<PAGE>
LifePoints Funds Class D & E Prospectus
Frank Russell Investment Company
Supplement Dated December 15, 1997
To the Prospectus Dated August 18, 1997
as amended through December 15, 1997
Effective August 29, 1997, the following statement is added to the Prospectus:
"CLASS D SHARES OF THE LIFEPOINTS FUNDS ARE NOT CURRENTLY
OFFERED OR AVAILABLE FOR INVESTMENT"
. As the third sentence of the first paragraph on page 1
. As the second sentence of the second-to-last paragraph on page 2
. As the second sentence of the second paragraph on page 5
. Immediately following the heading "CLASS D SHARES" on page 6
. As the second sentence under "ELIGIBLE INVESTORS" on page 16
. As the first sentence under "PURCHASE OF LIFEPOINTS FUND SHARES" on
page 30
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 28 different investment portfolios referred to as the
"Funds." This Prospectus describes and offers shares of beneficial interest in
the Class D and Class E Shares of the five Funds listed below (the "LifePoints
Funds"). Each of the LifePoints Funds invests in different combinations of
other Funds (the "Underlying Funds") which, in turn, invest in different
combinations of stocks, bonds and cash equivalents. The Investment Company
believes that these combinations offer varying degrees of potential risk and
reward.
Equity Balanced Strategy Fund Moderate Strategy Fund
Aggressive Strategy Fund Conservative Strategy Fund
Balanced Strategy Fund
Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company. 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 Underlying
Funds in which the LifePoints Funds may invest.
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, which interests
may be offered in one or more classes. 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 the Class D and Class E Shares of its five LifePoints Funds that a
prospective investor ought to know before investing. The Investment Company
has filed a Statement of Additional Information dated August 18, 1997, with
the Securities and Exchange Commission (the "SEC") which contains additional
information regarding the LifePoints Funds. The Statement of Additional
Information is incorporated herein by reference. The Statement of Additional
Information, or a paper copy of this Prospectus, if you have received your
Prospectus electronically, 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. This Prospectus relates only to the Class D and
Class E Shares of the LifePoints Funds. The Funds also have authorized Class S
shares which are not offered at the date of this Prospectus for public
investment.
The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the Investment Company
and the Funds is maintained electronically with the SEC at its Internet web
site (http://www.sec.gov).
PROSPECTUS DATED AUGUST 18, 1997
AS AMENDED THROUGH DECEMBER 15, 1997
<PAGE>
Each LifePoints Fund diversifies its assets by investing, at present, in the
Class S Shares of six to eight Underlying Funds. Allocation decisions reflect
FRIMCo's outlook for the economy, financial markets and the relative
valuations of the Underlying Funds. Each LifePoints Fund seeks to achieve a
specific investment objective by investing in different combinations of the
Underlying Funds. Each LifePoints Fund and its investment objective are set
forth below. An investor can select investments in one or more LifePoints
Funds appropriate to the present investment aims, lifestyle and economic
status of the investor or the investor's clients, and can use reallocation of
assets among LifePoints Funds to reflect changes in these factors which occur
over time.
EQUITY BALANCED STRATEGY FUND seeks to achieve high, long-term capital
appreciation, while recognizing the possibility of high fluctuations in year-
to-year market values.
AGGRESSIVE STRATEGY FUND seeks to achieve high, long-term capital
appreciation, with low current income while recognizing the possibility of
substantial fluctuations in year-to-year market values.
BALANCED STRATEGY FUND seeks a moderate level of current income and, over
time, above-average capital appreciation with moderate risk.
MODERATE STRATEGY FUND seeks to achieve moderate long-term capital
appreciation with high current income, while recognizing the possibility of
moderate fluctuations in year-to-year market values.
CONSERVATIVE STRATEGY FUND seeks to achieve moderate total rate of return
through low capital appreciation and reinvestment of a high level of current
income.
This Prospectus describes and offers both Class D and Class E Shares of the
five LifePoints Funds. The LifePoints Funds had not yet commenced operations
as of May 23, 1997, and did not have any aggregate assets as of that date.
The Investment Company's Funds had aggregate net assets of approximately $10
billion on May 5, 1997.
2
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HIGHLIGHTS AND TABLE OF CONTENTS
ANNUAL FUND OPERATING EXPENSES OF THE CLASS D AND CLASS E SHARES OF THE
LIFEPOINTS FUNDS summarizes the fees paid by shareholders and provides an
example showing the effect of these fees together with the indirect expenses
of the Underlying Funds on a $1,000 investment over time without the manager
waiver in effect. PAGE 6.
THE PURPOSE OF THE LIFEPOINTS FUNDS is to provide a simple and effective
means for an Eligible Investor to employ a diversified mutual fund investment
allocation program suited to pursuing the long-term investment goals of the
investor or its clients. The LifePoints Funds are especially useful for
participants in tax-deferred retirement plans. The LifePoints Funds take
advantage of FRIMCo's asset allocation technology, as well as the Underlying
Funds' use of FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" techniques and money manager evaluation services, on an
economical and efficient basis. PAGE 10.
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 10.
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. Each LifePoints Fund
provides an additional layer of "multi-asset" diversification by allocating
its assets among several Underlying Funds, most of which employ multiple money
managers in pursuit of their investment objectives. PAGE 10.
INVESTMENT OBJECTIVES AND ASSET ALLOCATION FRAMEWORKS OF THE LIFEPOINTS
FUNDS are designed to meet the investment goals of long-term Eligible
Investors. While the LifePoints Funds invest primarily in the Underlying
Funds, each LifePoints Fund pursues a different investment objective by
allocating its assets among a number of Underlying Funds which pursue a
variety of their investment objectives. PAGE 11.
INVESTMENT POLICIES, RESTRICTIONS AND RISKS OF THE LIFEPOINTS FUNDS should
be considered in deciding whether to invest in a LifePoints Fund.
"Fundamental" investment objectives, policies, and restrictions may not be
changed without the approval of a majority of the shareholders of an affected
LifePoints Fund. While the LifePoints Funds' principal investment will be in
the Class S Shares of Underlying Funds, they may also invest in other types of
securities. Risks associated with certain investment policies of the
Underlying Funds should be considered when investing in the LifePoints Funds.
PAGE 14.
ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries which have entered into an Asset Management Services
Agreement with FRIMCo and institutions or individuals who have acquired shares
through such institutions or financial intermediaries. Institutions and
financial intermediaries selling Class E Shares of the LifePoints Funds may
only offer to sell Class E Shares to certain of their clients. PAGE 16.
GENERAL MANAGEMENT OF THE UNDERLYING FUNDS AND THE LIFEPOINTS FUNDS is
provided by FRIMCo, which employs the officers and staff required to manage
and administer the Underlying Funds and the LifePoints
3
<PAGE>
Funds on a day-to-day basis. All services necessary for the operation of the
LifePoints Funds (including accounting, custody, auditing, legal and
shareholder servicing) are arranged for by FRIMCo pursuant to the Special
Services Agreement (the "Services Agreement") between FRIMCo and each
LifePoints Fund and each Underlying Fund in which it invests. Frank Russell
Company provides to the Underlying Funds and FRIMCo comprehensive consulting
and money manager evaluation services. PAGE 17.
OPERATING EXPENSES OF THE LIFEPOINTS FUNDS are allocated among and borne by
the Underlying Funds in which the LifePoints Funds invest or by FRIMCo, in
either case pursuant to the Services Agreement. Except as to a 0.25%
management fee and a 0.25% Shareholder Services Fee applicable to the Class D
and Class E Shares and a 0.25% Rule 12b-1 distribution fee applicable only to
Class D Shares, the LifePoints Funds are not subject to any operating
expenses, because each LifePoints Fund's operating expense will be paid by the
Underlying Funds to the extent that the Underlying Funds receive an economic
benefit. Any operating expense of a LifePoints Fund in excess of the economic
benefit realized by the Underlying Funds will be paid by FRIMCo. As noted
above, each Lifepoints Fund has agreed to pay FRIMCo a management fee equal to
0.25% of the Fund's average daily net assets for providing investment
supervisory services. Currently, this fee is being voluntarily waived by
FRIMCo. In addition to the management fee, the LifePoints Funds will
indirectly bear their proportionate share of operating expenses that include
the management fees paid by the Underlying Funds in which they invest. While a
shareholder of a LifePoints Fund will also bear a proportionate part of
management fees paid by an Underlying Fund, each of the management fees paid
is based upon the services received by the respective Fund. PAGE 19.
