Construction Products, Inc. (a) 15,000 216
Champion Enterprises, Inc. 5,000 154
Continental Homes Holding Corp. 1,200 30
Elcor Chemical Corp. 1,500 33
Fastenal Co. 9,000 380
Granite Construction, Inc. 4,900 154
Lone Star Industries, Inc. 7,000 175
Oriole Homes Corp. Class B (a) 37,500 230
Pulte Corp. 5,600 188
Redman Industries, Inc. New (a) 1,200 40
Ryland Group, Inc. 26,900 377
Smith (Charles E.) Residential Realty, Inc. 32,600 770
Southdown, Inc. (a) 12,000 234
Toll Brothers, Inc. (a) 19,100 439
U.S. Home Corp. New (a) 2,300 67
USG Corp. New (a) 5,700 171
------
4,019
------
TECHNOLOGY - 17.5%
Activision, Inc. New 3,900 42
ACX Technologies, Inc. 3,600 54
Adaptec, Inc. (a) 22,300 912
ADC Telecommunications, Inc. 37,900 1,374
Affiliated Computer Services, Inc. Class A (a) 1,300 48
Altera Corp. 24,000 1,191
Amdahl Corp. (a) 10,500 89
AmeriData Technologies, Inc. (a) 12,800 123
Amplicon, Inc. 9,000 128
Applied Magnetics Corp. (a) 7,900 147
Applied Science & Technology, Inc. (a) 1,800 23
Applix, Inc. 3,200 86
Artisoft, Inc. (a) 3,300 21
Aseco Corp. (a) 1,500 24
Aspen Technology, Inc. (a) 6,500 219
Atria Software, Inc. 19,600 760
Augat, Inc. 49,000 839
Auspex Systems, Inc. (a) 23,700 427
Avnet, Inc. 7,700 345
Baan Co. NV 15,000 677
Banctec, Inc. (a) 2,900 54
Bell Industries 34,696 781
BI Incorporated Co. New (a) 24,000 183
BMC Industries, Inc. 10,200 237
Boole & Babbage, Inc. 7,500 178
Breed Technologies, Inc. 11,300 209
Brooktree Corp. NPV (a) 3,200 38
Brooktrout Technology, Inc. (a) 1,400 40
Burr-Brown Corp. 3,000 74
Business Objects S.A. - ADR (a) 12,200 586
Cadence Design Systems, Inc. 4,950 208
Cambridge Technology Partners, Inc. (a) 10,900 616
CBT Group PLC - ADR 12,500 650
CDW Computer Centers, Inc. (a) 20,000 795
CEM Corp. (a) 12,000 159
Checkmate Electronics, Inc. New (a) 9,500 140
Cheyenne Software, Inc. (a) 13,400 350
Circon Corp. (a) 34,800 700
Coeur d'Alene Mines Corp. 3,800 65
Computer Horizons Corp. 1,200 45
Computer Products, Inc. (a) 3,700 42
Computervision Corp. New (a) 15,300 235
Compuware Corp. (a) 5,300 98
Comverse Technology, Inc. New (a) 40,200 804
Consilium, Inc. (a) 15,700 186
Control Data Systems, Inc. (a) 2,400 47
CyCare Systems, Inc. (a) 1,300 33
Data General Corp. (a) 7,200 99
Data Transmission Network Corp. (a) 3,000 146
Datastream Systems, Inc. 2,200 41
Davidson & Associates, Inc. 22,000 473
DH Technology, Inc. 10,500 239
DSP Group, Inc. (a) 16,900 186
Dynamics Research Corp. (a) 64,350 499
Edmark Corp. New 1,500 46
22 Special Growth Fund
</TABLE>
<PAGE> 153
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
EG&G, Inc. 66,500 $ 1,613
Egghead, Inc. (a) 2,900 18
Electro Scientific Industries, Inc. (a) 1,800 51
Electroglas, Inc. 5,800 144
Electromagnetic Sciences, Inc. (a) 15,000 165
Eltron International, Inc. 1,400 49
Enterprise Systems, Inc. (a) 5,300 156
Esterline Corp. (a) 3,200 76
Evans & Sutherland Computer Corp. (a) 26,000 578
Exar Corp. (a) 13,000 192
EXECUTONE Information Systems, Inc. (a) 47,000 109
FORE Systems 14,000 831
Franklin Electronic Publishers, Inc. (a) 1,000 29
FTP Software, Inc. (a) 4,700 136
Fulcrum Technologies, Inc. (a) 2,000 62
Fusion Systems Corp. (a) 2,200 60
Gentex Corp. (a) 1,300 29
Gerber Scientific, Inc. 50,000 812
Glenayre Technologies, Inc. 5,000 310
Global Village Communication (a) 9,000 169
GT Interactive Software Corp. 40,300 559
GTI Corp. 8,100 142
Hadco Corp. (a) 9,600 270
Haemonetics Corp. (a) 2,500 44
HBO & Co. 26,100 1,990
HCIA, Inc. 13,800 635
Hello Direct, Inc. 12,000 81
Hyperion Software Corp. 3,800 80
InaCom Corp. (a) 1,800 25
Information Storage Devices Inc. 1,100 12
Informix Corp. 19,600 588
Input/Output, Inc. (a) 41,000 2,368
Insight Enterprises, Inc. 1,200 15
Integrated Circuit Systems, Inc. (a) 14,300 177
Intelligent Electronics, Inc. 20,279 122
International Rectifier Corp. 27,400 685
Intuit, Inc. 15,000 1,170
Iomega Corp. (a) 3,700 180
Jack Henry & Assocociates, Inc. 1,400 35
Keane, Inc. (a) 1,000 22
Komag, Inc. (a) 3,900 178
Kulicke & Soffa Industries, Inc. 8,700 200
Liberty Technologies, Inc. (a) 35,000 157
Linear Technology Corp. 20,900 820
Littlefuse, Inc. (a) 1,400 51
Loronix Information Systems, Inc. (a) 30,400 78
M-Wave, Inc. (a) 11,100 67
MapInfo Corp. (a) 1,200 24
Marcam Corp. (a) 9,000 133
Marshall Industries (a) 22,700 729
Mattson Technology, Inc. 2,500 37
Maxim Integrated Products, Inc. 18,000 688
McAfee Associates, Inc. 18,150 776
Medic Computer Systems, Inc. (a) 13,600 819
Mercury Interactive Corp. (a) 2,700 48
Merisel, Inc. (a) 17,000 72
Merix Corp. (a) 5,000 147
Metrologic Instruments, Inc. (a) 15,000 142
Micro Linear Corp. (a) 2,100 22
Microchip Technology, Inc. (a) 13,800 504
Microcom, Inc. (a) 4,400 114
Molex, Inc. Class A 16,000 488
Mylex Corp. (a) 3,200 61
National Semiconductor Corp. (a) 40,000 890
NetManage, Inc. 46,600 1,072
Network Computing Devices, Inc. (a) 6,000 42
Network General Corp. (a) 18,000 592
Oak Technology, Inc. (a) 6,600 279
Optical Data Systems, Inc. 31,800 779
Parametric Technology Corp. (a) 15,600 1,033
Peak Technologies Group, Inc. (a) 21,250 653
Perceptron, Inc. 2,100 45
Phamis, Inc. (a) 1,800 54
Phoenix Technologies, Ltd. (a) 2,300 36
Photronics, Inc. 2,200 59
Picturetel Corp. New 20,000 857
Pinnacle Micro, Inc. 1,500 22
Pittway Corp. Class A 32,078 2,173
Planar Systems, Inc. (a) 6,000 114
Platinum Technology, Inc. (a) 15,000 276
Premenos Technology Corp. 9,000 236
Project Software & Development, Inc. 1,500 52
Quarterdeck Corp. 4,800 131
Rational Software Corp. New (a) 2,500 56
Saville Systems Ireland PLC - ADR 14,800 209
Scientific Games Holdings Corp. 2,000 75
Security Dynamics Technologies, Inc. 3,600 197
Software Artistry, Inc. 1,000 14
Software Spectrum, Inc. (a) 9,000 189
SPSS, Inc. (a) 17,900 342
Stac, Inc. (a) 5,200 74
Storage Technology Corp. (a) 10,200 244
Stratus Computer, Inc. (a) 3,000 104
Structural Dynamics Research Corp. (a) 14,600 425
Systemsoft Corp. (a) 5,800 65
Tandem Computers, Inc. (a) 23,800 253
Tech Data Corp. (a) 7,700 115
Tech-Sym Corp. (a) 20,500 653
</TABLE>
Special Growth Fund 23
<PAGE> 154
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
Teledyne, Inc. 4,900 $ 126
Tellabs, Inc. 18,700 692
Tencor Instruments 26,300 638
Teradyne, Inc. 41,182 1,030
TGV Software, Inc. 19,600 176
Thiokol Corp. 1,200 41
Three-Five Systems, Inc. (a) 1,800 30
Trident Microsystems, Inc. (a) 12,200 284
Triquint Semiconductor, Inc. (a) 3,000 41
Tylan General, Inc. 1,400 17
Uniphase Corp. (a) 18,500 661
Unisys Corp. (a) 32,100 181
Veeco Instruments, Inc. (a) 1,300 18
Veritas Software Corp. 2,000 74
Viewlogic Systems, Inc. (a) 4,700 47
Wall Data, Inc. (a) 2,500 41
Watkins-Johnson Co. 2,000 88
Westcott Communications, Inc. (a) 14,200 195
Western Digital Corp. (a) 9,600 172
Wind River Systems, Inc. (a) 3,000 86
Zygo Corp. 1,300 32
------
55,035
------
TRANSPORTATION - 1.9%
Air Express International Corp. 9,000 203
Airborne Freight Corp. 4,700 125
Alexander & Baldwin, Inc. 25,000 575
American President Cos., Ltd. 6,000 138
Covenant Transport, Inc. Class A (a) 11,500 129
Fritz Companies, Inc. 28,400 1,179
GATX Corp. 2,000 97
Hornbeck Offshore Services, Inc. (a) 10,000 196
Knight Transportation, Inc. (a) 12,000 165
Liqui-Box Corp. 2,700 79
M.S. Carriers, Inc. (a) 6,000 117
MTL, Inc. (a) 46,500 628
Navistar International Corp. (a) 17,700 186
Overseas Shipholding Group, Inc. 36,300 690
Tidewater, Inc. 10,400 328
Transport Corp. of America 16,000 178
U.S. Xpress Enterprises, Inc. Class A (a) 15,000 105
Wisconsin Central Transportation Corp. (a) 11,400 745
XTRA Corp. 1,700 72
------
5,935
------
UTILITIES - 2.3%
ACC Corp. 700 16
Atlanta Gas Light Co. 4,200 83
Atlantic Energy, Inc. 4,100 79
Bangor Hydro-Electric Co. 2,400 28
Boston Edison Co. 3,200 94
Brooklyn Union Gas Co. (The) 3,400 99
C-Tec Corp. (a) 1,200 37
California Energy, Inc. (a) 5,000 98
Cellular Communications
of Puerto Rico, Inc. (a) 28,566 764
Centennial Cellular Corp. Class A (a) 43,500 745
Centerior Energy Corp. 14,500 129
Central Hudson Gas & Electric Corp. 1,000 31
Central Louisiana Electric Co., Inc. 1,100 30
Century Telephone Enterprises, Inc. 21,900 695
CILCORP, Inc. 1,000 42
Citizens Utility Co. Class A 6,706 85
Columbia Gas System, Inc. (a) 6,900 303
Commonwealth Energy System 1,000 45
Delmarva Power & Light Co. 2,900 66
Eastern Utilities Associates 1,600 38
El Paso Natural Gas Co. 6,600 187
Enron Global Power & Pipelines L.L.C. 1,400 35
ENSERCH Corp. 6,100 99
Equitable Resources, Inc. 2,900 91
Frontier Corp. 15,100 453
Hawaiian Electric Industries, Inc. 5,400 209
Idaho Power Co. 2,400 72
Kansas City Power & Light Co. 4,800 125
Long Island Lighting Co. 16,800 275
MidAmerican Energy Co. 4,300 72
Minnesota Power & Light Co. 1,800 51
Montana Power Co. 7,100 161
National Fuel & Gas Co. 3,100 104
New Jersey Resources Corp. 1,000 30
New York State Electric & Gas Corp. 8,900 230
NICOR, Inc. 2,100 58
Northwestern Public Service Co. 1,000 28
ONEOK, Inc. 4,400 101
Pennsylvania Enterprises, Inc. 700 27
Peoples Energy Corp. 1,900 60
Piedmont Natural Gas Co., Inc. 900 21
Primark Corp. (a) 2,600 78
Public Service Co. of New Mexico (a) 4,500 79
Puget Sound Power & Light Co. 2,400 56
Rochester Gas & Electric Corp. 5,400 122
TNP Enterprises, Inc. 1,500 28
UGI Corp. New 2,100 44
United Illuminating Co. 1,000 37
United States Cellular Corp. (a) 12,800 432
</TABLE>
24 Special Growth Fund
<PAGE> 155
SPECIAL GROWTH FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------ ------
<S> <C> <C>
US Long Distance Corp. (a) 3,100 $ 42
UtiliCorp United, Inc. 2,600 76
Washington Gas & Light Co. 1,600 33
Washington Water Power Co. 3,100 54
WPL Holdings, Inc. 1,200 37
WPS Resources Corp. 400 14
-------
7,128
-------
TOTAL COMMON STOCKS
(cost $239,505) 284,547
-------
OPTIONS PURCHASED - 0.1%
Russell 2000-Registered Trademark-
Index Mar 310 Calls (a) 170* 255
-------
TOTAL OPTIONS PURCHASED
(cost $247) 255
-------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.1%
Genesis Health Ventures, Inc. (conv.)
6.000% due 11/30/03 $100 162
-------
TOTAL LONG-TERM INVESTMENTS
(cost $131) 162
-------
SHORT-TERM INVESTMENTS - 7.6%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 24,047 24,047
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $24,047) 24,047
-------
TOTAL INVESTMENTS
(identified cost $263,930)(c) - 98.5% 309,011
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - 1.5% 4,667
-------
NET ASSETS - 100.0% $313,678
-------
-------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes
was $264,065 and net unrealized appreciation for all securities
was $44,946. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of
market value over tax cost of $57,957 and aggregate gross
unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $13,011.
* Number of contracts.
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 25
<PAGE> 156
SPECIAL GROWTH FUND
FUTURES AND OPTIONS WRITTEN
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
<S> <C> <C>
S&P 500 Index Futures Contracts
expiration Date 03/96 8 $ (11)
S&P 400 Midcap Index Futures Contracts
expiration Date 03/96 98 (56)
Russell 2000-Registered Trademark-
Index Futures Contracts expiration date 03/96 44 29
-------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (38)
-------
-------
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C> <C>
PUT OPTIONS WRITTEN
(Notes 2 and 3)
Russell 2000-Registered Trademark-
Index Mar 310 (a) 170 $ 94
-------
Total liability for options written
(premiums received $101)(***) $ 94
-------
-------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes,
due 12/31/95, valued at $6,750 were held as collateral by the
custodian in connection with options written and futures
contracts purchased by the Fund. The settlement amount
of these matured notes is included in Receivable for Investments
Sold on the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
26 Special Growth Fund
<PAGE> 157
SPECIAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $263,930,369)(Note 2) . . . . . . . . . . . $ 309,010,847
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,039
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,895
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,692,839
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962,338
Daily variation margin on futures contracts (Notes 2 and 3). . . . . . . . . . . 44,100
------------
319,217,058
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . . . $ 4,895,306
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . 186,698
Accrued bookkeeping service fees (Note 4) . . . . . . . . . . . . 5,052
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . 245,541
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . 36,076
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . 77,218
Options written, at market value
(premiums received $101,487)(Notes 2 and 3). . . . . . . . . . . . 93,500 5,539,391
----------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $313,677,667
------------
------------
NET ASSETS CONSIST OF:
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $ 286,547
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . 7,270,959
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,080,476
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,873)
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,987
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,088
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,989,483
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $313,677,667
------------
------------
Net asset value, offering and redemption price per share
($313,677,667 divided by 8,008,760 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . $39.17
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 27
<PAGE> 158
SPECIAL GROWTH FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,697,679
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . . 1,465,072
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,655
----------
4,663,406
Expenses (Notes 2 and 4):
Management Fees. . . . . . . . . . . . . . . . . . . . . $ 2,588,270
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 348,236
Transfer Agent Fees. . . . . . . . . . . . . . . . . . . 263,453
Bookkeeping Service Fees . . . . . . . . . . . . . . . . 18,212
Professional Fees. . . . . . . . . . . . . . . . . . . . 16,881
Registration Fees. . . . . . . . . . . . . . . . . . . . 60,587
Trustees' Fees . . . . . . . . . . . . . . . . . . . . . 4,375
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 16,700 3,316,714
----------- ----------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,346,692
----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,338,109
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516,129
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,189,384
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,555,328
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,873)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (554,772)
----------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . 67,006,305
----------
Net increase (decrease) in net assets resulting from operations . . . . . . .$68,352,997
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28 Special Growth Fund
<PAGE> 159
SPECIAL GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . $ 1,346,692 $ 1,076,743
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . 33,338,109 (2,327,246)
Futures contracts. . . . . . . . . . . . . 516,129 --
Options written. . . . . . . . . . . . . . 2,189,384 563,049
Net change in unrealized appreciation
or depreciation of:
Investments. . . . . . . . . . . . . . . . 31,555,328 (6,925,050)
Futures contracts. . . . . . . . . . . . . (37,873) --
Options written. . . . . . . . . . . . . . (554,772) 325,532
------------- -------------
Net increase (decrease) in net assets
resulting from operations . . . . . . . . . 68,352,997 (7,286,972)
Distributions to shareholders:
Net investment income. . . . . . . . . . . . (1,514,994) (682,770)
Net realized gain on investments . . . . . . (25,900,014) (2,632,245)
In excess of net realized gain on
investments . . . . . . . . . . . . . . . . -- (2,652,494)
Increase (decrease) in net assets from Fund
share transactions . . . . . . . . . . . . . 43,663,052 53,440,122
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . 84,601,041 40,185,641
Net assets at beginning of year . . . . . . . 229,076,626 188,890,985
------------- -------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $286,547 and $71,005, respectively) . . . $ 313,677,667 $ 229,076,626
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FUND SHARE TRANSACTIONS
Fund shares sold . . . . . . . . . . 3,140,651 $117,908,654 3,413,718 $116,189,471
Fund shares issued to shareholders
in reinvestments of distributions . 483,880 18,530,761 113,186 3,980,109
Fund shares redeemed . . . . . . . . (2,460,757) (92,776,363) (1,955,454) (66,729,458)
----------- ------------- ----------- ------------
Net increase (decrease). . . . . . . 1,163,774 $ 43,663,052 1,571,450 $ 53,440,122
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 29
<PAGE> 160
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . $ 33.47 $ 35.82 $ 36.63 $ 34.47 $24.71
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . .18 .16 .07 .05 .24
Net realized and unrealized gain (loss) on
investments . . . . . . . . . . . . . . . . . . 9.25 (.71) 5.22 4.22 10.34
------- ------- ------- ------- ------
Total Income From Investment Operations. . . . . 9.43 (.55) 5.29 4.27 10.58
------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . (.21) (.10) (.07) (.06) (.24)
Net realized gain on investments . . . . . . . . (3.52) (.85) (6.03) (2.05) (.58)
In excess of net realized gain on investments . -- (.85) -- -- --
------- ------- ------- ------- ------
Total Distributions. . . . . . . . . . . . . . . (3.73) (1.80) (6.10) (2.11) (.82)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . $39.17 $33.47 $35.82 $36.63 $34.47
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . 28.52 (3.71) 15.48 12.52 43.11
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets . . . 1.22 1.20 1.31 1.33 1.36
Net investment income to average net assets . . .49 .50 .19 .14 .80
Portfolio turnover . . . . . . . . . . . . . . 87.56 55.40 91.97 42.20 42.81
Net assets, end of year ($000 omitted) . . . . 313,678 229,077 188,891 134,913 105,245
</TABLE>
30 Special Growth Fund
<PAGE> 161
SPECIAL GROWTH FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS SPECIAL LIPPER-C- SMALL
ENDED DECEMBER 31 GROWTH RUSSELL 2500-TM- ** CO. GROWTH ++
- ----------------- --------- ------------------------- -------------------
<S> <C> <C> <C>
Inception* $ 10,000 $ 10,000 $ 10,000
1986 $ 10,807 $ 11,198 $ 10,482
1987 $ 11,513 $ 10,674 $ 9,968
1988 $ 13,104 $ 13,100 $ 11,865
1989 $ 16,239 $ 15,645 $ 14,517
1990 $ 13,920 $ 13,317 $ 13,039
1991 $ 19,921 $ 19,537 $ 19,698
1992 $ 22,415 $ 22,699 $ 22,122
1993 $ 25,885 $ 26,453 $ 25,807
1994 $ 24,923 $ 26,173 $ 25,542
1995 $ 32,030 $ 34,471 $ 33,417
</TABLE>
Special Growth Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------------- ------------ --------------
<S> <C> <C>
1 Year $12,852 28.52%
5 Years $23,010 18.13%***
10 Years $32,030 12.34%***
</TABLE>
Russel 2500-TM- Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ---------------------------- ------------ --------------
<S> <C> <C>
1 Year $13,170 31.70%
5 Years $25,884 20.95%***
10 years $34,471 13.17%***
</TABLE>
Lipper-C- Small Co. Growth Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ---------------------------- ------------ --------------
<S> <C> <C>
1 Year $13,083 30.83%
5 Years $25,628 20.71%***
10 Years $33,417 12.82%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 2500 Index is composed of the bottom 500
stocks in the Russell 1000-Registered Trademark- Index
and all the stocks in the Russell 2000-Registered Trademark-
Index. The largest security in this index has a market
capitalization of about $1.3 billion.
++ Lipper-C- Small Co. Growth Funds Average is the
average total return for the universe of funds within the
Small Company Growth Funds investment objective. The total return
for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
*** Annualized.
SPECIAL GROWTH FUND returned 28.5% during 1995, trailing the Russell 2500-TM-
Index return of 31.7%. The portfolio was managed in a manner consistent with
its objective to maximize total return, primarily through capital
appreciation, by assuming a higher level of volatility than is ordinarily
expected from the Diversified Equity Fund.
The year was a difficult one for small cap investors relative to the strong
gains of large cap stocks. Although the financial services, technology, and
health care sectors of the Russell 2500 all posted returns in excess of 40%
for the year, their performance came in bursts with strong rotations
throughout the year. Good technology stock selection added significant value
but was eclipsed by other factors. The Fund's balance of Value and Growth
investment styles was a marked disadvantage, given the outperformance of
stocks of small, rapidly growing companies during the year. A slightly
smaller cap orientation than the index also negatively impacted returns due
to the market's favor for large company stocks. The market's rotation to
defensive sectors (health care, energy, and utilities) in the latter part of
the year also detracted from the Fund's performance. Special Growth also
lagged the Lipper Small Company Growth Funds Average by 2.3% for the year.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Special Growth Fund 31
<PAGE> 162
EQUITY INCOME FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS - 91.4%
BASIC INDUSTRIES - 8.2%
Air Products & Chemicals, Inc. 8,900 $ 469
AK Steel Holding Corp. 4,500 154
Alumax, Inc. (a) 15,600 478
Aluminum Co. of America 5,900 312
ASARCO, Inc. 23,400 749
Bethlehem Steel Corp.(a) 34,100 477
Boise Cascade Corp. 22,200 769
Champion International Corp. 5,300 223
Crown Vantage, Inc. (a) 1,540 21
Cyprus Amax Minerals Co. 27,775 726
Dow Chemical Co. 35,400 2,491
du Pont (E.I.) de Nemours & Co. 3,300 231
Eastman Chemical Co. 5,500 344
Federal Paper Board, Inc. 14,600 757
Goodrich (B.F.) Co. 14,900 1,015
Great Lakes Chemical Corp. 15,300 1,102
International Paper Co. 30,100 1,140
James River Corp. of Virginia 15,400 372
Mark IV Industries, Inc. 10,900 215
Methanex Corp. (a) 37,500 274
Potlatch Corp. 7,600 304
Reynolds Metals Co. 15,700 889
Stone Container Corp. 11,300 162
Union Camp Corp. 3,700 176
Union Carbide Corp. 6,400 240
USX-U.S. Steel Group 24,000 739
--------
14,829
--------
CAPITAL GOODS - 2.7%
AGCO Corp. 10,900 556
Caterpillar, Inc. 4,100 241
Cummins Engine Co., Inc. 26,400 977
Deere & Co. 10,800 381
General Electric Co. 20,200 1,454
Harnischfeger Industries, Inc. 8,100 269
Johnson Controls, Inc. 7,400 509
Mid-American Waste Systems, Inc. (a) 4,800 17
Tecumseh Products Co. Class A 5,500 285
Varity Corp. (a) 6,000 222
--------
4,911
--------
CONSUMER BASICS - 9.5%
American Stores Co. 46,500 1,244
Archer-Daniels-Midland Co. 82,545 1,486
Bausch & Lomb, Inc. 6,000 238
Bergen Brunswig Corp. Class A 13,400 333
Beverly Enterprises, Inc. (a) 26,900 286
Black & Decker Corp. 10,200 360
Bristol-Myers Squibb Co. 26,300 2,259
Columbia/HCA Healthcare Corp. 17,700 898
Community Psychiatric Centers 28,800 353
Dial Corp. (The) 28,800 853
Hanson PLC - ADR 39,400 601
IBP, Inc. 14,800 747
McKesson Corp. 12,100 613
Philip Morris Cos., Inc. 16,400 1,484
RJR Nabisco Holdings Corp. 33,060 1,021
Sara Lee Corp. 32,100 1,023
Schering-Plough Corp. 15,700 860
Tambrands, Inc. 2,500 119
Tenet Healthcare Corp. (a) 33,900 703
U.S. Surgical Corp. 12,300 263
United Healthcare Corp. 4,300 282
Warner-Lambert Co. 11,000 1,067
--------
17,093
--------
CONSUMER DURABLES - 3.3%
Chrysler Corp. 4,200 233
Federal-Mogul Corp. 25,300 497
Ford Motor Co. 27,400 795
General Motors Corp. 67,900 3,590
Whirlpool Corp. 15,300 814
--------
5,929
--------
CONSUMER NON-DURABLES - 4.8%
Anheuser-Busch Cos., Inc. 17,500 1,170
Burlington Coat Factory
Warehouse Corp. (a) 9,500 97
Burlington Industries, Inc. (a) 46,600 612
CML Group, Inc. 35,400 181
Dayton Hudson Corp. 21,800 1,635
Melville Corp. 14,900 458
Michaels Stores, Inc. (a) 16,000 220
Penney (J.C.) Co., Inc. 12,400 591
Pier 1 Imports, Inc. 29,900 340
Price Costco, Inc. (a) 27,900 425
Reebok International, Ltd. 6,400 181
Sears Roebuck & Co. 17,900 698
SuperValu, Inc. 47,400 1,493
Toys "R" Us, Inc. (a) 24,700 538
--------
8,639
--------
</TABLE>
Equity Income Fund 33
<PAGE> 163
EQUITY INCOME FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
CONSUMER SERVICES - 0.7%
AMR Corp. (a) 9,200 $ 683
Brinker International, Inc.(a) 34,300 519
--------
1,202
--------
ENERGY - 11.8%
Amerada Hess Corp. NPV 9,900 525
Amoco Corp. 17,700 1,272
Atlantic Richfield Co. 20,100 2,226
British Petroleum Co. PLC - ADR 7,044 719
Castle Energy Corp. New (a) 6,800 57
Chevron Corp. 10,300 541
Exxon Corp. 18,400 1,474
Halliburton Co. 2,800 142
Helmerich & Payne, Inc. 5,600 167
LTV Corp. New (a) 35,400 487
Mobil Corp. 30,600 3,427
Murphy Oil Corp. 18,300 759
NorAm Energy Corp. 55,800 495
Norsk Hydro AS - ADR 6,900 289
Repsol - ADR 17,500 575
Royal Dutch Petroleum Co. - ADR 7,600 1,073
Tenneco, Inc. 28,400 1,409
Texaco, Inc. 20,700 1,625
Total Co. SA - ADR 18,100 615
Unocal Corp. 19,900 580
USX-Marathon Group 63,400 1,236
Valero Energy Corp. 27,600 676
YPF Sociedad Anonima Class D - ADR 44,100 955
--------
21,324
--------
FINANCE - 17.5%
Aetna Life & Casualty Co. 6,200 429
Allstate Corp. 16,620 683
AMBAC, Inc. 14,400 675
American General Corp. 40,900 1,426
Banc One Corp. 19,100 721
Bank of New York Co., Inc. 18,500 902
BankAmerica Corp. 36,700 2,376
Bankers Trust New York Corp. 18,600 1,237
Barnett Banks, Inc. 13,700 808
Beneficial Corp. 12,400 578
Central Fidelity Banks, Inc. 5,800 184
Chase Manhattan Corp. 11,700 709
Chemical Banking Corp. 39,600 2,327
Chubb Corp. (The) 11,800 1,142
Citicorp 9,800 659
CoreStates Financial Corp. 33,100 1,254
Countrywide Credit Industries, Inc. 41,700 907
Dean Witter, Discover & Co. 20,100 945
Federal National Mortgage Association 12,000 1,490
First Bank System, Inc. 20,800 1,032
First Chicago NBD Corp. 26,942 1,064
First Colony Corp. 10,800 274
Fleet Financial Group, Inc. 16,773 683
Golden West Financial Corp. 14,100 779
Great Western Financial Corp. 22,500 574
Life Re Corp. 17,100 428
Mid Ocean, Ltd. 20,000 733
NationsBank Corp. 17,400 1,211
North American Mortgage Co. 4,100 87
Old Republic International Corp. 8,200 291
Paine Webber Group, Inc. 15,700 314
PNC Bank Corp. 20,000 645
Prudential Reinsurance Holdings, Inc. 18,500 432
Reliance Group Holdings, Inc. 37,200 321
Reliastar Financial Corp. 13,200 586
Signet Banking Corp. 14,500 344
Southern National Corp. 29,700 780
St. Paul Cos., Inc. 3,200 178
TIG Holdings, Inc. 19,300 550
UNUM Corp. 10,400 572
USF & G Corp. 14,800 251
--------
31,581
--------
GENERAL BUSINESS - 1.6%
ADT, Ltd. (a) 51,600 774
Donnelley (R.R.) & Sons Co. 13,000 512
New York Times Co. Class A 20,300 601
Ogden Corp. 19,000 406
Tribune Co. 7,900 483
--------
2,776
--------
MISCELLANEOUS - 1.6%
Chelsea GCA Realty, Inc. 8,200 246
Colonial Properties Trust 13,400 342
Geon Co. 28,500 695
Irvine Apartment Communities, Inc. 24,600 474
Macerich Co. 19,000 380
PXRE Corp. 10,600 281
South West Property Trust, Inc. 11,000 149
Stolt-Nielsen SA 8,600 245
--------
2,812
--------
</TABLE>
34 Equity Income Fund
<PAGE> 164
EQUITY INCOME FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- ---------
<S> <C> <C>
SHELTER - 1.3%
Kaufman & Broad Home Corp. 18,000 $ 268
Lafarge Coppee 12,900 242
Louisiana Pacific Corp. 24,200 587
Weyerhaeuser Co. 29,000 1,254
--------
2,351
--------
TECHNOLOGY - 7.0%
Advanced Micro Devices, Inc. 20,500 338
Apple Computer, Inc. 10,400 330
Augat, Inc. 15,400 264
Boeing Co. 17,000 1,332
Coltec Industries, Inc. (a) 16,400 191
COMPAQ Computer Corp. (a) 9,900 475
Data General Corp. (a) 29,400 404
Hewlett-Packard Co. 8,700 729
Intel Corp. 17,700 1,004
International Business Machines Corp. 38,900 3,569
Kaman Corp. Class A 12,300 135
Northrop Grumman Corp. 16,000 1,024
Pitney Bowes, Inc. 2,700 127
Raytheon Co. 12,800 605
Storage Technology Corp. (a) 28,100 671
Sundstrand Corp. 9,700 683
Tandy Corp. 4,100 170
TRW, Inc. 4,800 372
United Technologies Corp. 2,500 238
--------
12,661
--------
TRANSPORTATION - 2.4%
Conrail, Inc. 15,300 1,071
CSX Corp. 22,000 1,004
Federal Express Corp. (a) 16,200 1,197
GATX Corp. 7,200 350
Ryder System, Inc. 25,900 641
XTRA Corp. 2,100 89
--------
4,352
--------
UTILITIES - 19.0%
AT&T Corp. 7,200 466
BCE, Inc. 52,300 1,804
BellSouth Corp. 23,000 1,001
Boston Edison Co. 17,300 510
Centerior Energy Corp. 13,200 117
CINergy Corp. 10,700 328
Detroit Edison Co. 16,500 569
Dominion Resources, Inc. 20,300 837
Entergy Corp. 41,600 1,217
Equitable Resources, Inc. 18,400 575
FPL Group, Inc. 13,900 645
General Public Utilities Corp. 33,900 1,153
GTE Corp. 84,600 3,722
MCI Communications Corp. 33,166 866
New England Electric System 5,400 214
New York State Electric & Gas Corp. 17,000 440
Niagara Mohawk Power Corp. 53,300 513
Northeast Utilities 44,300 1,080
NYNEX Corp. 42,340 2,286
Pacific Enterprises 4,200 119
Pacific Gas & Electric Co. 58,200 1,651
Pacific Telesis Group 46,800 1,574
PacifiCorp. 17,000 361
Panhandle Eastern Corp. 3,100 86
PP&L Resources, Inc. 24,000 600
Public Service Enterprise Group, Inc. 17,500 536
Rochester Gas & Electric Corp. 8,500 192
SCE Corp. 100,800 1,789
Sonat, Inc. 5,600 200
Southern New England
Telecommunications Corp. 14,000 557
Sprint Corp. 68,600 2,735
Texas Utilities Co. 62,400 2,566
U.S. West, Inc. 45,100 1,612
Unicom Corp. 41,200 1,348
--------
34,269
--------
TOTAL COMMON STOCKS
(cost $144,856) 164,729
--------
CONVERTIBLE PREFERRED STOCKS - 0.4%
Atlantic Richfield Co. 27,900 656
--------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $691) 656
--------
PRINCIPAL
AMOUNT
(000)
---------
LONG-TERM INVESTMENTS - 0.9%
AMR Corp. (conv.)
6.125% due 11/01/24 $ 865 902
Unisys Corp. (conv.)
8.250% due 08/01/00 745 663
--------
TOTAL LONG-TERM INVESTMENTS
(cost $1,548) 1,565
--------
</TABLE>
Equity Income Fund 35
<PAGE> 165
EQUITY INCOME FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.4%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 7,951 $ 7,951
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $7,951) 7,951
--------
TOTAL INVESTMENTS
(identified cost $155,046)(c) - 97.1% 174,901
OTHER ASSETS AND LIABILITIES,
NET - 2.9% 5,215
--------
NET ASSETS - 100.0% $180,116
--------
--------
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
FUTURE CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 32 $ (56)
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (56)
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax
purposes was $155,464 and net unrealized appreciation for all securities
was $19,437. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of
market value over tax cost of $22,850 and aggregate gross
unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $3,413.
(***) At December 31, 1995, United States Treasury Notes,
due 12/31/95, valued at $4,000 were held as collateral by the
custodian in connection with futures contracts purchased by
the Fund. The settlement amount of these matured notes is
included in Receivable for Investments Sold on the Statement
of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
36 Equity Income Fund
<PAGE> 166
EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $155,045,566)(Note 2) . . . . . . . . . . . . $174,901,062
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,663
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,121
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,672,669
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,417
Daily variation margin on futures contracts (Notes 2 and 3) . . . . . . . . . . . 11,200
------------
181,336,132
LIABILITIES
Payables:
Investments purchased. . . . . . . . . . . . . . . . . . . . . . . . . $ 860,498
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 178,410
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . . . . 3,000
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . . . . 121,015
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . . . . 15,285
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 42,106 1,220,314
---------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,115,818
------------
------------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 5,694,570
Unrealized appreciation (depreciation) on:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,855,663
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,472)
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,865
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,575,192
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,115,818
------------
------------
Net asset value, offering and redemption price per share
($180,115,818 divided by 4,686,463 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . $38.43
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 37
<PAGE> 167
EQUITY INCOME FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,003,782
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . . . . . 448,996
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,104
------------
5,830,882
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . . $1,314,461
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . 172,301
Transfer agent fees. . . . . . . . . . . . . . . . . . . . . 181,317
Bookkeeping service fees . . . . . . . . . . . . . . . . . . 12,000
Professional fees. . . . . . . . . . . . . . . . . . . . . . 13,160
Registration fees. . . . . . . . . . . . . . . . . . . . . . 24,610
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . 4,338
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . 11,488 1,733,675
---------- -----------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,097,207
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,001,868
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 553,919
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563,424
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,576,087
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,472)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (75,229)
-----------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . 44,563,597
-----------
Net increase (decrease) in net assets resulting from operations. . . . . . . $48,660,804
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
38 Equity Income Fund
<PAGE> 168
EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . $ 4,097,207 $ 3,830,220
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,001,868 10,254,455
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . 553,919 --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . 563,424 468,597
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,576,087 (13,667,583)
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . (56,472) --
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . (75,229) (9,002)
------------ -------------
Net increase (decrease) in net assets resulting from operations. . . . 48,660,804 876,687
Distributions to shareholders:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . (4,229,298) (3,777,456)
Net realized gain on investments . . . . . . . . . . . . . . . . . . (16,619,522) (12,526,614)
Increase (decrease) in net assets from Fund share transactions . . . . 8,018,497 10,180,286
------------ ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . 35,830,481 (5,247,097)
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . 144,285,337 149,532,434
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $130,702 at December 31, 1994). . . . . . . . . . . . . . . . . . $180,115,818 $144,285,337
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
FUND SHARE TRANSACTIONS
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,419,456 $ 52,652,979 1,730,988 $ 61,068,122
Fund shares issued to shareholders
in reinvestments of distributions . . . . . . . . . . . . . . . . . . 338,403 12,788,889 295,380 9,722,940
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (1,551,581) (57,423,371) (1,710,889) (60,610,776)
----------- ------------ ----------- ------------
Net increase (decrease). . . . . . . . . . . . . . . . . . . . . . . . 206,278 $ 8,018,497 315,479 $ 10,180,286
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 39
<PAGE> 169
EQUITY INCOME FUND
FINANCIAL HIGHTLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . $ 32.21 $ 35.90 $ 35.32 $ 36.54 $ 30.75
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . .94 .90 .83 .99 1.11
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . 10.08 (.70) 3.69 3.08 7.15
------- ------- ------- ------- -------
Total Income From Investment Operations. . 11.02 .20 4.52 4.07 8.26
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . (.97) (.89) (.83) (1.00) (1.10)
In excess of net investment income . . . . -- -- (.00) -- --
Net realized gain on investments . . . . . (3.83) (3.00) (3.11) (4.29) (1.37)
------- ------- ------- ------- -------
Total Distributions. . . . . . . . . . . . (4.80) (3.89) (3.94) (5.29) (2.47)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . $ 38.43 $ 32.21 $ 35.90 $ 35.32 $ 36.54
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%) . . . . . . . . . . . . . . 34.76 .69 13.23 11.51 27.52
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets . 1.06 1.04 1.05 1.08 1.11
Net investment income to average net
assets. . . . . . . . . . . . . . . . . . 2.51 2.56 2.23 2.68 3.11
Portfolio turnover . . . . . . . . . . . . 92.40 89.91 78.72 95.07 61.73
Net assets, end of year ($000 omitted) . . 180,116 144,285 149,532 134,365 122,689
</TABLE>
40 Equity Income Fund
<PAGE> 170
EQUITY INCOME FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[CHART]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
PERIODS ENDED RUSSELL 1000-Registered LIPPER-C- EQUITY
DECEMBER 31 EQUITY INCOME Trademark- VALUE** INCOME ++
- ------------- ------------- ----------------------- ----------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1986 $11,342 $11,998 $11,428
1987 $11,065 $12,058 $11,194
1988 $13,214 $14,850 $12,725
1989 $16,598 $18,591 $15,333
1990 $15,453 $17,088 $14,372
1991 $19,706 $21,292 $18,157
1992 $21,974 $24,233 $19,861
1993 $24,878 $28,625 $22,595
1994 $25,048 $28,056 $22,024
1995 $33,755 $38,815 $28,579
</TABLE>
Equity Income Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------------- -------------- -------------
<S> <C> <C>
1 Year $ 13,476 34.76%
5 Years $ 21,844 16.91%***
10 Years $ 33,755 12.93%***
</TABLE>
Russell 1000-Registered Trademark- Value Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------------- -------------- -------------
<S> <C> <C>
1 Year $ 13,835 38.35%
5 Years $ 22,715 17.83%***
10 Years $ 38,815 14.53%***
</TABLE>
Lipper-C- Equity Income Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------------- -------------- -------------
<S> <C> <C>
1 Year $ 12,976 29.76%
5 Years $ 19,885 14.74%***
10 Years $ 28,579 11.07%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Russell 1000 Value Index includes stocks from the
Russell-Register Trademark- 1000 Index with a less than average growth
orientation. The Index represents the universe of stocks from which
most price-driven managers typically select.
++ Lipper Equity-Copyright- Income Funds Average is the average
total return for the universe of funds within the Equity Income
Funds investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions
reinvested as of the ex-dividend dates.
*** Annualized.
EQUITY INCOME FUND returned 34.8% during 1995, trailing the Russell 1000
Value Index return of 38.4%. The portfolio was managed in a manner consistent
with its objective to provide exposure to the value style of investing,
utilizing common stocks that typically provide a higher level of dividend
income than the broader market. The Fund employs a multi-style, multi-manager
strategy wherein companies whose market prices are low relative to earnings
are found particularly attractive. Beyond that, the criteria may vary. Some
managers focus on yield while others concentrate on low price-to-book ratios.
This year it was particularly difficult for the Fund to keep pace with the
index, given the dominance of large cap stocks. The slowing of the economy
also had a negative impact on the Fund's cyclical holdings. Other sources of
performance gains and shortfalls were examples of the sector rotation-driven
nature of the market. Strong gains from good technology stock selection early
in the year were overshadowed by weak returns in the fourth quarter
attributable to underweighted positions in utilities and energy-related
issues. Despite its weak showing in the fourth quarter, the Fund finished
ahead of the average Value manager. The Fund ended the year 500 basis points
ahead of the Lipper Equity Income Funds Average.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Equity Income Fund 41
<PAGE> 171
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS - 94.1%
BASIC INDUSTRIES - 6.8%
Air Products & Chemicals, Inc. 11,200 $ 591
Albemarle Corp. 4,100 79
Allegheny Ludlum Corp. 6,600 122
Aluminum Co. of America 38,700 2,046
Arco Chemical Co. 8,700 423
Boise Cascade Corp. 33,200 1,150
Bowater, Inc. 2,500 89
Cabot Corp. 26,800 1,444
Carpenter Technology Corp. 14,100 580
Champion International Corp. 44,000 1,848
Crown Cork & Seal Co., Inc. (a) 12,000 501
Dow Chemical Co. 51,500 3,624
du Pont (E.I.) de Nemours & Co. 28,800 2,012
Eastern Enterprises, Inc. 8,300 293
Eastman Chemical Co. 11,900 745
Engelhard Corp. 18,500 402
Federal Paper Board, Inc. 28,500 1,478
Freeport McMoRan Copper
& Gold, Inc. Class B 8,100 228
Georgia Gulf Corp. 300 9
Goodrich (B.F.) Co. 4,500 307
IMC Global, Inc. 24,800 1,014
Inland Steel Industries, Inc. 4,000 101
International Paper Co. 45,400 1,720
James River Corp. of Virginia 5,600 135
Lyondell Petrochemical Co. 3,800 87
Mead Corp. 5,900 308
Monsanto Co. 15,000 1,838
Newmont Mining Corp. 200 9
Nucor Corp. 10,400 594
Phelps Dodge Corp. 25,300 1,575
PPG Industries, Inc. 25,000 1,144
Praxair, Inc. 18,700 629
Precision Castparts Corp. 100 4
Premark International, Inc. 5,200 263
Reynolds Metals Co. 7,500 425
Rohm & Haas Co. 3,000 193
Temple-Inland, Inc. 20,600 909
Texas Industries, Inc. 17,300 917
Union Carbide Corp. 50,533 1,895
USX-U.S. Steel Group 600 18
Wellman, Inc. 9,000 205
Westvaco Corp. 14,100 391
Willamette Industries, Inc. 6,200 347
Witco Chemical Corp. 100 3
Worthington Industries, Inc. 16,100 333
--------
33,028
--------
CAPITAL GOODS - 5.9%
Alliance Semiconductor Corp. 1,950 22
Arrow Electronics, Inc. (a) 11,900 513
Atmel Corp. 20,500 454
Boston Scientific Corp. (a) 14,300 701
Browning-Ferris Industries, Inc. 29,600 873
Caterpillar, Inc. 13,900 817
Cooper Industries, Inc. 8,300 305
Cummins Engine Co., Inc. 1,100 41
Dover Corp. 74,200 2,736
Duracell International, Inc. 8,200 424
Duriron Co., Inc. 12,899 300
Emerson Electric Co. 7,800 638
Exide Corp. 2,700 124
Fluor Corp. 7,600 502
General Electric Co. 118,300 8,518
General Signal Corp. 3,200 104
Grainger (W.W.), Inc. 2,500 166
Harnischfeger Industries, Inc. 9,900 329
Harsco Corp. 9,000 523
Ingersoll-Rand Co. 6,000 211
ITT Industries, Inc. 16,300 391
Johnson Controls, Inc. 21,600 1,485
Kaydon Corp. 5,200 158
Kennametal, Inc. 7,300 232
Litton Industries, Inc. (a) 6,900 307
National Service Industries, Inc. 22,800 738
Novellus Systems, Inc. (a) 12,500 675
Parker-Hannifin Corp. 28,550 978
Pentair, Inc. 1,100 55
Raychem Corp. 20,100 1,143
Tecumseh Products Co. Class A 30,800 1,594
Timken Co. 200 8
TRINOVA Corp. 1,500 43
Tyco International, Ltd. 21,400 762
Varity Corp. (a) 28,600 1,061
Wheelabrator Technologies, Inc. 12,000 200
WMX Technologies, Inc. 17,100 510
--------
28,641
--------
CONSUMER BASICS - 17.8%
Abbott Laboratories NPV 35,442 1,480
ALZA Corp. (a) 9,800 243
American Home Products Corp. 30,300 2,939
Apria Healthcare Group, Inc. 5,000 141
Archer-Daniels-Midland Co. 96,147 1,731
Bard (C.R.), Inc. 1,000 32
Bausch & Lomb, Inc. 5,800 230
</TABLE>
Quantitative Equity Fund 43
<PAGE> 172
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Baxter International, Inc. 27,700 $ 1,160
Becton, Dickinson & Co. 22,700 1,703
Black & Decker Corp. 25,400 895
Bristol-Myers Squibb Co. 37,600 3,229
Cardinal Health, Inc. 23,400 1,281
Church and Dwight Co., Inc. 2,800 52
Coca-Cola Co. (The) 70,400 5,227
Coca-Cola Enterprises, Inc. 65,300 1,747
Colgate-Palmolive Co. 10,100 710
Columbia/HCA Healthcare Corp. 47,100 2,390
ConAgra, Inc. 34,750 1,433
CPC International, Inc. 21,900 1,503
Dole Food, Inc. 3,700 130
Forest Labs, Inc. (a) 3,900 176
General Nutrition Companies, Inc. 9,800 225
Gillette Co. 9,050 472
Health Care & Retirement Corp. (a) 23,700 830
Health Management Associates Class A 7,100 185
Heinz (H.J.) Co. 19,450 644
Hershey Foods Corp. 11,100 722
Humana, Inc. (a) 16,600 454
IBP, Inc. 53,700 2,712
Johnson & Johnson 56,300 4,821
Kroger Co. (a) 30,300 1,136
Lilly (Eli) & Co. 65,500 3,684
Manor Care, Inc. 6,400 224
McKesson Corp. New 200 10
Medtronic, Inc. 24,000 1,341
Merck & Co., Inc. 99,970 6,573
Nabisco Holdings Corp. Class A 3,100 101
Outback Steakhouse, Inc. (a) 14,800 531
PepsiCo, Inc. 70,000 3,911
Pfizer, Inc. 26,200 1,651
Philip Morris Cos., Inc. 118,500 10,724
Procter & Gamble Co. 79,100 6,565
Ralston Purina Co. 13,000 811
Rhone Poulenc Rorer, Inc. 16,300 868
Safeway, Inc. New (a) 33,400 1,720
Sara Lee Corp. 23,200 740
Schering-Plough Corp. 44,800 2,453
Smith's Food & Drug Centers, Inc. Class B 20,300 513
Snap-On Tools Corp. 14,300 647
Tenet Healthcare Corp. (a) 14,600 303
United Healthcare Corp. 17,900 1,172
Vivra, Inc. 3,400 85
Vons Cos., Inc. (a) 17,300 489
Warner-Lambert Co. 14,600 1,418
--------
87,167
--------
CONSUMER DURABLES - 2.3%
AutoZone Inc. (a) 100 3
Chrysler Corp. 13,300 736
Cooper Tire & Rubber Co. 3,600 89
Dana Corp. 36,000 1,053
Eaton Corp. 14,800 794
Echlin, Inc. 35,500 1,296
Ford Motor Co. 59,510 1,726
General Motors Corp. 51,400 2,718
Genuine Parts Co. 100 4
Goodyear Tire & Rubber Co. 11,800 535
La-Z-Boy Chair Co. 20,000 618
Leggett & Platt, Inc. 15,600 378
Modine Manufacturing Co. 11,500 276
National Presto Industries, Inc. 3,800 151
PACCAR, Inc. 4,200 176
Whirlpool Corp. 10,000 532
--------
11,085
--------
CONSUMER NON-DURABLES - 3.6%
Alberto Culver Co. Class B 5,800 199
Anheuser-Busch Cos., Inc. 18,700 1,251
Avon Products, Inc. 4,700 354
Block Drug Co., Inc. Class A 953 33
Circuit City Stores, Inc. 6,900 191
Coors (Adolph) Co. Class B 15,700 347
CPI Corp. 4,400 70
Dayton Hudson Corp. 4,200 315
Eastman Kodak Co. 8,000 536
Fruit of the Loom, Inc. Class A (a) 7,600 185
Gap, Inc. 9,500 399
Home Depot, Inc. (The) 7,800 373
International Flavors & Fragrances, Inc. 8,200 394
Limited, Inc. (The) 37,000 643
Longs Drug Stores Corp. 20,300 972
Lowe's Cos., Inc. 9,400 315
May Department Stores Co. 200 8
Melville Corp. 6,200 191
Newell Co. 28,300 732
NIKE, Inc. Class B 22,900 1,594
Nine West Group, Inc. (a) 2,500 94
Penney (J.C.) Co., Inc. 15,900 757
Price Costco, Inc. (a) 13,800 210
Rayonier, Inc. 2,700 90
Ross Stores, Inc. 59,600 1,140
Sears Roebuck & Co. 43,200 1,685
Springs Industries, Inc. 1,000 41
</TABLE>
44 Quantitative Equity Fund
<PAGE> 173
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
TJX Cos., Inc. 6,200 $ 117
Toys "R" Us, Inc. (a) 16,000 348
V.F. Corp. 9,900 522
Waban, Inc. (a) 12,000 225
Wal-Mart Stores, Inc. 150,000 3,357
Warnaco Group, Inc. Class A 2,200 56
--------
17,744
--------
CONSUMER SERVICES - 2.8%
AMR Corp. (a) 4,000 297
Boyd Gaming Corp. (a) 3,500 41
Brinker International, Inc. (a) 4,500 68
Buffets, Inc. (a) 900 13
Callaway Golf Co. 18,500 419
Carnival Corp. Class A 9,000 219
Circus Circus Enterprises, Inc. (a) 10,400 290
Cracker Barrel Old Country Store, Inc. 4,500 78
Delta Air Lines, Inc. 15,300 1,130
Disney (Walt) Co. 60,300 3,558
Harrah's Entertainment, Inc. 9,200 223
HFS, Inc. (a) 1,500 123
International Game Technology 11,600 126
ITT Corp. New 16,300 864
King World Productions, Inc. (a) 37,100 1,442
La Quinta Motor Inns, Inc. 30,200 827
Marriot International, Inc. 14,300 547
McDonald's Corp. 18,400 830
Mirage Resorts, Inc. (a) 16,700 576
Southwest Airlines Co. 3,500 81
UAL Corp. (a) 11,800 2,106
--------
13,858
--------
ENERGY - 7.3%
Amerada Hess Corp. NPV 100 5
Amoco Corp. 27,000 1,941
Anadarko Petroleum Corp. 5,000 271
Ashland, Inc. 4,300 151
Atlantic Richfield Co. 15,600 1,728
Baker Hughes, Inc. 20,300 495
Chevron Corp. 53,200 2,793
Cooper Cameron Corp. (a) 2,300 82
Diamond Shamrock, Inc. 2,100 54
Exxon Corp. 133,622 10,706
FINA, Inc. Class A 700 35
Halliburton Co. 30,000 1,519
Indiana Energy, Inc. 2,000 48
Mobil Corp. 34,418 3,855
Occidental Petroleum Corp. 48,600 1,039
Oryx Energy Co. (a) 3,700 49
Phillips Petroleum Co. 20,500 700
Pittston Services Group 6,000 188
Royal Dutch Petroleum Co. - ADR 42,975 6,065
Sonat Offshore Drilling, Inc. 7,800 349
Sun Company 5,200 142
Tenneco, Inc. 18,700 928
Texaco, Inc. 20,600 1,617
Union Texas Petroleum Holdings, Inc. 6,800 132
Unocal Corp. 20,200 588
Valero Energy Corp. 17,800 436
--------
35,916
--------
FINANCE - 15.6%
Aetna Life & Casualty Co. 5,800 402
AFLAC, Inc. 46,825 2,031
Ahmanson (H.F.) & Co. 17,800 472
Allstate Corp. 68,327 2,810
AMBAC, Inc. 1,100 52
American Express Co. 6,300 261
American Financial Group, Inc. 6,000 184
American General Corp. 38,400 1,339
American International Group, Inc. 21,100 1,952
American National Insurance Co. 2,100 139
AT&T Capital Corp. 4,800 184
Banc One Corp. 20,500 774
Bank of Boston Corp. 16,584 767
Bank of New York Co., Inc. 59,172 2,885
BankAmerica Corp. 99,700 6,456
Bankers Trust New York Corp. 3,600 239
Barnett Banks, Inc. 5,700 336
BayBanks, Inc. 1,100 108
Bear Stearns Cos., Inc. 116,882 2,323
Beneficial Corp. 2,100 98
Boatmen's BancShares, Inc. 100 4
Centura Banks, Inc. 100 4
Chase Manhattan Corp. 11,400 691
Chemical Banking Corp. 32,600 1,915
Chubb Corp. (The) 3,900 377
CIGNA Corp. 13,100 1,353
Citicorp 25,100 1,688
CNA Financial Corp. (a) 3,900 443
Comerica, Inc. 4,300 173
CoreStates Financial Corp. 7,100 269
Dean Witter, Discover & Co. 9,700 456
</TABLE>
Quantitative Equity Fund 45
<PAGE> 174
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Edwards (A.G.), Inc. 38,100 $ 910
Federal National Mortgage Association 36,900 4,580
First Chicago NBD Corp. 90,652 3,581
First Colony Corp. 2,300 58
First Fidelity Bancorp New 4,200 317
First Union Corp. 9,000 501
First USA, Inc. 10,400 462
Firstar Corp. 3,300 131
Fleet Financial Group, Inc. 18,500 754
Fleet Financial Group, Inc.
New 1996 Warrants (a) 157 2
General Re Corp. 700 109
Golden West Financial Corp. 2,800 155
Great Western Financial Corp. 5,400 138
Greenpoint Financial Corp. 33,600 890
Household International Corp. 12,000 710
Huntington Bancshares, Inc. 26,100 620
Integra Financial Corp. 6,100 384
ITT Hartford Group, Inc. 16,300 789
Jefferson-Pilot Corp. 14,700 684
Kansas City Life Insurance Co. 1,300 68
KeyCorp 10,700 388
Lehman Brothers Holdings, Inc. 31,000 659
Lincoln National Corp. 41,800 2,247
Loews Corp. 38,800 3,041
MBIA, Inc. 1,500 113
MBNA Corp. 31,000 1,143
Mercantile Bancorp, Inc. 3,000 138
Mercury Finance Corp. 8,300 110
Mercury General Corp. 1,600 76
Meridian Bancorp, Inc. 6,400 298
Merrill Lynch & Co., Inc. 9,300 474
Midlantic Corp. 6,100 400
Morgan Stanley Group, Inc. 11,000 887
National City Corp. 20,900 692
NationsBank Corp. 79,316 5,522
Northern Trust Corp. 200 11
Norwest Corp. 30,900 1,020
Old Kent Financial Corp. 700 29
Old Republic International Corp. 19,500 692
Paine Webber Group, Inc. 2,600 52
PNC Bank Corp. 10,400 335
Protective Life Corp. 2,900 91
Republic New York Corp. 5,600 348
SAFECO Corp. 5,200 179
Salomon, Inc. 38,300 1,360
Southern National Corp. 5,400 142
SouthTrust Corp. 2,200 56
St. Paul Cos., Inc. 3,500 195
Star Banc Corp. 21,600 1,285
State Street Boston Corp. 3,700 167
Student Loan Marketing Association 9,400 619
TIG Holdings, Inc. 16,400 467
Torchmark Corp. 1,300 59
Transamerica Corp. 3,000 218
Travelers, Inc. 79,300 4,985
UMB Financial Corp. 110 3
Union Bank 3,300 176
United Counties Bancorporation 100 22
UNUM Corp. 3,200 175
Washington Mutual, Inc. 3,100 88
Washington National Corp. 2,000 54
Wilmington Trust Corp. 1,500 45
--------
76,089
--------
GENERAL BUSINESS - 4.6%
American Greetings Corp. Class A 28,600 790
Ascend Communications, Inc. 13,100 1,063
BHC Communications, Inc. Class A 2,900 274
Capital Cities/ABC, Inc. 16,800 2,073
Central Newspapers, Inc. Class A 6,000 188
Comcast Corp. Special Class A 17,300 314
Cox Communications, Inc. Class A (a) 4,700 92
Donnelley (R.R.) & Sons Co. 12,600 496
Gartner Group, Inc. Class A New (a) 11,000 525
Harcourt General, Inc. 8,200 343
Kelly Services, Inc. Class A 10,500 291
Manpower, Inc. 29,500 830
Media General, Inc. Class A 100 3
Miller (Herman), Inc. 1,700 51
New York Times Co. Class A 26,900 797
Olsten Corp. 2,400 95
Omnicom Group, Inc. 20,400 760
Paging Network, Inc. 6,000 143
PHH Group, Inc. 39,200 1,833
Pulitzer Publishing Co. 5,400 258
Reader's Digest Association, Inc.
Class A NV 100 5
SBC Communications, Inc. 68,600 3,945
Service Corp. International 7,400 326
Staples, Inc. 81,500 1,987
SunGard Data Systems 8,300 230
Tele-Communications, Inc. Class A 52,700 1,047
Time Warner, Inc. 31,500 1,193
Total Systems Services, Inc. 100 3
Tribune Co. 6,400 391
</TABLE>
46 Quantitative Equity Fund
<PAGE> 175
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Turner Broadcasting Systems, Inc. Class B 13,500 $ 351
Viking Office Products, Inc. (a) 7,200 335
Wallace Computer Services, Inc. 3,600 196
Washington Post Co. Class B 4,100 1,155
Wiley (John) & Son Inc. Class A 200 6
--------
22,389
--------
MISCELLANEOUS - 0.4%
Castle & Cook, Inc. New 1,233 21
Chris Craft Industries, Inc. 4,804 208
Eckerd Corp. (a) 30,200 1,348
Providian Corp. 4,000 162
--------
1,739
--------
SHELTER - 0.6%
Centex Corp. 300 10
Georgia Pacific Corp. 8,800 604
Granite Construction, Inc. 19,200 605
Lennar Corp. 9,000 226
Owens-Corning Fiberglas Corp. (a) 3,400 153
Pulte Corp. 18,500 622
USG Corp. New (a) 5,600 168
Weyerhaeuser Co. 14,000 605
--------
2,993
--------
TECHNOLOGY - 12.5%
Adaptec, Inc. (a) 5,000 204
ADC Telecommunications, Inc. 100 4
Advanced Micro Devices, Inc. 6,200 102
AlliedSignal, Inc. 52,200 2,480
Altera Corp. 2,200 109
AMP, Inc. 14,300 549
Amphenol Corp. Class A (a) 20,500 497
Analog Devices, Inc. 42,100 1,489
Apple Computer, Inc. 7,200 229
Applied Materials, Inc. 7,100 279
Autodesk, Inc. 36,400 1,238
Avery Dennison Corp. 10,600 531
Avnet, Inc. 44,200 1,978
Bay Networks, Inc. 10,600 435
Boeing Co. 48,900 3,833
Broderbund Software, Inc. (a) 1,200 73
Cadence Design Systems, Inc. 5,400 227
Cisco Systems, Inc. (a) 20,200 1,507
Coltec Industries, Inc. (a) 7,300 85
COMPAQ Computer Corp. (a) 15,600 749
Computer Associates International, Inc. 9,800 557
Cypress Semiconductor Corp. 33,000 421
Dell Computer Corp. 18,000 623
Diebold, Inc. 5,000 277
Digital Equipment Corp. (a) 12,700 814
EMC Corp. (a) 10,900 168
Gateway 2000, Inc. (a) 4,100 100
General Binding Corp. 5,000 99
General Dynamics Corp. 12,800 757
General Instrument Corp. (a) 5,800 136
General Motors Corp. Class H 47,000 2,309
Glenayre Technologies, Inc. 6,600 409
Harris Corp. 1,900 104
Hewlett-Packard Co. 69,700 5,837
Informix Corp. 55,200 1,656
Integrated Device Technology 13,500 174
Intel Corp. 10,900 619
International Business Machines Corp. 83,300 7,643
Komag, Inc. (a) 4,000 183
Lam Research Corp. (a) 4,900 223
Lockheed Martin Corp. 17,700 1,398
Loral Corp. 9,900 350
LSI Logic Corp. 4,600 151
Marquette Electronics, Inc. Class A (a) 6,600 134
Maxim Integrated Products, Inc. 8,600 329
McDonnell Douglas Corp. 4,200 386
Micro Warehouse, Inc. (a) 7,400 320
Micron Technology, Inc. 14,200 563
Microsoft Corp. (a) 32,800 2,878
Motorola, Inc. 45,500 2,594
National Semiconductor Corp. (a) 8,100 180
Novell, Inc. (a) 20,800 294
Oracle Systems Corp. 26,100 1,103
Parametric Technology Corp. (a) 700 46
Quantum Corp. (a) 2,300 37
Raytheon Co. 2,600 123
Read-Rite Corp. (a) 21,600 500
Rockwell International Corp. 20,700 1,095
Seagate Technology (a) 25,700 1,221
Silicon Graphics, Inc. (a) 9,500 261
Solectron Corp. (a) 200 9
Storage Technology Corp. (a) 25,900 618
Sun Microsystems, Inc. 11,600 529
Sybase, Inc. (a) 4,300 154
Symbol Technologies, Inc. (a) 5,300 209
Synopsys, Inc. 3,900 148
Tandy Corp. 4,200 174
</TABLE>
Quantitative Equity Fund 47
<PAGE> 176
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
Teradyne, Inc. 13,700 $ 343
Texas Instruments, Inc. 42,800 2,215
Textron, Inc. 15,600 1,053
TRW, Inc. 5,900 457
United Technologies Corp. 1,100 104
Varian Associates, Inc. 14,900 710
Vishay Intertechnology, Inc. 9,200 289
Watkins-Johnson Co. 9,100 397
Xilinx, Inc. 3,600 108
--------
61,187
--------
TRANSPORTATION - 0.8%
Arnold Industries, Inc. 100 2
Burlington Northern, Inc. 9,200 718
Conrail, Inc. 13,600 952
CSX Corp. 10,300 470
Florida East Coast Industries, Inc. 100 7
GATX Corp. 4,900 238
Norfolk Southern Corp. 4,100 325
Ryder System, Inc. 18,500 458
Union Pacific Corp. 14,300 943
--------
4,113
--------
UTILITIES - 13.1%
Allegheny Power System, Inc. 4,300 123
American Water Works, Inc. 200 8
Ameritech Corp. 69,900 4,124
AT&T Corp. 99,000 6,410
Baltimore Gas & Electric Co. 5,100 145
Bell Atlantic Corp. 330 22
BellSouth Corp. 91,500 3,980
Boston Edison Co. 7,900 233
California Energy, Inc. (a) 2,700 53
Carolina Power & Light Co. 9,200 317
Centerior Energy Corp. 7,900 70
Central & Southwest Corp. 7,100 198
Central Maine Power Co. 25,300 364
CILCORP, Inc. 6,900 292
Cincinnati Bell, Inc. 18,300 636
CMS Energy Corp. 4,700 140
Columbia Gas System, Inc. (a) 12,500 548
Consolidated Edison Co.
of New York, Inc. 78,700 2,518
Consolidated Natural Gas Co. 24,300 1,103
Detroit Edison Co. 24,800 856
Dominion Resources, Inc. 9,300 384
Duke Power Co. 9,500 450
El Paso Natural Gas Co. 1,300 37
Enron Corp. 24,900 949
Entergy Corp. 71,200 2,083
FPL Group, Inc. 10,900 505
General Public Utilities Corp. 16,500 561
GTE Corp. 184,140 8,102
Houston Industries, Inc. 15,400 373
Idaho Power Co. 2,000 60
Illinova Corp. 2,000 60
MCI Communications Corp. 40,000 1,045
New England Electric System 2,600 103
New York State Electric & Gas Corp. 32,400 838
Niagara Mohawk Power Corp. 5,900 57
Northeast Utilities 7,700 188
Northern States Power Co. 5,900 290
NYNEX Corp. 9,000 486
ONEOK, Inc. 12,000 275
Pacific Gas & Electric Co. 128,800 3,655
Pacific Telesis Group 23,000 773
PacifiCorp. 23,800 506
Panhandle Eastern Corp. 40,500 1,129
Peco Energy Co. 12,500 377
Pinnacle West Capital Corp. 3,100 89
Portland General Electric Co. 17,000 495
Potomac Electric Power Co. 8,100 213
PP&L Resources, Inc. 9,300 233
Public Service Co. of Colorado 2,000 71
Public Service Enterprise Group, Inc. 36,900 1,130
SCE Corp. 186,300 3,307
Sonat, Inc. 5,700 203
Southern Co. 12,446 306
Southern New England
Telecommunications Corp. 8,800 350
Sprint Corp. 125,300 4,996
Texas Utilities Co. 12,100 498
TransCanada Pipelines, Ltd. 5,100 70
Tucson Electric Power Co. (a) 23,900 78
U.S. West Media Group (a) 41,600 790
U.S. West, Inc. 25,400 908
Unicom Corp. 101,000 3,308
Washington Gas & Light Co. 1,000 21
Western Resources, Inc. 22,300 744
Williams Cos. (The) 16,300 716
--------
63,952
--------
TOTAL COMMON STOCKS
(cost $370,158) 459,901
--------
</TABLE>
48 Quantitative Equity Fund
<PAGE> 177
QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.0%
WMX Technologies, Inc. (conv.)
2.000% due 01/24/05 $ 25 $ 21
--------
TOTAL LONG-TERM INVESTMENTS
(cost $46) 21
--------
SHORT-TERM INVESTMENTS - 4.4%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 21,541 21,541
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $21,541) 21,541
--------
TOTAL INVESTMENTS
(identified cost $391,745)(c) - 98.5% 481,463
--------
OTHER ASSETS AND LIABILITIES,
NET - 1.5% 7,485
--------
NET ASSETS - 100.0% $488,948
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes
was $392,720 and net unrealized appreciation for all securities
was $88,743. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of
market value over tax cost of $95,638 and aggregate gross
unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $6,895.
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
CONTRACTS (000)
------- --------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/96 60 $ (55)
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ (55)
--------
--------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due
12/31/95, valued at $5,500 were held as collateral by the
custodian in connection with futures contracts purchased by
the Fund. The settlement amount of these matured notes is
included in Receivable for Investments Sold on the Statement
of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 49
<PAGE> 178
QUANTITATIVE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $391,745,457)(Note 2) . . $481,463,249
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593,795
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . 1,218,251
Investments sold . . . . . . . . . . . . . . . . . . . . . . . 10,805,102
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . 1,624,076
Daily variation margin on futures contracts (Notes 2 and 3). . 21,000
------------
495,725,473
LIABILITIES
Payables:
Investments purchased. . . . . . . . . . . . . . . $5,947,783
Fund shares redeemed . . . . . . . . . . . . . . . 397,636
Accrued bookkeeping service fees (Note 4). . . . . 5,750
Accrued management fees (Note 4) . . . . . . . . . 323,532
Accrued transfer agent fees (Note 4) . . . . . . . 39,156
Other accrued expenses . . . . . . . . . . . . . . 63,317 6,777,174
---------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $488,948,299
------------
------------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . . . . . . . . $ 2,561
Accumulated net realized gain (loss). . . . . . . . . . . . . . . 20,743,070
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 89,717,788
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . (55,213)
Shares of beneficial interest . . . . . . . . . . . . . . . . . . 158,955
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 378,381,138
------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $488,948,299
------------
------------
Net asset value, offering and redemption price per share
($488,948,299 divided by 15,895,547 shares of $.01 par value
shares of beneficial interest outstanding). . . . . . . . . . . . $30.76
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
50 Quantitative Equity Fund
<PAGE> 179
QUANTITATIVE EQUITY FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,503,830
Dividends from Money Market Fund (Note 5) . . . . . . . . . . . . . 846,794
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,404
------------
11,729,028
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . . . . . . $3,469,134
Custodian fees. . . . . . . . . . . . . . . . . . . . . 271,908
Transfer agent fees . . . . . . . . . . . . . . . . . . 276,771
Bookkeeping service fees. . . . . . . . . . . . . . . . 23,062
Professional fees . . . . . . . . . . . . . . . . . . . 22,143
Registration fees . . . . . . . . . . . . . . . . . . . 35,584
Trustees' fees. . . . . . . . . . . . . . . . . . . . . 4,439
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 24,362 4,127,403
---------- ------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 7,601,625
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,340,418
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . 441,477
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . 1,273,528
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,354,634
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . (55,213)
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . (250,179)
------------
Net gain (loss) on investments. . . . . . . . . . . . . . . . . . . . 133,104,665
------------
Net increase (decrease) in net assets resulting from operations . . . $140,706,290
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 51
<PAGE> 180
QUANTITATIVE EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,601,625 $ 6,811,978
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,340,418 11,339,993
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 441,477 --
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,273,528 1,360,068
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,354,634 (18,625,251)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . (55,213) --
Options written . . . . . . . . . . . . . . . . . . . . . . . . . . . (250,179) 116,517
------------ ------------
Net increase (decrease) in net assets resulting from operations . . . . . 140,706,290 1,003,305
Distributions to shareholders:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . (7,728,318) (6,763,825)
Net realized gain on investments. . . . . . . . . . . . . . . . . . . . (41,635,634) (15,563,510)
Increase (decrease) in net assets from Fund share transactions. . . . . . 17,013,464 87,269,459
------------ ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . 108,355,802 65,945,429
Net assets at beginning of year . . . . . . . . . . . . . . . . . . . . . 380,592,497 314,647,068
------------ ------------
NET ASSETS AT END OF YEAR
(including accumulated distributions in excess of net
investment income of $2,561 and $129,254, respectively) . . . . . . . . $488,948,299 $380,592,497
------------ ------------
------------ ------------
</TABLE>
FUND SHARE TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . 4,324,277 $ 124,379,767 6,025,143 $154,549,223
Fund shares issued to shareholders
in reinvestments of distributions. . . . . 1,137,910 34,236,981 575,744 14,421,907
Fund shares redeemed . . . . . . . . . . . . (4,885,755) (141,603,284) (3,180,658) (81,701,671)
---------- ------------- ---------- ------------
Net increase (decrease). . . . . . . . . . . 576,432 $ 17,013,464 3,420,229 $ 87,269,459
---------- ------------- ---------- ------------
---------- ------------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
52 Quantitative Equity Fund
<PAGE> 181
QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . .50 .49 .45 .49 .58
Net realized and unrealized gain (loss) on investments . . . 8.72 (.19) 2.69 1.67 5.93
------- ------- ------- ------- -------
Total Income From Investment Operations 9.22 .30 3.14 2.16 6.51
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . (.51) (.49) (.45) (.49) (.58)
Net realized gain on investments . . . . . . . . . . . . . . (2.79) (1.41) (2.07) (1.73) (1.12)
------- ------- ------- ------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . . (3.30) (1.90) (2.52) (2.22) (1.70)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . 37.69 .19 12.56 8.67 31.70
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets . . . . . . . . . . .93 .94 .98 1.02 1.03
Net investment income to average net assets. . . . . . . . . 1.71 1.95 1.68 1.94 2.39
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . 78.83 45.97 62.48 59.19 58.07
Net assets, end of year ($000 omitted) . . . . . . . . . . . 488,948 380,592 314,647 244,870 201,614
</TABLE>
Quantitative Equity Fund 53
<PAGE> 182
QUANTITATIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS RUSSELL 1000 LIPPER -C-
ENDED DECEMBER 31 QUANTITATIVE EQUITY -REGISTERED TRADEMARK-** GROWTH & INCOME ++
- ----------------- ------------------- -------------------------- ------------------
<S> <C> <C> <C>
Inception* $ 10,000 $ 10,000 $ 10,000
1987 $ 9,071 $ 8,636 $ 8,574
1988 $ 10,437 $ 10,124 $ 9,854
1989 $ 13,158 $ 13,203 $ 12,065
1990 $ 12,420 $ 12,654 $ 11,523
1991 $ 16,358 $ 16,834 $ 14,843
1992 $ 17,775 $ 18,354 $ 16,072
1993 $ 20,008 $ 20,218 $ 17,875
1994 $ 20,046 $ 20,295 $ 17,691
1995 $ 27,602 $ 27,960 $ 23,105
</TABLE>
Quantitative Equity Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $13,769 37.69%
5 Years $22,223 17.31%***
Inception $27,602 12.55%***
</TABLE>
Russell 1000-Registered Trademark- Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $13,777 37.77%
5 Years $22,095 17.18%***
Inception $27,960 12.73%***
</TABLE>
Lipper-C- Growth & Income Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $13,060 30.60%
5 Years $20,052 14.93%***
Inception $23,105 10.35%***
</TABLE>
* Assumes initial investment on June 1, 1987. Lipper index comparison for the
initial investment began July 1, 1987.
** Russell 1000 Index includes the 1,000 largest companies in the Russell
3000-Registered Trademark- Index, the smallest of which is valued at about
$450 million. The Russell 1000 Index represents the universe of stocks from
which most active money managers typically select.
++ Lipper-C- Growth & Income Funds Average is the average total return for the
universe of funds within the Growth and Income Funds investment objective.
The total return for the funds reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
*** Annualized.
QUANTITIATIVE EQUITY FUND returned 37.7% during 1995, nearly matching the
Russell 1000-Registered Trademark- Index return of 37.8%. The portfolio was
managed in a manner consistent with its objective to provide a total return
greater than the US stock market, as measured by the Russell 1000 Index over a
market cycle of four to six years, while maintaining volatility and
diversification similar to the index.
Historically, no single economic or industrial sector has been consistently
favored by the equity markets. By approximately duplicating the broad market's
structure, an investor can reduce the possibility of being overweighted in an
out-of-favor sector, and by selecting the most attractive stocks within each
sector, an investor can increase the potential for earning a return that is
above the market average.
Despite losing ground during a difficult fourth quarter, the Fund managed to
outperform the Lipper-Registered Trademark- Growth & Income Funds Average. The
Fund ended the year over 700 basis points ahead of the Lipper peer group. Good
security selection through most of the year helped keep the Fund's performance
close to the benchmark. Unlike other funds that attempted to add value via
sector selection, Quantitative Equity's sector-neutral posture helped it keep
pace with the market which underwent strong rotations among economic sectors
over the course of the year.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
54 Quantitative Equity Fund
<PAGE> 183
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
COMMON STOCKS - 92.6%
ARGENTINA - 0.2%
Banco de Galicia Y Buenos Aires
Class B New - ADR 6,104 $ 125
Banco Frances del Rio la Plata - ADR 3,611 97
Buenos Aires Embotelladora SA
Class B - ADR 1,507 31
Comercial de Plata (a) 20,590 55
Naviera Perez Companc Class B 26,154 139
Sociedad Comercial del Plata - ADR (a) 1,556 41
Telecom Argentina SA Class B - ADR 1,280 61
Telefonica de Argentina Class B - ADR 9,510 259
Transportadora de Gas Del Sur
Class B - ADR 4,760 61
YPF Sociedad Anonima Class D - ADR 9,210 199
------
1,068
------
AUSTRALIA - 3.6%
Amcor, Ltd. 50,800 358
Australia & New Zealand Bank Group, Ltd. 499,266 2,341
Australian Gas & Light Co. 70,713 265
Australian National Industries, Ltd. 336,270 249
Australian Resources, Ltd. 11,455 11
Australian Tourism Group 13,080 9
Azon Limited 6,793 9
Boral, Ltd. 40,000 101
BRL Hardy, Ltd. 2,399 3
Broken Hill Proprietary Co. 87,915 1,242
BT Property Trust (Units) 11,556 14
Burns Philip & Co., Ltd. 53,238 119
Burswood Property Trust (Units) 14,154 19
Caltex Australia 199,133 786
Coca-Cola Amatil, Ltd. 14,857 118
Coles Myer, Ltd. 111,704 348
Commonwealth Bank of Australia 2,106 17
CSR, Ltd. 200,768 654
Eastern Aluminum 272,000 224
Elders Australia, Ltd. 300,000 381
Eltin, Ltd. 153,513 337
Foodland Associated, Ltd. 5,765 20
Foster's Brewing Group, Ltd. (a) 166,560 274
Gasgoyne Gold Mines NL 2,509 4
George Weston Foods, Ltd. 229 1
Giant Resources (a)(d) 250,000 0
GIO Australia Holdings 275,524 641
Goodman Fielder Wattie 175,401 176
GWA International, Ltd. 8,479 9
Holyman Limited 3,513 7
Lend Lease Corp. 30,001 435
M.I.M. Holdings, Ltd. 31,460 43
Mt. Leyshon Gold Mines, Ltd. (a) 979 3
National Australia Bank, Ltd. 87,087 783
News Corp. 569,217 3,038
Normandy Poseidon 37,000 54
North Broken Hill Peko 165,844 462
Orion Resources NL 3,513 5
Pacific Dunlop, Ltd. 119,496 280
Pasminco, Ltd. 160,000 196
Pioneer International, Ltd. 157,700 407
Publishing Broadcasting, Ltd. 36,360 127
QCT Resources 14,867 17
QNI Limited 246,736 521
RGC Limited 117,397 585
Ross Mining NL 9,164 9
Rothmans Holdings 58,371 239
Santos, Ltd. 178,500 521
Sea World Property Australia, Ltd. 2,485 2
Simsmetal, Ltd. 4,255 25
Southcorp Holdings, Ltd. 144,600 336
St. Barbara Mines, Ltd. 5,783 4
Stockland Trust Group 48,100 111
Stockland Trust Group New (a) 1,949 4
T N T, Ltd. (a) 262,790 348
Tabcorp. Holdings, Ltd. 52,000 147
Walker Corp., Ltd. 15,274 5
Wesfarmers 60,319 369
Wesfi, Ltd. 1,585 5
Western Mining Corp. 507,763 3,261
Westfield Trust 150,480 271
Westfield Trust New Units (a) 6,510 12
Westpac Banking Corp. 149,566 663
Wills (W.D. & H.O.) 18,000 27
Woodside Petroleum, Ltd. 28,000 143
------
22,195
------
AUSTRIA - 0.4%
Bank Austria AG 2,400 193
Brau-Union Goess AG 1,346 65
BWT AG 1,700 175
Creditanstalt Bankverein 5,264 292
EA-Generali AG 122 37
EVN Energ-Versorg 582 80
Flughafen Wien AG 1,323 89
Interunfall Vericherungs AG 900 141
Lenzing AG 310 26
Oester Brau Beteil 1,200 55
Oester Elektrizita Class A 6,870 413
OMV AG 1,231 107
VA Technologie AG (BR) 2,000 254
Wiener Allianz Verscherung 700 142
</TABLE>
International Securities Fund 55
<PAGE> 184
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Wienerberger Baustoff 233 $ 46
Z Landerbank Bank Austria AG 12,210 485
------
2,600
------
BELGIUM - 0.6%
Algem Maatsch Voor Nijverheidskredit
Almanij NPV 205 62
Arbed SA NPV (a) 2,115 240
Banque Bruxelles Lambert NPV 184 32
Barco NV NPV 702 81
Electrabel NPV 2,928 696
Generale de Banque NPV 1,980 686
Groupe Bruxelles Lambert NPV 200 27
Kredietbank NPV 2,301 629
Petrofina SA NPV 1,330 407
Societe Generale de Belgique NPV 356 30
Solvay SA NPV 680 369
UCB Capital NV 330 439
------
3,698
------
BRAZIL - 0.2%
Cesp Cia Energetic - ADS (a) 3,600 30
Compania Energetica de Minas Gerais (a) 279,032 6
Eletrobras (centrais) NPV 655,618 178
Sider Nacional Cia NPV 3,980,000 82
Telecomunicacoes Brasileiras - ADR 15,624 752
Telecomunicacoes Brasileiras NPV 3,421,000 132
Usinas Siderurgicas de Minas - ADR 3,738 30
------
1,210
------
CANADA - 0.6%
Abitibi-Price, Inc. 4,200 60
Air Canada, Inc. (a) 11,600 39
Alcan Aluminum, Ltd. 9,140 283
Bank of Nova Scotia Halifax 77 2
Barrick Gold Corp. 22,300 588
BCE, Inc. NPV 1,100 38
Brascan, Ltd. Class A 5,900 104
CAE, Inc. 6,100 46
Canadian Imperial Bank of Commerce 9,900 295
CCL Industries, Inc. Class B 7,400 62
Cominco, Ltd. 11,900 244
Domtar, Inc. NPV (a) 14,000 109
Imperial Oil, Ltd. New 12,000 434
Laidlaw, Inc. Class B 8,200 83
MacMillan Bloedel, Ltd. 6,520 81
Moore Corp., Ltd. 4,600 86
National Bank of Canada 10,100 82
Noranda, Inc. 4,300 89
Placer Dome, Inc. 24,800 598
Royal Bank of Canada 4,000 91
Teck Corp. Class B 13,400 261
Transalta Corp. 8,000 86
United Dominion Industries, Ltd. 1,100 24
------
3,785
------
CHILE - 0.1%
Administradora de Fondos de
Pensiones Provida SA - ADR 1,208 33
Chile Fund, Inc. 7,134 186
Chilectra SA - ADR 2,570 124
Chilgener SA - ADR 4,052 101
Compania de Telefonos (Chile) SA - ADR 1,704 141
Enersis SA - ADR 2,619 75
------
660
------
CHINA - 0.1%
Huaneng Power International, Inc.