THE MONEY MANAGERS FOR THE UNDERLYING FUNDS are evaluated and recommended by
FRIMCo and Frank Russell Company. The money managers have complete discretion
to purchase and sell portfolio securities for their segment of an Underlying
Fund consistent with the Underlying Fund's investment objectives, policies and
restrictions, and the specific strategies developed by Frank Russell Company
and FRIMCo. The LifePoints Funds do not employ money managers, other than
FRIMCo, and therefore, do not pay management fees. The determination of how
the LifePoints Funds' assets will be allocated among the Underlying Funds is
made by FRIMCo pursuant to each LifePoints Fund's investment objectives and
policies. The LifePoints Funds, as shareholders of the Underlying Funds,
benefit from the multi-style, multi-manager services provided to the
Underlying Funds. PAGE 20.
INVESTMENT OBJECTIVES, POLICIES AND RISKS OF THE UNDERLYING FUNDS should be
considered when deciding whether to invest in a LifePoints Fund. "Fundamental"
investment objectives, policies and restrictions may not be changed without
the approval of a majority of the shareholders of an affected Underlying Fund.
Risks associated with certain investment policies of the Underlying Funds,
such as market volatility risk, political risk, and credit risk, are disclosed
in connection with a description of the policies giving rise to such risks.
PAGE 20.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or
received in cash. Dividends from net investment income are declared quarterly
by each of the LifePoints Funds. All LifePoints Funds declare distributions
from net realized capital gains, if any, at least annually. PAGE 26.
INCOME TAXES PAID BY THE LIFEPOINTS FUNDS should be nominal. Taxable
shareholders of the LifePoints Funds will be subject to federal taxes on
dividends and capital gains distributions and may also be subject to state or
local taxes. PAGE 27.
LIFEPOINTS FUND PERFORMANCE, including yields and total return information,
is calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 28.
4
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VALUATION OF LIFEPOINTS FUND SHARES occurs each business day. Class D and
Class E Shares are purchased or redeemed based upon the next computed net
asset value per share of each LifePoints Fund. Unless otherwise indicated,
"shares" in this Prospectus refers to the Class D and Class E Shares of the
LifePoints Funds. PAGE 30.
PURCHASE OF LIFEPOINTS FUND SHARES may be accomplished on each business day.
The Class D Shares are presently subject to a management fee of 0.25%, a Rule
12b-1 distribution fee of 0.25% and a Shareholder Service Fee of up to 0.25%.
The Class E Shares are presently subject to a management fee of 0.25%, and a
Shareholder Service Fee of up to 0.25%. PAGE 30.
REDEMPTION OF LIFEPOINTS FUND SHARES may be requested on any business day.
There is no redemption charge. The redemption price is the next computed net
asset value after receipt of the redemption request. The LifePoints Funds
reserve the right to redeem in kind any portion of a redemption request. PAGE
32.
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 34.
The LifePoints Funds are authorized to offer one other class of shares, the
Class S Shares, which is designed to meet different investor needs. Class S
Shares of the LifePoints Funds are not, as of the date of this Prospectus,
being offered to investors. PAGE 35.
5
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS D AND CLASS ESHARES OF THE
LIFEPOINTS FUNDS
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class D
and Class E Shares of the LifePoints Funds will bear directly or indirectly.
Each LifePoints Fund will indirectly bear its pro rata share of the expenses
of the Underlying Funds in which the LifePoints Fund invests. 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.
CLASS D SHARES
<TABLE>
<CAPTION>
EQUITY
BALANCED AGGRESSIVE BALANCED MODERATE CONSERVATIVE
STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY
FUND FUND FUND FUND FUND
-------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
CLASS D SHARES SHAREHOLDER
TRANSACTION EXPENSES:
Sales Load Imposed on Pur-
chases................... None None None None None
Sales Load Imposed on Re-
invested Dividends....... None None None None None
Deferred Sales Load....... None None None None None
Redemption Fees........... None None None None None
Exchange Fees............. None None None None None
ANNUAL CLASS D SHARES
OPERATING EXPENSES:#
(as a percentage of average
net assets)
Management Fees ##........ 0.25% 0.25% 0.25% 0.25% 0.25%
12b-1 Fees*............... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (After Re-
imbursement)**
Custodian Fees (After Re-
imbursement)**.......... None None None None None
Transfer Agent Fees (Af-
ter Reimbursement)**.... None None None None None
Other Fees (After Reim-
bursement)+ **.......... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (Af-
ter Reimbursement)**.... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Class D Operating
Expenses (After
Reimbursement)** *** ## 0.75% 0.75% 0.75% 0.75% 0.75%
</TABLE>
- ---------------------
# Annual Class D Shares operating expenses are estimated based on average net
assets expected to be invested during the fiscal year ending December 31,
1997. During the course of this period, expenses may be more or less than
the average amount shown.
+ Class D Shares of each LifePoints Fund can pay up to 0.25% of average net
assets as a Shareholder Service Fee.
## FRIMCo has voluntarily agreed to waive its Management fee of 0.25% of
average net assets. This waiver is intended to be in effect through
December 31, 1997 but may be revised or eliminated at any time without
notice to shareholders.
* Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by rules of the National
Association of Securities Dealers, Inc. See "Distribution and Shareholder
Services Plans."
6
<PAGE>
** The LifePoints Funds' operating expenses will be paid by the Underlying
Funds and/or FRIMCo, as more fully described below. If there were no waiver
of Management fees or reimbursement of operating expenses by the Underlying
Funds or FRIMCo, the estimated "Total Other Expenses" would be 5.59% for
the Equity Balanced Strategy Fund, 4.91% for the Aggressive Strategy Fund,
0.76% for the Balanced Strategy Fund, 3.97% for the Moderate Strategy Fund,
and 4.15% for the Conservative Strategy Fund, and the "Total Class D
Operating Expenses" would have been 6.09% for the Equity Balanced Strategy
Fund, 5.41% for the Aggressive Strategy Fund, 1.26% for the Balanced
Strategy Fund, 4.47% for the Moderate Strategy Fund, and 4.65% for the
Conservative Strategy Fund.
*** Investors purchasing Class D Shares of the LifePoints Funds through a
financial intermediary, such as a bank, broker or an investment adviser,
may also be required to pay additional fees to the financial intermediary
for services provided by the intermediary. Such investors should contact
the intermediary for information concerning what additional fees, if any,
will be charged by the intermediary.
CLASS E SHARES
<TABLE>
<CAPTION>
EQUITY
BALANCED AGGRESSIVE BALANCED MODERATE CONSERVATIVE
STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY
FUND FUND FUND FUND FUND
-------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
CLASS E SHARES SHAREHOLDER
TRANSACTION EXPENSES:
Sales Load Imposed on Pur-
chases................... None None None None None
Sales Load Imposed on Re-
invested Dividends....... None None None None None
Deferred Sales Load....... None None None None None
Redemption Fees........... None None None None None
Exchange Fees............. None None None None None
ANNUAL CLASS E SHARES OPER-
ATING EXPENSES:#
(as a percentage of average
net assets)
Management Fees ##........ 0.25% 0.25% 0.25% 0.25% 0.25%
12b-1 Fees................ None None None None None
Other Expenses (After Re-
imbursement)**:
Custodian Fees (After Re-
imbursement)**.......... None None None None None
Transfer Agent Fees (Af-
ter Reimbursement)**.... None None None None None
Other Fees (After Reim-
bursement)+ **.......... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (Af-
ter Reimbursement)**.... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Class E Operating
Expenses (After
Reimbursement)** *** ##.. 0.50% 0.50% 0.50% 0.50% 0.50%
</TABLE>
- ---------------------
# Annual Class E Shares operating expenses are estimated based on average net
assets expected to be invested during the fiscal year ending December 31,
1997. During the course of this period, expenses may be more or less than
the average amount shown.
+ Class E Shares of each LifePoints Fund can pay up to 0.25% of average net
assets as a Shareholder Service Fee.
## FRIMCo has voluntarily agreed to waive the Management fee of 0.25% of
average net assets. This waiver is intended to be in effect through
December 31, 1997 but may be revised or eliminated at any time without
notice to shareholders.
7
<PAGE>
** The LifePoints Funds' operating expenses will be paid by the Underlying
Funds and/or FRIMCo, as more fully described below. If there were no waiver
of Management fees or reimbursement of operating expenses by the Underlying
Funds or FRIMCo, the estimated "Total Other Expenses" would be 5.59% for
the Equity Balanced Strategy Fund, 4.91% for the Aggressive Strategy Fund,
0.76% for the Balanced Strategy Fund, 3.97% for the Moderate Strategy Fund,
and 4.15% for the Conservative Strategy Fund, and the "Total Class E
Operating Expenses" would have been 5.84% for the Equity Balanced Strategy
Fund, 5.16% for the Aggressive Strategy Fund, 1.01% for the Balanced
Strategy Fund, 4.22% for the Moderate Strategy Fund, and 4.40% for the
Conservative Strategy Fund.