- ADR Seires N (a) 24,100 346
Yizheng Chemical Fibre Series H 555,000 125
------
471
------
DENMARK - 0.6%
Bang & Olufsen Holding Series B 10,000 308
Carlsberg AS Series B 5,000 279
Coloplast AS Class B (Regd) 3,500 309
Den Danske Bank 5,625 388
ISS International Series B 7,000 158
Novo Nordisk AS Class B 11,278 1,544
Sophus Berendsen Class B 2,100 236
Tele Danmark AS Series B 6,500 355
Unidanmark Class A (Regd) 2,600 129
------
3,706
------
FINLAND - 0.5%
America Group Class A 21,500 335
Cultor Oy Series I 1,900 79
Kemira Oy (a) 5,000 42
Kymmene Corp. 10,000 264
Merita, Ltd. Series A (a) 164,667 416
Metsa Serla OY Class B 8,000 246
Nokia AB Series A 11,244 442
Nokia AB Series K 7,000 277
</TABLE>
56 International Securities Fund
<PAGE> 185
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Outokumpu OY Class A 24,200 $ 384
Partek AB OY 8,900 102
Rautaruukki OY 50,000 305
Repola OY 1,000 19
Stockmann OY AB Series B 1,200 63
Valmet Corp. Class A 6,500 163
------
3,137
------
FRANCE - 6.0%
Accor SA 2,440 315
Alcatel Alsthom 17,352 1,496
Assurances Generales de France 4,256 142
AXA 15,589 1,051
Banque Nationale Paris 40,919 1,846
Boiron 1,700 166
Bouygues 3,921 395
CarnaudMetalbox 600 27
Carrefour SA 2,964 1,798
Castorama Dubois 3,540 580
Cetelem 1,100 206
Chargeurs SA 1,730 347
Christian Dior 5,500 593
Cie de St. Gobain 7,922 864
Cie de Suez 21,673 894
Cie Finance Paribas Class A (BR) 11,374 624
Clarins 2,628 250
Compagnie Bancaire SA 898 100
Credit Commercial de France 7,800 398
Credit Local de France 6,167 494
Credit Lyonnais Cert d'Invest. (a) 7,200 346
Credit National 1,683 124
D.M.C. Dollfuss-Mieg 6,450 263
Eaux (cie Generale) 35,135 3,508
Ecco STE 2,357 357
Erid Beghin-Say 1,815 311
Essilor Internationale 950 182
Groupe Danone 2,971 490
GTM - Entrepose 1,900 133
Guilbert SA 1,189 140
Havas 2,400 190
L'Air Liquide 2,524 418
L'Oreal (Societe) 556 149
Lafarge Corp. SA (BR) 10,021 646
Lagardere Groupe (Regd) 9,500 175
Lapeyre (BR) 3,750 187
Legrand 1,450 224
LVMH Moet-Hennessy 4,103 855
Michelin (Cie Gen) Class B (Regd) 13,340 532
Moulinex (a) 35,000 479
Pechiney Cert d'Invest. 8,860 335
Pechiney International Class A (a) 7,482 259
Peugeot SA 3,365 444
Pinault-Printemps Redoute SA 2,433 485
Poliet 3,350 272
Primagaz Cie 4,122 327
Primagaz Cie 1998 Warrants (a) 190 2
Promodes 1,500 353
Renault 5,000 144
Rhone Poulenc SA Class A - ADR 8,500 182
Roussel Uclaf 530 90
S.G.E. 2,113 46
Saint Louis 175 46
Sanofi 11,357 728
Schneider SA 590 20
SEITA 8,500 308
SGS Thomson Microelectronics (a) 5,800 222
Sidel SA 3,650 1,137
Simco (a) 62 5
Simco (Regd) 764 73
Societe Generale 17,846 2,205
Societe Nationale Elf d'Aquitaine 10,365 764
Sodexho 660 194
Synthelabo 6,500 407
Thomson-CSF 13,699 305
Total Co. SA Class B 44,007 2,970
TV Francaise (TFI) 9,212 988
Union des Assurances Federales 2,000 239
Union Financiere de France Banque SA 1,500 125
Usinor Sacilor (a) 67,400 891
Valeo 8,239 382
Worms & Cie (Regd) 2,450 116
------
37,359
------
GERMANY - 5.2%
Allianz AG 1998 Warrants (a) 5,500 338
Allianz AG Holdings 351 684
Altana AG 262 153
AVA ALG Handels VB 1,190 403
Bankgesell Berlin 3,050 777
BASF AG 2,700 601
Bayer AG 12,170 3,211
Bayer Motoren Werk 400 205
Bayerische Hypotheken - und
Wechsel Bank AG 26,440 666
Bayerische Vereinsbank AG 35,000 1,039
Beiersdorf AG 400 280
</TABLE>
International Securities Fund 57
<PAGE> 186
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
BHF - Bank AG 15,000 $ 413
Bilfinger & Berger 1,161 439
Buderus AG 1,093 425
Commerzbank AG 2,381 563
Continental AG 13,000 181
Daimler-Benz AG 8,704 4,381
Deutsche Bank AG 32,660 1,548
Deutsche Pfandbrief & Hypothekenbank AG 4,800 186
Dresdner Bank AG 49,700 1,327
Gehe AG 1,078 549
Gehe AG New (a) 405 201
Hoechst AG 9,033 2,450
Hornback Baumarkt AG 1,135 49
M.A.N. AG 1,000 270
Mannesmann AG 9,521 3,031
Muenchener Rueckversicherungs
- Gesellschaft 460 1,000
Muenchener Rueckversicherungs
- Gesellschaft New (a) 41 88
Praktiker Bau und Heimwerkemaerkte AG (a) 2,084 64
Preussag AG 550 154
Rheinmetall Berlin 100 14
Rhoen - Klinikum AG 3,860 382
RWE AG 1,500 544
SAP AG 1,500 233
Schering AG 4,370 289
Siemens AG 4,068 2,226
Thyssen AG (a) 1,600 291
VEBA AG 31,070 1,319
VEBA International Finance 1998 Warrants (a) 2,700 425
Volkswagen AG 3,405 1,138
Wella AG 1996 Warrants (a) 300 15
-------
32,552
-------
HONG KONG - 3.9%
Allied Properties, Ltd. 140,000 16
Amoy Properties, Ltd. (a) 100,500 100
Cathay Pacific Airways 223,000 340
Cheung Kong Holdings, Ltd. 242,000 1,474
Citic Pacific, Ltd. 197,000 674
Cross Harbour Tunnel Co. 25,000 47
Dairy Farm International Holdings, Ltd. 152,547 140
Dao Heng Bank Group, Ltd. 80,000 288
Dickson Concept International 60,000 56
First Pacific Co. 472,399 525
Great Eagle Holdings 19,470 50
Guangdong Investment 348,000 209
Guangzhou Investment 1,300,000 249
Guoco Group, Ltd. 96,000 463
HSBC Holdings (UK Regd) PLC 57,550 871
Hang Lung Development Co. (a) 71,000 113
Hang Seng Bank 164,000 1,469
Harbour Centre Development 8,000 9
Henderson Investment, Ltd. 81,000 67
Hong Kong & China Gas Co., Ltd. 576 1
Hong Kong & Shanghai Hotel 24,500 35
Hong Kong Aircraft Engineering 14,800 38
Hong Kong Electric 230,000 754
Hong Kong Ferry 41,000 40
Hong Kong Land Holdings, Ltd. 566,207 1,047
Hong Kong Telecommunications 702,000 1,253
Hongkong China, Ltd. 48,000 14
Hopewell Holdings, Ltd. 265,547 153
Hutchison Whampoa, Ltd. 707,000 4,306
Hysan Development 35,000 93
Jardine International Motor 52,000 59
Johnson Electric Holdings, Ltd. 222,000 396
Kowloon Motor Bus 11,600 19
Kumagai Gumi Hong Kong 63,000 46
Lai Sun Development Co., Ltd. 128,000 15
Lai Sun Garment International 32,200 31
Lane, Crawford International Class A 48,000 66
Liu Chong Hing Investment, Ltd. 12,000 12
Maanshan Iron & Steel 506,000 71
Mandarin Oriental International, Ltd. 377,898 457
National Mutual Asia 12,000 11
New Asia Realty & Trust Class A 11,000 21
New World Development Co., Ltd. 474,000 2,066
New World Infrastructure, Ltd. (a) 346 1
Regal Hotels International 673,906 159
San Miguel Brewery 51,600 22
Shanghai Petrochemical Class H 724,800 209
Shaw Bros. (H.K.), Ltd. 10,000 11
Shun Tak Holdings, Ltd. 60,000 42
Sing Tao 546,000 212
Sino Land Co. 319,056 248
South China Morning Post 128,000 78
Stelux Holdings International 170,372 44
Sun Hung Kai & Co. 33,000 7
Sun Hung Kai Properties, Ltd. 278,400 2,277
Swire Pacific, Ltd. Class A 158,000 1,226
Swire Pacific, Ltd. Class B 32,500 41
Tai Cheung Holdings 48,000 37
Television Broadcast 149,000 531
Wharf Holdings 329,442 1,097
Wheelock & Co. 76,000 130
Winsor Industrial Corp., Ltd. 40,500 34
------
24,570
------
</TABLE>
INTERNATIONAL SECURITIES FUND 58
<PAGE> 187
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
INDIA - 0.0%
Perusahaan Persero Telekom - ADR (a) 11,000 $ 278
------
278
------
IRELAND - 0.1%
Allied Irish Banks 52,000 284
Irish Life PLC 20,000 76
Smurfit (Jefferson) 58,000 139
------
499
------
ITALY - 2.7%
Assicurazioni Generali SPA 50,612 1,226
Banca Commerciale Italiana 114,125 244
Banca Pop di Bergamo CV 19,800 274
Banco Commerciale Italiana di Risp 37,000 77
Banco di Napoli di Risp (a) 239,784 77
Banco di Roma (a) 207,750 211
Banco Fideuram SPA 77,525 90
Benetton Group SPA 16,400 195
Burgo (Cartiere) SPA 30,500 152
CIR Compagnie Industriali Riunite (a) 174,500 116
CIR Compagnie Industriali Riunite di Risp (a) 60,500 21
Credito Italiano 32,500 38
Credito Italiano di Risp NC 70,000 71
Danieli & Co. 3,000 19
Danieli & Co. di Risp NC 13,400 36
Danieli & Co. 1999 Warrants (a) 3,350 2
Edison 135,000 581
Editoriale La Repubblica SPA (a) 85,000 76
Ente Nazionale Idrocarburi SPA (Regd)(a) 39,000 136
Fiat SPA 553,666 1,799
Fiat SPA di Risp NC 74,000 131
Fidis 24,500 47
Finmeccanica SPA (a) 130,622 67
First Banco S. Paolo 42,000 249
I.M.I. 77,040 485
Industria Macchine Automatiche SPA (a) 25,000 168
Industrie Natuzzi SPA - ADR 10,800 490
Istituto National Assicurazioni 282,000 374
Italcementi 28,500 170
Italcementi di Risp NC 9,000 22
Italgas (Soc. Ital.) 41,000 125
La Rinascente 34,100 206
La Rinascente di Risp NC 12,000 34
Magneti Marelli SPA 17,500 21
Marzotto & Figli 4,000 24
Mondadori (Arnoldo) Editore 43,306 375
Montedison SPA (Ferruzzi Agricola)(a) 250,000 167
Montedison SPA di Risp
(Ferruzzi Agricola) NC (a) 500,000 296
Olivetti & Cie SPA (a) 3,869,494 3,102
Parmalat Finanziaria SPA 71,000 62
Pirelli & Co. 73,750 93
R.A.S. 3,090 35
Saipem AG 45,000 104
Sasib SPA 43,255 191
Sasib SPA di Risp NC 102,147 250
Sirti SPA 31,000 174
SME (Meridonale di)(a) 25,612 52
SNIA BPD (a) 130,000 108
SOPAF di Risp 172,500 137
Sorin Biomedica Group SPA 8,000 19
Stet 118,330 335
Stet di Risp NC 176,600 360
Telecom Italia SPA 542,528 844
Telecom Italia di Risp 356,518 436
Telecom Italia Mobile SPA (a) 942,895 1,659
Telecom Italia Mobile SPA - di Risp (a) 31,100 33
Unicem di Risp (a) 10,460 56
-------
16,942
-------
JAPAN - 32.8%
Achilles Corp. 60,000 231
Advantest 2,000 102
Aisin Seiki Co., Ltd. 11,000 145
Ajinomoto Co., Inc. 3,000 33
Alps Electric Co. 31,000 357
Amada Co., Ltd. 66,000 652
Aoki Corp. 67,000 281
Apic Yamada Corp. 13,000 516
Arabian Oil Co. 1,800 75
Asahi Bank 70,000 881
Asahi Breweries 7,000 83
Bank of Yokohama 15,000 123
Banyu Pharmaceutical 11,000 135
Brother Industries 130,000 706
Canon Sales Co., Inc. 2,050 55
Canon, Inc. 46,000 833
Chiba Bank, Ltd. 8,000 72
Chugai Pharmaceutical Co. 75,000 718
Chugoku Bank 11,000 190
Chuo Trust & Banking 85,000 823
Citizen Watch Co., Ltd. 23,000 176
Cosmo Oil Co. 144,000 787
CSK Corp., Ltd. 10,500 328
Dai Ichi Kangyo Bank 75,000 1,475
Dai Ichi Pharmaceutical Co. 42,000 598
Dai Nippon Printing, Ltd. 49,000 831
Dai Nippon Screen Manufacturing Co. (a) 88,000 772
Daicel Chemical Industries 53,000 301
</TABLE>
59 INTERNATIONAL SECURITIES FUND
<PAGE> 188
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Daido Steel Co. 85,000 $ 428
Daiei, Inc. 225,000 2,724
Daifuku Machinery Co. 9,000 127
Daikin Industries 94,000 920
Daikyo, Inc. 6,000 45
Daishi Bank 38,000 215
Daishinku Corp. 30,000 337
Daiwa Bank 247,000 1,998
Daiwa Danchi Co., Ltd. (a) 40,000 214
Daiwa House Industries Co. 48,000 790
Daiwa Kosho Lease Co. Ltd. 40,000 399
Daiwa Securities 211,000 3,229
DDI Corp. 426 3,301
Dowa Mining Co. 40,000 193
East Japan Railway 435 2,115
Ebara Corp. 60,000 877
Eisai Co. 3,000 53
Familymart, Co. 6,000 271
Fanuc Co. 10,000 433
Fuji Denki Reiki 31,000 414
Fuji Electric Co. 150,000 763
Fuji Fire & Marine Insurance 40,000 211
Fuji Heavy Industries (a) 10,000 39
Fuji Oil Co. 72,000 509
Fuji Photo Film Co. 35,000 1,010
Fujisawa Pharmaceutical 31,000 297
Fujita Corp. 43,000 194
Fujita Kanko, Inc. 3,000 66
Fujitsu Denso 18,000 579
Fujitsu, Ltd. 142,000 1,582
Fukui Bank1 35,000 719
Fukuyama Transporting Co. 9,000 85
Futaba Corp. 17,000 779
Gakken Co. (a) 196,000 1,291
General Sekiyu KK 12,000 110
Gunze Limited 12,000 73
Gunze Sangyo, Inc. 50,000 228
Hankyu Corp. 22,000 120
Hanwa Co. (a) 20,000 83
Haseko Corp. 49,000 198
Heiwa Corp. 20,000 521
Hitachi Cable 10,000 71
Hitachi Zosen Corp. 62,000 321
Hitachi, Ltd. 312,000 3,143
Hokkai Can Co. 50,000 342
Hokkaido Takushoku Bank, Ltd. 250,000 741
Hokko Chemical Industries 50,000 271
Hokuetsu Bank 74,000 389
Honda Motor Co., Ltd. 89,000 1,836
Hoya Corp. 2,000 69
Hyakugo Bank 70,000 400
Inax Corp. 37,000 351
Intec, Inc. 37,000 631
Ishihara Sangyo (a) 24,000 78
Ishikawajima-Harima Heavy Industries 195,000 822
Ishizuka Glass Co. 80,000 404
Ito-Yokado Co., Ltd. 32,000 1,971
Itochu Corp. 23,000 155
Itoham Foods 45,000 340
Izumiya Co. 4,000 64
Japan Airport Terminal 4,000 48
Japan Aviation Electronics (a) 5,000 36
Japan Energy Corp. 41,000 137
Japan Synthetic Rubber 30,000 182
Japan Tobacco, Inc. 110 954
Joshin Denki Co. 5,000 65
Juroku Bank 70,000 363
Kaken Pharmaceutical 60,000 540
Kamigumi Co. 5,000 48
Kaneka Corp. 11,000 69
Kanematsu Corp. 394,000 1,538
Kankaku Securities (a) 31,000 132
Kao Corp. 87,000 1,079
Kawasaki Heavy Industries 327,000 1,504
Kawasaki Kisen (a) 120,000 381
Kawasho Corp. (a) 122,000 510
Keihin Electric Express 12,000 72
Keio Teito Electric Railway 18,000 105
Keisei Electric Railway 7,000 59
Kinden Corp. 2,000 34
Kinki Nippon Railway 39,000 295
Kirin Brewery Co. 16,000 189
Kitz Corporation 80,000 326
Koa Fire & Marine 50,000 306
Koa Oil Company 40,000 348
Kokuyo Co., Ltd. 20,000 465
Komatsu Forklift Co., Ltd. 67,000 552
Komori Corp. 80,000 2,015
Koyo Seiko Co., Ltd. 4,000 36
Kumagai Gumi Co. 147,000 591
Kumiai Chemical Industry Co. 45,000 258
Kurabo Industries 162,000 620
Kuraray Co., Ltd. 54,000 591
Kureha Chemical Industrial Co. 45,000 211
Kyocera Corp. 31,000 2,303
Kyokuto Boeki 51,000 449
Kyowa Hakko Kogyo 36,000 340
Maeda Corp. 9,000 88
Maeda Corp. 1997 Warrants (a) 85 125
Makita Corp. 28,000 447
</TABLE>
INTERNATIONAL SECURITIES FUND 60
<PAGE> 189
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Marubeni Corp. 142,000 $ 769
Marudai Food Co. 15,000 108
Maruetsu, Inc. 25,000 203
Marui Co., Ltd. 64,000 1,333
Matsushita Electric Industrial Co., Ltd. 190,000 3,092
Matsushita ElectricWorks 7,000 74
Matsuzakaya Co. 51,000 647
Mitsubishi Chemical 220,000 1,070
Mitsubishi Corp. 27,000 332
Mitsubishi Electric Corp. 100,000 720
Mitsubishi Estate Company, Ltd. 34,000 425
Mitsubishi Gas & Chemical 39,000 176
Mitsubishi Heavy Industries 118,000 941
Mitsubishi Kakoki 25,000 235
Mitsubishi Material 99,000 513
Mitsubishi Motors Corp. 100,000 815
Mitsubishi Oil Co. 22,000 195
Mitsubishi Paper Mills 30,000 180
Mitsubishi Trust & Banking 112,000 1,866
Mitsubishi Warehouse 3,000 47
Mitsui & Co. 208,000 1,825
Mitsui Fudosan Co., Ltd. 88,000 1,082
Mitsui Mining & Smelting (a) 70,000 281
Mitsui Petrochemical Industry 58,000 475
Mitsui Soko Co. 22,000 176
Mitsui Toatsu Chemical 210,000 844
Mitsui Trust and Banking 16,000 175
Mizuno Corp. 60,000 520
Mochida Pharmaceutical Co. 2,000 28
Mori Seiki Co. 2,000 45
Murata Manufacturing Co. 23,000 846
Nagasakiya Co. (a) 110,000 472
Nagoya Railroad Co., Ltd. 21,000 106
Namco 32,000 1,066
Nankai Electric Railway 12,000 81
National House Industrial 11,000 201
NEC Corp. 493,000 6,016
New Oji Paper Co. 28,000 253
Nichido Fire & Marine 169,000 1,359
Nichiei Co., Ltd. of Kyoto 71,000 280
Nichimo Co. (a) 100,000 438
Nikko Securities Co., Ltd. 29,000 374
Nikon Corp. 77,000 1,044
Nippon Denso Co. 46,000 860
Nippon Express Co. 32,000 308
Nippon Hodo Co. 11,000 186
Nippon Oil Co. 212,000 1,331
Nippon Paper Industries 62,000 431
Nippon Road Co. 60,000 506
Nippon Sheet Glass 103,000 448
Nippon Steel Corp. 1,054,000 3,614
Nippon Suisan (a) 260,000 1,075
Nippon Telegraph & Telephone Corp. 441 3,566
Nippon Zeon Co., Ltd. (a) 52,000 280
Nissan Motor Co., Ltd. 505,000 3,879
Nissan Shatai Co. 45,000 252
Nisshin Steel Co. 80,000 323
Nisshinbo Industries, Inc. 22,000 213
Nitto Denko Corp. 15,000 232
NKK Corp. (a) 104,000 280
Nomura Securities 214,000 4,663
NSK, Ltd. 78,000 567
NTT Data Communications Systems Corp. 68 2,285
Obayashi Corp. 166,000 1,318
Odakyu Electric Railway 18,000 123
Okamoto Industries, Inc. 7,000 45
Okamura Corp. 80,000 612
Ono Pharmaceutica l8,000 308
Onoda Cement Co. 5,000 27
Osaka Gas Co. 165,000 571
Pioneer Electronics Corp. 88,000 1,611
Renown, Inc. (a) 56,000 195
Ricoh Co., Ltd. 40,000 438
Ryobi, Ltd. 13,000 67
Sagami Co. 29,000 211
Sagami Railway Co. 11,000 48
Sakura Bank 150,000 1,903
Sanden Corp. 11,000 71
Sangetsu Co. 6,000 151
Sankyo Aluminum 35,000 187
Sankyo Co. 32,000 719
Sankyo Seiko Co. 96,000 874
Sankyu, Inc. 180,000 744
Sanrio Co. 1,000 12
Sanshin Electronics 40,000 674
Sanwa Bank 78,000 1,586
Sanyo Electric Co., Ltd. 75,000 432
Sapporo Breweries 5,000 46
Secom Co. 2,000 139
Sega Enterprises 3,800 210
Seibu Railway Co. 6,000 279
Seino Transportation 13,000 218
Sekisui Chemical Co., Ltd. 59,000 869
Sekisui House, Ltd. 89,000 1,138
Settsu Corp. (a) 39,000 123
Seven-Eleven Japan NPV 2,000 141
Sharp Corp. 292,000 4,666
Shikoku Electric Power 35,700 823
</TABLE>
61 INTERNATIONAL SECURITIES FUND
<PAGE> 190
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Shin-Etsu Chemical Co. 16,000 $ 332
Shionogi & Co. 5,000 42
Shiseido Co., Ltd. 5,000 60
Showa Aircraft Industry 8,000 85
Showa Aluminium Co. 90,000 436
Showa Denko (a) 180,000 565
Showa Shell Sekiyu 37,300 312
Sintokogio 62,000 540
Skylark Co. 2,000 37
Snow Brand Milk 90,000 575
Sony Corp. 108,400 6,499
Sony Music Entertainment, Inc. 16,000 837
Sumitomo Bakelite Co., Ltd. 9,000 71
Sumitomo Bank 168,000 3,563
Sumitomo Corp. 157,000 1,597
Sumitomo Electric Industries 81,000 973
Sumitomo Forestry 84,000 1,285
Sumitomo Metal Industries, Ltd. (a) 632,000 1,916
Sumitomo Realty & Development 499,000 3,528
Sumitomo Rubber Industries 76,000 634
Sumitomo Sitix Corp. 56,000 1,020
Sumitomo Trust & Banking 119,000 1,683
Taisei Corp. 15,000 100
Taisho Pharmaceutical Co., Ltd. 5,000 99
Takashimaya Co. 45,000 719
Takeda Chemical Industries 15,000 247
Tanabe Seiyaku Co. 42,000 302
TDK Corp. 12,000 612
Teijin, Ltd. 182,000 931
Teikoku Oil 13,000 88
TOA Corp. 25,000 184
Tobu Railway Co. 55,000 344
Toenec Corp. 22,000 196
Toho Co. 1,300 208
Toho Gas Co. 100,000 323
Tohoku Electric Power 45,400 1,095
Tokio Marine & Fire 137,000 1,791
Tokyo Broadcasting 62,000 1,021
Tokyo Dome Corp. 3,000 51
Tokyo Electric Co., Ltd. (a) 224,000 1,102
Tokyo Electronics 8,000 310
Tokyo Ohka Kogyo 44,700 1,299
Tokyo Steel Manufacturing 19,000 350
Tokyo Tatemono Co., Ltd. 7,000 33
Tokyotokeiba Co. 6,000 25
Tokyu Construction 28,000 135
Tokyu Corp. 27,000 191
Tokyu Land Corp. 68,000 296
Tomen Corp. 130,000 480
Tonen Corp. 21,000 307
Toppan Printing 30,000 395
Tostem Corp. 2,000 66
Toto, Ltd. 3,000 42
Toyo Construction (a) 190,000 1,108
Toyo Engineering Co. 3,000 19
Toyo Trust & Banking 10,000 88
Toyota Motor Corp. 152,000 3,224
Tsubakimoto Chain 45,000 271
Uni-Charm Corp. 35,000 881
Victor Co. of Japan (a) 28,000 355
Wacoal Corp. 72,000 976
Yamaha Motor Co. 180,000 2,405
Yamaichi Securities Co. 127,000 988
Yamanouchi Pharmaceutica l4,000 86
Yamato Transport 13,000 155
Yamazaki Baking Co., Ltd. 36,000 669
Yaskawa Electric Corp. (a) 70,000 330
Yasuda Fire & Marine
Insurance Co., Ltd. (The) 150,000 1,061
Yasuda Trust & Banking 55,000 325
Yokogawa Electric Co. 11,000 104
Yokohama Rubber Co. 80,000 484
Yurtec Corp. 11,000 193
Zexel Corporation 80,000 544
---------
204,433
---------
MALAYSIA - 1.8%
Affin Holdings Berhad 297,000 573
Affin Holdings Berhad 1999 Warrants (a) 85,000 56
Berjaya Sports 104,000 242
Carlsberg Brewery Malaysia Berhad 35,000 164
Commerce Asset Holdings 97,000 489
Commerce Asset Holdings Rights (a) 43,333 112
Genting Berhad 50,000 418
Highlands & Lowlands 22,000 35
Magnum CP Berhad 7,500 14
Malayan Banking Berhad 750 6
Malayan United Industries 33,000 27
MBF Capital Berhad 170,000 172
Multi Purpose Holding 258,000 378
New Straits Times 170,000 569
Petronas Gas Berhad (a) 65,000 221
Renong Berhad 716,000 1,060
Resorts World Berhad 302,000 1,617
Selangor Properties 21,000 20
Sime Darby Berhad (Resident Shares) 425,800 1,132
Sime UEP Properties Berhad 80,000 116
</TABLE>
62 INTERNATIONAL SECURITIES FUND
<PAGE> 191
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Tan Chong Motor Holdings 484,000 $ 478
Technical Resource Industries Berhad (a) 262,000 774
Telekom Malaysia 156,000 1,216
United Engineers Berhad 178,000 1,135
--------
11,024
--------
MEXICO - 0.4%
Cemex SA de CV Class B NPV 33,360 121
Cemex SA de CV NPV 67,657 222
Cifra SA de CV - ADR (a) 292,640 307
Compania Cervecerias Unidas SA - ADR 2,702 62
Empresa Nacional de Electric - ADR 7,939 181
Fomento Economico Mexicano
SA de CV Series B NPV 56,047 126
Gruma SA Series B NPV (a) 25,169 71
Grupo Embotellador de Mexico (a) 70,612 120
Grupo Financiero Banamex AC
Series B NPV 76,168 128
Grupo Financiero Banamex AC
Series L NPV 925 1
Grupo Financiero Bancomer
Series C - GDS (a) 520 3
Grupo Industrial Maseca Series B NPV 148,656 91
Grupo Modelo SA Series C 11,920 56
Grupo Sidek Series B NPV (a) 47,520 21
Grupo Television SA de CV - GDR 8,557 193
Kimberly-Clark, Mexico Class A NPV 8,490 128
Pan American Beverage Class A 4,754 152
Telefonos de Mexico SA Series L - ADR 13,675 436
------
2,419
------
NETHERLANDS - 3.5%
ABN AMRO Holdings NV 23,245 1,059
Ahold-NV 14,396 588
AKZO Nobel NV 1,315 152
Boskalis Westminster CVA 14,128 202
CSM NV CVA 12,404 541
DSM NV (BR) 5,900 485
Elsevier NV 198,216 2,643
Fortis Amev NV 5,539 371
Hagemeyer NV 2,708 141
International Nederlanden CVA 23,437 1,566
KNP BT (Kon) NV 12,700 326
Kon Ptt Nederland 21,354 776
Nedlloyd Groep NV 10,800 245
Nutricia Verenigde Bedrijven CVA 2,354 190
Philips Electronics 15,600 564
Polygram 18,353 974
Randstad Holdings NV 7,000 318
Royal Dutch Petroleum Co. (BR) 35,587 4,972
Unilever NV CVA 10,900 1,532
Ver Ned Uitgevers 7,250 995
Wolters Kluwer CVA 37,058 3,506
--------
22,146
--------
NEW ZEALAND - 0.4%
Air New Zealand Class B 95,440 325
Carter Holt Harvey 218,855 472
DB Group, Ltd. (a) 92,500 54
Fernz Corp. 3,900 10
Fletcher Challenge, Ltd. 144,237 333
Fletcher Challenge, Ltd. (Forests Division) 80,275 114
Lion Nathan, Ltd. 217,156 518
Tasman Properties, Ltd. (a) 915,005 395
Telecom Corp. of New Zealand 51,600 223
Wrightson Limited 150,000 114
-------
2,558
-------
NORWAY - 1.1%
Aker AS Series A 1,600 22
Aker AS Series B 1,700 21
Bergesen DY AS Series A 9,110 181
Bergesen DY AS Series B 2,600 51
Den Norske Creditbank AS 53,700 141
Det Norske Luftsfartsverk AS Series B 3,100 137
Dyno Industrier AS 2,400 56
Elkem AS Series A 9,900 112
Hafslund Nycomed AS Series A 5,828 152
Hafslund Nycomed AS Series B 14,810 375
Kvaerner Industries AS 7,110 251
Kvaerner Industries AS Series B 1,750 59
NCL Holdings AS (a) 5,428 4
Norsk Hydro AS 68,354 2,871
Norske Skogindustrier AS Class A 1,400 41
Olav Thon Eiendomsselskap AS 18,300 303
Orkla AS New 15,861 789
Orkla AS Series B Free 700 33
Saga Petroleum AS Series A 1,900 25
Saga Petroleum AS Series B 6,610 82
Schibsted AS 50,100 680
Simrad AS Class B 11,200 124
Unitor AS 1,900 26
Veidekke AS 8,100 164
--------
6,700
--------
</TABLE>
INTERNATIONAL SECURITIES FUND 63
<PAGE> 192
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
PHILIPPINES - 0.0%
Enron Global Power & Pipelines L.L.C. 1,849 $ 46
---------
46
---------
PORTUGAL - 0.1%
Jeronimo Martins 6,796 377
---------
377
---------
SINGAPORE - 2.4%
Chuan HUP Holdings, Ltd. 136,000 123
City Developments 229,000 1,668
DBS Land 76,000 257
Development Bank (Alien Market) 100,000 1,244
Far East Levingston 16,000 75
First Capital Corp. 89,000 247
Fraser & Neave 78,000 993
Hai Sun Hup Group 155,000 104
Haw Par Brothers International, Ltd. 105,300 225
Hotel Properties 66,000 102
Inchcape Berhad 33,000 106
Jardine Matheson Holdings, Ltd. 112,003 767
Jardine Strategic Holdings, Ltd. 388,361 1,188
Jardine Strategic Holdings, Ltd.
1998 Warrants (a) 39,817 13
Jurong Shipyard 42,000 324
Keppel Corp. 136,000 1,211
Lum Chang Holdings 70,800 59
Metro Holdings, Ltd. 10,800 42
Natsteel, Ltd. 87,000 178
Neptune Orient Lines, Ltd. 181,000 203
Overseas Chinese Banking (Alien Market) 48,333 605
Overseas Union Bank (Alien Market) 61,100 421
Overseas Union Enterprises 32,000 162
Prima, Ltd. 7,000 27
Robinson & Co., Ltd. 22,000 92
Sembawang Shipyard 79,000 438
Shangri-La Hotel 6,000 23
Singapore Airlines, Ltd. (Alien Market) 41,000 383
Singapore Land 117,000 757
Singapore Press Holdings (Alien Market) 25,760 455
Straits Trading Co. 140,000 329
Times Publishing 39,000 90
Total Access Communication, Ltd. (a) 7,000 46
United Industrial Corp., Ltd. 690,000 678
United Overseas Bank, Ltd. (Alien Market) 78,966 759
United Overseas Bank, Ltd. 1997 Warrants (a) 15,866 64
United Overseas Land 229,000 435
WBL Corp., Ltd. 22,000 51
--------
14,944
--------
SOUTH KOREA - 0.3%
Bank of Seoul 13,000 113
Hanil Bank 11,000 118
Kookmin Bank 5,700 105
Kookmin Bank New (a) 2,117 38
Korea Electric Power Corp. 8,700 345
Pohang Iron & Steel 4,810 314
Samsung Electronics Co. (a) 678 119
Samsung Electronics Co. - GDR (a) 325 28
Samsung Electronics Co. - GDS (a) 7,020 410
Samsung Electronics Co. New (a) 48 9
Samsung Electronics, Ltd. 1,250 227
Yukong, Ltd. 3,571 123
Yukong, Ltd. New (a) 356 12
---------
1,961
---------
SPAIN - 2.8%
Argentaria 10,500 433
Asturiana Del Zinc (a) 4,586 37
Aumar (Aut Del Mar) 8,480 111
Banco Bilbao Vizcaya 18,436 664
Banco Central Hispano
Americano SA (Regd) 46,700 947
Banco de Santander SA (Regd) 57,094 2,867
Banco Exterior Espana 3,200 86
Banco Intercontinental (Regd) 6,375 620
Banco Pastor SA 3,000 158
Banco Popular Espanol (Regd) 5,247 968
Banco Zaragozano (Regd) 6,200 102
Bodegas Y Bebidas Series III (BR) 2,875 74
Centros Commerciales Pryca 39,100 820
Conserva Campofrio SA 950 32
Cristale Espanola (BR)(a) 3,789 212
Cubiertas Y Mzov 543 30
Dragados Y Construcciones SA 4,100 54
Ebro Agricolas 29,240 306
Empresa Nacional de Celulosas 11,900 193
Empresa Nacional de Electricidad 17,797 1,008
Fab Autom Renault 1,700 28
Fom Construction Y Contra 3,155 242
Fuerzas Electricat Series A 59,521 424
Gas Natural SDG SA 2,081 324
Grupo Anaya SA 2,200 48
Iberdrola SA 176,672 1,617
Koipe SA 1,212 71
Obrascon SA 8,000 97
Prosegur Compania (Regd) 8,000 199
Repsol SA 27,786 911
Sevillana de Electrica 38,366 298
</TABLE>
64 INTERNATIONAL SECURITIES FUND
<PAGE> 193
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Sociedad General Azucarera
de Espana SA de CV 12,271 $ 431
Tabacalera SA Series A (Regd) 20,569 780
Tableros de Fibras Series B 18,834 208
Telefonica de Espana 97,827 1,355
Union Electrica Fenosa 26,500 159
Uralita 17,750 161
Vallehermoso SA 4,266 79
Viscofan Envoltura 20,000 237
--------
17,391
--------
SWEDEN - 3.0%
Asea AB Series A 2,560 249
Astra AB Series A 146,180 5,835
Astra AB Series B 48,890 1,937
Atlas Copco AB Series B 14,740 222
Avesta-Sheffield 24,500 216
BT Industries AB (a) 30,000 330
Electrolux AB Series B 8,840 363
Esselte AB Series B Free 3,090 46
Foreninsbanken Kredit AB Series A (a) 161,000 456
Hennes & Mauritz AB Series B 7,500 418
Hoganas AB B Shares 14,000 409
Hufvudstaden Fast Series A 6,600 48
Incentive AB Series B Free 8,000 349
Investor AB Series A Free 1,500 49
Investor AB Series B Free 12,000 396
Kinnevik Investment Series B 23,500 734
Mo Och Domsjo AB Series B 800 34
Munksjo AB 40,900 268
OM Gruppen AB (a) 36,000 542
Sandvik AB Series B 15,050 264
Scribona AB Series B Free 3,060 33
Skand Enskilda Barken Series A 334,420 2,770
Skanska AB Series B Free 4,900 168
SKF AB Series A Free 14,000 265
SKF AB Series B Free 1,800 34
Stadshypotek AB Series A 10,000 200
Stora Kopparbergs Series B 12,350 148
Svenska Celluosa Series B Free 17,000 264
Svenska Handelsbank Series A 8,900 185
Telefonaktiebolaget Ericsson (LM)
Series B 54,560 1,068
Trelleborg AB Series B Free 39,800 429
Volvo AB Series B 11,050 226
---------
18,955
---------
SWITZERLAND - 3.8%
Baer Holdings AG (BR) 210 234
Baloise Holdings (Regd) 95 198
BBC Brown Boveri (BR) 1,009 1,172
Bil GT Gruppe AG 370 218
Ciba Geigy AG (BR) 50 44
Ciba Geigy AG (Regd) 1,996 1,757
CS Holdings (Regd) 17,740 1,819
Fischer (Georg) AG (BR) 495 644
Helvetia Schweizerische Vericherungs
- Gesellschaft (Regd) 200 104
Hilti AG 175 140
Holderbank Financiere Glarus AG (BR) 390 299
Nestle SA (Regd) 2,025 2,240
Phoenix Mecano (BR) 500 251
Richemont Series A (BR) 200 300
Roche Holdings Genusscheine AG NPV 519 4,106
Sandoz AG (Regd) 1,734 1,587
Sarna Kunststoff Holdings AG (Regd) 100 108
Schweiz Bankgesellsch (BR) 1,402 1,519
Schweiz Bankverein (BR) 3,897 1,591
Schweiz Bankverein (Regd) 1,501 306
Schweiz Ruckversicher (Regd) 1,057 1,230
SGS Holding (BR) 450 893
SGS Holding (Regd) 200 68
SMH AG Neuenburg (BR) 196 117
SMH AG Neuenburg (Regd) 3,700 484
Swissair (Regd)(a) 180 131
Winterthur (BR) 160 114
Winterthur (Regd) 560 396
Zurich Versicherungsgesellschaft (Regd) 5,525 1,652
---------
23,722
---------
THAILAND - 0.2%
Advanced Information Services
(Alien Market) 11,600 203
Bangkok Bank (Alien Market) 21,500 261
Bank of Ayudhya Public Co., Ltd.
(Alien Market) 23,300 131
Land & House (Alien Market) 5,000 82
Siam Cement Co. (Alien Market) 2,100 116
Siam Commercial Bank (Alien Market) 17,000 224
Thai Farmers Bank (Alien Market) 13,900 140
---------
1,157
---------
UNITED KINGDOM - 15.2%
Abbey National PLC 89,000 879
Airtours PLC 120,000 681
</TABLE>
INTERNATIONAL SECURITIES FUND 65
<PAGE> 194
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ------
<S> <C> <C>
Allied Colloids PLC 175,000 $ 362
Amersham International PLC 10,000 138
Amstrad PLC 37,637 115
Argos PLC 58,000 537
Argyll Group PLC 353,341 1,866
ASDA-MFI Group PLC 1,023,220 1,764
Associated British Ports PLC 95,000 427
B.A.T. Industries PLC 196,724 1,732
BAA PLC 18,000 136
Barclays Bank PLC 130,000 1,490
Barratt Development PLC 11,800 45
BASS PLC 101,399 1,132
Berisford PLC 9,000 29
BICC PLC 55,000 235
BOC Group PLC 26,000 364
Boots Co. PLC 13,985 127
British & Commonwealth
Shipping PLC (a)(d) 23,000 0
British Aerospace PLC 114,246 1,412
British Gas PLC 176,600 697
British Land Co. PLC 13,871 82
British Petroleum Co. PLC 687,133 5,736
British Telecommunications PLC 230,560 1,264
BTR PLC 217,525 1,108
Bunzl PLC 17,041 53
Burton Group PLC 144,093 301
Cable & Wireless PLC 149,000 1,067
Cadbury Schweppes PLC 416,518 3,438
Caradon PLC 222,916 677
Carlton Communications PLC 2,160 32
Charter PLC (Regd) 5,079 68
Chubb Security PLC 95,000 470
Coats Viyella PLC 48,000 130
Compass Group PLC 37,000 282
Costain Group PLC (a) 113,766 125
Cowie Group PLC 97,812 437
Dalgety PLC 70,000 441
Dixon Group PLC 21,661 149
E D & F Man Group PLC 110,000 237
East Midlands Electricity PLC 35,080 363
Electrocomponents PLC 23,000 128
English China Clay PLC 24,724 122
First Leisure Corp. PLC 85,000 503
Forte PLC 318,044 1,632
General Electric Co. PLC 160,508 882
GKN PLC 9,000 109
Glaxo Wellcome PLC 477,198 6,781
Glynwed International PLC 64,700 321
Granada Group PLC 104,000 1,042
Grand Metropolitan PLC 216,010 1,555
Great Portland Estates PLC 89,882 243
Great University Stores PLC 9,596 102
Greenalls Group PLC 28,360 260
Guardian Royal Exchange PLC 161,600 693
Guinness PLC 163,900 1,205
HSBC Holdings PLC 43,000 671
Hammerson Property PLC 100,953 553
Hanson PLC 271,000 808
Heywood Williams Group PLC 21,041 81
Hillsdown Holdings PLC 229,695 606
Huntingdon International Holdings
PLC - ADR (a) 92,000 506
Imperial Chemical Industries PLC 94,314 1,117
Inchcape PLC 62,200 241
Invesco PLC 219,000 862
Kingfisher PLC 161,142 1,356
Ladbroke Group, Ltd. PLC 280,076 637
Laing (John) PLC Class A NV 43,000 184
LASMO PLC 116,270 314
London Clubs International 80,000 524
London Electricity PLC 58,637 522
London International Group PLC 28,074 56
Lonrho PLC 163,205 446
Manchester United PLC 100,000 301
Marks & Spencer PLC 82,122 574
MEPC PLC 78,540 481
MFI Furniture Group PLC 107,800 268
Midlands Electric PLC 13,339 157
National Grid Group PLC (a) 113,216 350
National Power PLC 95,638 668
National Westminster Bank PLC 201,000 2,024
Northern Foods PLC 21,658 58
Ocean Group PLC 8,900 54
Pearson PLC 51,000 494
Pen & Orient DFD PLC 105,693 781
Pilkington Brothers PLC 158,273 497
Pilkington PLC New (a) 39,568 124
Polly Peck International
Holdings PLC (a)(d) 200,054 0
Powergen PLC 23,987 198
Provident Financial PLC 36,000 458
Racal Electronics PLC 191,000 844
Rank Organisation PLC 72,500 525
Reckitt & Colman PLC 56,357 624
Redland PLC 36,199 218
Reed International PLC 87,940 1,340
Reuter's Holdings PLC 71,981 659
Rexam PLC 44,000 242
</TABLE>
66 INTERNATIONAL SECURITIES FUND
<PAGE> 195
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
Rolls-Royce PLC 169,037 $ 494
Royal Bank of Scotland Group PLC 91,000 828
RTZ Corp. PLC (Regd) 97,500 1,417
Sainsbury (J.) PLC 132,278 806
Scottish Hydro-Electric PLC 48,000 268
Scottish Power PLC 6,333 36
Sears PLC 460,281 743
Securicor Group PLC Class A 4,238 58
Shell Transportation & Trading
PLC (Regd) 149,700 1,980
Smith & Nephew PLC 72,735 211
Smith (David S.) Holdings PLC 65,500 289
SmithKline Beecham PLC Class A 126,901 1,399
SmithKline Beecham/BEC Units PLC 245,565 2,677
South West Water PLC 64,500 520
Spring Ram Corp. PLC 23,222 9
Stagecoach Holdings PLC 115,000 634
Standard Chartered Bank Group PLC 55,000 468
Storehouse PLC 47,149 245
Sun Alliance Group PLC 62,000 360
T & N PLC 140,648 354
Tarmac, Ltd. PLC 602,336 964
Taylor Woodrow PLC 490,722 895
Tesco Store Holdings PLC 135,029 623
Thorn EMI PLC 18,743 441
Tomkins PLC 294,500 1,287
Trafalgar House PLC (a) 313,616 135
Trinity Holdings PLC 80,000 441
TSB Group PLC (a) 148,720 766
Unilever PLC 26,346 541
United Biscuits PLC 109,028 433
United Newspaper, Ltd. PLC 70,200 604
Vendome PLC 53,000 483
Vickers, Ltd. PLC 87,000 343
Vodafone Group PLC 885,800 3,178
Welsh Water PLC 31,250 376
Whitbread & Co. PLC 35,238 372
Willis Corroon Group PLC 69,000 151
Wimpey (George), Ltd. PLC 39,047 87
Wolseley PLC 1,179 8
WPP Group PLC 215,000 548
Yorkshire Electricity PLC 35,900 372
Zeneca Group PLC 15,000 290
-------
94,763
-------
TOTAL COMMON STOCKS
(cost $521,606) 577,326
-------
CONVERTIBLE PREFERRED STOCKS - 0.0%
UNITED KINGDOM - 0.0%
Trafalgar House PLC (a) 215,000 184
-------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $380) 184
-------
PREFERRED STOCKS - 1.0%
AUSTRALIA - 0.2%
News Corp., Ltd. 71,764 336
Sydney Harbour Casino Holdings, Ltd. (a) 569,968 720
-------
1,056
-------
AUSTRIA - 0.0%
Bau Holdings AG 1,500 56
Creditanstalt Bankverein 2,053 106
Z Landerbank Bank Austria AG 1,039 50
-------
212
-------
BRAZIL - 0.2%
Banco Bradesco SA NPV 26,884,742 235
Banco Itau SA (Regd) 253,000 71
Brahma (cia Cervej) NPV 379,465 156
Brasmotor SA NPV 445,000 88
CEMIG SA 4,389,910 97
Cim Port Itau (Cia) 313,600 75
Coteminas (Cia Tec) NPV 312,000 104
Lojas Americanas NPV 4,389,000 103
Petrol Brasileiros NPV 713,990 61
Telec SP Telesp NPV 881,356 130
Telecomunicacoes Brasileiras NPV 94,858 5
Uniao de Bancos Brasileiros NPV 2,307,000 90
Usiminas Uni Sd Mg NPV 154,000,000 125
-------
1,340
-------
FRANCE - 0.0%
Legrand 1,250 125
-------
125
-------
GERMANY - 0.5%
Bayer Motoren Werk 600 217
Fielmann AG 1,250 65
GEA AG 460 141
Henkel 460 173
Hornbach Holding AG 2,150 187
Jungheinrich 900 128
Krones AG NV 1,147 455
</TABLE>
International Securities Fund 67
<PAGE> 196
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
Lufthansa AG NV 1,200 $ 156
Porsche AG (a) 700 365
SAP AG 3,650 552
Volkswagen AG NV 200 48
Wella AG 550 296
-------
2,783
-------
ITALY - 0.1%
Autostrade Conc. SPA 140,000 153
Fiat SPA (Priv) 196,000 358
-------
511
-------
NETHERLANDS - 0.0%
International Nederlanden CVA 2,274 12
-------
12
-------
TOTAL PREFERRED STOCKS
(cost $6,149) 6,039
-------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.9%
BELGIUM - 0.0%
Kredietbank (conv.)
5.750% due 12/31/03 BEF 1,125 45
-------
45
-------
FRANCE - 0.0%
Michelin (Cie Gle)(conv.)
2.500% due 01/01/01 FRF 191 103
-------
103
-------
ITALY - 0.0%
Danieli & Co. (conv.)
7.250% due 01/01/00 ITL 20,100 $ 11
-------
11
-------
JAPAN - 0.8%
Bank of Tokyo - Cayman Finance, Ltd.
(Perpetual Maturity)
4.250% due 03/31/49 JPY 270,000 3,609
Hitachi, Ltd. (conv.)
2.700% due 03/31/97 40,000 496
Izumiya Co. (conv.)
0.800% due 08/31/99 $ 45,000 $ 510
Yamanouchi Pharmacutical (conv.)
1.250% due 03/31/14 20,000 223
-------
4,838
-------
SWITZERLAND - 0.1%
Sandoz Capital (conv.)
1.250% due 10/23/02 CHF 650 636
-------
636
-------
TOTAL LONG-TERM INVESTMENTS
(cost $5,009) 5,633
-------
SHORT-TERM INVESTMENTS - 3.8%
UNITED STATES - 3.8%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 23,702 23,702
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $23,702) 23,702
-------
TOTAL INVESTMENTS
(identified cost $556,846)(c) - 98.3% 612,884
OTHER ASSETS AND LIABILITIES,
NET - 1.7% 10,505
-------
NET ASSETS - 100.0% $623,389
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was $560,781
and net unrealized appreciation for all securities was $52,103. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $86,491 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $34,388.
(d) Securities are currently undergoing bankruptcy proceedings and present
negligible market value.
68 International Securities Fund
<PAGE> 197
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
All-Ordinaries Index
Futures Contracts (Australia)
expiration date 03/96 14 $ (1)
CAC - 40 Index
Futures Contracts (France)
expiration date 03/96 16 17
DAX - 30 Index
Futures Contracts (Germany)
expiration date 03/96 10 (19)
FTSE - 100 Index
Futures Contracts (UK)
expiration date 03/96 35 47
Hang Seng Index
Futures Contracts (Hong Kong)
expiration date 03/96 11 13
TOPIX Index
Futures Contracts (Japan)
expiration date 03/96 70 374
-------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (***) $ 431
-------------
-------------
</TABLE>
(***) At December 31, 1995, United States Treasury Notes, due 12/31/95,
valued at $4,000 were held as collateral by the custodian in connection
with futures contracts purchased by the Fund. The settlement amount of
these matured notes is included in Receivable for Investments Sold on the
Statement of Assets and Liabilities.
<TABLE>
<CAPTION>
% OF MARKET
NET VALUE
INDUSTRY DIVERSIFICATION ASSESTS (000)
- ---------------------------------- ------- ----------
<S> <C> <C>
Basic Industries 8.2% $ 51,001
Capital Goods 8.6 53,389
Consumer Basics 11.9 73,895
Consumer Durable Goods 6.8 42,498
Consumer Non-Durables 6.4 39,922
Consumer Services 2.3 14,120
Energy 4.9 30,821
Finance 18.1 112,909
General Business 5.5 34,100
Miscellaneous 6.6 40,903
Shelter 3.2 20,046
Technology 3.7 23,243
Transportation 1.4 9,064
Utilities 6.0 37,638
Long-Term Investments 0.9 5,633
Short-Term Investments 3.8 23,702
------- ----------
Total Investments 98.3 612,884
Other Assets and Liabilities, Net 1.7 10,505
------- ----------
NET ASSETS 100.0% $ 623,389
------- ----------
------- ----------
</TABLE>
<TABLE>
<CAPTION>
% OF MARKET
NET VALUE
GEOGRAPHIC DIVERSIFICATION ASSETS (000)
- ----------------------------------- ------- ----------
<S> <C> <C>
Japan 33.6% $ 209,271
Europe 31.1 194,222
United Kingdom 15.2 94,947
Pacific Basin 12.8 79,982
Latin America 1.1 6,697
Other 0.7 4,063
Short-Term Investments 3.8 23,702
------- ----------
Total Investments 98.3 612,884
Other Assets and Liabilities, Net 1.7 10,505
------- ----------
NET ASSETS 100.0% $ 623,389
------- ----------
------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Securities Fund 69
<PAGE> 198
INTERNATIONAL SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost
$556,845,725)(Note 2)..................................... $ 612,884,179
Foreign currency holdings (identified cost $5,587,801)..... 5,842,125
Forward foreign currency exchange contracts
(cost $51,586,378)(Notes 2 and 6)......................... 51,447,417
Foreign currency exchange spot contracts
(cost $1,036,258)(Notes 2 and 6).......................... 1,036,146
Receivables:,
Dividends and interest................................... 1,143,724
Investments sold......................................... 5,303,391
Fund shares sold......................................... 2,133,300
Foreign taxes recoverable................................ 765,738
Short-term investments held as collateral for
securities loaned, at market (Note 3)..................... 3,673,642
-------------
684,229,662
LIABILITIES
Payables:
Investments purchased......................... $ 3,914,079
Fund shares redeemed.......................... 407,267
Accrued bookkeeping service fees (Note 4)..... 17,420
Accrued management fees (Note 4).............. 496,277
Accrued transfer agent fees (Note 4).......... 45,956
Other accrued expenses and payables........... 286,371
Daily variation margin on futures contracts
(Notes 2 and 3).............................. 19,052
Forward foreign currency exchange contracts
(cost $51,586,378)(Notes 2 and 6).............. 50,944,813
Foreign currency exchange spot contracts
(cost $1,036,258)(Notes 2 and 6)............... 1,036,242
Collateral on securities loaned,
at market (Note 3)............................. 3,673,642 60,841,119
----------- -------------
NET ASSETS................................................... $ 623,388,543
-------------
-------------
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income $ (2,395,248)
Accumulated net realized gain (loss)....................... 4,758,770
Unrealized appreciation (depreciation) on:
Investments.............................................. 56,038,454
Futures contracts........................................ 431,831
Foreign currency-related transactions.................... 503,437
Shares of beneficial interest.............................. 110,123
Additional paid-in capital................................. 563,941,176
-------------
NET ASSETS................................................... $ 623,388,543
-------------
-------------
Net asset value, offering and redemption price per share
($623,388,543 divided by 11,012,306 shares of $.01 par value
shares of beneficial interest outstanding)................. $56.61
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
70 International Securities Fund
<PAGE> 199
INTERNATIONAL SECURITIES FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends................................................... $ 13,241,739
Dividends from Money Market Fund (Note 5)................... 1,603,964
Interest.................................................... 494,290
Less foreign taxes withheld................................. (1,699,839)
------------
13,640,154
Expenses (Notes 2 and 4):
Management fees................................ $ 5,723,534
Custodian fees................................. 1,520,293
Transfer agent fees............................ 333,651
Bookkeeping service fees....................... 165,549
Professional fees.............................. 42,746
Registration fees.............................. 62,351
Trustees' fees................................. 4,517
Miscellaneous.................................. 56,595
------------
Expenses before waivers........................ 7,909,236
Expenses waived by Manager..................... (83,475) 7,825,761
------------ ------------
Net investment income......................................... 5,814,393
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments.................................................. 23,860,138
Futures contracts............................................ 208,923
Foreign currency-related transactions........................ 260,551
Net change in unrealized appreciation or depreciation of:
Investments.................................................. 29,328,416
Futures contracts............................................ 431,831
Foreign currency-related transactions........................ 781,608
------------
Net gain (loss) on investments................................ 54,871,467
------------
Net increase (decrease) in net assets resulting from operations $ 60,685,860
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Securities Fund 71
<PAGE> 200
INTERNATIONAL SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income.......................... $ 5,814,393 $ 3,738,629
Net realized gain (loss) from:
Investments.................................. 23,860,138 59,472,591
Futures contracts............................ 208,923 --
Foreign currency-related transactions........ 260,551 (2,534,203)
Net change in unrealized appreciation
or depreciation of:
Investments.................................. 29,328,416 (41,059,424)
Futures contracts............................ 431,831 --
Foreign currency-related transactions........ 781,608 (958,114)
------------- -------------
Net increase (decrease) in net assets
resulting from operations...................... 60,685,860 18,659,479
Distributions to shareholders:
Net investment income.......................... (9,375,452) (359,274)
In excess of net investment income............. (2,395,248) (199,502)
Net realized gain on investments............... (18,007,535) (61,808,165)
Increase (decrease) in net assets from fund
Share transactions............................ 29,147,560 152,558,729
------------- -------------
INCREASE (DECREASE) IN NET ASSETS............... 60,055,185 108,851,267
Net assets at beginning of year................. 563,333,358 454,482,091
------------- -------------
NET ASSETS AT END OF YEAR
(including accumulated distributions in excess
of net investment income of $2,395,248
and $199,502, respectively).................... $ 623,388,543 $ 563,333,358
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------- -------------------------
Shares Amount Shares Amount
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Fund shares sold........ 3,789,941 $ 207,530,515 4,244,850 $ 257,139,963
Fund shares issued to
shareholders in
reinvestments of
distributions.......... 370,011 20,569,490 840,864 44,431,854
Fund shares redeemed.... (3,586,875) (198,952,445) (2,488,621) (149,013,088)
---------- ------------- ---------- -------------
Net increase (decrease). 573,077 $ 29,147,560 2,597,093 $ 152,558,729
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72 International Securities Fund
<PAGE> 201
INTERNATIONAL SECURITIES FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............ .56 .44 .40 .61 .72
Net realized and unrealized gain
(loss) on investments (a)....... 4.89 1.23 14.53 (4.02) 4.60
------- ------- ------- ------- -------
Total Income From
Investment Operations............ 5.45 1.67 14.93 (3.41) 5.32
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income............ (.88) (.04) (.38) (.68) (.76)
In excess of net
investment income............... (.23) (.02) (.23) -- --
Net realized gain on investments. (1.69) (5.60) (1.12) (.31) (.01)
------- ------- ------- ------- -------
Total Distributions.............. (2.80) (5.66) (1.73) (.99) (.77)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR...... $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%).................. 10.20 4.86 33.48 (6.94) 11.99
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average net assets.............. 1.30 1.30 1.38 1.45 1.49
Operating expenses, gross,
to average net assets........... 1.31 1.33 1.42 1.47 1.49
Net investment income to
average net assets.............. .97 .70 .82 1.37 1.68
Portfolio turnover............... 42.96 72.23 60.22 48.93 52.46
Net assets, end of year
($000 omitted).................. 623,389 563,333 454,482 262,886 243,065
Per share amount of fees
waived ($ omitted)............. .0080 .0178 .0161 .0054 --
</TABLE>
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.03 per share.
International Securities Fund 73
<PAGE> 202
INTERNATIONAL SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 INTERNATIONAL SECURITIES MSCI EAFE** LIPPER-C- INTERNATIONAL++
- ----------------- ------------------------ ----------- -------------------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1986 $14,854 $16,994 $15,034
1987 $17,214 $21,231 $16,865
1988 $21,010 $27,301 $19,661
1989 $25,682 $30,249 $24,085
1990 $21,743 $23,233 $21,208
1991 $24,350 $26,136 $23,845
1992 $22,659 $23,039 $22,857
1993 $30,246 $30,629 $31,905
1994 $31,717 $33,097 $31,583
1995 $34,953 $36,921 $34,497
</TABLE>
International Securities Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ----------------- ----------- ------------
<S> <C> <C>
1 Year $ 11,020 10.20%
5 Years $ 16,075 9.95%***
10 Years $ 34,953 13.33%***
</TABLE>
MSCI EAFE Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ----------------- ----------- ------------
<S> <C> <C>
1 Year $ 11,155 11.55%
5 Years $ 15,892 9.71%***
10 Years $ 36,921 13.95%***
</TABLE>
Lipper-C- International Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ----------------- ----------- ------------
<S> <C> <C>
1 Year $ 10,923 9.23%
5 Years $ 16,266 10.22%***
10 Years $ 34,497 13.18%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Morgan Stanley Capital International Europe, Australia, Far East Index is
an index composed of an arithmetic, market value-weighted average of the
performance of over 1,100 securities listed on the stock exchanges of the
countries of Europe, Australia, and the Far East. The index is calculated
on a total-return basis, which includes reinvestment of gross dividends
before deduction of withholding taxes.
++ Lipper-C- International Funds Average is the average total return for the
universe of funds within the International Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
INTERNATIONAL SECURITIES FUND returned 10.2% for 1995, trailing the Morgan
Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index
return of 11.6%. The portfolio was managed in a manner consistent with its
objective to provide favorable total return with reduced volatility using a
multi-style, multi-manager strategy. The Fund offers a high degree of
diversification among countries and currencies, which typically results in a low
correlation with US equities and reduced portfolio volatility.
Non-US markets lagged the US market by a wide margin in most cases during 1995.
The Swiss market was the one notable exception, with a return of over 42%,
including a 14% appreciation of the Swiss franc over the dollar. Japan was the
weakest market, down over 1% for the year, as it continued to struggle with an
economic recession and banking sector woes. The Fund was underweighted in Swiss
stocks for most of 1995 and also underweighted in large Japanese banks late in
the year. Both were factors in the Fund trailing the index. However, it was able
to outperform the average manager, with the Lipper-Registered Trademark-
International Funds Average up only 9.2%.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
74 International Securities Fund
<PAGE> 203
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 97.9%
ASSET-BACKED SECURITIES - 5.5%
Advanta Home Equity Loan Trust
9.000% due 02/25/06 $ 107 $ 111
Case Equipment Loan Trust
Series 1995-B Class A3
6.150% due 09/15/02 2,500 2,526
Chevy Chase Auto Receivables Trust
Series 1995-2 Class A
5.800% due 06/15/02 545 546
Contimortgage Home Equity Loan
Series 1994-3 Class A-4
7.850% due 06/01/24 714 737
Series 1994-4 Class A-6
8.270% due 12/15/24 551 578
Contimortgage Home Equity Loan Trust
Mortgage Pass-thru Certificate
Series 1995-1 Class A2-A
8.600% due 06/15/25 350 365
Daimler-Benz Auto Grantor Trust
Series 1995-A Class A
5.850% due 05/15/02 346 348
Discover Card Trust
Series 1991 Class F-A
7.850% due 11/21/00 780 820
Series 1992-B Class A
6.800% due 06/16/00 635 650
DR Structured Finance Corp.
Series 1994-K1 Class A-1
7.600% due 08/15/07 616 388
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 2,520 2,646
Green Tree Financial Corp.
Series 1995-A Class A
7.250% due 07/15/05 556 563
Lehman Pass-thru Securities, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 98 101
Premier Auto Trust
Series 1994-4 Class A-5
6.650% due 08/15/00 5,190 5,287
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1992 Class A-3
10.600% due 05/25/24 (c) 851 861
Series 1992-M2 Class A-4
8.465% due 03/25/20 35 36
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1994-C1 Class D
8.000% due 06/25/26 476 486
Series 1994-C2 Class D
8.000% due 04/25/25 390 398
Series 1995-C1 Class C
6.920% due 02/25/27 (c) 350 347
Sears Savings Bank
Mortgage Pass-thru Certificate
Series 1992-A Class A
8.720% due 05/25/32 (c) 1,258 1,257
Standard Credit Card Master Trust I
Series 1995-8 Class A
6.700% due 09/07/02 3,845 3,921
Series 1995-10 Class A
5.900% due 02/07/01 1,475 1,489
TMS Home Equity Loan Trust
Series 1994-D Class A-4
8.750% due 01/15/21 700 757
Wal Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 315 374
World Omni Automobile Lease
Securitization Trust
Series 1995-A Class A
6.050% due 11/25/01 2,675 2,691
-------
28,283
-------
CORPORATE BONDS AND NOTES - 16.8%
American Brands, Inc.
8.625% due 11/15/21 420 507
American Express Co.
8.500% due 08/15/01 255 286
American General Finance Corp.
8.250% due 01/15/98 500 525
7.250% due 03/01/98 455 471
8.500% due 08/15/98 260 278
AMR Corp.
9.500% due 05/15/01 150 170
Analog Devices, Inc.
6.625% due 03/01/00 125 127
Appalachian Power Co. (MTN)
8.500% due 12/01/22 395 479
Aristar, Inc.
6.300% due 07/15/00 1,020 1,037
</TABLE>
Diversified Bond Fund 75
<PAGE> 204
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Associates Corp. of North America
6.250% due 03/15/99 $ 1,010 $ 1,026
AT&T Corp.
8.625% due 12/01/31 220 256
Atlantic Richfield Co.
9.125% due 08/01/31 275 361
AVCO Financial Services, Inc.
7.250% due 07/15/99 275 288
8.500% due 10/15/99 405 440
Bank of New York, Inc.
7.875% due 11/15/02 350 385
Bank One, Columbus, Ohio
7.375% due 12/01/02 120 127
BankAmerica Corp.
6.850% due 03/01/03 425 442
Barnett Bank, Inc.
6.900% due 09/01/05 200 208
Bear Stearns Co., Inc.
6.750% due 08/15/00 750 771
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 355 446
BellSouth Telecommunications
7.625% due 05/15/35 255 272
Beneficial Corp.
8.400% due 05/15/08 1,235 1,508
C.I.T. Group Holdings, Inc. (MTN)
7.000% due 09/30/97 970 994
Case Corp.
7.250% due 08/01/05 330 348
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 420 523
Central Fidelity Banks, Inc.
8.150% due 11/15/02 170 188
Champion International Corp.
7.700% due 12/15/99 530 562
Chemical Banking Corp.
10.375% due 03/15/99 155 174
10.125% due 11/01/00 200 235
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 230 288
Chrysler Financial Corp.
9.500% due 12/15/99 275 309
Citicorp
9.500% due 02/01/02 120 140
7.125% due 06/01/03 390 410
Coastal Corp.
10.375% due 10/01/00 120 140
Coca-Cola Enterprises, Inc.
8.500% due 02/01/22 475 569
Commercial Credit Group, Inc.
5.750% due 07/15/00 295 293
8.700% due 06/15/10 380 472
Commonwealth Edison Co.
Series 85
7.375% due 09/15/02 945 999
Connecticut Light & Power Co.
7.875% due 10/01/24 790 911
Consolidated Natural Gas Co.
8.625% due 12/01/11 200 211
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 499 514
CoreStates Capital Corp.
5.875% due 10/15/03 205 199
CSFB Finance Co., Ltd.
Series 1995-A Class A
7.000% due 11/15/05 450 449
Dayton Hudson Corp. (MTN)
9.350% due 06/16/20 295 358
Discover Credit Corp. (MTN)
8.350% due 04/27/99 360 384
Dole Food Co., Inc.
6.750% due 07/15/00 170 172
Duke Power Co.
7.000% due 07/01/33 695 703
Eaton Corp.
7.000% due 04/01/11 315 314
Equitable Life Assurance Society
6.950% due 12/01/05 775 786
7.700% due 12/01/15 800 814
ERP Operating, L.P.
8.500% due 05/15/99 850 901
Evans Whitycombe Trust
Series 1994 Class A-1
7.980% due 08/01/01 600 647
Federal Express Corp.
Series 1993 Class B1
6.680% due 01/01/08 600 602
First Chicago Corp.
8.875% due 03/15/02 505 575
First Fidelity Bancorp
9.625% due 08/15/99 255 287
</TABLE>
76 Diversified Bond Fund
<PAGE> 205
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
First Interstate Bancorp (MTN)
9.375% due 01/23/02 $ 135 $ 155
First Union Corp.
6.550% due 10/15/35 1,550 1,612
Fleet Financial Group, Inc.
8.125% due 07/01/04 525 586
Ford Motor Credit Co.
7.750% due 10/01/99 1,505 1,598
Ford Motor Credit Co. (MTN) CMS Floater
4.820% due 07/12/96 (c) 325 323
General Electric Capital Corp.
8.300% due 09/20/09 235 281
General Motors Acceptance Corp.
6.625% due 10/01/02 1,550 1,593
General Motors Acceptance Corp. (MTN)
8.650% due 04/11/96 1,500 1,511
8.000% due 12/05/96 1,000 1,023
Georgia-Pacific Corp.
7.375% due 12/01/25 350 349
Goldman Sachs Group, L.P.
6.875% due 09/15/99 675 691
6.375% due 06/15/00 465 470
6.200% due 12/15/00 425 426
Hanson America, Inc. (conv.)
2.390% due 03/01/01 550 457
Hertz Corp.
7.000% due 04/15/01 790 826
9.000% due 11/01/09 230 284
Household Finance Corp.
6.375% due 06/30/00 1,200 1,223
International Lease Finance Corp.
5.750% due 01/15/99 455 456
ITT Financial Corp.
7.400% due 11/15/25 505 530
ITT Financial Corp. New
6.250% due 11/15/00 340 343
Liberty Mutual Insurance Co.
8.200% due 05/04/07 725 805
8.500% due 05/15/25 500 556
May Department Stores Co.
9.875% due 12/01/02 400 483
Merry Land & Investment, Inc.
7.250% due 06/15/05 750 772
Minnesota Mutual Life Insurance Co.
8.250% due 09/15/25 750 817
Motorola, Inc.
7.500% due 05/15/25 325 367
Nabisco, Inc.
6.700% due 06/15/02 260 264
NationsBank Corp.
6.625% due 01/15/98 170 173
New England Mutual Life Insurance Co.
7.875% due 02/15/24 1,550 1,601
New England Power Co. Series U
8.000% due 08/01/22 620 674
New England Telephone & Telegraph Co.
7.875% due 11/15/29 235 277
News America Holdings, Inc.
7.700% due 10/30/25 975 997
Noranda, Inc.
8.625% due 07/15/02 70 79
Northwestern Bell Telephone Co.
7.750% due 05/01/30 630 710
Norwest Corp. (MTN)
6.375% due 09/15/02 575 587
Norwest Financial, Inc.
6.250% due 11/01/02 525 533
NWA Trust
10.230% due 06/21/14 732 854
NYNEX Corp.
9.550% due 05/01/10 422 495
Occidental Petroleum Corp.
10.125% due 11/15/01 210 251
Occidental Petroleum Corp. (MTN)
8.500% due 11/09/01 245 274
Ohio Edison Co. 1st Mortgage
8.500% due 05/01/96 1,000 1,008
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,000 1,044
Pennzoil Co.
10.125% due 11/15/09 85 108
PepsiCo, Inc.
7.625% due 12/18/98 285 301
Philip Morris Cos., Inc.
8.875% due 07/01/96 2,500 2,541
8.750% due 06/01/01 675 756
Phillips Petroleum Co.
9.375% due 02/15/11 490 613
Pitney Bowes Credit Corp.
8.550% due 09/15/09 460 556
Praxair, Inc.
6.850% due 06/15/05 550 571
Procter & Gamble Co.
8.000% due 10/26/29 145 173
</TABLE>
Diversified Bond Fund 77
<PAGE> 206
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Procter & Gamble Co.
Sharing ESOP Series A
9.360% due 01/01/21 $ 275 $ 351
Ralston Purina Co.
7.875% due 06/15/25 565 615
Republic New York Corp.
9.750% due 12/01/00 190 220
8.250% due 11/01/01 150 167
RJR Nabisco, Inc.
8.625% due 12/01/02 735 766
Rockwell International Corp.
8.875% due 09/15/99 255 282
Salomon, Inc.
7.000% due 01/20/98 600 607
Salomon, Inc. (MTN)
6.360% due 04/01/98 700 701
6.125% due 05/15/98 50 50
6.820% due 07/26/99 75 76
Seagram Co., Ltd.
8.350% due 01/15/22 220 256
Shopping Center Associates
6.750% due 01/15/04 750 748
SKW Real Estate, L.P. Class C
7.450% due 04/15/03 850 853
Smith Barney Holdings, Inc.
7.980% due 03/01/00 925 992
Southern California Edison Co.
Series 1986-C
8.625% due 04/15/19 230 242
System Energy Resources, Inc.
6.000% due 04/01/98 675 676
Taubman Realty Group, L.P.
8.000% due 06/15/99 850 891
Tenneco, Inc.
10.000% due 03/15/08 415 534
Texaco Capital, Inc.
9.750% due 03/15/20 190 260
8.875% due 09/01/21 220 281
Texas Utilities Electric Co.
9.500% due 08/01/99 805 888
Time Warner Entertainment Co., L.P.
10.150% due 05/01/12 350 434
8.375% due 03/15/23 575 619
8.375% due 07/15/33 1,975 2,108
Time Warner, Inc.
6.835% due 08/15/00 (c) 500 503
7.975% due 08/15/04 300 318
8.110% due 08/15/06 600 639
8.180% due 08/15/07 600 644
Transamerica Financial Corp.
8.375% due 02/15/98 210 221
Transamerica Financial Corp. (MTN)
8.900% due 02/15/96 410 411
9.250% due 02/16/98 500 535
U.S. Bancorp of Oregon
7.000% due 03/15/03 470 489
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 590 656
Union Oil Co. (MTN)
9.400% due 02/15/11 470 590
United Airlines, Inc.
10.250% due 07/15/21 1,250 1,564
United Technologies Corp.
8.750% due 03/01/21 380 474
US West Communications, Inc.
7.250% due 10/15/35 875 911
Virginia Electric & Power Co.
8.750% due 04/01/21 200 239
Wachovia Corp. New
6.800% due 06/01/05 305 318
Wellsford Residential Property Trust
9.375% due 02/01/02 750 841
Weyerhaeuser Co.
8.500% due 01/15/25 500 615
Whirlpool Corp.
9.000% due 03/01/03 220 256
9.500% due 06/15/00 250 285
Wilmington Trust
10.370% due 01/02/07 1,964 2,305
--------
86,289
--------
EURODOLLAR BONDS - 0.2%
Euratom
7.750% due 01/15/97 1,200 1,228
--------
1,228
--------
MORTGAGE-BACKED SECURITIES - 37.6%
American Southwest Financial Corp.
Series G Class G-4 CMO
12.250% due 11/01/14 363 410
Citicorp Mortgage Securities, Inc.
Series 1992-1 Class A-5
8.000% due 04/25/21 2,689 2,713
Collateralized Mortgage Obligation
Trust 56 Class B CMO
9.985% due 12/01/18 327 357
</TABLE>
78 Diversified Bond Fund
<PAGE> 207
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
DLJ Mortgage Acceptance Corp.
Series 1993 Class A-2 CMO
7.650% due 09/18/03 $ 2,500 $ 2,604
FDIC REMIC Trust
Series 1994-C1 Class 2A-2
7.850% due 09/25/25 850 876
Federal Home Loan Mortgage Corp.
Participation Certificate
Group #17-0171 9.000% due 06/01/16 417 441
Group #17-0195 9.000% due 10/01/16 142 150
Group #17-0197 9.000% due 10/01/16 18 19
Group #17-0202 9.000% due 11/01/16 392 414
Group #17-0203 9.000% due 11/01/16 203 215
Group #18-1338 8.000% due 05/01/08 192 199
Group #18-2098 8.000% due 11/01/08 33 35
Group #18-2161 6.750% due 08/01/07 562 565
Group #18-6664 8.500% due 02/01/08 256 267
Group #21-7242 7.000% due 05/01/02 109 111
Group #26-0607 12.000% due 06/01/14 121 137
Group #28-4634 9.000% due 01/01/17 14 14
Group #30-0025 12.500% due 04/01/16 209 239
Group #30-8522 12.000% due 12/01/15 104 119
Group #50-1051 7.000% due 06/01/03 449 458
Group #A0-0690 9.000% due 02/01/20 1,122 1,192
Group #C0-0140 9.000% due 07/01/22 396 420
Group #C0-0413 8.000% due 08/01/25 89 92
Group #D2-3334 8.500% due 09/01/22 145 152
Group #D2-3590 8.500% due 09/01/22 48 50
Group #D5-0323 7.000% due 04/01/24 733 739
Group #D5-1011 7.000% due 04/01/24 136 137
Group #D5-1373 7.000% due 04/01/24 147 149
Group #D5-1426 7.000% due 04/01/24 51 51
Group #D5-2246 7.000% due 04/01/24 367 370
Group #D6-0678 8.000% due 06/01/25 130 135
Group #D6-0679 8.000% due 06/01/25 308 319
Group #D6-2015 8.000% due 07/01/25 1,738 1,801
Group #D6-2113 8.000% due 07/01/25 612 634
Group #E0-0318 7.500% due 06/01/09 359 369
Group #E0-0332 7.500% due 08/01/09 226 233
Group #E0-0339 7.500% due 09/01/09 402 413
Group #E0-0344 7.500% due 10/01/09 271 279
Group #E0-0353 7.500% due 12/01/09 919 946
Group #E2-0145 7.500% due 11/01/09 (c) 206 212
Group #E2-0153 8.000% due 01/01/10 91 94
Group #E5-6296 6.500% due 01/01/09 391 393
Group #E5-6562 6.500% due 02/01/09 1,106 1,112
Group #E5-6737 6.500% due 02/01/09 247 248
Group #E5-6830 6.500% due 02/01/09 109 110
Group #E5-6953 6.500% due 02/01/09 122 123
Group #E5-9461 7.500% due 08/01/09 244 251
Group #E5-9610 7.500% due 08/01/09 231 237
Group #E5-9853 8.000% due 10/01/09 457 473
Group #G1-0329 7.500% due 02/01/10 243 250
Group #L7-0277 7.000% due 08/01/98 39 40
Group #M1-1780 7.000% due 04/01/97 165 168
Group #M1-3072 7.000% due 03/01/97 494 502
Group #M1-3104 7.000% due 03/01/97 310 315
Group #M1-4743 7.000% due 08/01/97 28 28
Pool #D6-1022 8.000% due 06/01/25 1,925 1,995
Pool #D6-1023 8.000% due 06/01/25 1,839 1,906
Federal Home Loan Mortgage Corp.
Participation Certificate
Series 1053 Class G
7.000% due 03/15/21 2,000 2,036
Federal Home Loan Mortgage Corp.
7.500% 7 Year TBA (b) 280 287
6.500% 15 Year TBA (b) 7,600 7,640
7.000% 30 Year TBA (b) 15,285 15,423
7.500% 30 Year TBA (b) 10,110 10,366
8.000% 30 Year TBA (b) 6,960 7,212
Federal National Mortgage Association
Pool #030891 9.500% due 06/01/01 86 90
Pool #038842 8.000% due 07/01/10 44 46
Pool #042678 8.000% due 03/01/17 154 160
Pool #046939 8.000% due 05/01/17 58 60
Pool #047728 8.000% due 05/01/02 94 97
Pool #050377 9.500% due 12/01/05 66 69
Pool #050389 9.500% due 01/01/06 221 232
Pool #050621 7.000% due 08/01/99 6 6
Pool #050748 7.500% due 12/31/99 229 234
Pool #050752 7.000% due 05/01/00 119 121
Pool #050758 7.000% due 06/01/00 93 94
Pool #050765 7.000% due 07/01/23 95 96
Pool #050766 7.500% due 07/01/23 404 414
Pool #050989 7.000% due 02/01/09 137 139
Pool #052078 8.000% due 07/01/02 117 122
Pool #053718 8.000% due 08/01/17 128 133
Pool #054738 8.000% due 09/01/02 55 57
Pool #055397 8.000% due 07/01/17 395 411
Pool #057194 8.000% due 10/01/17 115 120
Pool #061217 8.000% due 05/01/03 3 3
Pool #061354 8.000% due 05/01/03 133 138
Pool #062502 8.000% due 06/01/03 52 54
Pool #063743 9.500% due 07/01/03 148 156
</TABLE>
Diversified Bond Fund 79
<PAGE> 208
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Pool #064518 9.500% due 08/01/02 $ 196 $ 206
Pool #070607 8.000% due 07/01/02 455 472
Pool #070694 9.500% due 12/01/05 104 110
Pool #087274 8.000% due 08/01/04 384 398
Pool #103914 9.500% due 09/01/05 59 63
Pool #110503 8.000% due 01/01/17 175 183
Pool #120778 8.000% due 03/01/17 59 62
Pool #124542 7.000% due 11/01/99 474 483
Pool #124721 7.000% due 02/01/23 952 962
Pool #124748 6.500% due 03/01/00 80 81
Pool #125350 6.500% due 06/01/09 1,872 1,882
Pool #127926 8.000% due 05/01/20 82 86
Pool #145536 8.000% due 06/01/03 47 48
Pool #157517 7.000% due 04/01/07 216 220
Pool #161640 7.500% due 12/01/22 236 242
Pool #183514 8.000% due 08/01/22 56 58
Pool #184344 7.500% due 10/01/22 189 194
Pool #187852 10.500% due 08/01/10 62 68
Pool #190506 6.500% due 12/01/08 319 320
Pool #190560 6.500% due 01/01/09 357 358
Pool #199710 7.000% due 05/01/00 35 35
Pool #204951 8.000% due 05/01/22 337 351
Pool #208747 7.000% due 05/01/00 230 234
Pool #210307 7.000% due 04/01/00 409 416
Pool #217364 8.000% due 01/01/22 583 606
Pool #224716 6.500% due 07/01/23 999 989
Pool #226836 7.000% due 09/25/08 235 240
Pool #229363 6.500% due 08/01/23 51 50
Pool #232574 6.500% due 08/01/08 499 502
Pool #233079 7.000% due 09/15/08 99 101
Pool #235711 7.000% due 11/25/23 162 164
Pool #236344 7.000% due 09/25/08 227 231
Pool #237598 7.500% due 05/01/24 199 204
Pool #238739 7.000% due 11/25/23 423 426
Pool #239057 7.000% due 09/01/23 309 312
Pool #240738 6.500% due 10/01/08 186 187
Pool #244286 7.000% due 05/01/24 168 169
Pool #244550 7.000% due 11/25/23 476 481
Pool #244970 7.000% due 11/25/23 456 460
Pool #245865 6.500% due 02/01/09 318 319
Pool #246599 7.000% due 11/25/23 155 157
Pool #248089 7.000% due 11/25/23 407 410
Pool #250030 7.000% due 05/01/24 28 28
Pool #250035 6.500% due 05/01/09 57 57
Pool #263037 6.500% due 05/01/09 391 393
Pool #265868 6.500% due 01/01/24 151 150
Pool #268936 6.500% due 01/01/24 48 48
Pool #270164 6.500% due 02/01/09 672 676
Pool #278623 8.500% due 08/01/24 440 459
Pool #279123 6.500% due 04/01/09 353 355
Pool #279585 7.500% due 04/01/24 418 428
Pool #280199 7.000% due 04/01/24 64 64
Pool #280256 7.000% due 05/01/24 379 382
Pool #280810 6.500% due 05/01/09 234 235
Pool #281940 6.500% due 05/01/09 387 389
Pool #282125 6.500% due 05/01/09 92 92
Pool #282300 6.500% due 04/01/09 756 760
Pool #282424 6.500% due 05/01/09 422 424
Pool #282833 7.000% due 06/01/09 190 194
Pool #283260 7.500% due 06/01/24 666 682
Pool #283947 7.500% due 06/01/24 164 168
Pool #284192 6.500% due 05/01/09 114 114
Pool #284451 6.500% due 05/01/09 57 58
Pool #284659 7.000% due 05/01/09 305 311
Pool #284690 7.000% due 06/01/09 293 298
Pool #285203 7.000% due 06/01/24 228 230
Pool #285280 7.000% due 06/01/24 411 414
Pool #286112 7.000% due 06/01/24 2,858 2,881
Pool #286570 7.000% due 06/01/24 800 806
Pool #286829 7.000% due 06/01/24 339 343
Pool #287464 6.500% due 06/01/09 131 132
Pool #288772 8.500% due 11/01/24 285 297
Pool #288935 7.500% due 07/01/24 802 822
Pool #290876 7.500% due 07/01/24 50 51
Pool #292564 8.500% due 12/01/24 472 493
Pool #295473 7.500% due 09/01/24 168 172
Pool #296279 7.500% due 10/01/24 594 608
Pool #299256 8.500% due 12/01/24 90 94
Pool #303555 7.000% due 09/01/25 3,163 3,189
Pool #307029 7.000% due 07/01/25 828 835
Pool #316681 7.000% due 07/01/25 751 757
Pool #316938 7.000% due 07/01/25 296 298
Pool #318203 7.000% due 08/01/25 780 787
Pool #318949 7.000% due 08/01/25 803 809
Pool #319622 7.000% due 08/01/25 654 659
Pool #319647 7.000% due 08/01/25 725 731
Pool #320080 7.000% due 08/01/25 310 313
Pool #320320 7.000% due 08/01/25 977 985
Pool #320333 7.000% due 08/01/25 128 129
Federal National Mortgage Association
7.500% 7 Year TBA (b) 1,260 1,290
7.000% 30 Year TBA (b) 5,650 5,696
</TABLE>
80 Diversified Bond Fund
<PAGE> 209
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Federal National Mortgage Association
Interest Only Inverse Floater
Series 1993-208 Class SA
0.273% due 02/25/23 (c) $ 56,427 $ 511
Principal Only Strip
Zero Coupon due 10/25/21 238 190
REMIC Trust Series 1992-G57 Class Z
7.800% due 10/25/22 4,750 4,907
REMIC Trust Series 1992-G36 Class A
7.000% due 04/25/15 686 694
Government National Mortgage Association
Pool #008148 6.500% due 02/20/23 (c) 4,799 4,892
Pool #008482 7.250% due 08/20/24 (c) 1,862 1,898
Pool #008503 7.250% due 09/20/24 (c) 2,792 2,846
Pool #146110 9.500% due 05/15/16 30 33
Pool #147480 9.500% due 03/15/16 53 57
Pool #149590 9.000% due 05/15/16 92 98
Pool #153267 9.500% due 04/15/16 21 23
Pool #154050 9.500% due 05/15/16 33 35
Pool #155749 8.500% due 06/15/16 46 49
Pool #156576 8.500% due 01/15/17 239 253
Pool #159956 9.000% due 06/15/16 403 430
Pool #161666 9.000% due 08/15/16 35 37
Pool #166178 8.500% due 07/15/16 237 251
Pool #168336 9.000% due 08/15/20 150 160
Pool #169824 9.000% due 11/15/16 72 77
Pool #170662 8.500% due 08/15/16 341 361
Pool #171553 9.000% due 07/15/16 526 562
Pool #171772 9.000% due 10/15/16 775 827
Pool #171776 9.000% due 11/15/16 185 198
Pool #172035 9.000% due 08/15/16 103 110
Pool #172723 8.500% due 07/15/16 71 75
Pool #172908 9.000% due 09/15/16 46 49
Pool #173049 9.000% due 07/15/16 348 371
Pool #174840 9.000% due 10/15/16 68 73
Pool #180290 8.500% due 11/15/16 603 639
Pool #182526 8.500% due 02/15/17 338 358
Pool #182616 9.000% due 06/15/17 44 47
Pool #182643 9.000% due 10/15/16 8 8
Pool #187956 9.000% due 11/15/16 26 28
Pool #190486 8.000% due 03/15/17 133 140
Pool #192748 8.500% due 08/15/17 69 74
Pool #192883 8.500% due 01/15/17 150 159
Pool #193242 8.500% due 01/15/17 138 146
Pool #193800 9.000% due 10/15/16 135 144
Pool #194001 8.500% due 02/15/17 349 370
Pool #196932 8.500% due 04/15/17 30 32
Pool #197268 8.500% due 05/15/17 177 188
Pool #199031 8.500% due 01/15/17 135 143
Pool #199531 8.500% due 02/15/17 341 362
Pool #202144 8.500% due 02/15/17 588 623
Pool #202883 8.500% due 03/15/17 169 179
Pool #204828 8.500% due 02/15/17 7 7
Pool #205426 8.500% due 02/15/17 153 162
Pool #208209 8.000% due 05/15/17 32 33
Pool #209198 8.500% due 03/15/17 266 282
Pool #209432 9.000% due 05/15/17 155 165
Pool #211127 8.500% due 03/15/17 320 339
Pool #211129 8.500% due 06/15/17 65 69
Pool #213365 8.000% due 04/15/17 29 30
Pool #216928 8.500% due 05/15/17 283 299
Pool #217536 8.500% due 05/15/17 104 110
Pool #220383 8.500% due 07/15/17 310 329
Pool #224505 9.000% due 07/15/17 43 46
Pool #225968 8.500% due 07/15/17 61 65
Pool #246616 9.000% due 04/15/18 19 20
Pool #290338 10.500% due 06/15/20 95 106
Pool #291365 10.500% due 07/15/20 38 42
Pool #295123 10.500% due 10/15/20 78 87
Pool #297999 10.500% due 12/15/20 182 204
Pool #299159 10.500% due 11/15/20 523 585
Pool #299881 9.000% due 04/15/21 20 22
Pool #301982 10.500% due 01/15/21 165 185
Pool #305463 9.000% due 04/15/21 15 15
Pool #330230 7.000% due 06/15/23 79 80
Pool #330867 7.000% due 11/15/22 325 329
Pool #335301 6.500% due 03/15/09 189 191
Pool #338250 7.000% due 11/15/22 527 534
Pool #340165 6.500% due 03/15/09 26 26
Pool #340376 7.000% due 05/15/23 505 511
Pool #343370 7.000% due 07/15/23 534 541
Pool #344510 7.000% due 09/15/23 364 368
Pool #345119 7.500% due 12/15/08 476 493
Pool #345170 7.000% due 08/15/23 512 518
Pool #345626 7.500% due 03/15/24 670 690
Pool #347721 6.500% due 06/15/09 269 271
Pool #350386 7.000% due 05/15/23 326 330
Pool #350934 7.000% due 08/15/23 91 92
Pool #351129 6.500% due 07/15/08 245 247
Pool #351553 7.000% due 10/15/23 479 485
Pool #351711 7.000% due 10/15/23 511 517
Pool #351923 7.500% due 06/15/23 654 673
Pool #352163 7.000% due 06/15/23 490 497
Pool #352474 7.000% due 06/15/23 528 536
Pool #354191 7.000% due 06/15/23 364 369
Pool #355637 7.000% due 07/15/23 348 353
</TABLE>
Diversified Bond Fund 81
<PAGE> 210
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Pool #356469 7.000% due 07/15/23 $ 345 $ 349
Pool #356697 7.000% due 08/15/23 371 375
Pool #356952 7.000% due 06/15/23 1,584 1,603
Pool #357959 7.000% due 07/15/23 488 494
Pool #358499 7.000% due 07/15/23 38 39
Pool #358674 7.000% due 06/15/23 81 82
Pool #358801 7.500% due 06/15/23 837 863
Pool #359897 7.000% due 10/15/23 68 69
Pool #361279 7.000% due 12/15/23 37 38
Pool #362159 7.500% due 12/15/08 189 196
Pool #363681 7.000% due 11/15/23 73 75
Pool #363760 7.000% due 11/15/23 74 75
Pool #363909 7.500% due 05/15/24 634 652
Pool #364318 7.000% due 08/15/23 519 525
Pool #364400 7.000% due 11/15/23 63 64
Pool #364457 7.000% due 09/15/23 551 557
Pool #366328 7.000% due 09/15/23 76 77
Pool #366437 7.000% due 09/15/23 35 36
Pool #367124 7.000% due 10/15/23 483 489
Pool #367861 7.000% due 10/15/23 125 127
Pool #368988 6.500% due 03/15/09 232 234
Pool #370426 7.000% due 09/15/23 519 526
Pool #370890 7.000% due 11/15/23 295 298
Pool #370931 7.000% due 11/15/23 327 331
Pool #371539 7.000% due 10/15/23 294 297
Pool #371828 6.500% due 06/15/09 584 590
Pool #372782 6.500% due 01/15/09 579 584
Pool #373788 7.000% due 10/15/23 93 95
Pool #374508 7.000% due 10/15/23 66 67
Pool #376293 7.000% due 11/15/23 69 69
Pool #376535 9.000% due 06/15/24 352 372
Pool #381495 7.000% due 12/15/23 75 76
Pool #386652 9.000% due 01/15/25 619 656
Pool #389814 6.500% due 05/15/09 147 148
Pool #390393 6.500% due 03/15/09 209 211
Pool #390730 7.000% due 03/15/24 97 99
Pool #403980 9.000% due 10/15/24 744 788
Pool #404014 9.000% due 12/15/24 676 716
Pool #405801 9.000% due 11/15/24 790 837
Pool #412531 7.000% due 12/15/25 990 1,002
Pool #413889 7.500% due 08/15/25 195 201
Pool #414123 7.500% due 08/15/25 459 472
Pool #415808 7.000% due 12/15/25 545 551
Pool #419251 9.000% due 11/15/25 355 376
Pool #780023 7.000% due 09/15/24 1,325 1,341
Pool #818263 5.000% due 05/20/24 (c) 2,509 2,501
Government National Mortgage Association
7.000% 15 Year TBA (b) 290 297
6.500% 30 Year TBA (b) 5,000 4,959
7.000% 30 Year TBA (b) 2,750 2,783
8.000% 30 Year TBA (b) 1,000 1,042
8.500% 30 Year TBA (b) 1,940 2,054
Mid-St Trust II
Class A-3 CMO
9.350% due 04/01/98 573 614
Morgan Stanley Mortgage Trust
Class P-4 CMO
7.850% due 08/20/18 45 45
PNC Mortgage Securities Corp.
Series 1994-3 Class A-1
7.500% due 06/18/10 733 734
Ryland Acceptance Corp. Four
Series 88 Class E CMO
7.950% due 01/01/19 2,322 2,365
Thomson McKinnon Mortgage
Assets Series 10 Class Z CMO
9.100% due 06/20/19 4,441 4,438
United States Department
of Veteran Affairs REMIC
Series 1992-1 Class 2-E
7.750% due 03/15/16 550 575
--------
193,112
--------
NON-US BONDS - 1.2%
Canada, Government of
8.750% due 12/01/05 CAD 3,000 2,457
Germany, Republic of
7.500% due 11/11/04 DEM 5,000 3,839
--------
6,296
--------
UNITED STATES GOVERNMENT
AGENCIES - 5.1%
Federal National Mortgage Association
8.200% due 03/10/16 $ 2,310 2,788
Federal National Mortgage
Association (MTN)
7.640% due 06/16/04 1,480 1,529
Government Backed Trust Certificates
Class 1-C
9.250% due 11/15/01 8,305 9,226
</TABLE>
82 Diversified Bond Fund
<PAGE> 211
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Government Backed Trust Certificates
Series 2-E
9.400% due 05/15/02 (c) $ 1,135 $ 1,266
Series T-3
9.625% due 05/15/02 (c) 4,955 5,512
Resolution Funding Corp.
8.875% due 07/15/20 3,155 4,182
8.625% due 01/15/21 880 1,144
8.625% due 01/15/30 390 514
--------
26,161
--------
UNITED STATES GOVERNMENT
TREASURIES - 29.9%
United States Treasury Bonds
10.750% due 08/15/05 9,075 12,468
12.750% due 11/15/10 2,425 3,694
13.875% due 05/15/11 2,280 3,711
7.500% due 11/15/16 6,800 7,973
8.750% due 05/15/17 8,255 10,917
8.875% due 08/15/17 615 824
8.125% due 08/15/19 11,550 14,522
7.875% due 02/15/21 3,965 4,883
8.125% due 08/15/21 2,845 3,601
7.250% due 08/15/22 1,990 2,302
7.125% due 02/15/23 250 286
United States Treasury Notes
4.375% due 11/15/96 4,665 4,631
6.750% due 02/28/97 2,775 2,822
6.875% due 02/28/97 1,600 1,630
6.500% due 05/15/97 3,535 3,594
8.500% due 05/15/97 3,270 3,410
6.500% due 08/15/97 10,805 11,021
8.750% due 10/15/97 555 588
5.750% due 10/31/97 2,795 2,822
8.875% due 11/15/97 955 1,016
5.625% due 01/31/98 1,235 1,245
5.125% due 02/28/98 40 40
5.125% due 03/31/98 1,780 1,777
5.375% due 05/31/98 4,515 4,530
5.125% due 06/30/98 2,460 2,455
8.250% due 07/15/98 1,770 1,894
5.250% due 07/31/98 1,405 1,405
5.125% due 11/30/98 1,000 997
5.875% due 03/31/99 2,595 2,641
6.750% due 06/30/99 1,325 1,385
6.375% due 07/15/99 1,295 1,342
6.875% due 07/31/99 1,750 1,837
6.875% due 08/31/99 1,600 1,682
6.375% due 01/15/00 1,275 1,324
7.750% due 01/31/00 12,750 13,850
7.125% due 02/29/00 5,795 6,169
6.875% due 03/31/00 5,000 5,286
8.750% due 08/15/00 795 903
6.250% due 02/15/03 5,275 5,503
5.750% due 08/15/03 245 248
United States Treasury
Principal Only Strip
Zero Coupon due 11/15/99 200 163
--------
153,391
--------
YANKEE BONDS - 1.6%
African Development Bank
8.800% due 09/01/19 295 373
Alberta, Province of
9.250% due 04/01/00 160 181
Asian Development Bank
8.500% due 05/02/01 180 203
European Investment Bank
10.125% due 10/01/00 190 224
Hydro Quebec
9.710% due 12/24/97 1,000 1,074
Inter-American Development Bank
7.000% due 06/15/25 1,025 1,091
Manitoba, Province of
9.250% due 04/01/20 200 263
New Brunswick, Province of
9.750% due 05/15/20 190 254
Newfoundland, Province of
10.000% due 12/01/20 90 121
Nova Scotia, Province of
9.125% due 05/01/21 640 796
Quebec, Province of
7.500% due 07/15/23 775 812
7.125% due 02/09/24 705 709
Saskatchewan, Province of
8.000% due 07/15/04 1,045 1,165
St. George Bank, Ltd.
7.150% due 10/01/05 775 802
--------
8,068
--------
TOTAL LONG-TERM INVESTMENTS
(cost $480,677) 502,828
</TABLE>
--------
Diversified Bond Fund 83
<PAGE> 212
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
--------- --------
<S> <C> <C>
OPTIONS PURCHASED - 0.2%
United States Treasury Notes
Feb 96.5 Call (e) 1,500* $ 841
--------
TOTAL OPTIONS PURCHASED
(cost $745) 841
--------
PREFERRED STOCKS - 0.6%
Australia & New Zealand
Banking Group, Ltd. 23,500 640
ConAgra Capital LC Series B (c) 13,000 278
Credit Lyonnais Capital S.C.A. - ADR 15,700 390
Lasalle National Corp. Series K 14,000 735
Texaco Capital Series B 15,600 328
TIG Holdings, Inc. 7,200 768
--------
TOTAL PREFERRED STOCKS
(cost $3,197) 3,139
--------
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 11.8%
Federal Home Loan Mortgage Corp.
Discount Notes (a)
5.740% due 01/16/96 $ 2,750 $ 2,744
Frank Russell Investment Company
Money Market Fund due on demand (a) 58,140 58,140
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $60,884) 60,884
--------
TOTAL INVESTMENTS
(identified cost $545,503)(d) - 110.5% 567,692
OTHER ASSETS AND LIABILITIES,
NET - (10.5%) (53,884)
--------
NET ASSETS - 100.0% $513,808
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate security.
(d) At December 31, 1995, the cost for federal income tax purposes was
$545,000 and net unrealized appreciation for all securities was $22,692.
This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$24,147 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $1,455.
(e) Nonincome-producing security.
* Number of contracts.
The accompanying notes are an integral part of the financial statements.
84 Diversified Bond Fund
<PAGE> 213
DIVERSIFIED BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $545,502,660)(Note 2) . . . . . . . . . . $567,692,373
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,224
Forward foreign currency exchange contracts (cost $3,990,013)(Notes 2 and 6) . . 3,990,013
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,899,324
Investments sold (regular settlement). . . . . . . . . . . . . . . . . . . . . 9,014,627
Investments sold (delayed settlement). . . . . . . . . . . . . . . . . . . . . 3,810,937
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,491,635
------------
594,957,133
LIABILITIES
Payables:
Investments purchased (regular settlement) . . . . . . . . . . . $15,186,615
Investments purchased (delayed settlement) . . . . . . . . . . . 61,620,975
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . 159,046
Accrued bookkeeping service fees (Note 4). . . . . . . . . . . . 10,439
Accrued management fees (Note 4) . . . . . . . . . . . . . . . . 194,225
Accrued transfer agent fees (Note 4) . . . . . . . . . . . . . . 37,154
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . 66,265
Forward foreign currency exchange contracts
(cost $3,990,013)(Notes 2 and 6) . . . . . . . . . . . . . . . . 3,874,042 81,148,761
----------- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $513,808,372
------------
------------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . . . . . . . . . $ 48,520
Accumulated net realized gain (loss). . . . . . . . . . . . . . . . (10,540,994)
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,189,713
Foreign currency-related transactions . . . . . . . . . . . . . . 115,902
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . 216,916
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 501,778,315
------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $513,808,372
------------
------------
Net asset value, offering and redemption price per share
($513,808,372 divided by 21,691,574 shares of $.01 par value
shares of beneficial interest outstanding). . . . . . . . . . . . . $23.69
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 85
<PAGE> 214
DIVERSIFIED BOND FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,382,350
Dividends from Money Market Fund (Note 5) . . . . . . . . . . . . . 2,704,342
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,510
-----------
37,365,202
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . . . . . . $2,308,823
Custodian fees. . . . . . . . . . . . . . . . . . . . . 313,176
Transfer agent fees . . . . . . . . . . . . . . . . . . 240,755
Bookkeeping service fees. . . . . . . . . . . . . . . . 56,280
Professional fees . . . . . . . . . . . . . . . . . . . 28,282
Registration fees . . . . . . . . . . . . . . . . . . . 61,072
Trustees' fees. . . . . . . . . . . . . . . . . . . . . 4,501
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 35,709 3,048,598
---------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 34,316,604
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,954,837
Foreign currency-related transactions . . . . . . . . . . . . . . . 84,358
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,675,270
Foreign currency-related transactions . . . . . . . . . . . . . . . 115,902
-----------
Net gain (loss) on investments. . . . . . . . . . . . . . . . . . . . 49,830,367
-----------
Net increase (decrease) in net assets resulting from operations . . . $84,146,971
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
86 Diversified Bond Fund
<PAGE> 215
DIVERSIFIED BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,316,604 $ 33,198,214
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,954,837 (15,176,170)
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . 84,358 (491,175)
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,675,270 (33,079,340)
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . 115,902 (27,109)
------------ -----------
Net increase (decrease) in net assets resulting from operations . . . . . . . . . . 84,146,971 (15,575,580)
Distributions to shareholders:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,786,410) (32,359,732)
In excess of net realized gain on investments . . . . . . . . . . . . . . . . . . -- (182,259)
Increase (decrease) in net assets from Fund share transactions. . . . . . . . . . . (60,866,783) 96,091,443
------------ -----------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . (11,506,222) 47,973,872
Net assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . 525,314,594 477,340,722
------------ -----------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $48,520 and $268,550, respectively). . . . . . . . . . . . . . . . . . . . . . $513,808,372 $525,314,594
------------ -----------
------------ -----------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS
1995 1994
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold. . . . . . . . . . . . . . . . . . . 7,173,629 $163,517,029 10,821,598 $243,887,095
Fund shares issued to shareholders
in reinvestments of distributions . . . . . . . . . 841,387 19,186,853 814,891 18,064,635
Fund shares redeemed. . . . . . . . . . . . . . . . . (10,716,980) (243,570,665) (7,359,378) (165,860,287)
----------- ------------ ---------- ------------
Net increase (decrease) . . . . . . . . . . . . . . . (2,701,964) $(60,866,783) 4,277,111 $ 96,091,443
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 87
<PAGE> 216
DIVERSIFIED BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . 1.54 1.46 1.48 1.62 1.72
Net realized and unrealized gain (loss) on investments . . . . . . . 2.18 (2.22) .83 (.10) 1.61
------- ------- ------- ------- -------
Total Income From Investment Operations. . . . . . . . . . . . . . . 3.72 (.76) 2.31 1.52 3.33
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . (1.56) (1.42) (1.48) (1.63) (1.69)
In excess of net investment income. . . . . . . . . . . . . . . . . -- -- (.01) -- --
Net realized gain on investments . . . . . . . . . . . . . . . . . . -- -- (.58) (.69) (.16)
In excess of net realized gain on investments. . . . . . . . . . . . -- (.02) -- -- --
------- ------- ------- ------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . (1.56) (1.44) (2.07) (2.32) (1.85)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.76 (3.25) 10.02 6.57 15.29
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets . . . . . . . . . . . .59 .56 .58 .62 .74
Operating expenses, gross, to average net assets . . . . . . . . . . .59 .56 .58 .67 .74
Net investment income to average net assets. . . . . . . . . . . . . 6.69 6.57 6.13 6.79 7.38
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . 135.85 153.21 177.74 228.37 130.96
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . . . 513,808 525,315 477,341 412,394 344,081
Per share amount of fees waived ($ omitted). . . . . . . . . . . . . -- -- -- .0115 --
</TABLE>
88 Diversified Bond Fund
<PAGE> 217
DIVERSIFIED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS LIPPER-C-
ENDED DECEMBER 31 DIVERSIFIED BOND LB AGGREGATE ** INTERMEDIATE++
- ----------------- ----------------- --------------- ----------------------------
<S> <C> <C> <C>
* $ 10,000 $ 10,000 $ 10,000
1986 $ 11,549 $ 11,526 $ 11,366
1987 $ 11,694 $ 11,844 $ 11,670
1988 $ 12,590 $ 12,779 $ 12,481
1989 $ 14,167 $ 14,636 $ 13,898
1990 $ 15,242 $ 15,947 $ 14,881
1991 $ 17,573 $ 18,499 $ 17,141
1992 $ 18,726 $ 19,869 $ 18,297
1993 $ 20,602 $ 21,806 $ 20,036
1994 $ 19,933 $ 21,170 $ 19,367
1995 $ 23,473 $ 25,081 $ 22,578
</TABLE>
Diversified Bond Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- -------------- -------------
<S> <C> <C>
1 Year $ 11,776 17.76%
5 Years $ 15,400 9.01%***
10 Years $ 23,473 8.90%***
</TABLE>
Lehman Brothers Aggregate Bond Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- -------------- -------------
<S> <C> <C>
1 Year $ 11,848 18.48%
5 Years $ 15,727 9.48%***
10 Years $ 25,081 9.63%***
</TABLE>
Lipper-C- Intermediate Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- -------------- -------------- -------------
<S> <C> <C>
1 Year $ 11,658 16.58%
5 Years $ 15,172 8.69%***
10 Years $ 22,578 8.48%***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
++ Lipper-C- Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates.
*** Annualized.
DIVERSIFIED BOND FUND returned 17.8% for 1995, trailing the Lehman Brothers
Aggregate Bond Index return of 18.5%. The portfolio was managed in a manner
consistent with its objective to reduce risk and provide exposure to multiple
strategies for adding value by employing managers with separate and distinct
assignments. The Fund seeks to provide investors a conservative vehicle to meet
the traditional objectives of bond investing core fixed income exposure and
diversification against equities.
While interest rates fell throughout 1995, bond investors experienced an
eventful year. Bond markets reacted disapprovingly to the US budget impasse in
Washington, but soon resumed their bullish form. By year end, investors bid the
30-year treasury bond yield down to 5.94%, a two-year low. For the year, the
Fund trailed the index, largely due to the negative impact of falling interest
rates on its mortgage-backed securities holdings. Duration was an important
factor in returns for most of the year, with long maturity bonds up more than
30%. Fund managers added value in the corporate bond sector, which led other
sectors for most of 1995. Although it lagged the index, the Fund's performance
was nearly 120 basis points better than the Lipper-Registered Trademark-
Intermediate Investment Grade Debt Funds Average.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Diversified Bond Fund 89
<PAGE> 218
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 93.6%
ASSET-BACKED SECURITIES - 9.9%
Advanta Mortgage Loan Trust
Series 1993-4 Class A-1
7.270% due 06/25/08 $ 695 $ 696
ALPS Pass-thru Trust
Series 1994-1 Class A-2
7.150% due 11/15/97 (c) 416 422
Chase Manhattan Grantor Trust
Series 1995-B Class A
5.900% due 11/15/01 967 972
Daimler-Benz Auto Grantor Trust
Series 1995-A Class A
5.850% due 05/15/02 1,346 1,351
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 101 98
Ford Credit Grantor Trust
Series 1994-B Class A
7.300% due 10/15/99 1,183 1,205
Series 1995-A Class A
5.900% due 05/15/00 832 835
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 664 648
Green Tree Financial Corp.
Series 1992-2 Class A-2
7.050% due 01/15/18 84 85
Series 1994-1 Class A-1
5.600% due 04/15/19 1,013 1,012
Series 1995-A Class A
7.250% due 07/15/05 378 383
Series 1995-D Class A2
6.250% due 09/15/25 1,025 1,033
NationsBank Auto Grantor Trust
Series 1995-A Class A
5.850% due 06/15/02 1,446 1,453
Nissan Auto Receivables Grantor Trust
Series 1995-A Class A
6.100% due 08/15/01 2,250 2,269
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 550 566
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-CHF Class B
7.150% due 12/25/20 1,123 1,135
Series 1992-M2 Class A-4
8.465% due 03/25/20 44 44
Series 1992-M3 Class A-1
7.750% due 07/25/30 171 174
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 311 318
TMS Home Equity Loan Trust
Series 1993-D Class A-1
5.675% due 12/15/08 1,414 1,376
Series 1994-C Class A-1
6.775% due 09/15/07 920 921
UCFC Home Equity Loan Trust
Series 1993-B1 Class A-1
6.075% due 07/25/14 223 223
Series 1994-B Class A-6
7.100% due 06/10/23 740 762
------
17,981
------
CORPORATE BONDS AND NOTES - 25.8%
Ahmanson (H.F.)
9.875% due 11/15/99 400 453
Avalon Properties, Inc.
7.375% due 09/15/02 500 516
Bank of Boston Corp.
9.500% due 08/15/97 1,250 1,326
Bear Stearns Co., Inc.
6.750% due 08/15/00 1,000 1,028
Capital One Bank (MTN)
8.125% due 02/27/98 1,750 1,828
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 1,400 1,414
Chase Manhattan Corp.
7.500% due 12/01/97 500 517
5.938% due 12/05/09 (c) 800 774
Chemical Banking Corp.
10.375% due 03/15/99 895 1,006
CIT Group Holdings, Inc.
7.625% due 12/05/96 475 483
ERP Operating, L.P.
6.625% due 12/22/97 (c) 875 880
8.500% due 05/15/99 1,000 1,060
First Union Corp.
6.750% due 01/15/98 410 418
First USA Bank
8.100% due 02/21/97 340 350
5.750% due 01/15/99 875 872
Fleet Financial Group, Inc.
7.250% due 10/15/97 1,225 1,260
Fleet/Norstar Financial Group, Inc.