*** Investors purchasing Class E Shares of the LifePoints Funds through a
financial intermediary, such as a bank, broker or an investment adviser,
may also be required to pay additional fees to the financial intermediary
for services provided by the intermediary. Such investors should contact
the intermediary for information concerning what additional fees, if any,
will be charged by the intermediary.
Although Class D and Class E Shares of the LifePoints Funds will be subject
to a 0.25% management fee and a 0.25% Shareholder Service Fee and the Class D
Shares will be subject to an additional 0.25% Rule 12b-1 distribution fee,
neither class will bear any operating expenses. The operational expenses will
be paid by the Underlying Funds in which they invest to the extent that an
Underlying Fund receives a net reduction in its otherwise anticipated
operating expenses as a result of the LifePoints Funds' investment in that
Underlying Fund's shares. The operating expense-savings that are expected to
be realized by the Underlying Funds from the LifePoints Funds result primarily
from the assumed reduction in the number of accounts that each Underlying Fund
has to maintain due to the existence of the LifePoints Funds (i.e., one
account per investor as opposed to one for each Underlying Fund per investor
if the investor duplicated a LifePoints Fund's investment program by investing
directly in the Underlying Funds) and from the assumed reductions in investor
trading activity. Any LifePoints Funds operational expenses that are in excess
of the estimated savings to the Underlying Funds will be borne by FRIMCo, an
arrangement that can be terminated at any time by FRIMCo in its sole
discretion without notice to shareholders but which will not be terminated
prior to April 30, 1998. (See "Expenses of the LifePoints Funds" for an
explanation of the Special Service Agreement under which the LifePoints Funds'
operating expenses are allocated among and borne by the Underlying Funds in
which the LifePoints Funds invest.) However, while the LifePoints Funds are
expected to operate without expense (except as to the management fee and any
Rule 12b-1 and Shareholder Service Fees), shareholders in a LifePoints Fund
will bear indirectly the proportionate expenses of the Underlying Funds in
which the LifePoints Fund invests. The following table provides the expense
ratios for each of the Underlying Funds in which the LifePoints Funds may
invest (based on information as of December 31, 1996). Where applicable,
expense ratios are restated to reflect current fees. As explained in this
Prospectus, each LifePoints Fund intends to invest in some, but not all, of
the Underlying Funds.
8
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING
UNDERLYING FUND EXPENSE RATIOS
--------------- ---------------
<S> <C>
Diversified Equity Fund................................... .94%
Special Growth Fund....................................... 1.19%
Quantitative Equity Fund.................................. .93%
International Securities Fund............................. 1.30%
Diversified Bond Fund..................................... .61%
Volatility Constrained Bond Fund.......................... .76%
Multistrategy Bond Fund................................... .80%
Real Estate Securities Fund............................... 1.04%
Emerging Markets Fund..................................... 1.71%
</TABLE>
The following table illustrates the indirect expense ratio that each
LifePoints Fund would have incurred based on its allocation strategy in the
Underlying Funds for the year ended December 31, 1996 if it had been
operational:
<TABLE>
<CAPTION>
INDIRECT
LIFEPOINTS FUND EXPENSE RATIOS
--------------- --------------
<S> <C>
Equity Balanced Strategy Fund.............................. 1.08%
Aggressive Strategy Fund................................... 1.05%
Balanced Strategy Fund..................................... .92%
Moderate Strategy Fund..................................... .85%
Conservative Strategy Fund................................. .80%
</TABLE>
EXAMPLE:
You would pay the following expenses on a $1,000 investment in the Class D
and Class E Shares of each of the LifePoints Funds including the indirect
expenses of the Underlying Funds, assuming at any time during the periods
noted below (1) 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
CLASS D SHARES: 1 YEAR 3 YEARS
--------------- ------ -------
<S> <C> <C>
Equity Balanced Strategy Fund.............................. $18 $58
Aggressive Strategy Fund................................... $18 $57
Balanced Strategy Fund..................................... $17 $53
Moderate Strategy Fund..................................... $16 $50
Conservative Strategy Fund................................. $16 $49
<CAPTION>
CLASS E SHARES: 1 YEAR 3 YEARS
--------------- ------ -------
<S> <C> <C>
Equity Balanced Strategy Fund.............................. $16 $50
Aggressive Strategy Fund................................... $16 $49
Balanced Strategy Fund..................................... $14 $45
Moderate Strategy Fund..................................... $13 $43
Conservative Strategy Fund................................. $13 $41
</TABLE>
9
<PAGE>
THE PURPOSE OF THE LIFEPOINTS FUNDS
The LifePoints Funds have been organized to provide a simple and effective
means for Eligible Investors to structure a diversified mutual fund investment
allocation program that is suited to the long-term investment goals of the
investor, and that permits an investor to access and use FRIMCo's and Frank
Russell Company's "multi-style, multi-manager diversification" method of
investment. The LifePoints Funds, by investing in the Class S Shares of the
Underlying Funds, obtain FRIMCo's and 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 1,300 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 goals of
reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
FRIMCo and Frank Russell Company believe that 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.
10
<PAGE>
Similarly, FRIMCo and Frank Russell Company believe 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, including the LifePoints Funds, with
different objectives and policies, FRIMCo believes that they are able to
provide its and Frank Russell Company's multi-style, multi-manager, multi-
asset diversification techniques and money manager evaluation services to
Eligible Investors on a basis which is both efficient and cost effective for
the investor, FRIMCo and Frank Russell Company.
The advantages of diversifying among a mixture of investment styles and
money managers are potentially even greater with the LifePoints Funds, where
each LifePoints Fund will typically invest in shares of from six to eight
Underlying Frank Russell Investment Company Funds. The LifePoints Funds have
been created in response to increasing demand by mutual fund investors for a
simple and effective means of structuring a diversified mutual fund investment
program suited to their general needs. The proliferation of mutual funds has
left many investors confused and in search of a simpler means to manage their
investments. FRIMCo has long stressed the value of diversifying investments in
a number of mutual funds (e.g., a money market fund for liquidity and price
stability, a growth fund for long-term appreciation, an income fund for
current income and relative safety of principal, an international fund for
greater potential diversification, etc.), and has offered its advisory
expertise in assisting investors to determine such issues as which mutual
funds to select, how much of their assets to commit to each fund, and when to
reallocate their selections.
INVESTMENT OBJECTIVES AND ASSET ALLOCATION FRAMEWORKS
OF THE LIFEPOINTS FUNDS
The investment objectives of the LifePoints Funds are subject to the
investment restrictions and asset allocation policies described in this
Prospectus. The investment objective of each LifePoints Fund is as follows:
. EQUITY BALANCED STRATEGY FUND seeks to achieve high, long-term capital
appreciation, while recognizing the possibility of high fluctuations in
year-to-year market values.
. AGGRESSIVE STRATEGY FUND seeks to achieve high, long-term capital
appreciation, with low current income while recognizing the possibility
of substantial fluctuations in year-to-year market values.
. BALANCED STRATEGY FUND seeks a moderate level of current income and, over
time, above-average capital appreciation with moderate risk.
. MODERATE STRATEGY FUND seeks to achieve moderate long-term capital
appreciation with high current income, while recognizing the possibility
of moderate fluctuations in year-to-year market values.
. CONSERVATIVE STRATEGY FUND seeks to achieve moderate total rate of return
through low capital appreciation and reinvestment of a high level of
current income.
11
<PAGE>
The investment objectives of the LifePoints Funds are summarized below in a
chart that illustrates the degree to which each LifePoints Fund seeks to
obtain capital appreciation, income, and stability of principal:
<TABLE>
<CAPTION>
POSSIBILITY
CAPITAL OF
LIFEPOINTS FUND NAME APPRECIATION INCOME FLUCTUATION
-------------------- ------------ -------- -----------
<S> <C> <C> <C>
Equity Balanced Strategy Fund.............. High Low High
Aggressive Strategy Fund................... High Low High
Balanced Strategy Fund..................... Moderate Moderate Moderate
Moderate Strategy Fund..................... Moderate High Moderate
Conservative Strategy Fund................. Low High Low
</TABLE>
There is no assurance that a LifePoints Fund will achieve its stated
objective. The investment objective of each LifePoints Fund is fundamental and
cannot be changed without the approval of a majority of shareholders of the
particular LifePoints Fund.