7.650% due 03/01/97 875 894
Ford Motor Credit Co. CMS Floater (MTN)
4.820% due 07/08/96 (c) 3,200 3,188
</TABLE>
Volatility Constrained Bond Fund 91
<PAGE> 219
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Franchise Finance Corp.
7.000% due 11/30/00 $ 675 $ 678
General Motors Acceptance Corp.
7.750% due 04/15/97 465 477
General Motors Acceptance Corp. (MTN)
6.625% due 03/22/99 300 308
Georgia Pacific Corp.
9.850% due 06/15/97 700 738
Goldman Sachs Group, L.P.
7.625% due 05/29/97 450 461
6.375% due 06/15/00 550 556
6.200% due 12/15/00 450 453
Greyhound Financial Corp.
8.500% due 02/15/99 775 831
GTE Corp.
10.750% due 09/15/17 1,200 1,344
Health & Rehabilitation Properties Trust
6.345% due 07/13/99 (c) 975 970
Hertz Corp.
9.500% due 05/15/98 900 972
Huntington Bancshares, Inc.
Series A (MTN) 6.150% due 10/15/98 1,700 1,722
ITT Corp.
6.250% due 11/15/00 450 454
Merrill Lynch & Co., Inc.
9.000% due 05/01/98 1,265 1,353
6.700% due 08/01/00 400 412
Midlantic Corp.
9.250% due 09/01/99 450 499
Occidental Petroleum Corp.
9.625% due 07/01/99 900 915
Occidental Petroleum Corp. (MTN)
5.950% due 11/09/98 1,400 1,407
5.960% due 11/09/98 150 151
Salomon, Inc.
6.700% due 12/01/98 500 502
Salomon, Inc. CMT Floater (MTN)
5.767% due 04/05/99 (c) 2,350 2,233
Shawmut Corp.
8.875% due 04/01/96 650 654
Smith Barney Holdings, Inc.
6.000% due 03/15/97 1,075 1,079
7.875% due 10/01/99 1,000 1,065
System Energy Resources, Inc.
7.625% due 04/01/99 2,000 2,074
Taubman Realty Group, L.P.
8.000% due 06/15/99 475 498
Tennessee Gas Pipeline Co.
9.250% due 05/15/96 818 828
9.000% due 01/15/97 750 773
Time Warner, Inc.
9.625% due 05/01/02 925 1,071
Transamerica Corp.
9.875% due 01/01/98 500 540
USF&G Corp.
7.000% due 05/15/98 2,500 2,555
------
46,840
------
EURODOLLAR BONDS - 1.1%
Chrysler Financial Corp.
9.500% due 04/12/96 900 907
Goldman Sachs Group, L.P.
5.000% due 08/23/96 1,050 1,044
-----
1,951
-----
MORTGAGE-BACKED SECURITIES - 31.6%
FDIC REMIC Trust
Series 1994-C1 Class 2A-1
6.300% due 09/25/25 91 91
Series 1994-C1 Class 2A-2
7.850% due 09/25/25 1,100 1,134
Federal Home Loan Mortgage Corp.
Participation Certificates
Group # 17-0163 14.000% due 04/01/16 18 21
Group # 23-0114 7.375% due 03/01/06 (c) 548 560
Group # 27-4537 8.000% due 06/01/96 7 7
Group # 27-4978 8.000% due 07/01/96 9 9
Group # 30-9784 8.000% due 12/01/17 1,212 1,259
Group # 40-9223 6.906% due 01/01/24 (c) 749 761
Group # 54-4461 8.500% due 04/01/09 254 265
Group # 84-6188 6.786% due 12/01/99 (c) 1,176 1,201
Group # 84-6190 7.358% due 04/01/29 (c) 867 896
Group # 85-0105 9.000% due 09/01/05 589 616
Group # A0-1509 0.000% due 03/01/20 538 592
Group # D2-9159 7.500% due 10/01/07 828 852
Group # G0-0238 8.500% due 07/01/24 1,233 1,298
Group # G5-0215 8.000% due 08/01/97 3,967 3,994
Group # G5-0238 8.000% due 01/01/00 974 980
Group # G5-0258 7.500% due 05/01/00 2,248 2,276
Group # G5-0297 7.500% due 10/01/00 954 966
Group # L7-3024 8.000% due 12/01/99 197 198
Group # L7-3099 8.000% due 02/01/00 466 469
Group # L7-3102 8.500% due 01/01/00 487 490
Group # L7-3115 8.000% due 02/01/00 333 336
Group # L9-0152 8.000% due 02/01/00 735 740
Group # L9-0166 7.500% due 05/01/00 975 988
Group # M9-0379 8.500% due 12/01/99 447 449
Group # M9-0386 8.000% due 02/01/00 241 242
</TABLE>
92 Volatility Constrained Bond Fund
<PAGE> 220
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
-------- -------
<S> <C> <C>
Group # M9-0387 7.500% due 02/01/00 $ 823 $ 833
Federal Home Loan Mortgage Corp.
Participation Certificates
Series 1357 Class E Inverse Floater
3.464% due 08/15/97 (c) 594 580
Series 1442 Class S Inverse Floater
4.920% due 12/15/97 543 538
Federal National Mortgage Association
Pool #013957 8.500% due 11/01/01 244 254
Pool #019455 8.750% due 03/01/04 76 79
Pool #067546 7.000% due 10/01/05 206 211
Pool #081582 7.000% due 02/01/07 399 407
Pool #116591 7.248% due 01/01/21 (c) 717 723
Pool #212919 6.910% due 01/01/21 (c) 983 978
Pool #300695 9.500% due 12/01/24 215 229
Pool #303172 7.523% due 12/01/24 (c) 800 823
Pool #303293 7.485% due 07/01/24 (c) 781 801
Pool #303599 6.565% due 10/01/24 (c) 955 986
Pool #304670 9.500% due 01/01/25 799 851
Pool #305450 9.500% due 01/01/25 764 814
Pool #306052 9.500% due 02/01/25 729 776
Pool #308163 9.500% due 04/01/25 808 861
Pool #308278 9.500% due 04/01/25 486 518
Pool #325732 9.500% due 09/01/17 924 991
Federal National Mortgage Association
REMIC Trust Series 1995-W2 Class 1A
7.610% due 05/25/22 792 809
Government National Mortgage Association
Pool #003196 7.250% due 11/15/03 251 262
Pool #005719 7.250% due 02/15/05 306 320
Pool #007204 7.250% due 05/15/05 35 36
Pool #007433 7.250% due 07/15/05 188 197
Pool #007612 7.250% due 06/15/05 340 356
Pool #008000 7.375% due 06/20/22 (c) 2,678 2,729
Pool #008348 7.000% due 12/20/23 (c) 1,027 1,051
Pool #008580 7.250% due 11/15/05 180 188
Pool #008597 7.500% due 02/20/25 (c) 788 802
Pool #008623 7.500% due 04/20/25 405 413
Pool #008638 6.000% due 06/20/25 (c) 790 804
Pool #008644 7.500% due 06/20/25 (c) 1,404 1,433
Pool #009360 7.250% due 01/15/06 307 321
Pool #121490 10.000% due 03/15/15 182 201
Pool #148859 10.000% due 01/15/16 193 213
Pool #175626 10.000% due 04/15/16 152 168
Pool #204521 10.000% due 11/15/17 69 76
Pool #228783 10.000% due 09/15/17 313 346
Pool #252144 10.000% due 11/15/18 152 169
Pool #254833 10.000% due 09/15/18 311 344
Pool #260557 10.000% due 02/15/19 291 322
Pool #260968 10.000% due 08/15/18 21 24
Pool #261984 10.000% due 07/15/18 20 22
Pool #262831 10.000% due 11/15/18 103 114
Pool #270471 10.000% due 06/15/19 309 342
Pool #271132 9.000% due 06/15/24 246 260
Pool #272887 10.000% due 04/15/19 64 70
Pool #288862 10.000% due 07/15/20 139 153
Pool #324490 9.500% due 06/15/22 22 24
Pool #342846 9.000% due 01/15/23 789 839
Pool #377441 9.000% due 02/15/25 284 301
Pool #378868 9.000% due 07/15/25 436 462
Pool #380710 9.000% due 01/15/25 313 331
Pool #384636 9.000% due 07/15/25 448 475
Pool #390783 9.000% due 07/15/24 116 123
Pool #393727 9.000% due 03/15/25 442 469
Pool #394228 9.000% due 05/15/25 109 115
Pool #395869 9.000% due 05/15/25 109 115
Pool #397838 9.000% due 07/15/25 371 393
Pool #400765 9.000% due 08/15/24 202 215
Pool #401241 9.000% due 01/15/25 446 472
Pool #402837 9.000% due 11/15/24 496 525
Pool #403594 9.000% due 02/15/25 299 317
Pool #403954 9.000% due 09/15/24 187 198
Pool #404067 9.000% due 03/15/25 430 455
Pool #404594 9.000% due 01/15/25 449 475
Pool #404874 9.000% due 12/15/24 446 472
Pool #406396 9.000% due 04/15/25 381 404
Pool #407372 9.000% due 04/15/25 424 449
Pool #407720 9.000% due 07/15/25 213 225
Pool #409793 9.000% due 01/15/25 26 27
Pool #410045 9.000% due 06/15/25 323 342
Pool #413246 9.000% due 07/15/25 446 473
Pool #780285 9.500% due 11/15/25 1,072 1,150
Government National Mortgage Association
9.000% 30 Year TBA (b) 200 212
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.293% due 06/15/21 497 512
Resolution Trust Corp.
Series 1995-2 Class C1
7.450% due 05/25/29 411 409
-------
57,467
-------
MUNICIPAL BONDS - 0.4%
Oklahoma County Industrial Revenue Authority
6.050% due 10/01/21 (c) 675 675
-------
675
-------
</TABLE>
Volatility Constrained Bond Fund 93
<PAGE> 221
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
-------- -------
<S> <C> <C>
UNITED STATES GOVERNMENT
AGENCIES - 1.8%
Federal Farm Credit Bank (MTN)
6.260% due 10/15/98 $ 1,000 $ 1,011
Federal National Mortgage Association
CMT Floater (MTN)
4.820% due 04/29/96 (c) 1,525 1,502
Resolution Funding Corp.
Interest Only Strips
Zero Coupon due 10/15/98 950 821
-------
3,334
-------
UNITED STATES GOVERNMENT
TREASURIES - 18.4%
United States Treasury
Interest Only Strips
Zero Coupon due 09/15/98 2,315 2,022
Zero Coupon due 11/15/98 8,600 7,411
United States Treasury Notes
6.875% due 02/28/97 1,215 1,237
6.750% due 05/31/97 3,675 3,751
7.250% due 02/15/98 1,740 1,809
6.125% due 05/15/98 4,300 4,386
5.375% due 05/31/98 1,550 1,555
5.250% due 07/31/98 975 975
5.125% due 11/30/98 4,100 4,087
7.750% due 12/31/99 3,550 3,852
6.375% due 01/15/00 590 613
6.250% due 08/31/00 660 683
6.125% due 09/30/00 775 798
5.625% due 11/30/00 310 313
-------
33,492
-------
YANKEE BONDS - 4.6%
Forte
7.750% due 12/19/96 1,360 1,381
Household International
5.250% due 10/15/98 1,350 1,331
Ontario, Province of
17.000% due 11/05/11 1,295 1,494
11.500% due 03/10/13 2,415 2,798
Quebec, Province of
13.000% due 10/01/13 1,180 1,440
-------
8,444
-------
TOTAL LONG-TERM INVESTMENTS
(cost $170,429) 170,184
-------
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
-------- -------
<S> <C> <C>
PREFERRED STOCKS - 1.2%
ConAgra Capital LC Series B (c) 63,000 $ 1,347
Texaco Capital Series B (c) 43,000 903
-------
TOTAL PREFERRED STOCKS
(cost $2,650) 2,250
-------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
--------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.3%
Frank Russell Investment Company
Money Market Fund, due on demand (a) $ 7,872 7,872
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $7,872) 7,872
--------
TOTAL INVESTMENTS
(identified cost $180,951)(d) - 99.1% 180,306
OTHER ASSETS AND LIABILITIES,
NET - 0.9% 1,575
--------
NET ASSETS - 100.0% $181,881
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate security.
(d) At December 31, 1995, the cost for federal income tax purposes was $180,930
and net unrealized depreciation for all securities was $624. This consisted
of aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $1,665 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $2,289.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
94 Volatility Constrained Bond Fund
<PAGE> 222
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $180,950,768)(Note 2). . . . . . . . . . . . $ 180,306,598
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,012,720
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,285
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,504
--------------
183,260,107
LIABILITIES
Payables:
Investments purchased (regular settlement). . . . . . . . . . . . . $ 521,180
Investments purchased (delayed settlement). . . . . . . . . . . . . 213,813
Fund shares redeemed. . . . . . . . . . . . . . . . . . . . . . . . 490,646
Accrued bookkeeping service fees (Note 4) . . . . . . . . . . . . . 5,178
Accrued management fees (Note 4). . . . . . . . . . . . . . . . . . 78,595
Accrued transfer agent fees (Note 4). . . . . . . . . . . . . . . . 23,031
Other accrued expenses and payables . . . . . . . . . . . . . . . . 46,193 1,378,636
------------ --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,881,471
--------------
--------------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,112
Accumulated net realized gain (loss). . . . . . . . . . . . . . . . . . . . . . . . . (10,437,926)
Unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . (644,170)
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,687
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,813,768
--------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,881,471
--------------
--------------
Net asset value, offering and redemption price per share
($181,881,471 divided by 9,468,744 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . . . $ 19.21
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 95
<PAGE> 223
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,747,564
Dividends from Money Market Fund (Note 5) . . . . . . . . . . 951,503
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 180,950
-------------
13,880,017
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . $ 985,215
Custodian fees. . . . . . . . . . . . . . . 148,049
Transfer agent fees . . . . . . . . . . . . 154,077
Bookkeeping service fees. . . . . . . . . . 22,829
Professional fees . . . . . . . . . . . . . 22,648
Registration fees . . . . . . . . . . . . . 56,874
Trustees' fees. . . . . . . . . . . . . . . 4,361
Miscellaneous . . . . . . . . . . . . . . . 13,805 1,407,858
------------- -------------
Net investment income . . . . . . . . . . . . . . . . . . . . . 12,472,159
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . (890,274)
Options written. . . . . . . . . . . . . . . . . . . . . . . . (19,453)
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 6,898,312
Options written. . . . . . . . . . . . . . . . . . . . . . . . (2,847)
-------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . 5,985,738
-------------
Net increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,457,897
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
96 Volatility Constrained Bond Fund
<PAGE> 224
VOLATILITY CONSTRAINED BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . $ 12,472,159 $ 13,053,872
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . (890,274) (6,449,438)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . (19,453) 37,625
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,898,312 (6,853,429)
Options written. . . . . . . . . . . . . . . . . . . . . . . . . . (2,847) 2,847
------------- -------------
Net increase (decrease) in net assets resulting from operations. . . . 18,457,897 (208,523)
Distributions to shareholders from net investment income . . . . . . . (12,574,744) (12,896,175)
Increase (decrease) in net assets from Fund share transactions . . . . (19,008,806) (17,560,079)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . (13,125,653) (30,664,777)
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . 195,007,124 225,671,901
------------- -------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $55,112 and $157,697, respectively) . . . . . . . . . . . . . . . $ 181,881,471 $ 195,007,124
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . 4,380,834 $ 83,390,317 5,306,519 $ 102,279,878
Fund shares issued to shareholders
in reinvestments of distributions. . . . . 400,321 7,621,504 342,050 6,519,884
Fund shares redeemed . . . . . . . . . . . . (5,771,882) (110,020,627) (6,596,369) (126,359,841)
------------- -------------- ------------- --------------
Net increase (decrease). . . . . . . . . . . (990,727) $ (19,008,806) (947,800) $ (17,560,079)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 97
<PAGE> 225
VOLATILITY CONSTRAINED BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . 1.21 1.15 .82 1.34 1.45
Net realized and unrealized gain (loss) on investments . . . . . . . .58 (1.16) .45 (.88) .80
-------- -------- -------- -------- --------
Total Income From Investment Operations. . . . . . . . . . . . . . . 1.79 (.01) 1.27 46 2.25
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . (1.22) (1.13) (.71) (1.28) (1.43)
Tax return of capital. . . . . . . . . . . . . . . . . . . . . . . . -- -- (.29) -- --
-------- -------- -------- -------- --------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . (1.22) (1.13) (1.00) (1.28) (1.43)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.89 (.02) 6.67 2.29 12.00
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets . . . . . . . . . . . . . . .71 .67 .66 .68 .62
Net investment income to average net assets. . . . . . . . . . . . . 6.33 5.97 5.79 6.74 7.34
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . 256.72 182.65 220.77 312.05 159.20
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . . . 181,881 195,007 225,672 292,909 293,603
</TABLE>
98 Volatility Constrained Bond Fund
<PAGE> 226
VOLATILITY CONSTRAINED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS VOLATILITY LIPPER -C- SHORT
ENDED DECEMBER 31 CONSTRAINED M-L 1-2.99 ** 1-5 YR ++
- ----------------- ----------- -------------- ----------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1986 $10,868 $11,035 $10,948
1987 $11,333 $11,658 $11,505
1988 $12,213 $12,384 $12,295
1989 $13,511 $13,730 $13,539
1990 $14,717 $15,065 $14,634
1991 $16,482 $16,824 $16,373
1992 $16,860 $17,885 $17,306
1993 $17,984 $18,852 $18,372
1994 $17,981 $18,959 $18,304
1995 $19,759 $21,045 $20,272
</TABLE>
<TABLE>
<CAPTION>
Volatility Constrained Bond Fund
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- --------------- ------------ ----------
<S> <C> <C>
1 Year $ 10,989 9.89%
5 Years $ 13,426 6.06% ***
10 Years $ 19,759 7.04% ***
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch 1-2.99 Years Treasury Index
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- --------------- ------------ ----------
<S> <C> <C>
1 Year $ 11,100 11.00%
5 Years $ 13,969 6.91% ***
10 Years $ 21,045 7.72% ***
</TABLE>
<TABLE>
<CAPTION>
Lipper-C- Short Investment Grade Debt Funds Average
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- --------------- ------------ ----------
<S> <C> <C>
1 Year $ 11,075 10.75%
5 Years $ 13,852 6.73% ***
10 Years $ 20,272 7.32% ***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start and
at the close of the performance measurement periods.
++ Lipper-C- Short (1-5 Yr.) Investment Grade Debt Funds Average is the average
total return for the universe of funds within the Short Investment Grade Debt
Funds investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates. This type of fund which invests at least 65% of
assets in investment grade debt issues (rated in top four grades) with
average maturities of five years or less.
*** Annualized.
VOLATILITY CONSTRAINED BOND FUND returned 9.9% in 1995, trailing the Merrill
Lynch 1-2.99 Years Treasury Index return of 11%. The portfolio was managed in a
manner consistent with its objective to maximize total return, limit price
volatility, and provide a consistent level of current income. The Fund seeks to
reduce risk and provide exposure to a variety of total-return and income-
producing strategies by employing the services of two bond managers, each with a
separate and distinct assignment.
During the year, short-term bond investors saw rates fall by over 200 basis
points in the one- to five-year segment of the market. For most of the year,
widening interest rate spreads had a negative impact on the mortgage sector
relative to the index. This was partially offset by the income advantage of the
sector and good performance from corporate bond holdings.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Volatility Constrained Bond Fund 99
<PAGE> 227
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 84.8%
ASSET-BACKED SECURITIES - 5.9%
American Airlines, Inc.
Series 1990-H
9.800% due 01/02/08 $ 1,190 $ 1,446
Fleetwood Credit Corp.
Grantor Trust Series 1994-B Class A
6.750% due 03/15/10 582 593
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 215 210
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 600 608
Series 1995-6 Class A3
6.650% due 11/15/25 900 921
Series 1995-7 Class A2
6.150% due 11/15/25 1,150 1,159
Series 1995-8 Class A2
6.150% due 12/15/26 950 964
Series 1995-A Class A
7.250% due 07/15/05 400 406
Greenwich Capital Acceptance, Inc.
Series 1994 Class A-1
7.650% due 11/25/24 (c) 1,341 1,368
Olympic Automobile Receivables Trust
Series 1995-C Class A2
6.200% due 06/15/02 843 853
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1994-1 Class M-2
7.750% due 09/25/29 455 459
Series 1995-1 Class 2-C
7.500% due 10/25/28 (c) 325 330
Series 1995-C1 Class C
6.900% due 02/25/27 (c) 300 298
Salomon Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
7.790% due 11/25/24 (c) 2,271 2,329
TMS Home Equity Loan Trust
Series 1992-B Class A
6.900% due 07/15/07 382 387
UCFC Home Equity Loan Trust
Series 1994-B Class A-6
7.100% due 06/10/23 518 532
--------
12,863
--------
CORPORATE BONDS AND NOTES - 23.3%
Acme Metals, Inc. Step Up Bond
13.500% due 08/01/04 370 304
Adelphia Communications Corp. PIK
Series B
9.500% due 02/15/04 631 492
ADT Operations, Inc.
8.250% due 08/01/00 400 422
American Airlines Class A-1
9.710% due 01/02/07 379 439
American Standard, Inc.
10.875% due 05/15/99 350 384
AMR Corp. (MTN)
9.950% due 03/07/01 1,000 1,131
Anchor Bancorp, Inc.
8.937% due 07/09/03 375 369
Arkla, Inc. (MTN)
9.300% due 03/01/96 1,000 1,004
8.780% due 07/19/96 500 506
Armco, Inc.
9.375% due 11/01/00 265 262
Bally's Casino Holdings, Inc.
Zero Coupon due 06/15/98 230 185
Banesto Delaware, Inc.
8.250% due 07/28/02 500 547
BellSouth Telecommunications, Inc.
5.850% due 11/15/45 1,100 1,112
Berkeley Federal Bank & Trust
12.000% due 06/15/05 300 309
Cablevision Industries Co.
9.250% due 04/01/08 320 342
Capital One Bank (MTN)
8.125% due 02/27/98 325 339
Chevy Chase Savings Bank
9.250% due 12/01/05 500 510
Citicorp (MTN)
6.750% due 10/15/07 380 389
Clark Oil & Refining Corp.
10.500% due 12/01/01 75 79
9.500% due 09/15/04 150 155
Cleveland Electric Illum Co.
9.375% due 03/01/17 1,000 997
Series B
9.500% due 05/15/05 130 135
Cleveland Electric Illum Co. (MTN)
9.110% due 07/22/96 1,000 1,010
CMS Energy Corp.
9.500% due 10/01/97 1,000 1,035
</TABLE>
Multistrategy Bond Fund 101
<PAGE> 228
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Coast Federal Bank
13.000% due 12/31/02 $ 375 $ 427
Coast Savings Financial, Inc.
10.000% due 03/01/00 175 183
Coastal Corp.
10.375% due 10/01/00 500 584
Columbia Gas Systems, Inc.
Series A
6.390% due 11/28/00 63 64
Series B
6.610% due 11/28/02 58 59
Series C
6.800% due 11/28/05 58 60
Series D
7.050% due 11/28/07 58 59
Series E
7.320% due 11/28/10 58 59
Series F
7.420% due 11/28/15 58 59
Series G
7.620% due 11/28/25 58 59
Columbia/HCA Health Care Corp.
6.630% due 07/15/45 550 568
Companhia Petroleo Ipiranga
8.625% due 02/25/02 (c) 600 585
Continental Cablevision, Inc.
8.500% due 09/15/01 125 130
8.625% due 08/15/03 100 104
8.300% due 05/15/06 650 652
Cott Corp.
9.375% due 07/01/05 350 349
CP Limited Partnership
8.750% due 03/02/00 500 526
CTC Mansfield Funding Corp.
10.250% due 03/30/03 500 507
Delta Air Lines, Inc.
10.375% due 02/01/11 195 244
Dime Bancorp, Inc.
10.500% due 11/15/05 320 352
EnviroSource, Inc.
9.750% due 06/15/03 470 414
Exide Corp.
10.750% due 12/15/02 250 271
Exide Corp. Step Up Bond
12.250% due 12/15/04 665 559
Falcon Holdings Group, L.P. PIK Series B
11.000% due 09/15/03 420 399
Federal Realty Investment Trust
8.875% due 01/15/00 650 705
First Nationwide Holdings, Inc.
12.250% due 05/15/01 425 484
First USA Bank
8.200% due 02/15/98 500 521
Ford Motor Credit Co. (MTN)
4.800% due 07/22/96 200 199
Ford Motor Credit Co. CMS Floater (MTN)
4.820% due 07/12/96 (c) 250 249
Gaylord Container Corp. Step Up Bond
12.750% due 05/15/05 165 163
General Medical Corp. of Virginia PIK
12.125% due 08/15/05 897 916
General Motors Acceptance Corp.
8.625% due 06/15/99 130 141
8.400% due 10/15/99 185 201
General Motors Acceptance Corp. (MTN)
5.480% due 07/19/96 (c) 2,000 2,001
7.375% due 04/15/99 940 985
Goldman Sachs Group, L.P
6.375% due 06/15/00 400 405
6.200% due 02/15/01 300 299
Grancare, Inc.
9.375% due 09/15/05 700 711
Grancare, Inc. (conv.)
6.500% due 01/15/03 200 173
Grupo Industrial Durango SA de CV
12.000% due 07/15/01 555 487
Hanson America, Inc. (conv.)
2.390% due 03/01/01 775 643
Inland Steel Industries, Inc.
12.750% due 12/15/02 275 309
Koppers Industries, Inc.
8.500% due 02/01/04 500 480
Liberty Mutual Insurance Co.
8.200% due 05/04/07 500 555
Long Island Lighting Co.
6.250% due 07/15/01 190 182
8.900% due 07/15/19 200 202
Nabisco, Inc.
8.000% due 01/15/00 2,000 2,126
New England Mutual Life Insurance Co.
7.875% due 02/15/24 325 336
News America Holdings, Inc.
8.875% due 04/26/23 350 405
7.700% due 10/30/25 300 307
Niagara Mohawk Power Corp.
5.875% due 09/01/02 240 214
7.375% due 08/01/03 200 187
</TABLE>
102 Multistrategy Fund
<PAGE> 229
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
NWA Trust
13.875% due 06/21/08 $ 90 $ 105
Owens-Illinois, Inc.
11.000% due 12/01/03 900 1,017
PDV America, Inc.
7.875% due 08/01/03 750 703
PennCorp. Financial Group, Inc.
9.250% due 12/15/03 700 711
Peters (J.M.), Inc.
12.750% due 05/01/02 230 210
Pueblo Xtra International
9.500% due 08/01/03 220 206
Purity Supreme, Inc. Series B
11.750% due 08/01/99 375 411
Revlon Worldwide Corp. Series B
Zero Coupon due 03/15/98 290 215
Riggs National Corp. Washington, D.C.
9.650% due 06/15/09 250 290
Salomon, Inc.
9.375% due 04/15/98 100 106
6.700% due 12/01/98 425 427
7.125% due 08/01/99 275 278
Salomon, Inc. (MTN)
6.360% due 04/01/98 125 125
6.125% due 05/15/98 75 75
Smith Barney Holdings, Inc.
7.980% due 03/01/00 400 429
6.500% due 10/15/02 225 229
Stone Container Corp.
9.875% due 02/01/01 700 681
Stop & Shop Cos., Inc.
9.750% due 02/01/02 300 331
Summit Communications Group, Inc.
10.500% due 04/15/05 390 435
Swiss Bank Corp.
6.750% due 07/15/05 420 439
Taubman Realty Group, L.P.
8.000% due 06/15/99 450 472
Tenet Healthcare Corp.
8.625% due 12/01/03 700 735
Time Warner, Inc.
6.835% due 08/15/00 (c) 375 377
7.975% due 08/15/04 225 238
8.110% due 08/15/06 840 894
8.180% due 08/15/07 450 483
9.125% due 01/15/13 845 952
9.150% due 02/01/23 990 1,123
Toledo Edison Co.
8.700% due 09/01/02 500 460
Toledo Edison Co. (MTN)
8.000% due 12/31/98 500 497
U.S. West Communications, Inc.
7.200% due 11/10/26 375 386
UCC Investors Holding, Inc.
Step Up Bond
12.000% due 05/01/05 220 167
United Companies Financial Corp.
9.350% due 11/01/99 375 398
USAT Holdings, Inc.
9.050% due 05/15/98 (c) 200 196
Varity Corp.
11.375% due 11/15/98 250 261
Viacom, Inc.
7.750% due 06/01/05 700 743
Wellsford Residential Property Trust
9.375% due 02/01/02 475 533
Westpoint Stevens, Inc.
8.750% due 12/15/01 250 249
--------
50,903
--------
EURODOLLAR BONDS - 3.1%
Argentina, Republic of Series L
6.813% due 03/31/05 (c) 2,000 1,425
Bulgaria, Republic of Series A
6.750% due 07/28/24 (c) 550 292
Cemex SA
8.875% due 06/10/98 2,000 1,925
Credit Lyonnais
6.844% due 09/19/49 (f) 230 209
Fifth Mexican Acceptance Corp. Class A
8.000% due 12/15/98 550 220
Hong Kong & Shanghai Bank
6.250% due 08/29/49 (f) 535 427
Indah Kiat Paper & Pulp
8.875% due 11/01/00 195 182
Mexico (United Mexican States)
6.766% due 12/31/19 (c) 2,000 1,445
Midland Bank
6.063% due 12/31/49 (f) 170 137
Nacional Financier
9.375% due 04/23/99 (c) 500 484
--------
6,746
--------
</TABLE>
Multistrategy Bond Fund 103
<PAGE> 230
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES - 31.2%
Asset Securitization Corp.
Series 1995-MD4 Class A1
7.100% due 08/13/29 $ 699 $ 729
Collateralized Mortgage Securities Corp.
Series J Class J-5 CMO
7.985% due 05/01/17 1,980 2,019
FDIC REMIC Trust
Series 1994-C1 Class 2A-2
7.850% due 09/25/25 500 515
Federal Home Loan Mortgage Corp.
6.000% 5 Year TBA (e) 185 186
8.000% 30 Year TBA (e) 5,450 5,648
Participation Certificates
Series 1014 Class E
7.950% due 02/15/20 1,100 1,128
Series 1037 Class Z
9.000% due 02/15/21 1,542 1,655
Federal National Mortgage Association
Pool #050748 7.500% due 06/01/23 19 20
Pool #050766 7.500% due 07/01/23 561 575
Pool #050775 7.500% due 08/01/23 119 122
Pool #050796 7.500% due 09/01/23 361 370
Pool #050996 7.500% due 02/01/24 658 674
Pool #124032 10.000% due 02/01/05 515 542
Pool #190504 7.349% due 11/01/23 (c) 2,010 2,059
Pool #227029 7.500% due 09/01/23 259 266
Pool #228620 7.500% due 07/01/23 132 135
Pool #231431 7.500% due 10/01/23 93 95
Pool #250060 7.500% due 06/01/24 260 266
Pool #250179 7.500% due 11/01/24 504 516
Pool #250345 7.000% due 09/01/25 451 455
Pool #250350 7.500% due 10/01/25 985 1,009
Pool #250359 7.000% due 10/01/25 1,283 1,294
Pool #276234 7.000% due 05/01/24 515 520
Pool #286017 7.000% due 06/01/24 744 750
Pool #303016 6.000% due 10/01/01 1,254 1,252
Pool #303555 7.000% due 09/01/25 2,059 2,075
Pool #312494 7.000% due 07/01/25 480 484
Pool #316651 7.000% due 08/01/25 291 294
Pool #316681 7.000% due 07/01/25 1,373 1,384
Pool #317262 7.000% due 07/01/25 403 406
Pool #318863 7.000% due 08/01/25 794 801
Pool #319580 7.000% due 08/01/25 903 910
Pool #320094 7.000% due 09/01/25 197 199
Pool #321110 7.000% due 09/01/25 272 274
Pool #322344 7.500% due 09/01/25 63 65
Pool #324193 7.000% due 09/01/25 986 994
Pool #324205 7.000% due 09/01/25 986 994
Federal National Mortgage Association
6.500% 7 Year TBA (e) 150 152
7.000% 15 Year TBA (e) 2,700 2,750
REMIC
9.100% due 12/25/12 32 32
REMIC Series 1994-3 Class SA
3.450% due 01/25/24 (c) 425 184
REMIC Trust Series 1990-21 Class Z
9.000% due 03/25/20 3,300 3,515
REMIC Trust Series 1994-79 Class Z
7.000% due 04/25/24 2,247 2,085
Government National Mortgage Association
Pool #008163 6.500% due 03/20/23 (c) 2,420 2,468
Pool #008288 7.250% due 09/20/23 (c) 834 847
Pool #008528 6.500% due 10/20/24 (c) 4,677 4,774
Pool #321855 7.500% due 06/15/23 199 205
Pool #330320 7.500% due 10/15/23 43 44
Pool #345696 7.000% due 06/15/24 58 59
Pool #348193 7.500% due 07/15/23 508 523
Pool #348888 7.000% due 07/15/23 1,662 1,682
Pool #351437 7.000% due 02/15/24 23 24
Pool #352050 7.000% due 10/15/23 1,043 1,056
Pool #352129 9.000% due 08/15/24 718 760
Pool #353132 7.500% due 07/15/23 129 133
Pool #359600 7.500% due 07/15/23 91 93
Pool #362175 7.000% due 01/15/24 247 250
Pool #369166 7.500% due 10/15/23 356 366
Pool #369168 7.500% due 11/15/23 223 229
Pool #372108 7.000% due 06/15/24 25 25
Pool #376352 7.500% due 12/15/23 921 947
Pool #384568 7.000% due 04/15/24 198 200
Pool #385312 9.000% due 11/15/24 587 621
Pool #389622 9.000% due 10/15/24 431 456
Pool #393138 7.500% due 04/15/24 257 265
Pool #401237 9.000% due 01/15/25 296 314
Pool #403241 9.000% due 02/15/25 664 703
Pool #404014 9.000% due 12/15/24 261 277
Pool #405334 9.000% due 10/15/24 170 181
Pool #409930 7.500% due 08/15/25 503 518
Pool #780029 9.000% due 11/15/24 399 427
Government National Mortgage Association
7.000% 30 Year TBA (e) 5,900 5,970
Paine Webber Mortgage Acceptance Corp. IV
Series 1995-M1 Class A
6.700% due 01/15/07 720 733
Ryland Acceptance Corp.
Series 83 Class 83-E CMO
8.150% due 10/01/17 127 127
</TABLE>
104 Multistrategy Bond Fund
<PAGE> 231
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Ryland Mortgage Securities Corp. CMO
Series 1993-8 Class A
7.870% due 09/25/23 (c) $ 2,564 $ 2,604
--------
68,279
--------
MUNICIPAL BONDS - 0.5%
Atlanta Water & Sewer Revenue
4.750% due 01/01/23 290 266
Chicago, Illinois, General Obligation
5.500% due 01/01/24 155 152
Salt River Project, Arizona,
Agricultural Improvement
& Power District Series B
5.250% due 01/01/19 290 285
South Carolina, Public Service Authority
Series C
5.125% due 01/01/21 500 485
--------
1,188
--------
NON-US BONDS - 3.7%
Canada, Government of
8.750% due 12/01/05 CD 1,000 819
Germany, Republic of
6.250% due 01/04/24 DM 9,800 6,364
Italy, Republic of
6.875% due 09/27/23 $ 470 459
Poland, Government of
6.875% due 10/27/24 (c) 455 343
--------
7,985
--------
UNITED STATES GOVERNMENT
AGENCIES - 0.5%
Tennessee Valley Authority
6.235% due 07/15/45 1,100 1,139
--------
1,139
--------
UNITED STATES GOVERNMENT
TREASURIES - 12.5%
United States Treasury Bonds
7.250% due 05/15/16 975 1,113
7.500% due 11/15/16 1,800 2,111
8.125% due 08/15/19 1,850 2,326
7.875% due 02/15/21 4,455 5,486
7.125% due 02/15/23 2,081 2,379
United States Treasury Notes
5.375% due 05/31/98 1,700 1,706
5.125% due 11/30/98 1,500 1,495
6.750% due 05/31/99 2,450 2,559
6.750% due 06/30/99 1,050 1,098
6.875% due 07/31/99 85 89
6.875% due 08/31/99 300 315
7.750% due 11/30/99 95 103
7.125% due 02/29/00 1,000 1,065
6.375% due 08/15/02 660 692
6.250% due 02/15/03 150 156
5.750% due 08/15/03 1,150 1,164
5.875% due 02/15/04 375 381
5.875% due 11/15/05 2,050 2,096
United States Treasury
Principal Only Strip
Zero Coupon due 11/15/99 465 379
Zero Coupon due 11/15/21 3,475 709
--------
27,422
--------
YANKEE BONDS - 4.1%
Bombril SA
8.000% due 08/26/98 400 363
Brazil, Federal Republic of
6.688% due 01/01/01 (c) 475 409
Christiana Bank
6.063% due 11/30/49 (c) 80 64
Den Norske Creditbank AS
6.125% due 11/30/49 (f) 170 134
Doman Industries, Ltd.
8.750% due 03/15/04 420 398
Domtar, Inc.
11.750% due 03/15/99 200 224
12.000% due 04/15/01 500 591
Ecuador, Republic of
3.000% due 02/28/25 (c) 1,800 650
Fairfax Financial Holdings, Ltd.
7.750% due 12/15/03 275 289
Lloyds Bank
6.063% due 12/31/99 (f) 290 241
Methanex Corp.
7.750% due 08/15/05 775 822
Mexico (United Mexican States)
6.547% due 12/31/19 (c) 1,000 723
6.250% due 12/31/19 750 488
National Westminster Bank PLC
6.125% due 12/31/99 (c) 220 185
</TABLE>
Multistrategy Bond Fund 105
<PAGE> 232
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Santander Finnish Issuances
6.775% due 09/30/49 (c) $ 500 $ 450
St. George Bank, Ltd.
7.150% due 10/15/05 700 725
Standard Chartered Bank Group PLC
5.775% due 12/31/99 (f) 250 189
Telewest Communications
PLC Step Up Bond
11.000% due 10/01/07 1,700 1,026
Tembec Finance Corp.
9.875% due 09/30/05 600 596
Trizec Finance
10.875% due 10/15/05 350 359
Videotron Holdings PLC Step Up Bond
11.000% due 08/15/05 200 124
--------
9,050
--------
TOTAL LONG-TERM INVESTMENTS
(cost $180,887) 185,575
--------
OPTIONS PURCHASED - 0.1%
United States Treasury Bond
Feb 98.50 Call (b) 5,000* 155
--------
TOTAL OPTIONS PURCHASED
(cost $145) 155
--------
<CAPTION>
NUMBER
OF
SHARES
------
<S> <C> <C>
PREFERRED STOCKS - 0.6%
Australia & New Zealand
Banking Group, Ltd 5,300 144
California Federal Bank
of Los Angeles Series B 4,475 486
Credit Lyonnais Capital S.C.A. - ADR 6,400 159
Equity Residential Property Trust 4,000 102
Lasalle National Corp. Series K 2,500 131
Newscorp Overseas, Ltd. 8,000 178
Texaco Capital Series B 2,100 44
Wellsford Residential Property Trust Series B 5,000 129
--------
TOTAL PREFERRED STOCKS
(cost $1,361) 1,373
--------
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 19.3%
Federal Home Loan Mortgage Corp.
Discount Notes
4.215% due 01/16/96 (a)(h) $ 900 $ 898
Frank Russell Investment Company
Money Market Fund, due on demand (a) 28,165 28,165
Mexico (United Mexican States)
Structured Note
Zero Coupon due 11/27/96 600 611
United States Treasury Bills
5.340% due 02/08/96 (a)(g)(h) 115 114
5.265% due 02/15/96 (a)(g)(h) 120 119
5.305% due 02/22/96 (a)(g)(h) 140 139
5.305% due 06/27/96 (h) 150 147
United States Treasury Notes
6.125% due 07/31/96 5,000 5,026
4.375% due 08/15/96 7,000 6,965
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $42,159) 42,184
--------
TOTAL INVESTMENTS
(identified cost $224,552)(d) - 104.8% 229,287
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - (4.8%) (10,522)
--------
NET ASSETS - 100.0% $218,765
--------
--------
</TABLE>
(a) At cost, which approximates market.
(b) Nonincome-producing security.
(c) Adjustable or floating rate security.
(d) At December 31, 1995, the cost for federal income tax purposes was $224,674
and net unrealized appreciation for all securities was $4,613. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $6,562 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $1,949.
(e) Forward commitment. See Note 2.
(f) Perpetual floating rate note.
(g) Held as collateral by the custodian in connection with futures contracts
and put options written.
(h) Rate noted is yield-to-maturity (unaudited).
(MTN) represents Medium Term Note.
* Number of contracts.
The accompanying notes are an integral part of the financial
statements.
106 Multistrategy Bond Fund
<PAGE> 233
MULTISTRATEGY BOND FUND
FUTURES AND OPTIONS WRITTEN
December 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
German 10 Year Bund
Futures Contracts
expiration date 03/96 40 $ 59
UK Long Gilt
Futures Contracts
expiration date 03/96 30 29
United States Treasury 5 Year Note
Futures Contracts
expiration date 03/96 80 51
United States Treasury 10 Year Note
Futures Contracts
expiration date 03/96 110 110
United States Treasury 30 Year Bond
Futures Contracts
expiration date 03/96 25 37
-------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (*) $ 286
-------
-------
</TABLE>
(*) At December 31, 1995, United States Treasury Bills valued at $367 were held
as collateral by the custodian in connection with futures contracts
purchased by the Fund.
PUT OPTIONS WRITTEN
(Notes 2 and 3)
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
CONTRACTS (000)
--------- -------
<S> <C> <C>
Eurodollar Futures Contract
strike price 91.75
expiration date 03/96 19 $ 1
-------
Total Liability for Put Options Written
(premiums received $7)(++) $ 1
-------
-------
</TABLE>
(++) At December 31, 1995, United States Treasury Bills valued at $5 were held
as collateral by the custodian in connection with put options written.
The accompanying notes are an integral part of the financial
statements.
Multistrategy Bond Fund 107
<PAGE> 234
MULTISTRATEGY BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost
$224,551,998)(Note 2). . . . . . . . . . . . . . . . . . . . . . $ 229,287,406
Foreign currency holdings (identified cost $409,166). . . . . . . 412,445
Forward foreign currency exchange contracts (cost $6,746,595)
(Notes 2 and 6). . . . . . . . . . . . . . . . . . . . . . . . . 6,746,595
Receivables:
Dividends and interest. . . . . . . . . . . . . . . . . . . . . 3,384,860
Investments sold. . . . . . . . . . . . . . . . . . . . . . . . 399,502
Fund shares sold. . . . . . . . . . . . . . . . . . . . . . . . 451,136
From Manager (Note 4) 83,382
Daily variation margin on futures contracts (Notes 2 and 3) . . 65,190
Deferred organization expenses (Note 2) . . . . . . . . . . . . . 14,117
---------------
240,844,633
LIABILITIES
Payables:
Investments purchased (regular settlement). . . . . $ 463,170
Investments purchased (delayed settlement)(Note 2). 14,533,047
Fund shares redeemed . . . . . . . . . . . . . . . 105,789
Accrued bookkeeping service fees (Note 4) . . . . . 5,776
Accrued management fees (Note 4). . . . . . . . . . 120,287
Accrued transfer agent fees (Note 4). . . . . . . . 24,518
Other accrued expenses and payables . . . . . . . . 65,746
Forward foreign currency exchange contracts
(cost $6,746,595)(Notes 2 and 6). . . . . . . . . . 6,760,332
Options written, at market value
(premiums received $6,536)(Notes 2 and 3) . . . . . 475 22,079,140
----------- ---------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,765,493
---------------
---------------
NET ASSETS CONSIST OF:
Undistributed net investment income. . . . . . . . . . $ 13,737
Accumulated net realized gain (loss) . . . . . . . . . (614,377)
Unrealized appreciation (depreciation) on:
Investments. . . . . . . . . . . . . . . . . . . . . 4,735,408
Futures contracts. . . . . . . . . . . . . . . . . . 286,219
Options written. . . . . . . . . . . . . . . . . . . 6,061
Foreign currency-related transactions. . . . . . . . (14,044)
Shares of beneficial interest. . . . . . . . . . . . . 213,480
Additional paid-in capital . . . . . . . . . . . . . . 214,139,009
---------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 218,765,493
---------------
---------------
Net asset value, offering and redemption price per
share ($218,765,493 divided by 21,348,039 shares
of $.01 par value, shares of beneficial interest
outstanding) . . . . . . . . . . . . . . . . . . . . . . $10.25
---------------
---------------
</TABLE>
The accompanying notes are an integral part of the financial
statements.
108 Multistrategy Bond Fund
<PAGE> 235
MULTISTRATEGY BOND FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,445,853
Dividends from Money Market Fund (Note 5). . . . . . . . . . . . 1,999,570
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,967
----------------
14,579,390
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . $ 1,271,039
Custodian fees. . . . . . . . . . . . . . . . 154,337
Transfer agent fees.. . . . . . . . . . . . . 186,523
Bookkeeping service fees. . . . . . . . . . . 26,872
Registration fees . . . . . . . . . . . . . . 66,781
Professional fees . . . . . . . . . . . . . . 17,222
Trustees' fees . . . . . . . . . . . . . . . 4,352
Amortization of deferred organization
expenses . . . . . . . . . . . . . . . . . . 5,690
Miscellaneous . . . . . . . . . . . . . . . . 12,704
--------------
Expenses before reimbursement . . . . . . . . 1,745,520
Expenses reimbursed by Manager (Note 4) . . . (83,382) 1,662,138
-------------- ----------------
Net investment income . . . . . . . . . . . . . . . . . . . . . 12,917,252
----------------
REALIZED AND UNREALIZED,
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 1,563,456
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . 3,136,612
Options written. . . . . . . . . . . . . . . . . . . . . . . . 379,327
Foreign currency-related transactions. . . . . . . . . . . . . 242,452
Net change in unrealized appreciation or depreciation of:
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 13,490,293
Futures contracts. . . . . . . . . . . . . . . . . . . . . . . 294,891
Options written. . . . . . . . . . . . . . . . . . . . . . . . 43,948
Foreign currency-related transactions. . . . . . . . . . . . . (14,044)
--------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . 19,136,935
--------------
Net increase (decrease) in net assets resulting from
operations. . . . . . . . . . . . . . .. . . . . . . . . . . . $ 32,054,187
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial
statements.
Multistrategy Bond Fund 109
<PAGE> 236
MULTISTRATEGY BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income. . . . . . . . . . . . . . . $ 12,917,252 $ 9,107,483
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . 1,563,456 (5,043,783)
Futures contracts . . . . . . . . . . . . . . . . 3,136,612 (981,398)
Options written . . . . . . . . . . . . . . . . . 379,327 68,998
Foreign currency-related transactions . . . . . . 242,452 --
Net change in unrealized appreciation or
depreciation of:
Investments . . . . . . . . . . . . . . . . . . . 13,490,293 (8,695,141)
Futures contracts . . . . . . . . . . . . . . . . 294,891 (7,547)
Options written . . . . . . . . . . . . . . . . . 43,948 (37,887)
Foreign currency-related transactions . . . . . . (14,044) --
------------- ------------
Net increase (decrease) in net assets resulting
from operations. . . . . . . . . . . . . . . . . . . 32,054,187 (5,589,275)
Distributions to shareholders:
Net investment income . . . . . . . . . . . . . . . (13,104,794) (8,986,943)
Increase (decrease) in net assets from Fund
share transactions . . . . . . . . . . . . . . . . . 26,780,829 89,237,389
------------ ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . 45,730,222 74,661,171
Net assets at beginning of year . . . . . . . . . . . 173,035,271 98,374,100
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $13,737 and $96,915, respectively). . . . . . . $218,765,493 $173,035,271
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . 9,709,055 $94,838,687 12,276,488 $119,806,005
Fund shares issued to
shareholders in reinvestments
of distributions. . . . . . . . 1,058,466 10,420,168 703,819 6,739,486
Fund shares redeemed . . . . . . (8,041,858) (78,478,026) (3,901,970) (37,308,102)
---------- ---------- ---------- -----------
Net increase (decrease). . . . . 2,725,663 $26,780,829 9,078,337 $89,237,389
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial
statements.
110 Multistrategy Bond Fund
<PAGE> 237
MULTISTRATEGY BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period ended December 31, and other performance information derived
from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993++
------- ------- ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . $9.29 $10.31 $10.00
------- ------- ------
Income From Investment Operations:
Net investment income . . . . . . . . . . . . .65 .58 .46
Net realized and unrealized gain (loss)
on investments. . . . . . . . . . . . . . . . .97 (1.03) .40
------- ------- ------
Total Income From Investment Operations . . . 1.62 (.45) .86
------- ------- ------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . . (.66) (.57) (.46)
Net realized gain on investments. . . . . . . -- -- (.08)
In excess of net realized gain on investments -- -- (.01)
------- ------- ------
Total Distributions . . . . . . . . . . . . . (.66) (.57) (.55)
------- ------- ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . $10.25 $9.29 $10.31
------- ------- ------
------- ------- ------
TOTAL RETURN (%)(a). . . . . . . . . . . . . . 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)(c). . . . . . . .. . . . . . . . . .85 .85 .85
Operating expenses, gross, to average net
assets (b)(c) . . . . . . . . . . . . . . . . .89 .90 1.20
Net investment income to average net
assets (b). . . . . . . . . . . . . . . . . . 6.61 6.26 5.60
Portfolio turnover (b). . . . . . . . . . . . 142.26 136.39 188.95
Net assets, end of year ($000 omitted). . . . 218,765 173,035 98,374
Per share amount of fees waived ($ omitted) . -- -- .0002
Per share amount of fees reimbursed
($ omitted)(c) . . . . . . . . . . . . . . . .0042 .0043 .0286
</TABLE>
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a)Periods less than one year are not annualized.
(b)The ratios for the period ended December 31, 1993 are annualized.
(c)See Note 4.
Multistrategy Bond Fund 111
<PAGE> 238
MULTISTRATEGY BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 MULTISTRATEGY BOND LB AGGREGATE** LIPPER-C- INTERMEDIATE++
- ----------------- ------------------ -------------- ------------------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1993 $10,874 $10,768 $10,506
1994 $10,401 $10,454 $10,155
1995 $12,265 $12,386 $11,839
</TABLE>
Multistrategy Bond Fund
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ --------- ------
<S> <C> <C>
1 Year $ 11,792 17.92%
Inception $ 12,265 7.24%***
</TABLE>
Lehman Brothers Aggregate Bond Index
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ --------- ------
<S> <C> <C>
1 Year $ 11,848 18.48%
Inception $ 12,386 7.61%***
</TABLE>
Lipper-C- Intermediate Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------ --------- ------
<S> <C> <C>
1 Year $ 11,658 16.58%
Inception $ 11,839 6.33%***
</TABLE>
*Assumes initial investment on February 1, 1993. Lipper index comparison
for the initial investment began January 1, 1993.
**Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
++Lipper-C- Intermediate (5-10 Yr.) Investment Grade Debt Funds Average
is the average total return for the universe of funds with the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates. This type of funds
invests at least 65% of assets in U.S. Treasury Bills, Notes and Bonds with
average maturities of five to ten years.
***Annualized.
MULTISTRATEGY BOND FUND returned 17.9% in 1995, which lagged the Lehman
Brothers Aggregate Bond Index Return of 18.5%. The portfolio was managed in a
manner consistent with its objective to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed income market
portfolios. The Fund seeks to diversify risk and provide exposure to a
variety of total return strategies by employing the services of three bond
managers, each with a separate and distinct assignment.
With the US Bond market up dramatically in 1995, the Fund's foreign holdings
lagged through most of the year before contributing strong returns in the
fourth quarter. Domestic mortgage-backed securities and high yield bonds also
lagged for the greater part of the year, which impacted Fund performance
negatively. Corporate and Treasury holdings performed well and were enhanced
by good security selection to help offset some of the underperformance caused
by other factors.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
112 Multistrategy Bond Fund
<PAGE> 239
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 22 different investment portfolios referred to as "Funds."
These financial statements report on 8 Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.01 par value.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies, which
require the use of estimates made by management. Such policies are
consistently followed by the Funds in the preparation of these financial
statements.
SECURITY VALUATION: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States
over-the-counter equity and fixed-income securities and options are valued on
the basis of the closing bid price. Futures contracts are valued on the basis
of the last sale price. Many fixed-income securities do not trade each day
and, thus, last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
Money Market instruments held by the Funds maturing within 60 days of the
valuation date and valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. The Funds may lend portfolio securities with a value of up to 50%
of their total assets. The Funds will receive cash, U.S. government
treasuries or U.S. government agency securities as collateral. The Funds will
retain most rights of beneficial ownership, including dividends, interest or
other distributions on the loaned securities. Realized gains and losses from
securities transactions are recorded on the basis of identified cost incurred
by each money manager.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
Notes to Financial Statements 113
<PAGE> 240
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. No federal income tax provision was
required for the year ended December 31, 1995. From November 1, 1995 to
December 31, 1995, the Volatility Constrained Bond Fund incurred net realized
capital losses of $9,180. As permitted by tax regulations, the Volatility
Constrained Bond Fund intends to elect to defer these losses and treat them
as arising in the year ending December 31, 1996.
At December 31, 1995, certain Funds had net tax basis capital loss
carryforwards which may be applied against any net realized taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/02 12/31/03 TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Diversified Bond $ -- $(9,899,442) $ -- $(9,899,442)
Volatility Constrained Bond (2,298,957) (5,583,410) (1,871,605) (9,753,972)
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For all Funds, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend date.
Dividends are generally declared and paid quarterly for the equity Funds,
annually for the International Securities Fund and monthly for the fixed
income Funds. Capital gain distributions are generally declared and paid
annually. An additional distribution may be paid by the Funds to avoid
imposition of federal income tax on any remaining undistributed capital gains
and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles ("GAAP"). As a
result, net investment income and net realized gain (or loss) on investment
and foreign currency-related transactions for a reporting period may differ
significantly from distributions during such period. The differences between
tax regulations and GAAP primarily relate to investments in options, futures,
forward contracts, passive foreign investment companies, foreign-denominated
investments, mortgage-backed securities, and certain securities sold at a
loss. Accordingly, a Fund may periodically make reclassifications among
certain of its capital accounts without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1995:
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
--------------- -------------- ----------------
<S> <C> <C> <C>
Diversified Equity $ 92,558 $ 18,251 $ (110,809)
Special Growth 383,844 (220,155) (163,689)
Equity Income 1,389 115,609 (116,998)
Quantitative Equity -- 20,078 (20,078)
International Securities 3,760,561 (3,243,107) (517,454)
Diversified Bond 249,777 (354,610) 104,833
Volatililty Constrained Bond -- 95,965 (95,965)
Multistrategy Bond 104,364 (3,809) (100,555)
</TABLE>
EXPENSES: Expenses such as management, custodian, transfer agent, bookkeeping,
printing, and registration fees are charged directly to the individual Funds;
while indirect expenses, such as administrative, insurance, and professional
fees are allocated among all Funds principally based on their relative net
assets.
DEFERRED ORGANIZATION EXPENSES: Organization and initial registration costs of
Multistrategy Bond Fund have been deferred and are being amortized over 60
months on a straight-line basis.
114 Notes to Financial Statements
<PAGE> 241
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
REPURCHASE AGREEMENTS: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of the underlying securities. Each Fund's Money Manager
will monitor repurchase agreements daily to determine that the market value
(including accrued interest) at Fedwire closing time of the underlying
securities remains at least equal to 102% of the repurchase price. The Money
Manager will notify the Seller to immediately increase the collateral on the
repurchase agreement to 102% of the repurchase price if collateral value
falls below 102%.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts and transactions of the
Funds are translated into U.S. dollars on the following basis:
(a) Market value of investment securities, other assets and liabilities at
the closing rate of exchange on the valuation date.
(b) Purchases and sales of investment securities and income at the closing
rate of exchange prevailing on the respective trade dates of such
transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities; sales
of foreign currencies; currency gains or losses realized between the trade
and settlement dates on securities transactions; the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Funds' books; and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized gains or losses from foreign currency-related
transactions arise from changes in the value of assets and liabilities, other
than investments in securities, at year-end, resulting from changes in the
exchange rates.
It is not practical to isolate that portion of the results of operations of
the International Securities, Diversified Bond, Volatility Constrained Bond
and Multistrategy Bond Funds that arise as a result of changes in exchange
rates from that portion that arise from changes in market prices of
investments during the year. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. However, for federal
income tax purposes these Funds do isolate the effects of changes in foreign
exchange rates from the fluctuations arising from changes in market prices
for realized gain (or loss) on debt obligations.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement of
Additional Information, the Funds may participate in various derivative-based
transactions. Derivative securities are instruments or agreements whose value
is derived from an underlying security or index. They include options,
futures, swaps, forwards, structured notes and stripped securities. These
instruments offer unique characteristics and risks that assist the Funds in
meeting their investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may be
used by certain Funds through the use of options and futures to earn
"market-like" returns with a Funds' excess and liquidity reserve cash
balances. Hedging is used by some Funds to limit or control risks, such as
adverse movements in exchange rates and interest rates. Return enhancement
can be accomplished through the use of derivatives in a Fund. By purchasing
certain instruments, a Fund may more effectively achieve the desired
portfolio characteristics that assist the Funds in meeting their investment
objectives. Depending on how the derivatives are utilized and their
structure, the risks associated with them may vary widely. These risks are
generally categorized as market risk, liquidity risk and counterparty or
credit risk.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: In connection with portfolio
purchases and sales of securities denominated in a foreign currency, certain
Funds may enter into foreign currency exchange spot contracts and forward
foreign currency exchange contracts ("contracts"). The International
Securities Fund may enter into foreign currency forward overlays on liquidity
reserve balances. Additionally, from time to time the International
Securities, Diversified Bond, Volatility Constrained Bond and Multistrategy
Bond Funds may enter into contracts to hedge certain foreign
currency-denominated assets. Contracts are recorded at market value. Certain
risks may arise upon entering into these contracts from the potential
inability of counterparties to meet the terms of their contracts. Realized
gains or losses arising from such transactions are included in net realized
gain (or loss) from foreign currency-related transactions.
Notes to Financial Statements 115
<PAGE> 242
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
FORWARD COMMITMENTS: The Funds may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (not to exceed
120 days)(i.e., a "forward commitment" or "delayed settlement" transaction,
e.g., to be announced ("TBA")) consistent with a Fund's ability to manage its
investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Funds may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such sale.
When effecting such transactions, cash or liquid high-grade debt obligations
of the Fund in a dollar amount sufficient to make payment for the portfolio
securities to be purchased will be segregated on the Fund's records at the
trade date and maintained until the transaction is settled. A forward
commitment transaction involves a risk of loss if the value of the security
to be purchased declines prior to the settlement date or the other party to
the transaction fails to complete the transaction.
OPTIONS: The Funds may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. These Funds
may also purchase and sell put and call options on foreign currencies. The
domestic equity Funds utilize options to equitize liquidity reserve balances.
When a Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. The Fund receives a premium on the sale of a
call option but gives up the opportunity to profit from any increase in stock
value above the exercise price of the option, and when the Fund writes a put
option it is exposed to a decline in the price of the underlying security. If
an option which the Fund has written either expires on its stipulated
expiration date or the Fund enters into a closing purchase transaction, the
Fund realizes a gain (or loss, if the cost of a closing purchase transaction
exceeds the premium received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the liability related
to such option is extinguished. If a call option which the Fund has written
is exercised, the Fund realizes a capital gain or loss from the sale of the
underlying security, and the proceeds from such sale are increased by the
premium originally received. When a put option which a Fund has written is
exercised, the amount of the premium originally received will reduce the cost
of the security which a Fund purchases upon exercise of the option.
The Funds' use of written options involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The face or contract amounts of these instruments reflect the
extent of the Funds' exposure to off balance sheet risk. The risks may be
caused by an imperfect correlation between movements in the price of the
instrument and the price of the underlying securities and interest rates. The
Funds' activities in written options are conducted through regulated
exchanges, which do not result in counterparty credit risks.
FUTURES: The domestic and international equity Funds utilize futures to
equitize liquidity reserve balances. Multistrategy Bond Fund may utilize
futures contracts (i.e., interest rate, foreign currency and index futures
contracts) to a limited extent. The face or contract amounts of these
instruments reflect the extent of the Funds' exposure to off balance sheet
risk. The primary risks associated with the use of futures contracts are an
imperfect correlation between the change in market value of the securities
held by the Fund and the prices of futures contracts and the possibility of
an illiquid market. Changes in the initial settlement values of futures
contracts are accounted for as unrealized appreciation (depreciation) until
the contracts are terminated, at which time realized gains and losses are
recognized.
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1995, purchases and sales of
investment securities excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Diversified Equity $436,869,833 $455,771,508
Special Growth 249,994,270 224,249,380
Equity Income 144,689,534 152,930,831
Quantitative Equity 338,314,431 356,292,119
International Securities 253,000,004 249,677,571
Diversified Bond 84,483,671 96,821,867
Volatility Constrained Bond 66,828,607 80,372,982
Multistrategy Bond 93,100,726 72,196,222
</TABLE>
116 Notes to Financial Statements
<PAGE> 243
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Purchases and sales of U.S. Government and Agency obligations (excluding
repurchase agreements, options, futures and other short-term securities) were
as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Diversified Bond $619,544,075 $639,085,567
Volatility Constrained Bond 413,854,692 397,644,434
Multistrategy Bond 202,850,167 190,725,781
</TABLE>
OPTIONS WRITTEN AND FUTURES CONTRACTS: Fund transactions in written put
options and futures contract purchases for the year ended December 31, 1995
were as follows:
<TABLE>
<CAPTION>
DIVERSIFIED EQUITY WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 480 $ 589,886 -- $ --
Opened 1,440 1,212,786 182 54,413,896
Closed (1,920) (1,802,672) (122) (35,699,958)
------------ ------------ ------------ ------------
Outstanding December 31, 1995 -- $ -- 60 $ 18,713,938
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SPECIAL GROWTH WRITTEN PUT OPTIONS FUTURES CONTRACTS
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 1,200 $ 1,159,510 -- $ --
Opened 2,190 1,269,133 365 56,362,491
Closed (3,220) (2,327,156) (215) (36,145,068)
------------ ------------ ------------ ------------
Outstanding December 31, 1995 170 $ 101,487 150 $ 20,217,423
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 185 $ 229,854 -- $ --
Opened 435 362,022 85 25,465,261
Closed (620) (591,876) (53) (15,513,589)
------------ ------------ ------------ ------------
Outstanding December 31, 1995 -- $ -- 32 $ 9,951,672
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 640 $ 775,554 -- $ --
Opened 750 633,355 116 34,978,624
Closed (1,390) (1,408,909) (56) (16,369,911)
------------ ------------ ------------ ------------
Outstanding December 31, 1995 -- $ -- 60 $ 18,608,713
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Notes to Financial Statements 117
<PAGE> 244
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
VOLATILITY CONSTRAINED BOND WRITTEN PUT OPTIONS
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------------ ------------
<S> <C> <C>
Outstanding December 31, 1994 133,500 $ 79,772
Opened -- --
Closed (133,500) (79,772)
------------ ------------
Outstanding December 31, 1995 -- $ --
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
MULTISTRATEGY BOND WRITTEN PUT OPTIONS FUTURES CONTRACTS
AGGREGATE
NUMBER OF PREMIUMS NUMBER OF FACE VALUE OF
CONTRACTS RECEIVED CONTRACTS CONTRACTS(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 67 $ 58,763 175 $ 18,982,344
Opened 769 377,288 1,315 151,352,250
Exercised (100) (47,838) -- --
Closed (717) (381,677) (1,205) (138,502,178)
------------ ------------ ------------ -------------
Outstanding December 31, 1995 19 $ 6,536 285 $ 31,832,416
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUTURES CONTRACTS
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------------ ------------
<S> <C> <C>
Outstanding December 31, 1994 -- --
Opened 485 $ 54,521,405
Closed (302) (35,157,475)
------------ ------------
Outstanding December 31, 1995 156 $ 19,363,930
------------ ------------
------------ ------------
</TABLE>
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
SECURITIES LENDING: The International Securities Fund may loan securities
with a value up to 50% of its total assets to certain brokers. The Fund
receives cash (U.S. currency) and securities issued or guaranteed by the U.S.
Government or its agencies as collateral against the loaned securities. To
the extent that a loan is secured by cash collateral, such collateral shall
be invested by State Street Bank and Trust Company ("State Street") in
short-term instruments, short-term investment funds maintained by State
Street, money market mutual funds, and such other short-term investments as
State Street may from time to time select, provided the investments meet
certain quality and diversification requirements. Income generated from the
investment of cash collateral less negotiated rebate fees paid to
participating brokers is divided between the Fund and State Street Bank and
is included as interest income for the Fund. To the extent that a loan is
secured by non-cash collateral, brokers pay the Fund negotiated lenders'
fees, which are divided between the Fund and State Street, and are included
as interest income for the Fund. All collateral received will be in an amount
at least equal to 100% of the market value of the loaned securities at the
inception of each loan. This collateral must be maintained at not less than
100% of the market value of the loaned securities during the period of the
loan. Should the borrower of the securities fail financially, there is a risk
of delay in recovery of the securities or loss of rights in the collateral.
Consequently, loans are made only to borrowers which are deemed to be of good
financial standing. On December 7, 1995, the Fund suspended its securities
lending program. All outstanding loans were recalled over the following two
months. As of December 31, 1995, the value of outstanding securities on loan
and the value of collateral amounted to $3,436,372 and $3,673,642,
respectively.
118 Notes to Financial Statements
<PAGE> 245
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. RELATED PARTIES
Frank Russell Investment Management Company ("FRIMCo" or "Manager") operates
and administers all the Funds which comprise the Investment Company, and
manages the U.S. Government Money Market and Money Market Funds (two series
of the Investment Company not presented in this annual report). FRIMCo is a
wholly owned subsidiary of Frank Russell Company, which researches and
recommends to FRIMCo, and to the Investment Company, one or more investment
management organizations to manage the portfolio of each of the other Funds.
For the year ended December 31, 1995, the management fee paid to Frank
Russell Investment Management Company ("FRIMCo" or "Manager"), in accordance
with the Investment Company's Management Agreement with that firm, amounted
to $21,502,947 before waivers. Such fee is payable monthly and is equal to
the annual rate, by Fund, shown in the table below, of the average daily net
assets of the applicable Fund.
<TABLE>
<CAPTION>
ANNUAL RATE
-------------
<S> <C>
Diversified Equity 0.78%
Special Growth 0.95
Equity Income 0.80
Quantitative Equity 0.78
International Securities 0.95
Diversified Bond 0.45
Volatility Constrained Bond 0.50
Multistrategy Bond 0.65
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits on an annual basis, such
excess will be paid by FRIMCo. For the year ended December 31, 1995, FRIMCo
voluntarily agreed to reimburse all expenses of the Multistrategy Bond Fund
that exceeded the annual rate of 0.85% of its average daily net assets. The
amount of such reimbursement was $83,382.
Fees for bookkeeping services provided to the Funds are paid or accrued to
Frank Russell Company, an affiliate of the Investment Company. Frank Russell
Company provides its Portfolio Verification System ("PVS") to the Funds,
pursuant to a written Service Agreement. The PVS computerized data base
system records detailed transactions data for each of the Funds necessary to
prepare various financial and Internal Revenue Service accounting reports.
The Funds' total fees for the year ended December 31, 1995 were $349,884
before waivers. The Manager voluntarily agreed to waive $83,475 of these fees
for the International Securities Fund.
The Funds have a contract with FRIMCo to provide transfer agent services to
the Investment Company. Total fees for the year ended December 31, 1995 were
$1,929,613.
The Funds also paid brokerage commissions for trades executed through Frank
Russell Securities, Inc., an affiliate of the Frank Russell Investment
Management Company. These commissions are net of a refund (up to 70%) paid
back to the Fund effecting such transactions after reimbursement for research
services provided to FRIMCo. Amounts retained by Frank Russell Securities,
Inc. for the year ended December 31, 1995 were as follows:
<TABLE>
<S> <C>
Diversified Equity $63,262
Special Growth 1,442
Equity Income 30,547
Quantitative Equity 108
International Securities 91,467
</TABLE>
The Investment Company was paying each of its Trustees not affiliated with
FRIMCo a retainer of $16,000 per year plus out-of-pocket expenses. Effective
April 25, 1995, the annual retainer was increased to $20,000. Total trustee
expenses were $96,696 for the year ended December 31, 1995 and were allocated
to each Fund on a pro rata basis, including 14 affiliated funds not presented
here.
Russell Fund Distributors, Inc. (the "Distributor"), a wholly owned
subsidiary of FRIMCo, is the principal Distributor of the Investment Company
shares. The Distributor receives no compensation from the Investment Company
for its services.
Notes to Financial Statements 119
<PAGE> 246
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. MONEY MARKET FUND
The Funds are permitted to invest their cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in the
Frank Russell Investment Company Money Market Fund (a series of Frank Russell
Investment Company not presented in this annual report). These investments
are reflected as purchases and redemptions of shares of the Money Market
Fund. The interest earned by the Money Market Fund related to these investments
is reflected as dividends paid (or payable) on such shares. As of December 31,
1995, $157,451,000 of the Money Market Fund's net assets represents
investments by these Funds and $334,481,000 represents the investments of
other affiliated Funds not presented here.
6. COMMITMENTS
As of December 31, 1995 Diversified Equity, International Securities,
Diversified Bond and Multistrategy Bond Funds have entered into various
forward foreign currency exchange and foreign currency exchange spot
contracts which contractually obligate the Fund to deliver or receive
currencies at specified future dates. Open contracts were as follows:
DIVERSIFIED EQUITY FUND
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
USD 52,097 NOK 329,481 01/02/96 $ (1)
USD 65,549 NOK 417,086 01/03/96 299
USD 48,456 NOK 307,213 01/04/96 45
--------------
$ 343
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
USD 1,046,290 AUD 1,400,000 03/29/96 $ (10,236)
USD 2,315,627 DEM 3,300,000 03/29/96 (4,783)
USD 1,915,410 FRF 9,400,000 03/29/96 6,939
USD 7,784,000 GBP 5,000,000 03/29/96 (35,558)
USD 13,830,575 JPY 1,400,000,000 03/29/96 (95,322)
DEM 5,765,000 USD 4,055,176 03/21/96 19,802
FRF 25,910,000 USD 5,269,473 03/21/96 (28,646)
GBP 3,595,000 USD 5,699,190 02/01/96 120,591
JPY 722,775,000 USD 7,500,000 01/08/96 489,562
JPY 217,400,000 USD 2,170,636 03/21/96 40,255
---------------
$ 502,604
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
USD 135,358 AUD 181,810 01/08/96 $ (223)
USD 23,853 CHF 27,469 01/04/96 (39)
USD 138,411 GBP 89,234 01/08/96 173
USD 599,192 SEK 3,978,934 01/04/96 72
USD 133,640 SGD 188,900 01/04/96 (95)
BRL 5,627 USD 5,804 01/02/96 16
---------------
$ (96)
---------------
---------------
</TABLE>
120 Notes to Financial Statements
<PAGE> 247
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DIVERSIFIED BOND FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
DEM 5,403,208 USD 3,884,908 01/11/96 $ 115,638
DEM 147,908 USD 105,104 12/09/96 333
--------------
$ 115,971
---------------
---------------
</TABLE>
MULTISTRATEGY BOND FUND
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
DEM 4,317,000 USD 3,014,665 01/18/96 $ 1,988
DEM 591,840 USD 420,565 12/09/96 1,333
DEM 4,698,000 USD 3,311,366 12/13/96 (17,058)
-------------
$ (13,737)
-------------
-------------
</TABLE>
The related net unrealized appreciation (depreciation) is reflected in the
preceding Funds' financial statements.
7. DIVIDENDS
On February 1, 1996, the Board of Trustees declared the following dividends
from net investment income payable on February 9, 1996, to shareholders of
record on February 2, 1996:
<TABLE>
<S> <C>
Diversified Bond $ 0.1233
Volatility Constrained Bond 0.0991
Multistrategy Bond 0.0528
</TABLE>
Notes to Financial Statements 121
<PAGE> 248
FRANK RUSSELL INVESTMENT COMPANY
ADDITIONAL INFORMATION
December 31, 1995 (Unaudited)
On January 22, 1996, a special meeting of the shareholders of the Funds was
held for the purpose of voting on the following matter:
To approve the Investment Company's operation in accordance with the
exemptive order granted on June 27, 1995 to the Investment Company and
the Manager by the Securities and Exchange Commission.
The exemptive order permits the Manager to engage and terminate
unaffiliated money managers for each Fund without holding shareholder
meetings and to disclose in the Investment Company's prospectus, with
respect to each Fund, only the aggregate fees paid to that Fund's money
managers and the net advisory fees retained by the Manager with respect
to that Fund.
The results of the vote on the proposal for the 22 Funds, on which 8 are
reported in these financial statements, were as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF OUTSTANDING % OF SHARES
VOTE SHARES SHARES VOTED
--------------------- ----------- ---------------- ------------
<S> <C> <C> <C>
Affirmative 349,878,731 68.5% 99.9%
Against 226,716 -- 0.1%
Abstain 15,879 -- --
----------- ---------------- ------------
Total 350,121,326 68.5% 100.0%
----------- ---------------- ------------
----------- ---------------- ------------
</TABLE>
TAX INFORMATION
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as capital gain dividends for their taxable year ended
December 31, 1995:
<TABLE>
<S> <C>
Diversified Equity $35,078,456
Special Growth 16,739,577
Equity Income 9,173,168
Quantitative Equity 27,443,680
International Securities 17,973,915
Multistrategy Bond 2,646
</TABLE>
Please consult a tax advisor for questions about federal or state income tax
laws.
122 Additional Information
<PAGE> 249
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(206) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary
MANAGER
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Legal Counsel
Stradley, Ronon, Stevens & Young
2600 - One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
DIVERSIFIED EQUITY
Alliance Capital Management L.P., Minneapolis, MN
Systematic Financial Management, L.P., Fort Lee, NJ
Columbus Circle Investors, Stamford, CT
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc. Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Wellington Management Company, Boston, MA
SPECIAL GROWTH
Delphi Management, Inc., Boston, MA
Fiduciary International, Inc., New York, NY
Globeflex Capital, L.P., San Diego, CA
(added on 01/08/96)
Jacobs Levy Equity Management, Inc., Roseland, NJ
Mitchell Hutchins Institutional Investors, New York, NY
(replaced on 12/21/95)
Sirach Capital Management, Inc., Seattle, WA
Wellington Management Company, Boston, MA
EQUITY INCOME
Brandywine Asset Management, Inc., Wilmington, DE
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
QUANTITATIVE EQUITY
BZW Barclays Global Fund Advisors, San Francisco, CA
Franklin Portfolio Associates Trust, Boston, MA
J.P. Morgan Investment Management Inc., New York, NY
INTERNATIONAL SECURITIES
Grantham, Mayo, Van Otterloo & Co., Boston, MA
J.P. Morgan Investment Management Inc., New York, NY
Marathon Asset Management Limited, London, England
Oechsle International Advisors, Boston, MA
Rowe Price-Fleming International, Inc., Baltimore, MD
DIVERSIFIED BOND
Lincoln Capital Management Company, Chicago, IL
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
VOLATILITY CONSTRAINED BOND
Blackrock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
MULTISTRATEGY BOND
BEA Associates, New York, NY
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
Manager and Money Managers 123
<PAGE> 250
FRANK RUSSELL INVESTMENT COMPANY
Frank Russell Investment Company is a "series mutual fund" with 22 different
investment portfolios. These financial statements report on five Funds, each
of which has distinct investment objectives and strategies.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
Responsible for overall management and administration of the Funds.
FRANK RUSSELL COMPANY
Consultant to Frank Russell Investment Management Company.
<PAGE> 251
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . 2
REAL ESTATE SECURITIES FUND. . . . . . . . . . . . . . . . . . . . . . 3
EMERGING MARKETS FUND . . . . . . . . . . . . . . . . . . . . . . . . 11
LIMITED VOLATILITY TAX FREE FUND . . . . . . . . . . . . . . . . . . . 25
U.S. GOVERNMENT MONEY MARKET FUND. . . . . . . . . . . . . . . . . . . 37
TAX FREE MONEY MARKET FUND . . . . . . . . . . . . . . . . . . . . . . 43
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 53
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 59
MANAGER AND MONEY MANAGERS . . . . . . . . . . . . . . . . . . . . . . 60
FRANK RUSSELL INVESTMENT COMPANY - SPECIALTY FUNDS
Copyright -C- Frank Russell Company 1996. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance quoted represents past performance and,
except for a money market fund, the investment return and principal value of an
investment will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. An investment in a money market fund is neither
insured nor guaranteed by the U.S. government. There can be no assurance that a
money market fund will be able to maintain a stable net asset value of $1.00
per share. Investments in securities of non-US issuers and foreign currencies
involve investment risks different than those of US issuers; the Prospectus
contains further information and details regarding these risks. Income from
tax-free funds may be subject to an alternative minimum tax. Russell Fund
Distributors, Inc., is the distributor of Frank Russell Investment Company.
<PAGE> 252
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Real Estate Securities Fund, Emerging
Markets Fund, Limited Volatility Tax Free Fund, U.S. Government Money Market
Fund, and Tax Free Money Market Fund (the "Funds")), as of December 31, 1995,
and the related statements of operations, the statements of changes in net
assets and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds enumerated above as of December 31, 1995, the results of their
operations, the changes in their net assets and the financial highlights for
each of the periods indicated therein in conformity with generally accepted
accounting principles.
Boston, Massachusetts
February 12, 1996
/s/ Coopers & Lybrand LLP.
<PAGE> 253
REAL ESTATE SECURITIES FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS - 91.7%
APARTMENT - 23.0%
Associated Estates Realty Corp. (c) 245,000 $ 5,268
Avalon Properties, Inc. (c) 262,900 5,652
Camden Property Trust (c) 277,500 6,625
Colonial Properties Trust (c) 200,300 5,108
Columbus Realty Trust (c) 227,800 4,414
Equity Residential Properties Trust (c) 69,700 2,135
Merry Land and Investment Co., Inc. (c) 367,100 8,673
Oasis Residential, Inc. (c) 234,800 5,342
Post Properties, Inc. (c) 262,000 8,351
Security Capital Pacific Trust (c) 138,615 2,738
Smith (Charles E.) Residential Realty, Inc. (c) 178,300 4,212
Summit Properties, Inc. (c) 134,800 2,679
United Dominion Realty Trust, Inc. (c) 372,400 5,585
--------
66,782
--------
HEALTH CARE - 6.9%
Health Care Property Investors, Inc. (c) 253,200 8,894
Nationwide Health Properties, Inc. (c) 267,500 11,235
--------
20,129
--------
HOTELS - 4.6%
Bristol Hotel Co. (a) 42,900 1,046
Felcor Suite Hotels, Inc. (c) 138,300 3,838
Patriot American Hospitality, Inc. (c) 156,200 4,022
Starwood Lodging Trust New (c) 151,600 4,510
--------
13,416
--------
OFFICE/INDUSTRIAL - 18.2%
Beacon Properties Corp. (c) 123,400 2,838
Cali Realty Corp. (c) 253,900 5,554
Carr Realty Corp. (c) 118,200 2,881
Cousins Properties, Inc. (c) 284,400 5,759
Crescent Real Estate Equities (c) 130,100 4,440
Duke Realty Investments, Inc. (c) 184,600 5,792
Highwoods Properties, Inc. (c) 196,000 5,537
Liberty Property Trust (c) 259,000 5,374
Reckson Associates Realty Corp. (c) 148,800 4,371
Security Capital Industrial Trust (c) 95,700 1,675
Spieker Properties, Inc. (c) 134,700 3,384
Weeks Corp. (c) 217,300 5,460
--------
53,065
--------
SELF STORAGE - 2.2%
Shurgard Storage Centers, Inc. Class A (c) 87,700 2,368
Storage USA, Inc. (c) 122,000 3,980
--------
6,348
--------
SHOPPING CENTER - 17.3%
Bradley Real Estate, Inc. (c) 164,000 2,214
Developers Diversified Realty Corp. (c) 324,300 9,729
Federal Realty Investment Trust New (c) 420,700 9,571
Kimco Realty Corp. (c) 444,750 12,119
Price (The), Inc. (c) 171,000 4,745
Sizeler Property Investors, Inc. (c) 96,300 855
Vornado Realty Trust (c) 295,500 11,082
--------
50,315
--------
OUTLET CENTERS - 2.3%
Chelsea GCA Realty, Inc. (c) 109,100 3,273
HGI Realty, Inc. (c) 13,500 309
Tanger Factory Centers, Inc. (c) 126,400 3,160
--------
6,742
--------
REGIONAL MALLS - 17.2%
CBL & Associates Properties, Inc. (c) 204,500 4,448
DeBartolo Realty Corp. (c) 537,500 6,988
Glimcher Realty Trust (c) 398,000 6,866
J.P. Realty, Inc. (c) 338,700 7,409
Macerich Co. (c) 333,000 6,660
Mills Corp. (The) (c) 44,900 763
Rouse Co. (The) 501,000 10,208
Simon Property Group, Inc. (c) 167,800 4,089
Taubman Centers, Inc. (c) 246,500 2,464
--------
49,895
--------
TOTAL COMMON STOCKS
(cost $244,230) 266,692
--------
</TABLE>
Specialty Funds Real Estate Securities Fund 3
<PAGE> 254
REAL ESTATE SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 7.6%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $22,127 $ 22,127
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $22,127) 22,127
--------
TOTAL INVESTMENTS
(identified cost $266,357)(d) - 99.3% 288,819
--------
OTHER ASSETS AND LIABILITIES,
NET - 0.7% 2,171
--------
NET ASSETS - 100.0% $290,990
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Real Estate Investment Trust.
(d) At December 31, 1995, the cost for federal income tax purposes was $266,409
and net unrealized appreciation for all securities was $22,410. This
consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $27,876 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $5,466.
The accompanying notes are an integral part of the financial statements.
4 Real Estate Securities Fund Specialty Funds
<PAGE> 255
REAL ESTATE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $266,356,526)(Note 2)......................... $288,818,934
Receivables:
Dividends.......................................................................... 2,460,627
Investments sold................................................................... 1,021,859
Fund shares sold................................................................... 1,017,761
------------
293,319,181
LIABILITIES
Payables:
Investments purchased............................................ $ 734,184
Fund shares redeemed............................................. 1,280,854
Accrued bookkeeping service fees (Note 4)........................ 1,150
Accrued management fees (Note 4)................................. 204,822
Accrued transfer agent fees (Note 4)............................. 55,211
Other accrued expenses........................................... 53,024 2,329,245
---------- ------------
NET ASSETS............................................................................. $290,989,936
------------
------------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss)................................................. $ (2,439,743)
Unrealized appreciation (depreciation) on investments................................ 22,462,408
Shares of beneficial interest........................................................ 123,766
Additional paid-in capital........................................................... 270,843,505
------------
NET ASSETS............................................................................. $290,989,936
------------
------------
Net asset value, offering and redemption price per share,
($290,989,936 divided by 12,376,566 shares of $.01 par value
shares of beneficial interest outstanding)............................................ $23.51
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 5
<PAGE> 256
REAL ESTATE SECURITIES FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends............................................................................ $16,205,619
Dividends from Money Market Fund (Note 5)............................................ 1,156,241
-----------
17,361,860
Expenses (Notes 2 and 4):
Management fees.................................................... $ 2,065,552
Custodian fees..................................................... 90,904
Transfer agent fees................................................ 297,051
Bookkeeping service fees........................................... 5,231
Professional fees.................................................. 14,711
Registration fees.................................................. 42,580
Trustees' fees..................................................... 4,366
Miscellaneous...................................................... 14,880 2,535,275
----------- -----------
Net investment income.................................................................. 14,826,585
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments.............................................. (947,446)
Net change in unrealized appreciation or depreciation of investments................... 14,217,578
-----------
Net gain (loss) on investments......................................................... 13,270,132
-----------
Net increase (decrease) in net assets resulting from operations........................ $28,096,717
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6 Real Estate Securities Fund Specialty Funds
<PAGE> 257
REAL ESTATE SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income.................................................. $ 14,826,585 $ 10,250,499
Net realized gain (loss) from investments.............................. (947,446) 2,709,077
Net change in unrealized appreciation or depreciation of
investments during the year........................................... 14,217,578 (787,306)
------------ ------------
Net increase (decrease) in net assets resulting from operations.......... 28,096,717 12,172,270
Distributions to shareholders:
Net investment income.................................................. (15,134,155) (10,055,022)
Net realized gain on investments....................................... -- (3,360,493)
In excess of net realized gain on investments.......................... -- (1,491,333)
Tax return of capital.................................................. (207,871) --
Increase (decrease) in net assets from Fund share transactions........... 69,027,371 66,775,555
------------ ------------
INCREASE (DECREASE) IN NET ASSETS........................................ 81,782,062 64,040,977
Net assets at beginning of year.......................................... 209,207,874 145,166,897
------------ ------------
NET ASSETS AT END OF YEAR
(including undistributed net investment income of $390,637 at
December 31, 1994)..................................................... $290,989,936 $209,207,874
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS 1995 1994
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold........................................ 4,842,544 $108,140,650 4,115,042 $ 95,055,963
Fund shares issued to shareholders in reinvestments of
distributions.......................................... 548,366 12,360,832 543,891 12,030,634
Fund shares redeemed.................................... (2,298,035) (51,474,111) (1,752,061) (40,311,042)
---------- ------------ ---------- ------------
Net increase (decrease)................................. 3,092,875 $ 69,027,371 2,906,872 $ 66,775,555
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 7
<PAGE> 258
REAL ESTATE SECURITIES FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $ 22.53 $ 22.76 $ 21.50 $ 19.33 $ 14.99
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................ 1.32 1.25 1.05 1.08 1.11
Net realized and unrealized gain (loss) on
investments......................................... 1.03 .40 2.68 2.16 4.36
------- ------- ------- ------- -------
Total Income From Investment Operations.............. 2.35 1.65 3.73 3.24 5.47
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................................ (1.35) (1.23) (1.04) (1.07) (1.13)
Net realized gain on investments..................... -- (.45) (1.43) -- --
In excess of net realized gain on investments........ -- (.20) -- -- --
Tax return of capital................................ (.02) -- -- -- --
------- ------- ------- ------- -------
Total Distributions.................................. (1.37) (1.88) (2.47) (1.07) (1.13)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR........................... $ 23.51 $ 22.53 $ 22.76 $ 21.50 $ 19.33
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)....................................... 10.87 7.24 17.42 17.29 37.08
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expense, net, to average net assets........ 1.04 1.05 1.11 1.20 1.26
Operating expenses, gross, to average net assets..... 1.04 1.05 1.11 1.20 1.31
Net investment income to average net assets.......... 6.10 5.65 4.52 5.60 6.50
Portfolio turnover................................... 23.49 45.84 58.38 19.72 13.28
Net assets, end of year ($000 omitted)............... 290,990 209,208 145,167 75,902 42,771
Per share amount of fees reimbursed ($ omitted)...... -- -- -- -- .0076
</TABLE>
8 Real Estate Securities Fund Specialty Funds
<PAGE> 259
REAL ESTATE SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 REAL ESTATE SECURITIES NAREIT EQUITY REIT** LIPPER-C- REAL ESTATE++
- ----------------- ---------------------- -------------------- -----------------------
<S> <C> <C> <C>
Inception* $ 10,000 $ 10,000 $10,000
1989 $ 9,843 $ 9,690 $ 9,692
1990 $ 8,276 $ 8,203 $ 8,093
1991 $ 11,345 $ 11,182 $10,712
1992 $ 13,306 $ 12,733 $12,093
1993 $ 15,624 $ 15,237 $14,911
1994 $ 16,755 $ 15,721 $14,614
1995 $ 18,576 $ 18,119 $16,528
</TABLE>
Real Estate Securities Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $ 11,087 10.87%
5 Years $ 22,446 17.55%
Inception $ 18,576 10.13%***
</TABLE>
NAREIT Equity REIT Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $ 11,526 15.26%
5 Years $ 22,088 17.17%
Inception $ 18,119 9.71%***
</TABLE>
Lipper Real Estate Benchmark
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $ 11,310 13.10%
5 Years $ 20,421 15.35%
Inception $ 16,528 8.37%***
</TABLE>
* Assumes initial investment on August 1, 1989. Lipper index comparison for
the initial investment began October 1, 1989.
** NAREIT Equity REIT Index is an index composed of all the data based on the
last closing price of the month for all tax-qualified REIT's listed on the
New York Stock Exchange, American Stock Exchange, and the NASDAQ National
Market System. The data is market value-weighted. The total-return
calculation is based upon whether it is 1-month, 3-months or 12-months.
Only those REITS listed for the entire period are used in the total return
calculation.
++ Lipper-C- Real Estate Benchmark is the average total return for the
universe of funds within the Real Estate Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
*** Annualized.
REAL ESTATE SECURITIES FUND returned 10.9% in 1995, which trailed the NAREIT
Equity REIT Index return of 15.3%. The portfolio was managed in a manner
consistent with its objective to achieve a high level of total return
generated through above-average current income, while maintaining the
potential for capital appreciation by investing primarily in the equity
securities of companies in the real estate industry.
Although it was an excellent year for real estate investment trust
investments, the Fund fell behind the index early in the year and proceeded to
lose further ground in the ensuing months. The Fund's bearish view, and
subsequent underweighting, of the self storage and hotel sectors in the first
quarter resulted in the Fund missing out on the strong gains posted by
securities in these sectors early in the year. The Fund's underperformance
late in the year was driven by an overweighting of investments in retail and
apartment property securities, which lagged other sectors of the market by a
considerable margin.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Specialty Funds Real Estate Securities Fund 9
<PAGE> 260
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
COMMON STOCKS - 69.4%
ARGENTINA - 4.8%
Banco Frances del Rio la Plata - ADR 8,970 $ 241
Buenos Aires Embotelladora SA - ADR 18,000 371
Central Puerto SA Class B 120,000 456
Comercial de Plata (a) 201,100 533
Cresud SA (a) 349,500 475
Dalmine Siderca SA 615,830 597
Inversiones Y Representaciones 66,529 168
Inversiones Y Representaciones SA - GDR 6,225 159
Naviera Perez Companc Class B 414,540 2,197
Telecom Argentina Class B 87,122 411
Telefonica de Argentina Class B 150,000 405
Telefonica de Argentina Class B - ADR 36,950 1,007
YPF Sociedad Anonima Class D - ADR 57,100 1,234
--------
8,254
--------
AUSTRALIA - 0.3%
Lihir Gold, Ltd. (a) 444,200 485
--------
485
--------
AUSTRIA - 0.6%
Julius Meinl International 5,626 178
Nafta (a) 5,110 340
Tabak AS (a) 3,500 540
--------
1,058
--------
BANGLADESH - 0.2%
Apex Tannery (a) 2,300 44
Beximco Infusion 7,500 64
Eastern Housing, Ltd. 5,000 16
Orion Infusions, Ltd. (a) 80,000 275
--------
399
--------
BRAZIL - 2.8%
Compania Energetica de Minas - ADR (a) 25,623 557
Compania Energetica de Minas Gerais (a) 544,776 12
Forca E Luz (Cia Paul) NPC 4,047,000 196
Makro Atacadista - GDS (a) 30,000 171
Rhodia Ster SA NPV 129,820 116
Souza Cruz NPV 15,920 90
Telecomunicacoes Brasileiras - ADR 42,970 2,036
Telecomunicacoes Brasileiras -
ADR (144A) 88 4
Telecomunicacoes Brasileiras NPV 29,823,900 1,154
White Martins SA NPV 542,259,378 541
--------
4,877
--------
CHILE - 4.0%
Administradora de Fondos
de Pensiones Provida SA - ADR 20,470 565
Antofagasta Holdings PLC 190,000 841
Banco de A. Edwards Series A - ADR (a) 8,800 173
Banco O'Higgins - ADR 20,000 460
Chilgener SA - ADR 30,000 750
Compania de Telefonos (Chile) SA - ADR 13,922 1,154
Embotelladora Andina - ADR 17,000 614
Enersis SA - ADR 39,355 1,122
Laboratorio Chile SA - ADR 30,000 379
Madeco SA - ADR 4,942 133
Maderas Y Sinteticos Sociedad - ADR 25,400 495
Moneda Chile Fund (a) 5,125 51
Sociedad Quimica Y Minera
de Chile SA - ADR 2,030 95
Vina Concha Y Toro SA - ADR 5,750 104
--------
6,936
--------
CHINA - 0.3%
Huaneng Power International, Inc.
- ADR Series N (a) 3,700 53
Luoyang Glasswork Class H 38,000 10
Shanghai Dazhong Taxi Class B 317,570 232
Yizheng Chemical Fibre Series H 800,000 179
--------
474
--------
COLOMBIA - 0.2%
Banco Industrial Colombiano SA - ADR 24,400 400
--------
400
--------
CZECH REPUBLIC - 0.6%
Cesky IF (a) 11,582 133
Czechoslovakian Value Fund (Units)(a) 17,000 162
Czechoslovakian Value Fund
1998 Warrants (a) 3,400 7
Elektrarny Opatovice AS (a) 500 60
Komercni Banka AS - GDR (a) 7,700 139
Privat Fonds 10,300 189
SPT Telecom AS (a) 2,530 239
Vseobecny Investment Fund (a) 1,300 6
Vynosovy Investment Fund (a) 18,600 97
--------
1,032
--------
GHANA - 0.3%
Ashanti Goldfields Co., Ltd. - GDS 24,490 484
--------
484
--------
</TABLE>
Specialty Funds Emerging Markets Fund 11
<PAGE> 261
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
GREECE - 1.3%
AEGEK SA 14,000 $ 120
AEGEK SA New (a) 1,400 12
Alpha Credit Bank (Regd) 3,500 202
Athens Medical Center SA (Regd) 24,000 150
Ergo Bank (Regd) 22,000 876
Greek Progress Fund 17,410 148
Hellenic Bottling 12,332 403
Titan Cement Co. 8,000 336
--------
2,247
--------
HONG KONG - 1.9%
Alco Holdings 1,000,000 153
ASM Pacific Technology 212,000 184
Chen Hsong Holding 700,000 367
Cheung Kong Holdings, Ltd. 108,000 658
Formosa Fund - IDR (Regd)(a) 38 281
Fountain Set Holdings 1,500,000 287
Guangdong Investment 60,000 36
Guangzhou Investment 1,000,000 191
H.S.B.C. Holdings (UK Regd) 42,200 639
Johnson Electric Holdings, Ltd. 43,000 77
M.C. Packaging 199,000 71
Peregrine (Alien Market)(Units)(a) 5,400 40
Shangri-La Asia, Ltd. 52,000 64
Yue Yuen Industrial 323,000 85
Zhenhai Refining & Chemical Co., Ltd.