Each of the LifePoints Funds allocates its assets by investing in shares of
a diversified group of from six to eight Underlying Funds. Each of the
LifePoints Funds will adjust its investments within set limits based on
FRIMCo's outlook for the economy, financial markets and relative market
valuation of the asset classes represented by each Underlying Fund. However,
the LifePoints Funds may deviate from set limits when, in FRIMCo's opinion, it
is necessary to do so to pursue a LifePoints Fund's investment objective. The
amounts allocated to each Underlying Fund by each LifePoints Fund will
generally vary within 10% of the ranges specified below:
<TABLE>
<CAPTION>
EQUITY
BALANCED AGGRESSIVE BALANCED MODERATE CONSERVATIVE
STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY
UNDERLYING FUND FUND FUND FUND FUND FUND
--------------- -------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Diversified Equity Fund.... 30% 21% 16% 11% 5%
Special Growth Fund........ 10% 11% 5% 2% --
Quantitative Equity Fund... 30% 21% 16% 11% 6%
International Securities
Fund...................... 20% 19% 14% 9% 5%
Diversified Bond Fund...... -- -- 25% 27% 18%
Volatility Constrained Bond
Fund...................... -- -- -- 33% 60%
Multistrategy Bond Fund.... -- 18% 16% -- --
Real Estate Securities
Fund...................... 5% 5% 5% 5% 5%
Emerging Markets Fund...... 5% 5% 3% 2% 1%
</TABLE>
12
<PAGE>
================================================================================
[PIE CHART APPEARS HERE]
5% Real Estate Securities
5% Emerging Markets
20% International Securities
30% Quantitative Equity
30% Diversified Equity
10% Special Growth
Equity Balanced Strategy Fund
================================================================================
[PIE CHART APPEARS HERE]
33% Volatililty Constrained
27% Diversified Bond
11% Diversified Equity
2% Special Growth
11% Quantitative Equity
9% International Securities
2% Emerging Markets
5% Real Estate Securities
Moderate Strategy Fund
================================================================================
[PIE CHART APPEARS HERE]
18% Multistrategy Bond
5% Real Estate Securities
5% Emerging Markets
19% International Securities
21% Diversified Equity
11% Special Growth
21% Quantitative Equity
Aggressive Strategy Fund
================================================================================
[PIE CHART APPEARS HERE]
60% Volatility Constrained
5% Diversified Equity
6% Quantitative Equity
5% International Securities
1% Emerging Markets
5% Real Estate Securities
18% Diversified Bond
Conservative Strategy Fund
===============================================================================
[PIE CHART APPEARS HERE]
16% Multistrategy Bond
25% Diversified Bond
5% Real Estate Securities
16% Diversified Equity
5% Special Growth
16% Quantitative Equity
14% International Securities
3% Emerging Markets
Balanced Strategy Fund
13
<PAGE>
INVESTMENT POLICIES, RESTRICTIONS
AND RISKS OF THE LIFEPOINTS FUNDS
Each LifePoints Fund's investment policies and practices are subject to
further restrictions and risks which are described in the Statement of
Additional Information. The LifePoints Funds will not make a material change
in their investment objectives or their fundamental policies without obtaining
shareholder approval. The LifePoints Funds' allocation ranges, as described in
the previous section, unless otherwise specified, are not fundamental policies
and may be changed without shareholder approval. Shareholders will be notified
of any material change in such investment programs.
Cash Reserves. Each LifePoints Fund is authorized to invest its cash
reserves (i.e., funds awaiting investment in the Underlying Funds) in money
market instruments and in debt securities which are at least comparable in
quality to the permitted investments of the Underlying Funds which may be
acquired by that LifePoints Fund. Each LifePoints Fund may also invest its
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, high-grade, money market
instruments. A LifePoints Fund investing in the Money Market Fund will
indirectly bear its proportionate share of the management fee and other
expenses incurred by the Money Market Fund.
Repurchase Agreements. Each LifePoints 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 LifePoints Fund as collateral (102%
of the amount of cash paid by the LifePoints Fund to such party at time of the
agreement) should fall below the repurchase price, the LifePoints Fund could
incur a loss. Subject to the overall limitations described in "Illiquid
Securities" below, no LifePoints Fund will invest more than 15% of its net
assets (taken at current market value) in repurchase agreements maturing in
more than seven days.
Reverse Repurchase Agreements. Each LifePoints Fund may enter into reverse
repurchase agreements to meet redemption requests where the liquidation of
portfolio securities is deemed by FRIMCo to be inconvenient or
disadvantageous. A reverse repurchase agreement is a transaction whereby a
LifePoints 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 LifePoints Fund retains record ownership of the security involved,
including the right to receive interest and principal payments. At an agreed
upon future date, the LifePoints Fund repurchases the security by paying an
agreed upon purchase price plus interest. Liquid assets of the LifePoints 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."
Illiquid Securities. The LifePoints 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 LifePoints Funds will not invest more
than 15% 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"). There may be undesirable delays in
selling illiquid securities at prices representing their fair value. Investing
in illiquid
14
<PAGE>
securities that are considered to be SEC Rule 144A securities could have the
effect of increasing the level of a LifePoints Fund's illiquidity to the
extent that qualified institutional buyers became, for a time, uninterested in
purchasing such securities.
Diversification. Each LifePoints Fund is a "nondiversified" investment
company for purposes of the Investment Company Act of 1940, as amended (the
"1940 Act") because it invests in the securities of a limited number of mutual
funds. Each of the Underlying Funds in which the LifePoints Funds may invest
is a diversified investment company. Each LifePoints Fund intends to qualify
as a diversified investment company for purposes of Subchapter M of the
Internal Revenue Code.
INVESTMENT RESTRICTIONS OF THE LIFEPOINTS FUNDS
The LifePoints 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 LifePoints Fund will:
1. Invest in any security if, as a result of such investment, less than
75% of its total assets would be represented by cash; cash items;
securities of the US government, its agencies, or instrumentalities;
securities of other investment companies (including the Underlying Funds);
and other securities limited in respect of each issuer to an amount not
greater in value than 5% of the total assets of such LifePoints Fund.
2. Invest 25% or more of the value of the LifePoints Fund's total assets
in the securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities, and shares of
the Underlying Funds).
3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer, as noted below, except with
respect to shares of Funds that are investment portfolios of the Investment
Company.
4. Borrow amounts in excess of 5% of its total assets taken at cost or at
market value, whichever is lower, and then only from banks as a temporary
measure for extraordinary or emergency purposes (reverse repurchase
agreements are not deemed to be borrowings for the purposes of this
limitation).
5. Invest more than 15% of its net assets in illiquid securities,
provided that each LifePoints Fund will not invest more than 5% of its net
assets in restricted securities (other than securities eligible for resale
under Rule 144A of the 1933 Act.
SPECIAL RISKS AND CONSIDERATIONS OF THE LIFEPOINTS FUNDS
Investors should consider the following factors when investing in the
LifePoints Funds:
. The investments of each LifePoints Fund will consist primarily of shares
of the Underlying Funds, so each LifePoints Fund's investment performance
is directly related to the investment performances of the Underlying
Funds in which the LifePoints Fund invests.
. As a matter of policy, the LifePoints Funds will generally allocate their
investments among the Underlying Funds within certain ranges. As a
result, the LifePoints Funds may have less flexibility to invest than a
mutual fund without such constraints.
. In addition to their principal investments, some or all of the Underlying
Funds may: invest varying percentages of their assets in foreign
securities; enter into forward currency transactions; lend their
15
<PAGE>
portfolio securities; enter into stock index, interest rate and currency
futures contracts, and options on such contracts; engage in options
transactions; make short sales; purchase zero coupon bonds and payment-
in-kind bonds; and engage in various other investment practices which
result in market risk, currency risk, and the risks of investing in
foreign securities.
. The officers, the Trustees, and FRIMCo (the investment manager of the
LifePoints Funds) presently serve as officers, Trustees and investment
manager of the Underlying Funds. Therefore, conflicts may arise as those
persons and FRIMCo fulfill their fiduciary responsibilities to the
LifePoints Funds and to the Underlying Funds.
. Some of the LifePoints Funds may invest in the Emerging Markets Fund, and
the Aggressive Strategy Fund may invest in the Multistrategy Bond Fund.