Series H 620,000 115
--------
3,248
--------
HUNGARY - 1.0%
Chemical Works of Gedeon Richter - ADR 31,652 592
Egis 21,719 482
Mol Magyar Olay-Es Gazipari - GDS (a) 80,000 640
--------
1,714
--------
INDIA - 2.7%
Arvind Mills - GDS 88,990 378
Ashok Leyland, Ltd. - GDR (a) 10,000 102
Bajaj Auto Ltd. - GDR 28,500 713
Century Textiles & Industries, Ltd. - GDR (a) 500 70
Genesis India Investment Co. (a) 95,742 950
Global Tele-Systems Group, Inc. (a) 525 9
Grasim Industries, Ltd. - GDR (a) 9,350 187
Grasim Industries, Ltd. - GDS 18,200 364
Hindalco Industries, Ltd. - GDR (a) 12,200 407
I.T.C., Ltd.- GDR (a) 17,600 156
Indian Hotels Co., Ltd. - GDR (a) 7,000 135
Indian Petrochemicals - GDR (a) 7,000 87
Indo Gulf Fertilizers & Chemicals - GDR 207,600 270
Larsen & Toubro - GDS 8,100 144
Larsen & Toubro, Ltd. - GDR 10,600 187
Perusahaan Persero Telekom - ADR (a) 8,300 210
Raymond Woolen Mills, Ltd. - GDR (a) 3,700 61
Tube Investments of India - GDR 123,080 214
Videocon International - GDS 25,900 64
--------
4,708
--------
INDONESIA - 2.4%
Astra International (Alien Market) 85,000 177
Bank Bali (Alien Market) 31,200 61
Bank Bali 2000 Warrants (Alien Market)(a) 14,400 4
Bank International Indonesia (Alien Market) 36,800 122
Bimantara Citra (Alien Market)(a) 131,500 109
Ciputra Development (Alien Market) 70,000 110
Dankos Laboratories (Alien Market) 46,250 107
HM Sampoerna (Alien Market) 26,500 276
Indorama Synthetic (Alien Market) 58,400 211
Indosat (Alien Market) 122,000 443
Inti Indorayon Utama (Alien Market) 161,000 169
Kalbe Farma (Alien Market) 88,000 298
Modern Photo Film Co. (Alien Market) 35,000 203
Ometraco Corporation 2000 Warrants (a) 75,000 4
Ometraco Finance (Alien Market) 700,000 321
Pabrik Kertas Tjiwi Kimia (Alien Market) 35,434 33
Perusahaan Per Ind Sat Cor - ADR 2,400 88
PT Sekar Bumi (Alien Market)(a) 75,000 66
Putra Surya Perkasa (Alien Market) 400,000 153
Semen Cibinong (Alien Market) 230,600 575
Semen Gresik (Alien Market) 88,000 246
Smart (Sinar Mas) AG (Alien Market) 300,000 167
Tambang Timah - GDR (a) 10,300 122
--------
4,065
--------
ISRAEL - 0.5%
Africa-Israel Investments, Ltd. (a) 85 102
ECI Telecom, Ltd. 4,300 98
Elbit, Ltd. 60 3
Israel Chemicals, Ltd. (a) 74,400 59
</TABLE>
2 Emerging Markets Fund Specialty Funds
<PAGE> 262
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
Koor Industries 280 $ 28
Teva Pharmaceutical Industries, Ltd. 252 115
Teva Pharmaceutical Industries, Ltd. - ADR 11,650 538
--------
943
--------
LUXEMBOURG - 0.5%
Millicom International Cellular SA (a) 30,000 915
--------
915
--------
MALAYSIA - 6.5%
AMMB Holdings Berhad 41,000 468
Arab Malaysian Corp. Berhad 518,000 1,876
Arab Malaysian Finance (Alien Market) 40,000 170
DCB Holdings Berhad 288,000 839
DCB Holdings Berhad 1999 Warrants (a) 33,000 33
Genting Berhad 72,500 605
Hong Leong Industries Berhad 75,000 399
IJM Corp. Berhad 471,000 749
IND Oxygen, Inc. 519,000 509
Kwong Yik Bank 89,000 191
Land & General Berhad 120,000 260
Linatex Process 137,500 552
London & Pacific Insurance Co. Berhad 4,000 17
Malaysian Assurance Alliance Berhad 9,125 41
Metacorp Berhad 114,000 296
Nestle Berhad 55,000 403
Petronas Gas Berhad (a) 260,000 886
Petronas Gas Berhad 2000 Warrants (a) 11,000 18
Public Finance Berhad (Alien Market) 300,000 650
Renong Berhad 109,000 161
Resorts World Berhad 90,000 482
Tanjong PLC 68,000 198
Telekom Malaysia 87,000 678
United Engineers Berhad 106,000 677
--------
11,158
--------
MEXICO - 7.3%
Cemex SA Class B NPV 314,000 1,140
Cemex SA de CV NPV 108,640 358
Cifra SA de CV Class B NPV (a) 100,000 104
Cifra SA de CV Class C NPV (a) 207,960 210
Compania Cervecerias Unidas SA - ADR 16,200 375
Desc Sociedad de Fomento Industrial
SA de CV Series B NPV (a) 48,000 176
Empresas ICA Sociedad - ADR 16,000 164
Empresas la Moderna SA de CV - ADR (a) 20,886 324
Fomento Economico Series B NPV 215,000 483
Grupo Carso Series A NPV (a) 84,000 453
Grupo Casa Autrey SA de CV - ADR 9,600 128
Grupo Financiero Banamex AC Series B 219,600 368
Grupo Financiero Banamex AC
Series L NPV 38,000 56
Grupo Financiero Bancomer
Series B NPV (a) 570,000 159
Grupo Mexico SA B Shares NPV (a) 107,000 452
Grupo Modelo SA Series C 58,000 274
Grupo Simec SA de CV - ADR (a) 20,700 129
Herdez Class B NPV (a) 300,000 65
Industrias Penoles NPV 228,700 949
Kimberly-Clark, Mexico Class A NPV 69,000 1,041
Pan American Beverage Class A 22,000 704
Sears Roebuck de Mexico
Series B - GDS (a) 21,000 95
Seguros Comercial America NPV
Series B (a) 870,000 203
Telefonos de Mexico SA Series L - ADR 108,465 3,457
Transportacion Maritima Mexica
Series A - ADR (a) 47,000 353
Transportacion Maritima Mexicana
SA de CV - ADR Series L (a) 28,100 235
Vitro Sociedad Anonima - ADR (a) 20,541 98
--------
12,553
--------
NETHERLANDS - 0.5%
Ceteco Holding NV CVA 25,357 811
--------
811
--------
PAKISTAN - 0.6%
Adamjee Insurance 15,875 47
Dandot Cement Co. (a) 7,887 4
Dewan Salmon Fibre (a) 10,300 25
DG Kahn Cement 96,954 85
DG Kahn Cement Rights (a) 29,086 10
Engro Chemical 15,320 63
Hub Power Co. - GDR (a) 15,000 261
Hub Power, Ltd. - GDR (a) 1,300 23
Khadim Ali Shah 15,972 12
National Development Bank 7,628 4
Nishat Textile (a) 47,633 41
Pakistan State Oil 49,506 383
Pakistan Telecommunications Corp. (a) 160,000 144
--------
1,102
--------
</TABLE>
Specialty Funds Emerging Markets Fund 13
<PAGE> 263
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
PAPUA NEW GUINEA - 0.4%
Oil Search, Ltd. (Australia Regd) 700,000 $ 604
--------
604
--------
PERU - 1.9%
Backus & Johnston Class T 64,948 112
CPT Telefonica del Peru B Shares 200,880 430
CPT Telefonica del Peru S.A. Series A 369,218 781
Credicorp, Ltd. (a) 66,853 1,153
Minas Buenaventura 24,944 161
Southern Peru Copper Corp. (a) 169,656 596
--------
3,233
--------
PHILIPPINES - 3.6%
Aboitiz Equity Ventures (a) 1,665,960 318
Ayala Land, Inc. Class B 296,712 362
Bacnotan Cement Co. 62,600 43
Bacnotan Consolidated Industries 96,730 553
Bacnotan Consolidated Industries Rights (a) 9,673 18
Belle Corporation (a) 2,600,000 357
C & P Homes, Inc. (a) 123,000 90
DMCI Holdings, Inc. (a) 430,000 154
Enron Global Power & Pipelines L.L.C. 25,000 622
Filinvest Land (a) 491,300 157
First Philippine Holdings Class B 147,679 287
JG Summit Holdings, Inc. Series B 755,000 207
Keppel Philippine Holdings Class B (a) 41,437 17
Keppil Phillipine Shipyard (a) 1,062,700 58
Manila Electric Co. Class B 21,000 171
Manila Mining Corp. Class B 64,450,180 120
Metro Pacific Corp. Class A 2,347,568 434
Philippine Long Distance Telephone Co. 9,500 516
Philippine Long Distance Telephone Co
- ADR 24,000 1,299
Philippine Long Distance Telephone Co.
- GDS 700 36
San Miguel Corp. Class B 75,000 257
SM Prime Holdings, Inc. - GDS (a) 7,500 102
--------
6,178
--------
POLAND - 0.4%
Agros Holdings Series C 12,200 102
Bank Slaski SA 3,400 198
Banka Przemyslowo 4,747 138
Debica Series A 7,500 113
E. Wedel SA 2,190 72
Zywiec 1,390 96
--------
719
--------
PORTUGAL - 3.5%
Banco Espir Santo (Regd) 39,000 589
Banco Totta e Acores (a) 867 14
Banco Totta e Acores (Regd) 12,840 212
Capital Portugal (a) 4,360 385
CEL-CAT Fabrica Nacional de
Condutores Electricos SA (a) 7,200 111
Cimpor Cimentos de Portugal 33,518 555
Corp. Ind. Norte 6,300 144
Empresa Fabril
de Maquinas Electricas - Efacec 33,600 227
Jeronimo Martins 10,000 555
Jornalgeste SGPS (a) 5,000 58
Portugal Telecom (a) 43,000 809
Portugal Telecom SA - ADR (a) 7,300 139
Sonae Investimento 100,900 2,157
Unicer-Uniao Cervj (Regd) 9,000 149
--------
6,104
--------
RUSSIA - 0.2%
AO Mosenergo - ADR (a) 5,600 44
Russian Depositary Trust (a) 1 122
Russian Depositary Trust (a) 1 53
SFMT, Inc. (a) 2,000 33
Templeton Russia Fund, Inc. 3,200 44
--------
296
--------
SINGAPORE - 0.4%
Far East Levingston 163,000 766
--------
766
--------
SOUTH AFRICA - 4.7%
Anglo America Coal 1,857 116
Anglo America Corp. 6,590 398
Anglo American Industrial Corp. 2,110 96
Barlow, Ltd. 33,600 479
Clinic Holdings, Ltd. 73,700 70
De Beers Centenary AG 6,926 210
De Beers Consolidated Mines, Ltd. - ADR 4,957 149
Engen, Ltd. 16,281 123
Free State Consolidated Gold Mines, Ltd. 9,610 72
Gencor, Ltd. 65,060 227
Gencor, Ltd. - ADR 54,679 190
Highstone Property 370,000 188
Impala Platinum Holdings, Ltd. 2,760 50
ISCOR 1,215,636 1,094
Lonrho PLC (a) 186,800 525
Malbak, Ltd. NPV 125,040 866
Murray & Roberts Holdings, Ltd. 57,500 406
</TABLE>
14 Emerging Markets Fund Specialty Funds
<PAGE> 264
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
Nampak, Ltd. 51,000 $ 283
Nampak, Ltd. - ADR (a) 19,260 68
PepsiCo International, Inc. (a) 2,000 200
Polifin, Ltd. (a) 1,603 3
Premier Group Holdings, Ltd. 49,634 82
Rembrandt Group, Ltd. 115,752 1,111
Rustenberg Platinum Holdings, Ltd. 3,341 55
Safmarine & Rennie Holdings, Ltd. 34,000 124
Sasol NPV 53,920 442
South African Breweries 9,244 339
Zambia Consolidated Copper
Series B (UK Regd)(a) 43,846 53
Zambia Copper Investments
PLC (BR)(a) 369,265 131
--------
8,150
--------
SOUTH KOREA - 3.5%
Daewoo Securities 4,370 114
Hanil Iron & Steel Co. 1,320 60
Hankook Tire Manufacturing 1,900 113
Hyundai Engineering &
Construction Co. New (a) 442 20
Hyundai Motor Co. - GDR (a) 9,000 131
Korea Electric Power Corp. 12,730 505
Korea Electric Power Corp. - ADR 3,000 80
Korea Electric Power Corp. New - ADR 5,000 133
Korea Long-Term Credit Bank 6,313 178
Korea Mobile Telecommunications Corp. 385 289
Korea Mobile Telecommunications Corp.
- GDR (a) 700 31
Kwang Ju Bank 16,000 152
Kwang Ju Bank New (a) 3,344 32
Pohang Iron & Steel 6,970 456
Samsung Construction (a) 3,371 87
Samsung Electronic Co. - GDR (a) 495 42
Samsung Electronics (a) 96 8
Samsung Electronics - GDR (a) 900 77
Samsung Electronics - GDS (a) 1,601 86
Samsung Electronics Co. - GDR (144A)(a) 6,160 591
Samsung Electronics Co. - GDS (a) 13,800 828
Samsung Electronics Co. New (a) 49 9
Samsung Electronics, Ltd. 1,000 182
Samsung Electronics, Ltd. - GDR (144A)(a) 12 1
Samsung Electronics, Ltd. - GDR (a) 62 6
Samsung Electronics, Ltd. - GDS (a) 1,600 96
Samsung Engineering & Construction (a) 34 1
Samsung Engineering & Construction
- GDS (a) 10,600 103
Shin Han Bank 23,790 466
Shin Han Bank New (a) 20,000 379
Shinil Engineering 5,564 96
Shinil Engineering New (a) 1,698 29
Ssangyong Investment & Securities 9,312 168
Ssangyong Oil Refining Co., Ltd. 19,120 542
--------
6,091
--------
SPAIN - 0.5%
Quilmes Industrial (Regd) 58,100 906
--------
906
--------
SRI LANKA - 0.5%
Aitken Spence & Co. 30,365 105
Blue Diamond Jewel NPV 97,911 29
Ceylon Theatre 6,830 41
Development Finance Corp. 84,999 472
Habarana Lodge, Ltd. 17,000 9
Hayleys 15,199 48
John Keells Holdings, Ltd. 26,666 69
National Development Bank 9,800 40
--------
813
--------
SWITZERLAND - 0.6%
Holderbank Financiere Glarus AG (BR) 1,392 1,068
--------
1,068
--------
TAIWAN - 2.7%
Advanced Semiconductor Engineering
- GDR (a) 11,650 150
Advanced Semiconductor Engineering
- GDR (a) 7,500 96
Asia Cement Corp. - GDR 13,300 216
Asia Cement Corp. - GDS 18,000 284
China Steel Corp. - ADR 28,970 464
China Steel Corp. - GDS 35,600 570
Hocheng Group Corp. - GDR 52,617 500
Microelectronics - GDS (a) 35,801 197
President Enterprises - GDS (a) 58,300 583
ROC Taiwan Fund (a) 50,200 527
Siliconware Precision Industries, Inc.
- GDR (a) 15,600 257
Taiwan Fund, Inc. 22,262 456
Yageo Corp. - GDR (a) 16,465 144
Yageo Corp. - GDR (144A)(a) 32,413 284
--------
4,728
--------
</TABLE>
Specialty Funds Emerging Markets Fund 15
<PAGE> 265
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
THAILAND - 5.1%
Advanced Information Services
(Alien Market) 25,000 $ 443
Bangkok Insurance PLC
(Alien Market) 5,900 94
Bank of Ayudhya Public Co., Ltd.
(Alien Market) 110,000 616
Electricity General Public Co. Ltd. (a) 15,300 45
Electricity Generating Public Co., Ltd.
(Alien Market)(a) 67,210 229
Finance One Public Co., Ltd.
(Alien Market) 15,000 95
Industrial Finance Corp. of Thailand
(Alien Market)(a) 420,000 1,426
International Cosmetics (Alien Market) 29,000 265
Land & House (Alien Market) 5,100 84
Lanna Lignite Public Co. (Alien Market)(a) 16,200 107
Nation Publishing (Alien Market) 35,500 43
Peregrine Bank - GDR (a) 49,400 424
Phatra Thanakit Co. (Alien Market) 39,600 340
Precious Shipping (Alien Market) 137,000 799
Regional Container Line (Alien Market) 29,950 321
Siam Cement Co. (Alien Market) 10,500 582
Siam Commercial Bank (Alien Market) 148,000 1,951
Thai Farmers Bank (a) 23,700 162
Thai Farmers Bank (Alien Market) 39,000 393
Thai Plastic & Chemical Co., Ltd.
(Alien Market)(a) 31,000 150
United Communications Industries 8,800 112
United Communications Industries
(Alien Market) 4,600 59
Wong Paitoon Footwear (Alien Market) 68,700 64
--------
8,804
--------
TURKEY - 0.5%
Akbank 25,000 5
Efes Sinai Yatirim (a) 268,800 18
EGE Biracilik Ve M 1,173,000 404
Erciyas Biracilik Ve Malt Sanayii
- ADR (a) 5,500 54
Koc Holding 202,800 29
T Garanti Bankasi 1,696,000 142
Tat Konserve Sanay 106,365 67
Tofas Turk Otomobil Fabrikasi 800,000 78
Tofas Turk Otomobil Fabrikasi
AS - GDS 48,000 24
Trakya Cam Sanayii AS 430,000 44
--------
865
--------
UNITED KINGDOM - 0.5%
Lonrho PLC 300,000 820
--------
820
--------
VENEZUELA - 0.7%
Electricidad de Caracas (Regd) 68,637 47
Mavesa SA - ADR 51,250 190
Sider Venezolana 122,000 39
Siderurgica Venezolana Sivensa - ADR 486,100 873
Venezolana de Ceme 3,564 4
Venprecar - GDS 11,600 42
--------
1,195
--------
ZIMBABWE - 0.4%
Delta Corp. 360,000 603
--------
603
--------
TOTAL COMMON STOCKS
(cost $124,649) 119,806
--------
PREFERRED STOCKS - 9.5%
BRAZIL - 9.2%
Acos Especitabira NPV 107,915,428 627
Banco Bradesco SA NPV 272,389,440 2,382
Banco Bradesco SA NPV Rights (a) 6,181,957 11
Banco Itau SA (Regd) 809,000 226
Brahma (cia Cervej) NPV 1,493,000 614
Brasmotor SA NPV 4,575,000 908
Casa Anglo Bras SA NPV 2,524,000 106
CEMIG SA 11,409,000 252
Ceval Alimentos SA - ADR 9,300 105
Ceval Alimentos SA NPV 15,847,000 181
Cim Port Itau (Cia) 910,000 217
Companhia Energetica de Sao Paulo
- ADR (Regd)(a) 9,200 76
Companhia Energetica
de Sao Paulo NPV (a) 1,225,000 36
Coteminas (Cia Tec) NPV 3,027,505 1,012
Duratex SA (BR) 3,364,000 117
Electrobras (centr) Series B NPV 10,140,439 2,744
Industrias Romi SA NPV (a) 3,310,700 68
Inepar SA - Industria
e Construction NPV 84,168,000 46
Iochpe Maxion SA - ADR 29,000 82
Kepler Weber SA NPV (a) 3,200 8
Lojas Renner SA NPV (a) 6,000,000 160
Marco Polo SA Class B NPV (a) 800,000 119
</TABLE>
16 Emerging Markets Fund Specialty Funds
<PAGE> 266
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES (000)
----------- --------
<S> <C> <C>
Metalurgica Schulz NPV (a) 850,000 $ 25
Petro Ipiranga (cia) NPV 79,100,000 659
Petrobras Distribuidora NPV 4,915,000 131
Petrol Brasileiros 6,228,866 532
Randon Participacoes SA 170,777,104 104
Refrigeracao Parana SA NPV 285,893,430 571
Sadia Concordia SA NPV 635,000 470
Siderurgica Tubarao NPV 9,669,000 157
Telec SP Telesp NPV 4,732,000 696
Telecomunicacoes Brasileiras NPV 30,435,542 1,466
Vale Rio Doce (Cia) NPV 5,704,000 940
--------
15,848
--------
GREECE - 0.1%
AEGEK SA Rights (a) 2,800 17
Delta Dairy 10,500 155
--------
172
--------
RUSSIA - 0.2%
Fleming Russia Securities Fund (a) 53,458 307
--------
307
--------
SOUTH KOREA - 0.0%
Mando Machinery Corp. (a) 4,770 122
--------
122
--------
TOTAL PREFERRED STOCKS
(cost $17,375) 16,449
--------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
--------------
<S> <C> <C>
LONG-TERM INVESTMENTS - 2.4%
INDIA - 0.3%
Scici (conv.)
3.500% due 04/01/04 $ 250 250
Tata Iron & Steel Co. (conv.)
2.250% due 04/01/99 167 149
--------
399
--------
INDONESIA - 0.0%
Modernland Realty (conv.)
6.000% due 01/04/03 IDR 30 31
--------
31
--------
MALAYSIA - 0.3%
AMMB Holdings Berhad (conv.)
7.500% due 11/07/99 MYR 29 15
United Engineers Berhad (conv.)
2.000% due 03/01/04 $ 380 433
--------
448
--------
PORTUGAL - 0.1%
Jeronimo Martins (conv.)
13.500% due 01/31/97 PTE 14,000 200
--------
200
--------
SOUTH AFRICA - 0.0%
Sappi Bvi Finance (conv.)
7.500% due 08/01/02 $ 60 57
--------
57
--------
SOUTH KOREA - 0.4%
Inkel Corp. (conv.)
0.750% due 12/31/03 250 133
Shinwon Corp. (conv.)
0.500% due 12/31/08 520 525
--------
658
--------
TAIWAN - 0.6%
Nan Ya Plastics Corp. (conv.)
1.750% due 07/19/01 50 49
Nan Ya Plastics Corp. (conv.)(144 A)
1.750% due 07/19/01 300 296
U Ming Marine Holdings (Conv)
1.500% due 02/07/01 326 306
United Microelectronics Corp., Ltd. (conv.)
1.250% due 06/08/04 205 257
United Microelectronics Corp., Ltd.
(conv.)(144 A)
1.250% due 06/08/04 90 113
--------
1,021
--------
THAILAND - 0.5%
Bangkok Bank Public Co. (conv.)
3.250% due 03/03/04 690 731
Banpu Coal Co., Ltd. (conv.)
3.500% due 08/25/04 142 172
</TABLE>
Specialty Funds Emerging Markets Fund 17
<PAGE> 267
EMERGING MARKETS FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
---------- --------
<S> <C> <C>
Siam Sindhorn BVI, Ltd. (conv.)
2.000% due 07/31/00 $ 50 $ 45
--------
948
--------
UNITED KINGDOM - 0.2%
Barlow International Investments (conv.)
7.000% due 09/20/04 185 300
--------
300
--------
TOTAL LONG-TERM INVESTMENTS
(cost $4,339) 4,062
--------
SHORT-TERM INVESTMENTS - 16.5%
UNITED STATES - 16.5%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 28,477 28,477
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $28,477) 28,477
--------
TOTAL INVESTMENTS
(identified cost $174,840)(c) - 97.8% 168,794
OTHER ASSETS AND LIABILITIES,
NET - 2.2% 3,879
--------
NET ASSETS - 100.0% $172,673
--------
--------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) At December 31, 1995, the cost for federal income tax purposes was
$176,221 and net unrealized depreciation for all securities was $7,427.
This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$12,674 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $20,101.
<TABLE>
<CAPTION>
% OF MARKET
NET VALUE
INDUSTRY DIVERSIFICATION ASSETS (000)
- -------------------------------------------- ------ --------
<S> <C> <C>
Basic Industries 10.3% $ 17,765
Capital Goods 4.3 7,413
Consumer Basics 6.6 11,416
Consumer Durable Goods 2.5 4,253
Consumer Non-Durables 1.9 3,231
Consumer Services 1.0 1,707
Energy 5.6 9,763
Finance 14.1 24,329
General Business 5.6 9,615
Miscellaneous 9.2 15,972
Shelter 4.0 6,935
Technology 1.9 3,303
Transportation 0.6 1,102
Utilities 11.3 19,451
Long-Term Investments 2.4 4,062
Short-Term Investments 16.5 28,477
----- --------
Total Investments 97.8 168,794
Other Assets and Liabilities, Net 2.2 3,879
----- --------
NET ASSETS 100.0% $172,673
----- --------
----- --------
<CAPTION>
% OF MARKET
NET VALUE
GEOGRAPHIC DIVERSIFICATION ASSETS (000)
- -------------------------------------------- ------ --------
<S> <C> <C>
Latin America 30.9% $ 53,296
Pacific Basin 28.9 49,829
Eurasia 16.1 27,898
Africa 5.4 9,294
Short-Term Investments 16.5 28,477
----- --------
Total Investments 97.8 168,794
Other Assets and Liabilities, Net 2.2 3,879
----- --------
NET ASSETS 100.0% $172,673
----- --------
----- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 Emerging Markets Fund Specialty Funds
<PAGE> 268
EMERGING MARKETS FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $174,839,895)(Note 2). . . . . . . . . . . . . . . $168,794,360
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486,859
Foreign currency holdings (identified cost $1,535,723). . . . . . . . . . . . . . . . . . 1,475,072
Foreign currency exchange spot contracts (cost $396,015)(Notes 2 and 6) . . . . . . . . . 395,516
Receivables:
Dividends and interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474,214
Investments sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332,714
Fund shares sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,975,148
From Manager (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,115
Foreign taxes recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,669
Deferred organization expenses (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . 15,474
------------
175,992,141
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,445,794
Fund shares redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,271
Accrued bookkeeping service fees (Note 4) . . . . . . . . . . . . . . . . . 12,308
Accrued management fees (Note 4). . . . . . . . . . . . . . . . . . . . . . 169,599
Accrued transfer agent fees (Note 4). . . . . . . . . . . . . . . . . . . . 29,211
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 140,894
Foreign currency exchange spot contracts (cost $396,015)(Notes 2 and 6) . . . 396,015 3,319,092
--------- ------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $172,673,049
------------
------------
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income. . . . . . . . . . . . . . . $ (226,144)
Accumulated distributions in excess of net realized gains . . . . . . . . . . . . . . . . (7,918,418)
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,045,535)
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . . . . . . (68,830)
Shares of beneficial interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,699
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,777,277
------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $172,673,049
------------
------------
Net asset value, offering and redemption price per share
($172,673,049 divided by 15,469,865 shares of $.01 par value
shares of beneficial interest outstanding). . . . . . . . . . . . . . . . . . . . . . . . $11.16
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 19
<PAGE> 269
EMERGING MARKETS FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,648,260
Dividends from Money Market Fund (Note 5) . . . . . . . . . . . . . . . . . . 1,335,478
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,783
Less foreign taxes withheld . . . . . . . . . . . . . . . . . . . . . . . . . (315,892)
------------
3,816,629
Expenses (Notes 2 and 4):
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . $1,380,549
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 818,534
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . 225,468
Bookkeeping service fees. . . . . . . . . . . . . . . . . . . . . 73,250
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . 25,822
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . 39,474
Trustees' fees. . . . . . . . . . . . . . . . . . . . . . . . . . 4,332
Amortization of deferred organization expenses. . . . . . . . . . 7,424
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 27,020
----------
Expenses before waivers and reimbursements. . . . . . . . . . . . 2,601,873
Expenses waived (Note 4). . . . . . . . . . . . . . . . . . . . . (25,061)
Expenses reimbursed by Manager (Note 4) . . . . . . . . . . . . . (37,115) 2,539,697
---------- ------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,276,932
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,504,249)
Foreign currency-related transactions . . . . . . . . . . . . . . . . . . . . (805,707)
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,221,432)
Foreign currency-related transactions. . . . . . . . . . . . . . . . . . . . 88,862
------------
Net gain (loss) on investments. . . . . . . . . . . . . . . . . . . . . . . . . (12,442,526)
------------
Net increase (decrease) in net assets resulting from operations . . . . . . . . $(11,165,594)
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 Emerging Markets Fund Specialty Funds
<PAGE> 270
EMERGING MARKETS FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,276,932 $ 1,153,059
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,504,249) 3,579,128
Foreign currency-related transactions . . . . . . . . . . . . . . . . (805,707) (374,943)
Net change in unrealized appreciation or depreciation of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,221,432) (11,391,205)
Foreign currency-related transactions . . . . . . . . . . . . . . . . 88,862 (87,886)
------------ ------------
Net increase (decrease) in net assets resulting from operations . . . . . (11,165,594) (7,121,847)
Distributions to shareholders:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . (461,248) (832,396)
In excess of net investment income. . . . . . . . . . . . . . . . . . . (226,144) (902,784)
Net realized gain on investments. . . . . . . . . . . . . . . . . . . . -- (5,126,070)
In excess of net realized gain on investments . . . . . . . . . . . . . (400,869) (812,357)
Increase (decrease) in net assets from Fund share transactions. . . . . . 57,655,780 76,609,101
------------ ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . 45,401,925 61,813,647
Net assets at beginning of year . . . . . . . . . . . . . . . . . . . . . 127,271,124 65,457,477
------------ ------------
NET ASSETS AT END OF YEAR
(including accumulated distributions in excess of net
investment income of $226,144 and $902,784, respectively) . . . . . . . $172,673,049 $127,271,124
------------ ------------
------------ ------------
</TABLE>
FUND SHARE TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . 8,376,850 $ 94,656,077 7,223,682 $ 97,277,256
Fund shares issued to shareholders
in reinvestments of distributions. . . . . 90,071 985,053 536,210 6,993,116
Fund shares redeemed . . . . . . . . . . . . (3,386,748) (37,985,350) (2,077,684) (27,661,271)
---------- ------------ ---------- ------------
Net increase (decrease). . . . . . . . . . . 5,080,173 $ 57,655,780 5,682,208 $ 76,609,101
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 21
<PAGE> 271
EMERGING MARKETS FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993++
------- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . $ 12.25 $ 13.90 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 .15 .07
Net realized and unrealized gain (loss) on investments . . . . . . . . . . . (1.12) (1.24) 4.09
------- ------- -------
Total Income From Investment Operations. . . . . . . . . . . . . . . . . . . (1.01) (1.09) 4.16
------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . (.03) (.10) (.07)
In excess of net investment income . . . . . . . . . . . . . . . . . . . . . (.02) (.10) (.01)
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . -- (.31) (.18)
In excess of net realized gain on investments. . . . . . . . . . . . . . . . (.03) (.05) --
------- ------- -------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.56) (.26)
------- ------- -------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . $11.16 $ 12.25 $ 13.90
------- ------- -------
------- ------- -------
TOTAL RETURN (%)(a)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.21) (5.83) 41.83
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)(d) . . . . . . . . . . 1.75 .80 .80
Operating expenses, gross, to average net assets (b)(c)(d) . . . . . . . . . 1.80 .83 1.60
Net investment income to average net assets (b)(c) . . . . . . . . . . . . . .88 1.10 1.33
Portfolio turnover (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.16 57.47 89.99
Net assets, end of year ($000 omitted) . . . . . . . . . . . . . . . . . . . 172,673 127,271 65,457
Per share amount of fees waived ($ omitted)(d) . . . . . . . . . . . . . . . .0022 .0044 .0016
Per share amount of fees reimbursed ($ omitted)(d) . . . . . . . . . . . . . .0032 .0017 .0420
</TABLE>
++ For the period January 29, 1993 (commencement of operations) to
December 31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the periods ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
(d) See Note 4.
22 Emerging Markets Fund Specialty Funds
<PAGE> 272
EMERGING MARKETS FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS EMERGING MARKET IFC INVESTABLE COMPOSITE ** EXTENDED BARING EM ++
ENDED DECEMBER 31 $10,000 $10,000 $10,000
- ----------------- --------------- ----------------------------- ---------------------
<S> <C> <C> <C>
inception* $10,000 $10,000 $10,000
1993 $14,183 $18,040 $17,628
1994 $13,356 $15,882 $16,793
1995 $12,260 $14,540 $15,956
</TABLE>
Emerging Markets Fund
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $ 9,179 (8.21)%
Inception $12,260 7.23%***
</TABLE>
IFC Investable Composite Index
<TABLE>
<CAPTION>
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $ 9,175 (8.25)%
Inception $14,540 13.69%***
</TABLE>
<TABLE>
<CAPTION>
Extended Baring Emerging Markets Index
PERIOD ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- -------
<S> <C> <C>
1 Year $ 9,501 (4.99)%
Inception $15,956 17.37%***
</TABLE>
* Assumes initial investment on February 1, 1993.
** International Finance Corporation (IFC) Investable Composite Index is a
market capitalization-weighted index of the performance of securities
listed on the stock exchange(s) of the countries included in the index,
calculated on a total-return basis. The investable index reflects the
accessibility of markets and individual stocks to foreign investors.
++ Extended Baring Emerging Markets Index is a market capitalization-
weighted index of companies' performance within 20 countries in Africa,
Asia, Europe and Latin America.
*** Annualized.
EMERGING MARKETS FUND lost 8.2% of its value in 1995, essentially matching
the (8.3%) return for the IFC Investable Composite Index, but trailing the
Extended Baring Emerging Markets Index return of (5.0%). The portfolio was
managed in a manner consistent with its objective to provide US investors an
opportunity to expand their international investments to include the emerging
stock markets of newly industrialized countries and further diversify the
equity portions of their portfolios. The Fund employs a multi-manager
strategy that embraces numerous techniques necessary for successful
investments in emerging markets.
Latin American markets were the worst performers for the year, as the Mexican
peso collapse in late December of 1994 preceded broad political and economic
problems in the region. In 1995, the region was down over 11%. Asian markets
were also poor performers, down 6.4%, with losses greater than 20% from
China, India, and Taiwan. The Fund's underweighting in South Africa hurt
performance as the region was up nearly 26% for the year. Many active
managers were underweighted in the region as South Africa was added for the
first time to both comparison indexes during the first half of the year.
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
Specialty Funds Emerging Markets Fund 23
<PAGE> 273
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 97.8%
ALASKA - 2.3%
Alaska State Housing Finance Corp., Series A, Housing Revenue $ 1,000 4.500% 06/01/99 $ 1,009
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation 500 0.000 06/30/99 431
-------
1,440
-------
ARIZONA - 2.5%
Arizona State Transportation Board, Series A,
Special Obligations Revenue (pre-refunded 07/01/01) 1,425 6.450 07/01/06 1,593
-------
1,593
-------
CALIFORNIA - 9.9%
California Health Facilities Financing, Series D, Health Care Revenue 500 5.600 07/01/97 513
California Health Facilities Financing, Series D, Health Care Revenue 665 5.750 07/01/98 693
California State Public Works Lease, Series A,
State and Local Appropriation 500 5.100 12/01/98 515
California State Public Works Lease, State and Local Appropriation 600 5.250 12/01/98 620
California, State of, General Obligation 850 6.100 11/01/01 927
Los Angeles County, California, California Transporation
Participation Certficate, Series B, Tax Revenue 760 5.900 07/01/00 804
Sacramento, California Municipal Utility District,
Series Z, Utility Revenue 1,000 6.000 07/01/01 1,082
San Diego County, California Transportation Commission,
Series A, Tax Revenue 500 5.000 04/01/98 511
Southern California, Rapid Transit District Revenue 630 5.400 09/01/02 666
-------
6,331
-------
COLORADO - 4.1%
Denver, Colorado, City and County, General Obligation 500 5.950 08/01/97 517
Jefferson County, Colorado Participation Certificate,
Series 1988, Special Obligation Revenue (pre-refunded 12/01/96) 1,000 7.050 12/01/96 1,032
Jefferson County, Colorado School District,
Series A, General Obligation 1,000 5.500 12/15/01 1,063
-------
2,612
-------
DELAWARE - 1.6%
Delaware, State of, Series C, General Obligation 1,000 5.000 07/01/00 1,036
-------
1,036
-------
DISTRICT OF COLUMBIA - 0.8%
District of Columbia, Series A, General Obligation 500 7.250 06/01/98 534
-------
534
-------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 25
<PAGE> 274
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
GEORGIA - 1.1%
DeKalb County, Georgia, General Obligation
(pre-refunded 01/01/97) $ 700 7.300% 01/01/98 $ 740
-------
740
-------
HAWAII - 0.8%
Hawaii, State of, Series B-F, General Obligation
(pre-refunded 08/01/96) 500 6.900 08/01/97 517
-------
517
-------
ILLINOIS - 7.7%
Chicago, Illinois School Financial Authority,
Series A, State and Local Appropriation 1,000 5.400 06/01/97 1,021
Chicago, Illinois Water Revenue, State and Local Debt 500 5.750 11/01/01 533
Chicago, Illinois, Series C, General Obligation 1,500 6.250 10/31/01 1,637
Illinois Health Facilities Authority, Series C,
Special Obligation Revenue (pre-refunded 04/01/99) 500 7.500 04/01/18 560
Illinois, State of, General Obligation 500 5.500 08/01/00 525
Illinois, State of, General Obligation (pre-refunded 06/01/98) 625 5.800 06/01/98 650
-------
4,926
-------
INDIANA - 4.9%
Indiana Health Facility Financing Authority Hospital Revenue 1,525 4.700 05/15/01 1,542
Indianapolis, Indiania Local Public Improvement
Bond Bank Series B, State and Local Appropriation 500 5.000 02/01/00 514
Richmond Indiana Hospital Authority Facilities Revenue 1,000 5.900 01/01/02 1,066
-------
3,122
-------
IOWA - 1.6%
Iowa Student Loan Liquidity Corp., Series A, Student Loan Revenue 1,000 6.000 03/01/98 1,034
-------
1,034
-------
KENTUCKY - 1.7%
McCracken County, Kentucky Hospital Revenue,
Series A, Health Care Revenue 1,000 5.700 11/01/00 1,060
-------
1,060
-------
LOUISIANA - 1.6%
Louisiana Public Facilities Authority Revenue, Health Care Revenue 500 5.500 10/15/99 522
Louisiana, State of, Series A, General Obligation 500 5.300 05/15/01 522
-------
1,044
-------
</TABLE>
26 Limited Volatility Tax Free Fund Specialty Funds
<PAGE> 275
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
MASSACHUSETTS - 4.9%
Massachusetts State Housing Finance Agency, Series 43,
Housing Revenue $ 500 4.600% 06/01/00 $ 502
Massachusetts State Water Resources Authority,
Series C, Utility Revenue 2,500 5.250 12/01/01 2,602
-------
3,104
-------
MICHIGAN - 3.3%
Michigan Municipal Bond Authority Revenue,
Series B, State and Local Appropriation 550 6.900 05/01/99 596
Michigan State Trunk Line, Series A, Special Obligation Revenue
(pre-refunded 08/15/99) 400 7.000 08/15/17 446
Michigan State, South Central Power Agency,
Special Obligation Revenue (pre-refunded 11/01/96) 1,000 7.250 11/01/06 1,050
-------
2,092
-------
MINNESOTA - 2.9%
Minneapolis St. Paul, Minnesota Metropolitan Council,
Series D, General Obligation 535 5.900 09/01/97 553
Minnesota, State of, General Obligation 500 6.400 08/01/98 531
Minnesota, State of, General Obligation 700 5.600 10/01/99 738
-------
1,822
-------
NEW JERSEY - 1.6%
New Jersey State Educational Facilities Authority, Series B, University
Revenue 500 5.000 12/01/00 519
New Jersey State Transportation Trust Fund Authority, Series A,
State and Local Appropriation 500 5.500 06/15/00 526
-------
1,045
-------
NEW YORK - 9.7%
New York City, New York, General Obligation 500 7.000 02/01/00 511
New York City, New York, Series B, General Obligation 1,745 5.300 08/15/00 1,770
New York City, New York, Series C, General Obligation 500 6.125 08/01/01 522
New York State Dormitory Authority Revenue, Series A,
State and Local Appropriation 500 5.100 05/15/00 506
New York State Dormitory Authority Revenue, Series E,
State and Local Appropriation 500 7.300 07/01/99 540
New York State Urban Development Corp. Revenue,
State and Local Appropriation 1,000 5.000 04/01/00 1,008
New York State Urban Development Corp.
Revenue, Syracuse University Center, State and Local Appropriation 1,050 5.000 01/01/01 1,051
New York, New York, Series G, General Obligation 250 5.600 02/01/03 253
-------
6,161
-------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 27
<PAGE> 276
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
OHIO - 0.6%
Montgomery County, Ohio Solid Waste Revenue $ 400 4.450% 11/01/01 $ 403
-------
403
-------
PENNSYLVANIA - 1.7%
Lehigh County, Pennsylvania, Special Obligation Revenue
(pre-refunded 08/01/00) 500 6.900 08/01/11 564
Pennsylvania, State of, General Obligation 500 5.300 07/01/99 519
-------
1,083
-------
RHODE ISLAND - 2.4%
Rhode Island Housing & Mortgage Finance Authority,
Series A, Housing Revenue 1,000 5.150 07/01/01 1,021
Rhode Island State Consolidated Capital Development,
Series B, General Obligation 500 6.000 05/15/97 514
-------
1,535
-------
SOUTH CAROLINA - 0.8%
Piedmont, South Carolina, Municipal Power Agency Service,
Series A, Utility Revenue 500 5.700 01/01/98 517
-------
517
-------
SOUTH DAKOTA - 1.0%
South Dakota State Lease Revenue, Series B,
State and Local Appropriation 650 5.700 09/01/97 668
-------
668
-------
TENNESSEE - 1.6%
Memphis, Tennessee Electric System Revenue,
Special Obligation Revenue (pre-refunded 01/01/96) 1,000 7.500 01/01/98 1,005
-------
1,005
-------
TEXAS - 12.3%
Abilene, Texas, Health Facilities Development Corp.,
Medical Center A, Health Care Revenue 500 5.100 09/01/99 515
Arlington, Texas Independant School District, General Obligation 600 5.150 02/15/99 619
Austin, Texas, Zero Coupon, General Obligation 675 0.000 09/01/97 633
Brownsville, Texas, Utilities System Revenue 600 5.000 09/01/00 621
Houston, Texas Independent School District,
Series A, General Obligation 1,000 5.400 08/15/01 1,055
Houston, Texas Water & Sewer System Revenue,
Special Obligation Revenue (pre-refunded 12/01/97) 780 8.000 12/01/07 855
</TABLE>
28 Limited Volatility Tax Free Fund Specialty Funds
<PAGE> 277
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
Houston, Texas, General Obligation $ 850 5.600% 03/01/00 $ 895
Texas, State of, Series C, General Obligation 1,500 5.000 04/01/99 1,542
Texas, State of, Special Obligation Revenue (pre-refunded 04/01/00) 500 7.125 04/01/20 565
Waco, Texas Waterworks and Sewer, Utility Revenue 500 5.400 09/01/99 521
-------
7,821
-------
UTAH - 2.1%
Intermountain Power Agency, Series B, Utility Revenue 500 7.200 07/01/99 544
Utah State Building Ownership Authority, Series A,
State and Local Appropriation 750 5.125 05/15/00 776
-------
1,320
-------
VIRGINIA - 2.0%
Fairfax County Virginia, Series B, General Obligation 750 5.000 06/01/00 776
Virginia Public Building Authority Revenue, State
and Local Appropriation 500 5.100 08/01/99 517
-------
1,293
-------
WASHINGTON - 9.9%
Clark County, Washington Public Utility District Number
1, Utility Revenue 500 5.000 01/01/99 512
Washington State Public Power Supply System, Utility Revenue 400 5.100 07/01/00 410
Washington State Public Power Supply System,
Series B, Utility Revenue 650 7.200 07/01/99 708
Washington State Public Power Supply System,
Utility Revenue 500 6.300 07/01/01 539
Washington, State of, Series C, General Obligation 2,000 5.500 07/01/99 2,089
Washington, State of, Series R, General Obligation 500 5.000 07/01/99 514
Washington, State of, Series R-92 B, General Obligation 500 5.750 09/01/97 515
Washington, State of, Series R-92 C, General Obligation
(pre-refunded 09/01/96) 985 8.000 09/01/05 1,014
-------
6,301
-------
WYOMING - 0.4%
Wyoming Community Development Authority,
Series 4, Housing Revenue 250 4.800 06/01/00 252
-------
252
-------
TOTAL MUNICIPAL BONDS (Cost $60,917) 62,411
-------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 29
<PAGE> 278
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE MARKET
AMOUNT OF VALUE
(000) COUPON MATURITY (000)
--------- ------ -------- -------
<S> <C> <C> <C> <C>
SHORT-TERM TAX-EXEMPT OBLIGATIONS - 3.4%
Charleston County, South Carolina Industrial Revenue,
daily demand (b) $ 100 5.900% 01/01/07 $ 100
Harris County, Texas, Industrial Development Corp.,
Series B, daily demand (b) 500 6.000 03/01/24 500
Jackson County, Mississippi Pollution Control Revenue, daily demand (b) 200 5.900 12/01/16 200
Jackson County, Mississippi Pollution Control Revenue, daily demand (b) 500 5.900 06/01/23 500
Uinta County, Wyoming Pollution Control Revenue, daily demand (b) 900 5.900 08/15/20 900
-------
TOTAL SHORT-TERM TAX-EXEMPT OBLIGATIONS (cost $2,200) 2,200
-------
TOTAL INVESTMENTS (identified cost $63,117)(a) - 101.2% 64,611
OTHER ASSETS AND LIABILITIES,
NET - (1.2)% (773)
-------
NET ASSETS - 100.0% $63,838
-------
-------
</TABLE>
(a) At December 31, 1995, the cost for federal income tax purposes is the same
as shown above and net unrealized appreciation for all securities was
$1,494. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$1,494.
(b) Adjustable or floating rate security.
QUALITY RATINGS AS A % OF MARKET VALUE (UNAUDITED)
AAA 60%
AA 25
A 5
BBB 10
------
100%
-------
-------
ECONOMIC SECTOR EMPHASIS AS A % OF MARKET VALUE (UNAUDITED)
General Obligation 35%
Refunded 17
State and Community Lease 14
Utility Revenue 14
Health Care Revenue 9
Housing Revenue 4
Student Loan Revenue 2
Other 5
------
100%
------
------
The accompanying notes are an integral part of the financial statements.
30 Limited Volatility Tax Free Fund Specialty Funds
<PAGE> 279
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at market (identified cost $63,117,132)(Note 2) . . . . . . . $ 64,611,019
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,163
Receivables:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,223
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,046,368
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,790
-----------
66,943,563
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . $ 2,970,201
Fund shares redeemed . . . . . . . . . . . . . . . . . . . 81,529
Accrued management fees (Note 4) . . . . . . . . . . . . . 26,621
Accrued transfer agent fees (Note 4) . . . . . . . . . . . 5,960
Other accrued expenses . . . . . . . . . . . . . . . . . . 21,685 3,105,996
---------- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,837,567
-----------
-----------
NET ASSETS CONSIST OF:
Undistributed net investment income . . . . . . . . . . . . . . . . . . $ 17,949
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . (1,371,186)
Unrealized appreciation (depreciation) on investments . . . . . . . . . 1,493,887
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . 30,049
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 63,666,868
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,837,567
-----------
-----------
Net asset value, offering and redemption price per share
($63,837,567 divided by 3,004,885 shares of $.01 par value
shares of beneficial interest outstanding) . . . . . . . . . . . . . . . $ 21.24
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 31
<PAGE> 280
LIMITED VOLATILITY TAX FREE FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,728,863
Expenses (Notes 2 and 4):
Management fees. . . . . . . . . . . . . . . . . . . . . . $ 294,007
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 52,377
Transfer agent fees. . . . . . . . . . . . . . . . . . . . 33,361
Professional fees. . . . . . . . . . . . . . . . . . . . . 9,755
Registration fees. . . . . . . . . . . . . . . . . . . . . 32,198
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . 4,300
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 6,501 432,499
---------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,296,364
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments . . . . . . . . . . . . . . . . 20,010
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069,894
-----------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . 2,089,904
-----------
Net increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,386,268
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
32 Limited Volatility Tax Free Fund Specialty Funds
<PAGE> 281
LIMITED VOLATILITY TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,296,364 $ 2,391,825
Net realized gain (loss) from investments . . . . . . . . . . . . . . 20,010 (476,148)
Net change in unrealized appreciation or depreciation of
investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069,894 (2,209,158)
----------- -----------
Net increase (decrease) in net assets resulting from operations. . . . . 4,386,268 (293,481)
Distributions to shareholders from net investment income . . . . . . . . (2,311,453) (2,380,708)
Increase (decrease) in net assets from Fund share transactions . . . . . 12,787,880 437,904
----------- -----------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . 14,862,695 (2,236,285)
Net assets at beginning of year. . . . . . . . . . . . . . . . . . . . . 48,974,872 51,211,157
----------- -----------
NET ASSETS AT END OF YEAR
(including undistributed net investment income
of $17,949 and $33,038, respectively). . . . . . . . . . . . . . . . . $63,837,567 $48,974,872
----------- -----------
----------- -----------
</TABLE>
FUND SHARE TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fund shares sold . . . . . . . . . . . . . . . . 1,982,132 $ 41,531,111 1,896,826 $ 39,960,833
Fund shares issued to shareholders in
reinvestments of distributions . . . . . . . 76,958 1,614,988 76,050 1,585,125
Fund shares redeemed . . . . . . . . . . . . . . (1,445,790) (30,358,219) (1,968,389) (41,108,054)
---------- ------------ ---------- ------------
Net increase (decrease) . . . . . . . . . . . . 613,300 $ 12,787,880 4,487 $ 437,904
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 33
<PAGE> 282
LIMITED VOLATILITY TAX FREE FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . $20.48 $21.45 $21.03 $20.85 $20.49
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . .81 .86 .94 1.01 1.17
Net realized and unrealized gain (loss) on investments. . . . . .77 (.97) .42 .18 .35
------ ------ ------ ------ ------
Total Income From Investment Operations. . . . . . . . . . . . . . 1.58 (.11) 1.36 1.19 1.52
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . (.82) (.86) (.94) (1.01) (1.16)
In excess of net investment income . . . . . . . . . . . . . . -- -- (.00) -- --
------ ------ ------ ------ ------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . (.82) (.86) (.94) (1.01) (1.16)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . $21.24 $20.48 $21.45 $21.03 $20.85
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . 7.81 (0.54) 6.58 5.85 7.64
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets . . . . . . . . . . . .74 .72 .75 .80 .84
Net investment income to average net assets . . . . . . . . . . 3.91 4.14 4.40 4.89 5.68
Portfolio turnover (a). . . . . . . . . . . . . . . . . . . . . 73.91 71.71 24.05 18.21 129.12
Net assets, end of year ($000 omitted). . . . . . . . . . . . . 63,838 48,975 51,211 38,399 26,173
</TABLE>
(a) Beginning in 1992, variable rate daily demand securities were excluded
from the portfolio turnover calculation.
34 Limited Volatility Tax Free Fund Specialty Funds
<PAGE> 283
LIMITED VOLATILITY TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1995 (Unaudited)
[GRAPH]
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
YEARLY PERIODS
ENDED DECEMBER 31 LIMITED VOLATILITY TAX FREE SB 3-MONTH T-BILL ** LIPPER-C- SHORT MUNI DEBT ++
- ----------------- --------------------------- -------------------- ----------------------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1986 $10,932 $10,617 $10,920
1987 $11,242 $11,245 $11,281
1988 $11,830 $12,005 $11,956
1989 $12,652 $13,043 $12,803
1990 $13,427 $14,073 $13,621
1991 $14,452 $14,882 $14,722
1992 $15,298 $15,419 $15,665
1993 $16,304 $15,893 $16,635
1994 $16,216 $16,563 $16,601
1995 $17,483 $17,513 $17,822
</TABLE>
Limited Volatility Tax Free Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $10,781 7.81%
5 Years $13,022 5.42% ***
10 Years $17,483 5.74% ***
</TABLE>
Salomon Brothers 3-Month Treasury Bill Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $10,574 5.74%
5 Years $12,444 4.47% ***
10 Years $17,513 5.76% ***
</TABLE>
Lipper-C- Short Municipal Debt Funds Average
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/95 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $10,735 7.35%
5 Years $13,084 5.52% ***
10 Years $17,822 5.95% ***
</TABLE>
* Assumes initial investment on January 1, 1986.
** Salomon Brothers 3-Month Treasury Bill Index consists of equal dollar
amounts of three-month Treasury bills purchased at the beginning of
each of three consecutive months. As each bill matures, all proceeds
are rolled over or reinvested in a new three-month bill. The income
used to calculate the monthly return is derived by subtracting the
original amount invested from the maturity value.
++ Lipper-C- Short Municipal Debt Funds Average is the average total
return for the universe of funds within the Short Municipal Debt Funds
investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions
reinvested as of the ex-dividend dates.
*** Annualized.
LIMITED VOLATILITY TAX FREE FUND returned 7.8% in 1995, well ahead of the
5.7% return for the Salomon Brothers 3-Month Treasury Bill Index and above
the 7.4% return for the Lipper-Registered Trademark- Short Municipal Debt Funds
Average. The portfolio was managed in a manner consistent with its objective to
preserve capital while providing income exempt from federal income tax.
The threat of tax reform weighed heavily on investors' minds for most of
1995, leading to relatively weak returns for municipal bonds relative to
other asset classes. The lingering effects of the default of Orange County
also lessened demand. Like their taxable bond counterparts, longer-maturity
munis enjoyed the strongest returns. Although yields fell on all maturities,
the yields on longer maturities fell the most. The Fund struggled to
establish a favorable duration position for the first half of the year, which
caused performance to lag. However, it recovered in the second half of the
year.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
The Limited Volatility Tax Free Fund's income may be subject to an alternative
minimum tax. See the Prospectus for further information.
Specialty Funds Limited Volatility Tax Free Fund 35
<PAGE> 284
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
------- ------ -------- --------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT AGENCIES - 73.2%
Aid to Chile Guaranteed Note (LIBOR Floater)(a) $ 6,803 5.750% 06/01/15 $ 6,810
Aid to Sri Lanka Guaranteed Note (LIBOR Floater)(a) 4,125 5.817 06/15/12 4,172
Downey Savings & Loan 5,000 5.700 01/23/96 4,983
Federal Farm Credit Bank 3,000 6.390 04/17/96 3,006
Federal Farm Credit Bank 4,000 5.640 04/22/96 3,998
Federal Home Loan Bank 4,000 6.937 01/25/96 3,981
Federal Home Loan Bank 9,075 5.500 02/05/96 9,069
Federal Home Loan Bank 2,200 4.760 02/09/96 2,197
Federal Home Loan Bank 1,155 8.100 03/25/96 1,161
Federal Home Loan Bank 2,000 9.800 03/25/96 2,018
Federal Home Loan Bank 1,800 4.360 04/15/96 1,792
Federal Home Loan Bank 3,000 8.250 05/27/96 3,026
Federal Home Loan Bank 1,750 5.100 07/08/96 1,743
Federal Home Loan Bank 5,500 5.900 08/29/96 5,500
Federal Home Loan Bank 2,000 5.900 09/20/96 2,000
Federal Home Loan Bank MTN 1,000 5.550 04/12/96 997
Federal Home Loan Mortgage Corp. 1,000 4.675 03/25/96 998
Federal Home Loan Mortgage Corp. 3,000 4.580 03/29/96 2,991
Federal Home Loan Mortgage Association Discount Note 5,000 5.590 01/19/96 4,986
Federal Home Loan Mortgage Association Discount Note 3,000 5.310 04/29/96 2,948
Federal Home Loan Mortgage Association MTN 11,000 5.470 02/02/96 10,995
Federal Home Loan Mortgage Association MTN (a) 5,000 5.490 08/30/96 4,999
Federal Home Loan Mortgage Association MTN (a) 10,000 5.330 04/04/97 9,955
Secondary Market Services 8,000 5.700 01/17/96 7,980
Secondary Market Services 5,000 5.720 02/12/96 4,967
Student Loan Marketing Association Discount Note (LIBOR Floater)(a) 2,540 5.650 01/02/96 2,539
--------
TOTAL UNITED STATES GOVERNMENT AGENCIES
(cost $109,811) 109,811
--------
TOTAL INVESTMENTS
(amortized cost $109,811) - 73.2% 109,811
--------
REPURCHASE AGREEMENTS - 28.7%
Agreement with Lehman Brothers, Inc. and Chemical Bank (Tri-Party) of $8,000,
acquired December 15, 1995 at 5.760% to be repurchased at $8,041 on January 16, 1996 collateralized by
$8,030 Federal Home Loan Mortgage Corp. Bonds, due 01/01/96 to 11/01/96, valued at $8,211 8,000
Agreement with Zions First National Bank of $35,000, acquired December 29, 1995
at 5.850% to be repurchased at $35,023 on January 2, 1996 collateralized by
$35,591 United States Treasury Notes, due 11/30/96, valued at $35,792 35,000
--------
TOTAL REPURCHASE AGREEMENTS (cost $43,000) 43,000
--------
</TABLE>
Specialty Funds U.S. Government Money Market Fund 37
<PAGE> 285
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
(Cost $152,811)(b) - 101.9% $152,811
OTHER ASSETS AND LIABILITIES, NET - (1.9%) (2,870)
--------
NET ASSETS - 100.0% $149,941
--------
--------
</TABLE>
* The interest rate for all securities with a maturity greater than
thirteen months has an automatic reset feature resulting in an
effective maturity of thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
38 U.S. Government Money Market Fund Specialty Funds
<PAGE> 286
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at amortized cost which approximates market (Note 2).................. $109,810,803
Repurchase agreements (identified cost $43,000,000)(Note 2)....................... 43,000,000
Interest receivable............................................................... 879,887
------------
153,690,690
LIABILITIES
Payables:
Dividends...................................................... $ 727,622
Investments purchased.......................................... 2,947,785
Accrued transfer agent fees (Note 4)........................... 29,111
Other accrued expenses and payables............................ 44,772 3,749,290
---------- ------------
NET ASSETS........................................................................... $149,941,400
------------
------------
NET ASSETS CONSIST OF:
Shares of beneficial interest..................................................... $ 1,499,414
Additional paid-in capital........................................................ 148,441,986
------------
NET ASSETS........................................................................... $149,941,400
------------
------------
Net assets value, offering and redemption price per share
($149,941,400 divided by 149,941,400 shares of $.01 par value
shares of beneifical interest outstanding)........................................ $1.00
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 39
<PAGE> 287
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
For the Year ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest............................................................................. $ 8,311,248
Expenses (Notes 2 and 4):
Management fees................................................... $ 338,745
Custodian fees.................................................... 41,814
Transfer agent fees............................................... 208,500
Professional fees................................................. 8,114
Registration fees................................................. 83,455
Trustees' fees.................................................... 4,325
Miscellaneous..................................................... 7,543
----------
Expenses before waiver............................................ 692,496
Expenses waived by Manager (Note 4)............................... (261,988) 430,508
---------- ------------
Net investment income................................................................ 7,880,740
------------
Net increase in net assets resulting from operations................................. $ 7,880,740
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
40 U.S. Government Money Market Fund Specialty Funds
<PAGE> 288
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income and net increase
in net assets resulting from operations......................... $ 7,880,740 $ 3,251,920
Distributions to shareholders from net investment income............. (7,880,740) (3,251,920)
Increase (decrease) in net assets from Fund share transactions....... 37,864,438 16,667,251
------------ ------------
INCREASE (DECREASE) IN NET ASSETS.................................... 37,864,438 16,667,251
Net assets at beginning of year...................................... 112,076,962 95,409,711
------------ ------------
NET ASSETS AT END OF YEAR............................................ $149,941,400 $112,076,962
------------ ------------
------------ ------------
FUND SHARE TRANSACTIONS
(ON A CONSTANT DOLLAR BASIS):
Fund shares sold..................................................... 474,116,728 360,755,315
Fund shares issued to shareholders
in reinvestments of distributions.................................. 5,695,155 1,794,043
Fund shares redeemed................................................. (441,947,445) (345,882,107)
------------ ------------
Net increase (decrease).............................................. 37,864,438 16,667,251
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 41
<PAGE> 289
U.S. GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ........................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... .0580 .0380 .0284 .0347 .0573
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income...................................... (.0580) (.0380) (.0284) (.0347) (.0573)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR.................................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%).............................................. 5.98 3.87 2.88 3.53 5.90
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (a).... .32 .57 .49 .41 .38
Operating expenses, gross, to average daily net assets (a).. .51 .57 .49 .41 .38
Net investment income to average daily net asses............ 5.82 3.91 2.85 3.47 5.74
Net assets, end of year ($000 omitted)...................... 149,941 112,077 95,410 153,976 182,747
Per share amount of fees waived ($ omitted)(a).............. .0019 -- -- -- --
</TABLE>
(a) See Note 4.
42 U.S. Government Money Market Fund Specialty Funds
<PAGE> 290
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
------- ------ -------- --------
<S> <C> <C> <C> <C>
ALABAMA - 2.4%
Mobile, Alabama Industrial Development Revenue weekly demand $ 1,150 5.250%(2) 12/01/97 $ 1,150
Mobile, Alabama Industrial Development Board Pollution Control
Revenue weekly demand 700 6.000(1) 06/01/15 700
--------
1,850
--------
ARIZONA - 1.1%
Maricopa County Arizona Industrial Development Authority Revenue
weekly demand 900 5.350(2) 10/01/04 900
--------
900
--------
CALIFORNIA - 2.6%
Apple Valley, California Unified School District, General Obligation 2,000 4.500 08/30/96 2,005
--------
2,005
--------
DISTRICT OF COLUMBIA - 2.7%
District of Columbia General Fund Recovery, General Obligation (a) 500 5.600 06/01/96 503
District of Columbia General Fund Recovery, General Obligation,
Series B, daily demand 1,600 6.000(1) 06/01/03 1,600
--------
2,103
--------
FLORIDA - 6.9%
Boca Raton, Florida Industrial Development Authority Revenue, weekly
demand 425 5.375(2) 12/01/14 425
Broward County, Florida Multi-family Housing Revenue, weekly demand 1,875 5.250(2) 12/01/10 1,875
Lee County, Florida Industrial Development Authority Revenue, weekly
demand 1,000 4.975(2) 04/01/10 1,000
Sarasota, Florida Multi-family Housing Authority, weekly demand 2,100 5.125(2) 08/01/06 2,100
--------
5,400
--------
GEORGIA - 1.1%
Cobb County, Georgia Multi-family Housing Authority, weekly demand 675 5.125(2) 12/01/97 675
Gwinnen County, Georgia School District, General Obligation
(pre-refunded 02/01/96)(b) 200 7.500 02/01/03 205
--------
880
--------
HAWAII - 1.3%
Honolulu, Hawaii City and County, General Obligation 450 9.000 03/01/96 454
Kauai County Hawaii, General Obligation (a) 560 6.600 08/01/96 569
--------
1,023
--------
</TABLE>
Specialty Funds Tax Free Money Market Fund 43
<PAGE> 291
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
------- ------ -------- --------
<S> <C> <C> <C> <C>
ILLINOIS - 9.9%
Chicago, Illinois Park District, Series A $ 280 5.000% 10/30/96 $ 282
East Peoria, Illinois Multi-family Housing Authority, weekly demand 2,000 5.250(2) 06/01/08 2,000
Illinois Development Finance Authority, Industrial Revenue, weekly
demand 3,000 5.500(2) 12/01/05 3,000
Illinois Development Finance Authority, quarterly demand 700 4.000(4) 08/01/25 700
St. Clair County, Illinois Industrial Development Board Revenue,
weekly demand 1,000 5.500(2) 10/01/15 1,000
Troy Grove, Illinois Revenue, weekly demand 750 5.015(2) 05/01/10 750
--------
7,732
--------
INDIANA - 5.1%
Lake County, Indiana Judgment Funding, General Obligation 700 4.700 06/01/96 702
Lake County, Indiana Judgment Funding, General Obligation 700 4.700 12/01/96 704
Plymouth, Indiana, Multischool Building Corp. Revenue (a) 555 3.850 01/01/96 555
Wayne Township, Indiana Metropolitan School District, General
Obligation 1,000 3.950 01/01/96 1,000
Wayne Township, Indiana Metropolitan School District, General
Obligation 1,000 4.000 07/01/96 1,000
--------
3,961
--------
IOWA - 0.3%
Iowa Finance Authority, Small Business Development Revenue, weekly
demand 200 5.000(2) 11/01/15 200
--------
200
--------
KANSAS - 1.0%
Leawood, Kansas, Temporary Notes, General Obligation 800 4.000 03/15/96 800
--------
800
--------
KENTUCKY - 3.2%
Elsmere, Kentucky Industrial Building Revenue semiannual demand 510 3.500(5) 02/01/06 510
Kentucky Development Finance Authority, Health Care Revenue, weekly
demand 2,000 5.250(2) 09/01/06 2,000
--------
2,510
--------
MARYLAND - 1.1%
Montgomery County, Maryland Industrial Development Revenue, monthly
demand 900 4.050(3) 04/01/14 900
--------
900
--------
MICHIGAN - 8.8%
Lansing, Michigan Economic Development Corp., semiannual demand 1,830 3.850(5) 05/01/15 1,830
Livonia, Michigan Economic Development Corp., semiannual demand 310 3.950(5) 11/15/04 310
McDonald Tax Exempt Mortgage Bond Trust, thirteen-month demand 180 5.350(7) 01/15/09 180
Michigan State Job Development Authority Revenue, weekly demand 1,000 5.000(2) 08/01/15 1,000
Michigan State Job Development Authority Revenue, monthly demand 1,100 3.950(3) 11/01/14 1,100
Michigan State Strategic Fund Revenue, annual demand 50 4.350(6) 06/01/11 50
Michigan State Strategic Fund Revenue, weekly demand 2,370 5.319(2) 11/01/01 2,370
--------
6,840
--------
</TABLE>
44 Tax Free Money Market Fund Specialty Funds
<PAGE> 292
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
----- ---- --------- -----
<S> <C> <C> <C> <C>
MINNESOTA - 4.4%
Mandota Heights, Minnesota Commercial Development, weekly demand $1,630 5.300%(2) 12/01/15 $1,630
Minneapolis, Minnesota General Obligation, weekly demand 1,300 5.250(2) 12/01/05 1,300
Minnesota State, Housing Finance Agency, Single Family Housing
Revenue, annual demand 500 3.500(6) 07/01/25 500
------
3,430
------
MISSISSIPPI - 2.6%
DeSoto county, Mississippi Industrial Development Revenue,
weekly demand 1,000 5.015(2) 12/01/08 1,000
Jackson Mississippi Public School District General Obligation (a) 725 4.100 04/01/96 725
Jackson Mississippi Redevelopment Urban Renewal Authority
Revenue (a) 300 4.000 04/01/96 300
------
2,025
------
MISSOURI - 2.6%
Kansas City, Missouri Industrial Development Authority Revenue,
weekly demand 2,025 5.050(2) 08/01/18 2,025
------
2,025
------
NEBRASKA - 1.3%
Oshkosh, Nebraska Industrial Development Revenue, semiannual
demand 1,000 3.900(5) 12/01/96 1,000
------
1,000
------
NORTH CAROLINA - 0.6%
North Carolina State Prison Facility General Obligation 500 4.250 06/01/96 501
------
501
------
OHIO - 12.1%
Brecksville-Broadview Heights, Ohio School District 500 5.710 01/18/96 500
Buckeye, Ohio Tax-Exempt Mortgage Bond Trust, semniannual demand 505 4.150(5) 02/01/05 505
Cincinnati & Hamilton County, Ohio Port Authority, quarterly demand 260 3.900(4) 09/01/99 260
Citizens Federal Tax-Exempt Mortgage Bond Trust, semiannual demand 80 4.350(5) 09/01/08 80
Clark County, Ohio Hospital Improvement Revenue, semiannual demand 155 4.050(5) 04/01/09 155
Clarmont County, Ohio Economic Development Revenue,
semiannual demand 220 3.850(5) 05/01/12 220
Cuyahoga County Ohio, Health Care Facilities Revenue, weekly demand 100 5.200(2) 12/01/96 100
Cuyohoga County, Ohio Industrial Development Revenue,
semiannual demand 295 3.750(5) 06/01/99 295
Franklin County, Ohio Industrial Development Revenue,
semiannual demand 330 3.900(5) 04/01/15 330
Franklin County, Ohio Industrial Development Revenue,
semiannual demand 170 3.800(5) 11/01/15 170
Greater Cleveland Regional Transportation Participation
Certificates (a) 150 9.100 07/01/96 154
Mahoning County, Ohio Industrial Development Revenue,
Project A, weekly demand 15 5.200(2) 10/01/00 15
Mahoning County, Ohio Industrial Development Revenue,
Project B, weekly demand 75 5.200(2) 10/01/00 75
McDonald Tax Exempt Mortgage Bond Trust, thirteen-month demand 840 5.350(7) 01/15/09 840
</TABLE>
Specialty Funds Tax Free Money Market Fund 45
<PAGE> 293
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
----- ---- --------- -----
<S> <C> <C> <C> <C>
Montgomery County, Ohio, Economic Development Authority Revenue,
semiannual demand $ 460 3.800%(5) 12/15/04 $ 460
North Olmsted, Ohio, General Obligation 500 4.670 06/20/96 501
Ohio State Economic Development Revenue, semiannual demand 805 4.000(5) 03/01/98 805
Ohio State Higher Educational Facilities Community College
Revenue, weekly demand 700 5.150(2) 09/01/20 700
Scioto County, Ohio Health Care Facilities, semiannual demand 725 3.750(5) 12/01/15 725
Stark County, Ohio Health Care Facilities, semiannual demand 1,710 3.800(5) 09/15/16 1,710
Trumbull County, Ohio Correctional Facility, General Obligation 300 4.830 04/11/96 301
Trumbull County, Ohio Industrial Development Revenue Refunding,
weekly demand 575 5.200(2) 04/01/04 575
------
9,476
------
OKLAHOMA - 3.6%
Creek County, Oklahoma Industrial Development Authority Revenue,
semiannual demand 1,405 4.100(5) 12/01/05 1,405
Norman, Oklahoma Utilities Authority Revenue (a) 300 3.625 11/01/96 300
Tulsa, Oklahoma Industrial Development Authority, weekly demand 100 5.125(2) 09/01/03 100
Tulsa, Oklahoma Industrial University Revenue, weekly demand 1,000 5.250(2) 12/01/15 1,000
------
2,805
------
OREGON - 3.9%
Port of Portland, Oregon Public Grain Elevator Revenue,
weekly demand 3,075 5.250(2) 12/01/14 3,075
------
3,075
------
PENNSYLVANIA - 5.1%
Commonwealth Tax-Exempt Mortgage Bond Trust, semiannual demand 790 4.000(5) 11/01/05 790
McDonald Tax Exempt Mortgage Bond Trust, thirteen-month demand 180 5.350(7) 01/15/09 180
Pennsylvania State Higher Education Revenue, nine-month demand 750 3.900(9) 06/01/18 750
Philadelphia, Pennsylvania Tax & Revenue Anticipation Notes,
General Obligation 1,000 4.500 06/27/96 1,002
York County, Pennsylvania Industrial Development Authority,
weekly demand 1,225 4.850(2) 07/01/09 1,225
------
3,947
------
RHODE ISLAND - 2.4%
Narragansett, Rhode Island Bay Water Quality Commission Revenue 1,500 5.000 01/19/96 1,501
Rhode Island Homeownership Opportunity Housing & Mortgage
Finance Authority Revenue, nine-month demand (a) 345 3.850(9) 06/27/96 345
------
1,846
------
</TABLE>
46 Tax Free Money Market Fund Specialty Funds
<PAGE> 294
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL DATE
AMOUNT OF VALUE
(000) RATE MATURITY* (000)
--------- ------ --------- ------
<S> <C> <C> <C> <C>
SOUTH CAROLINA - 1.3%
Richland County, South Carolina School District 1 General Obligation $ 975 4.600% 03/01/96 $ 976
-------
976
-------
SOUTH DAKOTA - 2.6%
Sioux Falls, South Dakota Industrial Development Revenue, weekly demand 2,005 5.400(2) 06/01/06 2,005
-------
2,005
-------
TENNESSEE - 3.0%
Franklin County, Tennessee Health and Education Facilities, monthly demand 1,500 4.250(3) 09/01/10 1,500
Shelby County, Tennessee, Health, Education, and Hospital Facility Revenue (a) 845 3.800 08/01/96 845
-------
2,345
-------
TEXAS - 0.2%
Harris County, Texas Hospital District (pre-refunded 04/01/96)(b) 175 8.500 04/01/15 180
-------
180
-------
UTAH - 1.3%
West Valley City, Utah, Industrial Development Revenue, daily demand 1,000 6.100(1) 11/01/11 1,000
-------
1,000
-------
VIRGINIA - 1.4%
Norfolk, Virginia, Industrial Development Authority Revenue, weekly demand 1,075 5.125(2) 03/01/16 1,075
-------
1,075
-------
WASHINGTON - 0.3%
Washington, State of, Motor Vehicle Fuel, Series E, General Obligation
(pre-refunded 09/01/96)(b) 200 8.000 09/01/05 205
-------
205
-------
WEST VIRGINIA - 2.6%
Charleston, West Virginia Building Community Parking Facility Revenue,
weekly demand 2,000 5.150(2) 12/01/16 2,000
-------
2,000
-------
WISCONSIN - 1.9%
South Milwaukee, Wisconsin School District Tax and Revenue,
Anticipation Notes 1,300 3.949 06/28/96 1,300
Wisconsin, State of, General Obligation 200 6.500 05/01/96 202
-------
1,502
-------
</TABLE>
Specialty Funds Tax Free Money Market Fund 47
<PAGE> 295
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
VALUE
(000)
-----
<S> <C>
TOTAL INVESTMENTS (amortized cost $78,522)(c) - 100.7% $ 78,522
OTHER ASSETS AND LIABILITIES, NET - (0.7)% (522)
--------
NET ASSETS - 100.0% $ 78,000
--------
--------
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) Pre-refunded: These bonds are collateralized by U.S. Treasury securities,
which are held in escrow by a trustee and used to pay principal and
interest in the tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
(c) The cost for federal income tax purposes is the same as shown above.
* All securities with a maturity date greater than thirteen months have a
demand feature, or an optional or mandatory put, or are pre-refunded
resulting in an effective maturity of thirteen months or less.
Variable Rate:
(1) Daily
(2) Weekly
(3) Monthly
(4) Quarterly
(5) Semiannual
(6) Annual
(7) Thirteen-month
(8) Eight-month
(9) Nine-month
QUALITY RATINGS AS A % OF MARKET VALUE (UNAUDITED)
VMIG1 or SP-1 + 100%
ECONOMIC SECTOR EMPHASIS AS A % OF MARKET VALUE (UNAUDITED)
General Obligation 62%
Housing Revenue 13
Healthcare Revenue 9
Education Revenue 8
Port Authority Revenue 4
Utility Revenue 2
Pollution Control Revenue 1
Refunded 1
-------
100%
-------
-------
+ VMIG1: The highest short-term municipal note credit rating given by Moody's
to notes with a demand feature which are of the "best quality."
SP-1: The highest short-term municipal note credit rating given by Standard
& Poor's to notes with a "very strong or strong capacity to pay
principal and interest."
The accompanying notes are an integral part of the financial statements.
48 Tax Free Money Market Fund Security Funds
<PAGE> 296
TAX FREE MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at amortized cost which approximates market (Note 2).............. $ 78,522,028
Cash.......................................................................... 75,370
Interest receivable........................................................... 710,458
-------------
79,307,856
LIABILITIES
Payables:
Dividends..................................................... $ 253,319
Investments purchased......................................... 1,006,908
Accrued management fees (Note 4).............................. 17,048
Accrued transfer agent fees (Note 4).......................... 7,486
Other accrued expenses........................................ 23,437 1,308,198
------------ -------------
NET ASSETS...................................................................... $ 77,999,658
-------------
-------------
NET ASSETS CONSIST OF:
Shares of beneficial interest................................................. $ 779,997
Additional paid-in capital.................................................... 77,219,661
-------------
NET ASSETS...................................................................... $ 77,999,658
-------------
-------------
Net asset value, offering and redemption price per share
($77,999,658 divided by 77,999,658 shares $.01 par value
shares of beneficial interest outstanding).................................... $ 1.00
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 49
<PAGE> 297
TAX FREE MONEY MARKET FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest....................................................................... $ 3,584,631
Expenses (Notes 2 and 4):
Management fees................................................ $ 214,949
Custodian fees................................................. 44,719
Transfer agent fees............................................ 63,138
Professional fees.............................................. 7,032
Registration fees.............................................. 70,289
Trustees' fees................................................. 4,320
Miscellaneous.................................................. 6,940 411,387
------------ ------------
Net investment income............................................................. 3,173,244
------------
Net increase in net assets resulting from operations............................. $ 3,173,244
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
50 Tax Free Money Market Fund Specialty Funds
<PAGE> 298
TAX FREE MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income and net increase
in net assets resulting from operations. . . . . $ 3,173,244 $ 2,585,604
Distributions to shareholders from net investment
income. . . . . . . . . . . . . . . . . . . . . . (3,173,244) (2,585,604)
Increase (decrease) in net assets from Fund share
transactions. . . . . . . . . . . . . . . . . . . (22,819,224) 32,665,032
------------ ------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . (22,819,224) 32,665,032
Net assets at beginning of year. . . . . . . . . . 100,818,882 68,153,850
------------ ------------
NET ASSETS AT END OF YEAR . . . . . . . . . . . . $ 77,999,658 $100,818,882
------------ ------------
------------ ------------
FUND SHARE TRANSACTIONS (ON A CONSTANT DOLLAR
BASIS)
Fund shares sold . . . . . . . . . . . . . . . . . 133,513,901 198,014,484
Fund shares issued to shareholders in
reinvestments of distributions. . . . . . . . . . 868,416 524,203
Fund shares redeemed . . . . . . . . . . . . . . . (157,201,541) (165,873,655)
------------ ------------
Net increase (decrease). . . . . . . . . . . . . . (22,819,224) 32,665,032
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 51
<PAGE> 299
TAX FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. . . . $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . .0370 .0279 .0251 .0304 .0473
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . (.0370) (.0279) (.0251) (.0304) (.0473)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR. . . . . . . $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%) . . . . . . . . . . . . 3.76 2.83 2.55 3.09 4.84
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily
net assets . . . . . . . . . . . . . . .48 .40 .43 .45 .45
Operating expenses, gross, to average
daily net assets. . . . . . . . . . . . .48 .40 .43 .45 .46
Net investment income to average daily
net assets . . . . . . . . . . . . . . 3.69 2.84 2.52 3.03 4.73
Net assets, end of year ($000 omitted) . 78,000 100,819 68,154 73,203 61,288
Per share amount of fees remimbursed
($ omitted) . . . . . . . . . . . . . . -- -- -- -- .0001
</TABLE>
52 Tax Free Money Market Fund Specialty Funds
<PAGE> 300
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 22 different investment portfolios referred to as "Funds."
These financial statements report on 5 Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.01 par value.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies, which
require the use of estimates made by management. Such policies are
consistently followed by the Funds in the preparation of these financial
statements.
SECURITY VALUATION: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States
over-the-counter equity and fixed-income securities and options are valued
on the basis of the closing bid price. Futures contracts are valued on the
basis of the last sale price. Many fixed-income securities do not trade each
day and, thus, last sale or bid prices are frequently not available.
Fixed-income securities, therefore, may be valued using prices provided by a
pricing service when such prices are believed to reflect the fair market
value of such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
The U.S. Government Money Market and the Tax Free Money Market Funds'
portfolio investments are valued on the basis of "amortized cost," a method
by which each portfolio instrument is initially valued at cost, and
thereafter a constant accretion/amortization to maturity of any discount or
premium is assumed. Both Funds utilize the amortized cost valuation method
in accordance with Rule 2a-7 of the Investment Company Act of 1940, as
amended. Money market instruments maturing within 60 days of the valuation
date held by Funds other than the U.S. Government Money Market and Tax Free
Money Market Funds are also valued at amortized cost unless the Board of
Trustees determines that amortized cost does not represent fair value.
Municipal investments of the Limited Volatility Tax Free Fund are appraised
or priced by an independent pricing source, approved by the Board of
Trustees, which utilizes information with respect to bond transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. The Funds, except Limited Volatility Tax Free and Tax Free Money
Market Funds, may lend portfolio securities with a value of up to 50% of
their total assets. The Funds will receive cash, U.S. government treasuries
or U.S. government agency securities as collateral. The Funds will retain
most rights of beneficial ownership, including dividends, interest or other
distributions on the loaned securities. Realized gains and losses from
securities transactions are recorded on the basis of identified cost
incurred by each money manager.
CHANGE IN ACCOUNTING PRINCIPLE: Effective January 1, 1995, the Emerging
Markets Fund changed its method of accounting for the cost of investments
from the average cost method to the specific identification method. The new
method of accounting for the cost of investments was adopted because it
better matches specific costs with proceeds from sales of securities and
more closely conforms realized gains with related distributions. The change
in accounting principle had no effect on the Fund's net assets, net asset
value per share, its net increase (decrease) in net assets resulting from
operations, or its distributions. The effect
Specialty Funds Notes to Financial Statements 53
<PAGE> 301
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
of the change was to increase accumulated net realized gain (loss) on
investments and decrease net unrealized depreciation on investments
previously reported through December 31, 1994 by $797,463.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Distributions from Real
Estate Investment Trusts (REITs) owned by the Real Estate Securities Fund
may have as their components dividend income, capital gains and/or returns
of capital. Distributions that are deemed to be capital gains or returns of
capital by the trusts are treated by the Fund, respectively, as an
adjustment to its realized capital gains or its cost of the investment. The
exact amount to be adjusted can be ascertained only at the end of each
REIT's fiscal year when finally determined and reported by the various
trusts.
AMORTIZATION AND ACCRETION: Discounts and premiums for the Limited
Volatility Tax Free Fund, all zero-coupon bond discounts, and original issue
discounts are amortized/accreted for both tax and financial reporting
purposes. All short-term premiums/discounts are amortized/accreted for both
tax and financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company
and distribute all of its taxable income. No federal income tax provision
was required for the year ended December 31, 1995. From November 1, 1995
to December 31, 1995, the Emerging Markets Fund incurred net realized
capital losses of $1,534,569. As permitted by tax regulations, the
Emerging Markets Fund intends to elect to defer these losses and treat them
as arising in the year ending December 31, 1996.
At December 31, 1995, certain Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/97 12/31/98 12/31/99 12/31/02 12/31/03 TOTALS
--------- --------- -------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Securities -- -- -- -- -- $(2,387,399) $(2,387,399)
Emerging Markets -- -- -- -- -- (5,631,976) (5,631,976)
Limited Volatility Tax Free $(238,975) $(103,283) $(26,604) $(383,404) $(345,504) (110,634) (1,208,404)
U.S. Government Money Market -- -- -- -- (1,309) (4,913) (6,222)
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For all Funds, income
dividends and capital gain distributions, if any, are recorded on the
ex-dividend date. Dividends are generally declared and paid monthly for the
Limited Volatility Tax Free Fund; quarterly for the Real Estate Securities
Fund; and annually for the Emerging Markets Fund. The U.S. Government Money
Market and Tax Free Money Market Funds declare and record dividends daily
and pay them monthly. Capital gain distributions are generally declared and
paid annually. An additional distribution may be paid by the Funds to avoid
imposition of federal income tax on any remaining undistributed capital
gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from generally accepted accounting principles ("GAAP"). As
a result, net investment income and net realized gain (or loss) on
investment and foreign currency-related transactions for a reporting period
may differ significantly from distributions during such period. The
differences between tax regulations and GAAP primarily relate to investments
in options, futures, forward contracts, passive foreign investment
companies, foreign-denominated investments, mortgage-backed securities, and
certain securities sold at a loss. Accordingly, a Fund may periodically make
reclassifications among certain of its capital accounts without impacting
its net asset value.
54 Notes to Financial Statements Specialty Funds
<PAGE> 302
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The following reclassifications have been made to reflect activity for the
year ended December 31, 1995:
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
-------------- ------------ ---------------
<S> <C> <C> <C>
Real Estate Securities $123,840 -- $(123,840)
Emerging Markets 87,099 $(192,697) 105,598
</TABLE>
EXPENSES: Expenses such as management, custodian, transfer agent,
bookkeeping, printing, and registration fees are charged directly to the
individual Funds; while indirect expenses, such as administrative,
insurance, and professional fees are allocated among all Funds principally
based on their relative net assets.
DEFERRED ORGANIZATION EXPENSES: Organization and initial registration costs
of the Emerging Markets Fund have been deferred and are being amortized over
60 months on a straight-line basis.
REPURCHASE AGREEMENTS: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of the underlying securities. Each Fund's Money Manager
will monitor repurchase agreements daily to determine that the market value
(including accrued interest) at Fedwire closing time of the underlying
securities remains at least equal to 102% of the repurchase price. The Money
Manager will notify the Seller to immediately increase the collateral on the
repurchase agreement to 102% of the repurchase price if collateral value
falls below 102%.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Emerging Markets
Fund are maintained in U.S. dollars. Foreign currency amounts and
transactions of the Fund are translated into U.S. dollars on the following
basis:
(a) Market value of investment securities, other assets and liabilities
at the closing rate of exchange on the valuation date.
(b) Purchases and sales of investment securities and income at the
closing rate of exchange prevailing on the respective trade dates of such
transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from sales and maturities of short-term securities; sales
of foreign currencies; currency gains or losses realized between the trade
and settlement dates on securities transactions; the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books; and the U.S. dollar equivalent of the amounts actually
received or paid. Net unrealized gains or losses from foreign
currency-related transactions arise from changes in the value of assets and
liabilities, other than investments in securities, at year-end, resulting
from changes in the exchange rates.
It is not practical to isolate that portion of the results of operations of
the Emerging Markets Fund that arises as a result of changes in exchange
rates from that portion that arises from changes in market prices of
investments during the year. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. However, for federal
income tax purposes the Fund does isolate the effects of changes in foreign
exchange rates from the fluctuations arising from changes in market prices
for realized gain (or loss) on debt obligations.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement
of Additional Information, certain Funds may participate in various
derivative-based transactions. Derivative securities are instruments or
agreements whose value is derived from an underlying security or index. They
include options, futures, swaps, forwards, structured notes and stripped
securities. These instruments offer unique characteristics and risks that
assist the Funds in meeting their investment strategies.
Funds typically use derivatives in three ways: cash equitization, hedging,
and return enhancement. Cash equitization is a technique that may be used by
certain Funds through the use of options and futures to earn "market-like"
returns with a Fund's
Specialty Funds Notes to Financial Statements 55
<PAGE> 303
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
excess and liquidity reserve cash balances. Hedging is used by some Funds to
limit or control risks, such as adverse movements in exchange rates and
interest rates. Return enhancement can be accomplished through the use of
derivatives in a Fund. By purchasing certain instruments, a Fund may more
effectively achieve the desired portfolio characteristics that assist the
Fund in meeting its investment objectives. Depending on how the derivatives
are utilized and their structure, the risks associated with them may vary
widely. These risks are generally categorized as market risk, liquidity risk
and counterparty or credit risk.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the
Emerging Markets Fund may enter into foreign currency exchange spot
contracts and forward foreign currency exchange contracts ("contracts").
Additionally, from time to time the Emerging Markets Fund may enter into
contracts to hedge certain foreign currency-denominated assets. Contracts
are recorded at market value. Certain risks may arise upon entering into
these contracts from the potential inability of counterparties to meet the
terms of its contracts. Realized gains or losses arising from such
transactions are included in net realized gain (or loss) from foreign
currency-related transactions.
INVESTMENT IN EMERGING MARKETS: Investing in emerging markets may involve
special risks and considerations not typically associated with investing in
the United States markets. These risks include revaluation of currencies and
future adverse political and economic developments. Moreover, securities
issued in these markets may be less liquid and their prices more volatile
than those of comparable securities in the United States.
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1995, purchases and sales of
investment securities excluding U.S. Government and Agency obligations,
short-term investments, and repurchase agreements were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES PURCHASES SALES
------------ ----------- ----------- -----------
<S> <C> <C> <S> <C> <C>
Real Estate Securities $110,219,142 $55,126,728 Limited Volatility $57,267,307 $42,677,451
Emerging Markets 143,593,571 94,294,965
</TABLE>
U.S. Government Money Market purchases, sales and maturities of U.S.
Government and Agency obligations (excluding repurchase agreements) were
$363,766,484, $93,411,702 and $272,016,000, respectively.
Tax Free Money Market purchases, sales and maturities of short-term tax
exempt obligations were $206,734,838, $204,652,740 and $25,675,000,
respectively.
4. RELATED PARTIES
Frank Russell Investment Management Company ("FRIMCo" or "Manager") operates
and administers all the Funds which comprise the Investment Company, and
manages the U.S. Government Money Market and the Money Market Funds (the
Money Market Fund is a series of the Investment Company that is not
presented here). FRIMCo is a wholly owned subsidiary of Frank Russell
Company, which researches and recommends to FRIMCo, and to the Investment
Company, one or more investment management organizations to manage the
portfolio of each of the other Funds.
On January 16, 1995 and March 28, 1995, the Investment Company's Board of
Trustees and shareholders, respectively, approved amendments to the
Investment Company's Management Agreement with FRIMCo to (i) provide for an
annual management fee to be paid to the Manager by the Emerging Markets Fund
based on the Fund's average daily net assets; and (ii) clarify the agency
relationship between the Investment Company and the Manager with respect to
fees paid to the money managers selected to manage the Investment Company's
assets. The amendments became effective April 1, 1995.
Prior to April 1, 1995, the Emerging Markets Fund paid no management or
advisory fees. Rather, each shareholder entered into a written Asset
Management Service Agreement with the Manager, pursuant to which the
shareholder paid an asset management service fee directly to the Manager,
which in turn, acting as a fiduciary for the Fund, compensated the money
managers. Effective April 1, 1995, as approved by shareholders on March 28,
1995, the Fund began incurring a management fee at the rate shown in the
table below.
56 Notes to Financial Statements Specialty Funds
<PAGE> 304
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
For the year ended December 31, 1995, the management fee paid to the FRIMCo,
in accordance with the Investment Company's Management Agreement with that
firm, amounted to $4,293,802 before waivers. Such fee is payable monthly and
is equal to the annual rate, by Fund, shown in the table below, of the
average daily net assets of the applicable Fund.
<TABLE>
<CAPTION>
ANNUAL RATE ANNUAL RATE
----------- -----------
<S> <C> <S> <C>
Real Estate Securities 0.85% U.S. Government Money Market 0.25%
Emerging Markets 1.20 Tax Free Money Market 0.25
Limited Volatility Tax Free 0.50
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits on an annual basis, such
excess will be paid by FRIMCo. Prior to April 1, 1995, the Management
Agreement provided that Emerging Markets Fund expenses (exclusive of
interest and taxes) exceeding 0.80% of its average daily net assets on an
annual basis, would be paid by FRIMCo. Effective April 1, 1995, the
amendment to the management contract, as approved by shareholders on March
28, 1995, provides that Fund expenses (exclusive of interest and taxes)
exceeding 2.00% of its average daily net assets on an annual basis will be
paid by FRIMCo. For the year ended December 31, 1995, the amount of such
reimbursement was $37,115.
Effective April 1, 1995 through December 31, 1995, the Manager voluntarily
agreed to waive its 0.25% management fee for the US Government Money Market
Fund, which amounted to $261,988.
Additionally, effective April 1, 1995, as approved by shareholders on March
28, 1995, each shareholder continues to enter into a written Asset
Management Services Agreement with the Manager, pursuant to which the
shareholder agrees to pay an annual shareholder investment services fee
calculated as a specified percentage of the shareholder's average net assets
in the Fund. For the period ended December 31, 1995, the Manager did not
impose such shareholder investment services fee with respect to the Emerging
Markets Fund. In addition, a shareholder may pay additional fees, expressed
as fixed dollar amounts, for the other services or reports provided by the
Manager to the shareholder. Accordingly, the expense information does not
reflect an amount for fees paid directly by an investor to the Manager.
Fees for bookkeeping services provided to the Funds are paid or accrued to
Frank Russell Company. Frank Russell Company provides its Portfolio
Verification System ("PVS") to the Real Estate Securities and Emerging
Markets Funds, pursuant to a written Service Agreement. The PVS computerized
data base system records detailed transactions data for each of the Funds
necessary to prepare various financial and Internal Revenue Service
accounting reports. Total fees for the year ended December 31, 1995 for the
Real Estate and Emerging Markets Funds were $78,481 before waivers. The
Manager voluntarily agreed to waive $25,061 of these fees for the Emerging
Markets Fund.
The Funds have a contract with FRIMCo to provide transfer agent services to
the Investment Company. Total fees for the year ended December 31, 1995 were
$827,518.
The Investment Company was paying each of its Trustees not affiliated with
FRIMCo a retainer of $16,000 per year plus out-of-pocket expenses. Effective
April 28, 1995, the retainer was increased to $20,000. Total trustee
expenses were $96,696 for the year ended December 31, 1995 and were
allocated to each Fund on a pro rata basis, including 17 other affiliated
funds not represented here.
Russell Fund Distributors, Inc. (the "Distributor"), a wholly owned
subsidiary of FRIMCo, is the principal Distributor of the Investment Company
shares. The Distributor receives no compensation from the Investment Company
for its services.
Specialty Funds Notes to Financial Statements 57
<PAGE> 305
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. MONEY MARKET FUND
The Real Estate Securities and Emerging Markets Funds are permitted to
invest their cash reserves (i.e., monies awaiting investment in portfolio
securities suitable for the Funds' objectives) in the Frank Russell
Investment Company Money Market Fund (a series of Frank Russell Investment
Company not presented in this annual report). These investments are
reflected as purchases and redemptions of shares of the Money Market Fund.
The interest earned by the Money Market Fund related to these investments is
reflected as dividends paid (or payable) on such shares. As of December 31,
1995, $50,604,000 of the Money Market Fund's net assets represents
investments by these Funds and $441,328,000 represents the investments of
other affiliated Funds not presented here.
6. COMMITMENTS
As of December 31, 1995, the Emerging Markets Fund entered into various
foreign currency exchange spot contracts which contractually obligate the
Fund to deliver or receive currencies at specified future dates. Open
contracts were as follows:
EMERGING MARKETS FUND
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (DEPRECIATION)
-------------------- --------------- --------------- --------------
<S> <C> <C> <C>
USD 396,015 MYR 1,004,491 01/03/96 $(499)
-----
$(499)
-----
-----
</TABLE>
The related net unrealized appreciation (depreciation) is reflected in the
Emerging Markets Fund's financial statements.
7. DIVIDENDS
On February 1, 1996, the Board of Trustees declared the following dividends
from net investment income payable on February 9, 1996, to shareholders of
record on February 2, 1996:
Limited Volatility Tax Free $0.0726
58 Notes to Financial Statements Specialty Funds
<PAGE> 306
FRANK RUSSELL INVESTMENT COMPANY
ADDITIONAL INFORMATION
December 31, 1995 (Unaudited)
On January 22, 1996, a special meeting of the shareholders of the Funds was
held for the purpose of voting on the following matter:
To approve the Investment Company's operation in accordance with the
exemptive order granted on June 27, 1995 to the Investment Company and
the Manager by the Securities and Exchange Commission.
The exemptive order permits the Manager to engage and terminate
unaffiliated money managers for each Fund without holding shareholder
meetings and to disclose in the Investment Company's prospectus, with
respect to each Fund, only the aggregate fees paid to that Fund's money
managers and the net advisory fees retained by the Manager with respect
to that Fund.
The results of the vote on the proposal for the 22 Funds, on which 5 are
reported in these financial statements, were as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF OUTSTANDING % OF SHARES
VOTE SHARES SHARES VOTED
------------- ----------- ---------------- -----------
<S> <C> <C> <C>
Affirmative 349,878,731 68.5% 99.9%
Against 226,716 -- 0.1%
Abstain 15,879 -- --
----------- ---- -----
Total 350,121,326 68.5% 100.0%
----------- ---- -----
----------- ---- -----
</TABLE>
TAX INFORMATION
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate
the following amounts as capital gain dividends for their taxable year ended
December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Real Estate Securities $ 964
Emerging Markets 182,288
Tax Free Money Market 8,804
</TABLE>
Please consult a tax advisor for questions about federal or state income tax
laws.
Specialty Funds Additional Information 59
<PAGE> 307
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(206) 627-7001
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
George F. Russell, Jr., Chairman State Street Bank and Trust Company
Lynn L. Anderson 1776 Heritage Drive
Paul E. Anderson North Quincy, MA 02171
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich TRANSFER AGENT
Eleanor W. Palmer Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds LEGAL COUNSEL
George W. Weber, Treasurer and Chief Accounting Officer Stradley, Ronon, Stevens & Young
Randall P. Lert, Director of Investments 2600 - One Commerce Square
Karl Ege, Secretary Philadelphia, PA 19103-7098
MANAGER INDEPENDENT ACCOUNTANTS
Frank Russell Investment Management Company Coopers & Lybrand L.L.P.
909 A Street One Post Office Square
Tacoma, WA 98402 Boston, MA 02109
CONSULTANT DISTRIBUTOR
Frank Russell Company Russell Fund Distributors, Inc.
909 A Street 909 A Street
Tacoma, WA 98402 Tacoma, WA 98402
MONEY MANAGERS
REAL ESTATE SECURITIES
Cohen & Steers Capital Management, New York, NY
EMERGING MARKETS
Genesis Asset Managers Limited, London, England
Montgomery Asset Management, L.P., San Francisco, CA
J.P. Morgan Investment Management Inc., New York, NY
LIMITED VOLATILITY TAX FREE
Massachusetts Financial Services, Boston, MA
T. Rowe Price Associates, Inc., Baltimore, MD
U.S. GOVERNMENT MONEY MARKET
Frank Russell Investment Management Co., Tacoma, WA
TAX FREE MONEY MARKET
Weiss, Peck & Greer Advisors, Inc., New York, NY
</TABLE>
THIS REPORT IS PREPARED FROM THE BOOKS AND RECORDS OF THE FUNDS AND IS
SUBMITTED FOR THE GENERAL INFORMATION OF SHAREHOLDERS AND IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS. NOTHING HEREIN CONTAINED IS TO BE CONSIDERED AN OFFER
OF SALE OR A SOLICITATION OF AN OFFER TO BUY SHARES OF FRANK RUSSELL INVESTMENT
COMPANY. SUCH OFFERING IS MADE ONLY BY PROSPECTUS, WHICH INCLUDES DETAILS AS TO
OFFERING PRICE AND OTHER MATERIAL INFORMATION.
60 Manager and Money Managers Specialty Funds