The Emerging Markets Fund may invest up to 5% of its net assets, and the
Multistrategy Bond Fund may invest up to 25% of its net assets, in lower-
rated securities, which are subject to the risks resulting from high
yield investing.
ELIGIBLE INVESTORS
Shares of the LifePoints Funds are currently offered only to Eligible
Investors. These investors are principally institutional investors and
financial intermediaries that have entered into Asset Management Services
Agreements (collectively, the "Agreements," and each, an "Agreement") with
FRIMCo or distribution agreements with the Investment Company's distributor,
and institutions or individuals who acquire shares through such institutions
or financial intermediaries. Employees, officers, trustees and directors of
FRIMCo or of its affiliates may also invest in the LifePoints Funds.
Broker-dealers, banks, investment advisers and other financial
intermediaries selling Class E Shares of the LifePoints Funds may only offer
to sell Class E Shares to certain of their clients. Although the initial
minimum aggregate investment in the Class D or Class E Shares of any
combination of the LifePoints Funds is $5 million, that initial required
minimum investment is waived until further notice. FRIMCo, on behalf of each
Fund, reserves the right to change, as to any Fund or any class of that Fund,
the categories of investors eligible to purchase shares of that Fund or class
of that Fund. Institutions and financial intermediaries which may have a
particular interest in the LifePoints Funds include:
.Bank trust departments managing discretionary institutional or personal
trust accounts
.Banks, other than through their trust departments
.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 FRIMCo,
using the facilities and resources of Frank Russell Company, to assist the
Eligible Investor or its 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 and
16
<PAGE>
different Underlying Funds by identifying the LifePoints Funds that are best
suited to the Eligible Investor's long-term investment goals. Once these
decisions have been made, the assets are then invested in one or more of the
Funds, which may include one or more LifePoints Funds. A client may change the
allocation of its assets among the Funds, including the LifePoints 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" directly to
individual investors, although FRIMCo may enter into Agreements with
individual investors. Bank trust departments, registered investment advisors,
broker-dealers and other Eligible Investors ("Financial Intermediaries") which
have entered into Agreements with FRIMCo may acquire shares of the Funds for
their customers. FRIMCo 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 may charge their customers a fee for providing these
and possibly other trust or investment-related services. LifePoints Funds may
be made available to investors other than under the terms of an Agreement, for
instance, pursuant to a distribution agreement with the Investment Company's
distributor.
GENERAL MANAGEMENT OF THE UNDERLYING FUNDS AND THE
LIFEPOINTS 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 FRIMCo, Frank Russell Company and the money managers.
The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo 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 in
the Underlying Funds assigned to them.
FRIMCo: (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, recommends
money managers to the Board of Trustees, allocates assets among money managers
and monitors the money managers' investment programs and results; (iv) is
authorized to select and hire portfolio managers to select individual
portfolio securities held in the Underlying Funds' Liquidity Portfolios or as
cash reserves for the Funds; and (v) provides the Funds with transfer agent,
dividend disbursing and shareholder recordkeeping services. FRIMCo 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 FRIMCo. 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 of FRIMCo since
1989.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in the Investment
Group of the Frank Russell Company. Ms. Carter jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Emerging
Markets Funds.
17
<PAGE>
. James M. Imhof, Manager of Portfolio Trading of FRIMCo, who has
supervised the day to day management of the Funds and ongoing analysis
and monitoring of Fund money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Frank Russell Company. Mr. Jornlin jointly
with another portfolio manager identified herein has primary responsible
for management of the Real Estate Securities Fund.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge has primary responsibility for management of
the Fixed I, Fixed Income II, Fixed Income III, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, Limited Volatility Tax
Free, International, International Securities and Emerging Markets Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of the US
Equity Manager Research Department with Frank Russell Company. Mr.
Trittin currently with another portfolio manager identified herein has
primary responsibility for management of the Equity I, Equity II, Equity
III, Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Williams was Senior Research
Analyst with Frank Russell Company. Ms. Williams currently with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Equity T,
Diversified Equity, Quantitative Equity, Special Growth and Equity Income
Funds.
Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.
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. FRIMCo is a wholly owned subsidiary of Frank Russell Company.
The Investment Company has received an exemptive order from 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
Underlying Fund. The Investment Company received shareholder approval to
operate under the order at a special meeting of the shareholders held on
January 22, 1996.
For its investment supervisory services, FRIMCo receives a management fee
from each LifePoints Fund at the annual rate of 0.25% of the average daily net
assets of each Fund, payable to FRIMCo monthly on a pro rata basis. Currently,
FRIMCo has voluntarily agreed to waive all of this fee. In addition to the
management fee payable by the LifePoints Funds, the LifePoints Funds will
indirectly bear a proportionate share of operating expenses that include the
management fees paid by the Underlying Funds in which they invest. While a
18
<PAGE>
shareholder of a LifePoints Fund will also bear a proportionate part of
management fees paid by an Underlying Fund, each of the management fees paid
is based upon the services received by the respective Fund. As noted above,
FRIMCo receives a management fee from each Underlying Fund. From this fee,
FRIMCo, acting as agent for the Investment Company, is responsible for paying
the money managers for their investment selection services. The remainder is
retained by FRIMCo as compensation for the services described above and to pay
expenses. The annual rate of the management fees, payable to FRIMCo monthly on
a pro rata basis, are the following percentages of the average daily net
assets of each Underlying Fund: Diversified Equity Fund, 0.78%; Special Growth
Fund, 0.95%; Quantitative Equity Fund, 0.78%; International Securities Fund,
0.95%; Diversified Bond Fund, 0.45%; Volatility Constrained Bond Fund, 0.50%;
Multistrategy Bond Fund, 0.65%; Real Estate Securities Fund, 0.85%; and
Emerging Markets Fund, 1.20%. The fees of the Underlying Funds, other than the
Diversified Bond, Volatility Constrained Bond, and Multistrategy Bond Funds,
may be higher than the fees charged by some mutual funds with similar
objectives which use only a single money manager. FRIMCo has voluntarily
agreed to waive all or a portion of its management fee with respect to certain
Underlying Funds.
OPERATING EXPENSES OF THE LIFEPOINTS FUNDS
Each LifePoints Fund seeks to operate at a low operating expense ratio.
While each LifePoints Fund will incur its pro rata share of the fees and
expenses of the Underlying Funds in which it invests, each Underlying Fund has
agreed to pay a pro rata share of the operational expenses of the LifePoints
Funds that invest in the Underlying Funds, but only to the extent that the
Underlying Funds receive a net reduction in its otherwise anticipated expenses
from maintaining numerous investor accounts and from investor trading
activity. This arrangement is subject to a Special Service Agreement (the
"Service Agreement") between FRIMCo, each LifePoints Fund and the Underlying
Funds in which it invests, as well as to certain voluntary expense
reimbursement undertakings made by FRIMCo, which can be terminated by FRIMCo
in its sole discretion, but which will not be terminated prior to April 30,
1998. Each LifePoints Fund has entered into an Investment Management Agreement
with FRIMCo, as well as a Portfolio Management Agreement which governs the
providing of sub-advisory services.
The Services Agreement is entered into, on a yearly basis, between FRIMCo,
the LifePoints Funds and the Underlying Funds. The Services Agreement provides
that all services necessary for the operation of a LifePoints Fund (including
expenses for Fund accounting, custody, auditing, legal and transfer agent
services (collectively, "Operating Expenses") (but not including services
covered by the management fee and any Rule 12b-1 distribution fee or
Shareholder Service Fees which will be borne directly by the LifePoints Funds)
will be paid by the Underlying Funds in which the LifePoints Fund invests
and/or FRIMCo. In consideration of the benefits derived by the Underlying
Funds from the establishment and operation of the LifePoints Funds, each of
the Underlying Funds will agree to pay a portion of the LifePoints Fund
Operating Expenses. The Operating Expenses will be allocated among and borne
by the Underlying Funds in proportion to the average daily value of shares of
the Underlying Funds owned by each LifePoints Fund, but in no event will any
Underlying Fund bear Operating Expenses in excess of its estimated cost
savings. Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which would have been established to
hold the LifePoints Funds' assets if they had been invested directly in the
Underlying Funds and the resulting reduction in shareholder servicing costs
from less investor trading activity. Although such cost savings cannot be
computed precisely at this time, the estimated savings to the Underlying Funds
generated by the operation of the LifePoints Funds, and the consequent
payments by the Underlying Funds, are expected to be sufficient to offset
most, if not all, of the Operating Expenses incurred by the LifePoints Funds.
Under the Services Agreement, FRIMCo has agreed to pay any Operating Expenses
of the LifePoints Funds which exceed the estimated savings to each of the
Underlying Funds.
19
<PAGE>
THE MONEY MANAGERS FOR THE UNDERLYING FUNDS
The assets of each Underlying Fund are allocated currently among the money
managers listed in the section "Money Manager Profiles." THE ALLOCATION OF AN
UNDERLYING FUND'S ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY
FRIMCO. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY FRIMCO, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES OF THE
INVESTMENT COMPANY.
From its management fees, FRIMCo, as agent for the Investment Company, pays
all fees to the money managers for their services to the Underlying Funds.
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 fiscal year ended December 31, 1996, 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 Underlying Fund:
Diversified Equity Fund, 0.24%; Special Growth Fund, 0.40%; Quantitative
Equity Fund, 0.21%; International Securities Fund, 0.42%; Diversified Bond
Fund, 0.08%; Volatility Constrained Bond Fund, 0.18%; Multistrategy Bond Fund,
0.21%; Real Estate Securities Fund, 0.31%; and Emerging Markets Fund, 0.72%.
Fees paid to the money managers are not affected by any voluntary 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 Underlying Funds
through broker-dealer affiliates. Each money manager has agreed that once the
Investment Company has advanced fees to FRIMCo as agent to make payment of the
money manager's fee, the money manager will look only to FRIMCo for the
payment of its fee.
The money managers are selected for the Underlying 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 an Underlying Fund within the Underlying Fund's
investment objectives, restrictions and policies, and the more specific
strategies developed by Frank Russell Company and FRIMCo. 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,
FRIMCO, NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY
MANAGERS' INDIVIDUAL SECURITY SELECTIONS.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
OF THE UNDERLYING FUNDS
Each Underlying Fund has certain "fundamental" investment objectives,
restrictions and policies which may be changed only with the approval of a
majority of the Underlying Fund's shareholders. Other policies reflect current
practices of the Underlying Funds, and may be changed by the Underlying Funds
without the approval of shareholders. Certain of the objectives, policies, and
risks are described in this section, and further information about the
Underlying Funds is contained in the Statement of Additional Information as
well as in the prospectuses of the Underlying Funds. Because the LifePoints
Funds invest in the Underlying Funds, investors of the LifePoints Funds will
be affected by the Underlying Funds' investment policies in direct
20
<PAGE>
proportion to the amount of assets each LifePoints Fund allocates to the
Underlying Fund pursuing such policies. To request a copy of a prospectus for
an Underlying Fund, contact the Investment Company at 800/972-0700 (in
Washington, 253/627-7001).
Each Underlying Fund's objective is "fundamental," as are the types of
securities in which it will invest. Ordinarily, each Underlying Fund will
invest more than 65% of its total assets in the types of securities identified
in its statement of objectives. However, the Underlying 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.
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.
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 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.
21
<PAGE>
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.
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.
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 up to 5% of its net assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by Standard &
Poor's Rating Group ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's")) or in unrated securities judged by the money managers of the Fund
to be of comparable quality. 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, see "Investment Policies and
Risks of the Underlying Funds--High Risk Bonds" and refer to the Statement of
Additional Information.
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. 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.
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.
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<PAGE>
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 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.
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.
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 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 issuers.
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, including: 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 and floating rate and zero coupon
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 invest up to 25% of its net assets in debt securities that are
rated below "investment grade" or in unrated securities judged by the money
managers of the Fund to be of comparable quality. For a description of lower
rated debt securities, see "Investment Policies and Risks of the Underlying
Funds--High Risk Bonds" and refer to the Statement of Additional Information.
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<PAGE>
INVESTMENT POLICIES AND RISKS OF THE UNDERLYING FUNDS
Investment in Foreign Securities. The Underlying 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.
Depository Receipts. The Underlying Funds may invest in securities of
foreign issuers in the form of American Depository Receipts ("ADRs") or other
similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying securities. Generally, ADRs in registered form are designed for use
in U.S. securities markets.
Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International Securities, Diversified Bond, Volatility
Constrained Bond, Multistrategy Bond and Emerging Markets 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 an
Underlying Fund enters into a contract. The Underlying 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 Underlying Funds may,
however, enter into forward currency contracts containing either or both
deposit requirements and commissions. In order to assure that the Underlying
Funds' forward currency contracts are not used to achieve investment leverage,
the Funds will segregate liquid assets in an amount at all times equal to or
exceeding the Funds' commitment with respect to these contracts.
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 an Underlying Fund's portfolio securities or adversely affect the
price of securities which the Funds intend to purchase at a later date. The
amount the Underlying Funds may invest in forward currency contracts is
limited to the amount of the Funds' aggregate investments in foreign
currencies.
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<PAGE>
Options. The Underlying 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
Underlying Funds may also purchase and sell put and call options on foreign
currencies.
An Underlying Fund may invest up to 5% of its net assets, represented by the
premium paid, in call and put options. An Underlying 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.
The purchase and writing of options involves certain risks. If a put or call
option purchased by an Underlying 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 an Underlying 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 an Underlying 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 an Underlying
Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, an Underlying
Fund may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Underlying 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.
Each Underlying 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 an Underlying Fund and the hedging
vehicle so that the portfolio return might have been greater had hedging not
been attempted.
High Risk Bonds. The Emerging Markets Fund may invest up to 5% of its net
assets, and the Multistrategy Bond Fund may invest up to 25% of its net
assets, in lower rated securities or in unrated securities judged by their
money managers to be of comparable quality. While lower rated securities
generally offer a higher yield than that available from higher grade issues,
lower rated debt securities also involve higher risks, in that they are
25
<PAGE>
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 fluctuations in response to changes in
interest rates. For additional information, please refer to the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
The Board of Trustees presently intends that dividends will be declared from
net investment income and net short-term capital gains, if any, for each
LifePoints Fund on a quarterly basis, with payment being made sometime in:
April, July, October and December.
Dividends paid by a LifePoints Fund with respect to its Class D and Class E
Shares are calculated in the same manner and at the same time. Both Class D
and Class E Shares will share proportionally in any investment income and
expenses of a LifePoints Fund, except that the per share dividends of Class D
Shares will ordinarily be less than the per share dividends of Class E Shares
as a result of the Rule 12b-1 distribution fees charged to Class D Shares.
CAPITAL GAINS DISTRIBUTIONS
The Board intends that distributions will be declared 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 LifePoints 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 LifePoints 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.
In addition, the LifePoints Funds receive capital gains distributions from
the Underlying Funds. Consequently, capital gains distributions may be
expected to vary considerably from year to year. Also, the LifePoints Funds
may generate capital gains through rebalancing the portfolios to meet the
Funds' allocation percentages.
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, new and old alike, will share in and be taxed on
distributions of gain realized by a LifePoints 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 LifePoints 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.
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<PAGE>
TAXES
Each LifePoints 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 LifePoints Fund will
generally not be liable for federal income or excise taxes. The LifePoints
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. 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 LifePoints 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.
The sale of shares of a LifePoints 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 LifePoints 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.
Shareholders of the LifePoints 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.
A LifePoints 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 LifePoints 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 advisors regarding the
applicability of income, estate or other taxes (including income tax
withholding) on their investment in a LifePoints Fund or on dividends and
distributions received by them from a LifePoints Fund and the application of
foreign tax laws.
Shareholders should consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of a LifePoints Fund and distributions and redemption proceeds
received from a LifePoints Fund.
Additional information on these and other tax matters relating to the
LifePoints Funds and their shareholders is included in the section entitled
"Taxes" in the Statement of Additional Information.
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<PAGE>
CALCULATION OF FUND PERFORMANCE
From time to time, the LifePoints 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.
Performance will be calculated separately for Class D and Class E Shares of
the LifePoints Funds. The Class D Shares have different expenses from the
Class E Shares which may affect performance.
The Moderate and Conservative Strategy 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
LifePoints Fund's portfolio. The calculation includes all recurring fees that
are charged to all shareholder accounts.
Each LifePoints Fund may also advertise non-standardized performance
information which is for periods in addition to those required to be
presented.
FRIMCO'S HISTORICAL PERFORMANCE
Since the LifePoints Funds are new portfolios, there is no information
regarding their past investment performance. However, FRIMCo has a history of
investment performance managing model investment portfolios with investment
objectives, strategies, policies, and restrictions substantially similar to
those of the LifePoints Funds. Set forth below are historical performance data
provided by FRIMCo pertaining to those model investment portfolios. The data
is provided to illustrate FRIMCo's past performance in managing similar
portfolios. The results presented are not intended to predict or suggest the
return to be experienced by any LifePoints Fund or the return an individual
investor might achieve by investing in a LifePoints Fund. A LifePoints Fund's
investment returns may differ from those of the relevant model portfolio
because, among other things, the LifePoints Fund's fees and expenses may
differ from those of the applicable portfolio.
28
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PERCENTAGE TOTAL RETURNS/1/
PERIODS ENDING DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ANNUALIZED
------------------------------------
ONE FIVE TEN INCEPTION INCEPTION
YEAR YEARS YEARS TO DATE DATE
---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
FRANK RUSSELL INVESTMENT COMPANY ASSET
ALLOCATION MODEL:
EQUITY BALANCED MODEL
FRIC Equity Balanced Fund comparable ... 19.7 13.8 13.1 -- 9/5/85
AGGRESSIVE STRATEGY MODEL
FRIC Aggressive Strategy Fund comparable
....................................... 16.5 12.5 12.5 -- 9/5/85
BALANCED STRATEGY MODEL
FRIC Balanced Strategy Fund comparable
....................................... 13.1 10.8 11.3 -- 9/5/85
MODERATE STRATEGY MODEL
FRIC Moderate Strategy Fund comparable.. 10.5 9.3 10.0 -- 9/5/85
CONSERVATIVE STRATEGY MODEL
FRIC Conservative Strategy Fund compara-
ble ................................... 8.1 -- -- 8.1 1/1/96
</TABLE>
- ---------------------
1 Performance is calculated based on the SEC standardized method. Periods of
12 months and over are annualized. Total returns of model portfolios are
presented gross of fees and expenses, and do not reflect deductions of any
management fees and Rule 12b-1 or Shareholder Services Fees, which are
deducted from net asset value of the Class D or Class E Shares of the
LifePoints Funds. The performance for a model portfolio would have been
reduced if such Fees had been deducted. Model portfolio performance is based
upon the actual mix of Underlying Funds recommended at each specific point
in time, which may differ slightly from the current mix. Detail of the
changes is available upon request. The Underlying Funds in existence for
less than the time periods shown were added to the mix on the following
dates: Quantitative Equity Fund, 07/01/87; Real Estate Securities Fund,
01/01/90; Multistrategy Bond Fund, 02/01/93; and Emerging Markets Fund,
04/01/95 (Fund performance for the Emerging Markets Fund is calculated gross
of investment services fees, descriptions of which can be obtained from
FRIMCo. Investment services fees will reduce performance). Equity Income
Fund was removed from the Conservative, Moderate, Balanced, and Aggressive
model portfolios as of January 1, 1996.
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<PAGE>
VALUATION OF LIFEPOINTS FUND SHARES
NET ASSET VALUE PER SHARE
The net asset value per share is calculated for shares of each class of each
LifePoints 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 the Class D and Class E Shares by dividing the current value of the
LifePoints Fund's assets (i.e., shares of the Underlying Funds plus any other
assets held in the portfolio) attributable to a particular class, less
liabilities attributable to that class, by the number of shares of the class
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 determination is made by appraising each LifePoints Fund's
underlying investments on each business day (i.e., the Underlying Funds at the
current net asset value per share of such Underlying Fund).
VALUATION OF PORTFOLIO SECURITIES
Money market instruments held by a LifePoints Fund and maturing within 60
days of the valuation date 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 LifePoints Funds utilize the amortized cost valuation method in
accordance with Rule 2a-7 of 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 LifePoints Fund would
receive if it sold the instrument.
PURCHASE OF LIFEPOINTS FUND SHARES
Shares of the LifePoints Funds are sold on each business day 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
LifePoints Funds reserve the right to reject any purchase order.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Under a distribution plan (the "Distribution Plan") for the Class D Shares,
the Investment Company may pay to the distributor, or any banks, broker-
dealers or other financial institutions that have entered into sales support
agreements ("Selling Agents"), an amount (the "12b-1 Fee") for the Selling
Agents' activities or expenses primarily intended to result in the sale of the
Class D Shares of the LifePoints Funds subject to the Distribution Plan. The
12b-1 Fee payments are calculated daily and paid quarterly by the Investment
Company, at an annual rate of up to 0.75% of the average daily net assets of a
LifePoints Fund's Class D Shares. At the present time, the Board of Trustees
has presently determined to limit payments under the Distribution Plan to
0.25% of average daily net assets. The 12b-1 Fee may only be increased when
the Trustees determine that it is in the best interests of shareholders of the
Class D Shares of the LifePoints Funds to do so.
The 12b-1 Fees may be used to compensate (a) Selling Agents for sales
support services provided, and related expenses incurred with respect to,
Class D Shares, by such Selling Agents, and (b) the distributor for
distribution services provided by it, and related expenses incurred, including
payments by the distributor to
30
<PAGE>
compensate Selling Agents for providing support services. The Distribution
Plan is a compensation-type plan. As such, the Investment Company makes no
payments to the distributor except as described above. Therefore, the
Investment Company does not pay for unreimbursed expenses of the distributor,
including amounts expended by the distributor in excess of amounts received by
it from the Investment Company, interest, carrying or other financing charges
in connection with excess amounts expended, or the distributor's overhead
expenses. However, the distributor may be able to recover such amount or may
earn a profit from future payments made by the Investment Company under the
Distribution Plan.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the distributor or
any investment advisors, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents' clients
who beneficially own Class D or Class E Shares of the LifePoints Funds.
Payments under the Services Plan are calculated daily and paid quarterly by
the Investment Company, at an annual rate of up to 0.25% of the average daily
net assets of a LifePoints Fund's Class D or Class E Shares.
ORDER PROCEDURES
Orders by all eligible investors (except for participants in the Three Day
Settlement Program described below) to purchase LifePoints 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' Transfer Agent or custodian, 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 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 (the
"Custodian").
Automated Clearing House ("ACH"). Payment for orders may be made through the
ACH to the Custodian. 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 on 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 a Financial
Intermediary or 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 the close of
the New York Stock Exchange, the order will be effected on the following
business day.
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THREE DAY SETTLEMENT PROGRAM
The Investment Company will accept orders from financial institutions to
purchase Class D or Class E Shares of the LifePoints Funds for settlement on
the third business day following the receipt of an order to be paid by federal
wire if the financial institution has agreed in writing to indemnify the
LifePoints 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 LifePoints Fund shares through a program of services
offered by a Financial Intermediary, such as a bank, broker-dealer, 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 Class D or Class E Shares of any LifePoints Fund
offered by this Prospectus for shares of the same class of another LifePoints
Fund offered by this Prospectus on the basis of current net asset value per
share at the time of the exchange. Shares of a LifePoints 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 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 advisor.
REDEMPTION OF LIFEPOINTS FUND SHARES
SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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 recent
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.
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<PAGE>
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 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 the Financial
Intermediary from whom this prospectus was obtained or 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 FRIMCo 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 as are 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, to the requested address on the payment date.
A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obtained or Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401-1591. The
33
<PAGE>
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 by a
distribution in kind of securities from the Fund's portfolio, in lieu of cash.
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 FRIMCo, 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
LifePoints 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 LifePoints
Funds, or their accounts, from FRIMCo.
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 shares of beneficial interest divisible into
an unlimited number of funds, each of which funds is a separate trust under
Massachusetts law, and the funds' shares may be offered in multiple classes.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund attributable to that class, and have the same voting and other
rights and preferences as the shares of other classes of the Fund. Shares of
each class of a Fund are entitled to such dividends and distributions earned
on the assets belonging to the Fund as may be declared by the Board of
Trustees. Shares of each class of a Fund have a par value of $.01 per share,
are fully paid and nonassessable, and have no preemptive or conversion rights.
Each share of a class of a Fund has one vote; there are no cumulative voting
rights. There are no annual meetings of shareholders, but special meetings may
be held. On any matter which affects only a particular Fund or class, only
shareholders of that Fund or class, as applicable, will vote, unless otherwise
required by the 1940 Act or the amended Master Trust Agreement.
34
<PAGE>
In addition to offering Class D and Class E Shares, the LifePoints Funds are
authorized to offer beneficial interests in Class S Shares. Class S Shares are,
as of the date of this Prospectus, not offered for public investment.
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 May 20, 1997, FRIMCo may be deemed by the 1940 Act to control the
LifePoints Funds because it owns more than 25% of the voting shares.
MONEY MANAGER PROFILES
The money managers have no other affiliations with the Underlying Funds,
FRIMCo, 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, is 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.
Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st 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, is a corporation whose indirect parent is AMVESCO, 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.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308, Peachtree is a unit of the Smith Barney Asset
Management division of Smith Barney Mutual Funds Management, Inc., which is a
wholly owned subsidiary of Travelers Group Inc.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is an SEC registered investment adviser owned by Arnold Schneider. As of
the date of this Prospectus, the Investment
35
<PAGE>
Company understands that an injunction is being sought against Arnold
Schneider in Massachusetts Middlesex County Superior Court by partners of
Wellington Management Company L.L.P. ("Wellington"). The proceedings were
instituted on December 13, 1996. The Investment Company believes that the
injunction request seeks to prevent Mr. Schneider from engaging in the
investment advisory or investment management business in competition with
Wellington.
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.
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 advisor 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
advisor. 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, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan
QUANTITATIVE EQUITY FUND
Barclays Global Fund Advisors, See: Diversified Equity Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, is 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.
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<PAGE>
INTERNATIONAL SECURITIES FUND
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martins Lane.,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, L.L.C., 10500 N.E. 8th Street, Suite 660,
Bellevue, WA 98004, is a Washington Limited Liability Corporation that is
controlled by the following founding members: Thomas A. Garr, Robert L.
Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
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.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.
The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X 7LY, 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
advisor 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 International Ltd., is controlled 55% by
management and associated interests and the balance held by outside
shareholders, with the largest single holding being 15%.
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Montgomery Asset Management, L.P., 600 Montgomery Street, 17th Floor, San
Francisco, CA 94111, is a Delaware limited liability company with majority
ownership held by Commerzbank AG, a foreign banking organization.
37
<PAGE>
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management, 757 Third Avenue, New York, NY 10017, is
a corporation whose two principals, Robert H. Steers and Martin Cohen, control
the corporation within the meaning of the 1940 Act.
AEW Capital Management, L.P., 225 Franklin Street, Boston, MA 02110-2803, is
a wholly-owned affiliate of New England Investment Companies, L.P. ("NEIC").
NEIC is a publicly-held limited partnership. Metropolitan Life Insurance
Company, a publicly-held corporation, owns approximately 53% of NEIC. AEW
Capital Management, Inc., a wholly-owned subsidiary of NEIC, is the general
partner, and NEIC is the sole limited partner, of AEW Capital Management, L.P.
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, is 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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.
38
<PAGE>
MULTISTRATEGY BOND FUND
BEA Associates, 153 East 53rd Street, 58th Floor, 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 advisor.
Pacific Investment Management Company, See: Diversified Bond Fund.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
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.
39
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY MULTISTRATEGY BOND
Alliance Capital Management L.P. BEA Associates
Barclays Global Fund Advisors Pacific Investment Management Company
Peachtree Asset Management Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc. REAL ESTATE SECURITIES
Lincoln Capital Management Company Cohen & Steers Capital Management
Schneider Capital Management AEW Capital Management, L.P.
Suffolk Capital Management, Inc.
EMERGING MARKETS
Trinity Investment Management Corporation
Genesis Asset Managers, Ltd.
SPECIAL GROWTH J.P. Morgan Investment Management, Inc.
Delphi Management, Inc. Montgomery Asset Management, L.P.
Fiduciary International, Inc.
GlobeFlex Capital, L.P. MANAGER, TRANSFER AND DIVIDEND PAYING
Jacobs Levy Equity Management, Inc. AGENT
Sirach Capital Management, Inc. Frank Russell Investment Management
Wellington Management Company, L.L.P. Company
909 A Street
QUANTITATIVE EQUITY Tacoma, Washington 98402
Barclays Global Fund Advisors
Franklin Portfolio Associates L.L.C. CONSULTANT
J.P. Morgan Investment Management, Inc. Frank Russell Company
909 A Street
INTERNATIONAL SECURITIES Tacoma, Washington 98402
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited DISTRIBUTOR
Mastholm Asset Management, L.L.C. Russell Fund Distributors, Inc.
Oechsle International Advisors 909 A Street
Rowe Price-Fleming International, Inc. Tacoma, Washington 98402
Sanford C. Bernstein & Co., Inc.
INDEPENDENT ACCOUNTANTS
The Boston Company Asset Management, Inc.
Coopers & Lybrand L.L.P.
DIVERSIFIED BOND One Post Office Square
Lincoln Capital Management Company Boston, Massachusetts 02109
Pacific Investment Management Company
Standish, Ayer & Wood, Inc. LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
VOLATILITY CONSTRAINED BOND 2600 -- One Commerce Square
BlackRock Financial Management Philadelphia, Pennsylvania 19103-7098
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd. OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (253) 627-7001
40
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 28 different investment portfolios referred to as the
"Funds." This Prospectus describes and offers shares of beneficial interest in
the Class S Shares of the eight Funds listed below.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company. 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 individual
Funds. There is no sales charge for investing in the Class S Shares of the
Funds.
<TABLE>
<S> <C>
Equity I Fund International Fund
Equity II Fund Fixed Income I Fund
Equity III Fund Fixed Income II Fund
Equity Q Fund Fixed Income III Fund
</TABLE>
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, which interests
may be offered in one or more classes. 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 the Class S Shares of 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, 1997, 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.
This Prospectus relates only to the Class S Shares of the eight Funds
described herein. The Funds listed above currently do not offer shares of
beneficial interest in any other classes.
The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the FRIMCo and the Funds
is maintained electronically with the SEC at its Internet Web Site
(http://www.sec.gov).
PROSPECTUS DATED MAY 1, 1997,
AS AMENDED THROUGH DECEMBER 15, 1997
<PAGE>
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.
This Prospectus describes and offers Class S Shares of the eight Funds set
forth on the first page of this Prospectus. A shareholder of a Fund described
herein may pay a quarterly shareholder investment services fee directly to
FRIMCo. The fee is computed on the amount the shareholder has invested in the
applicable Fund. The Investment Company had aggregate net assets of
approximately $10 billion on April 3, 1997. The net assets of these eight
Funds on April 3, 1997, were:
<TABLE>
<S> <C>
Equity I............. $901,974,708
Equity II............ $350,811,383
Equity III........... $200,932,814
Equity Q............. $866,252,959
</TABLE>
<TABLE>
<S> <C>
International........ $943,052,415
Fixed Income I....... $668,822,040
Fixed Income II...... $237,434,172
Fixed Income III..... $302,338,259
</TABLE>
2
<PAGE>
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. PAGE 13.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" techniques and money manager evaluation services on an
economical and efficient basis. PAGE 21.
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 21.
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 21.
ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries that have $10 million or more to invest and that
invest for their own account or in a fiduciary or agency capacity and which
have entered into an Asset Management Services Agreement with FRIMCo and
institutions or individuals who have acquired shares through such institutions
or financial intermediaries. PAGE 22.
GENERAL MANAGEMENT OF THE FUNDS is provided by FRIMCo, 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 FRIMCo comprehensive
consulting and money manager evaluation services. PAGE 23.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. Each Eligible Investor
may pay to FRIMCo directly a fee for other services provided to that Eligible
Investor. PAGE 25.
THE MONEY MANAGERS are evaluated and recommended by FRIMCo and 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 FRIMCo. PAGE 25.
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 26.
3
<PAGE>
PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE 40.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or
received in cash. Dividends from net investment income are declared 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
41.
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 41.
FUND PERFORMANCE, including yields and total return information, is
calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 43.
VALUATION OF FUND SHARES occurs each business day. The value of a Class S
share purchased or redeemed is based upon the next computed current market
value of the assets, less liabilities, of each Class S Fund. Unless otherwise
indicated, "shares" in this Prospectus refers to the Class S Shares of the
Funds. PAGE 44.
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE 45.
REDEMPTION OF FUND SHARES may be requested on any business day that shares
are offered. 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 47.
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 49.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE EQUITY I FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES 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 Class S Shares Operating Expenses**........................... .71%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 peri-
od........................................... $ 7 $22 $39 $90
=== === === ===
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE EQUITY II FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .75%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .04
---
Total Other Expenses............................................... .20
----
Total Class S Shares Operating Expenses**........................... .95%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 peri-
od........................................... $10 $29 $53 $120
=== === === ====
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE EQUITY 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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .60%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .08%
Transfer Agent Fees................................................ .07
Other Fees......................................................... .04
---
Total Other Expenses............................................... .19
----
Total Class S Shares Operating Expenses**........................... .79%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXAMPLE:
<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 peri-
od........................................... $ 8 $24 $44 $99
=== === === ===
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE EQUITY Q FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .60%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .05%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .03
---
Total Other Expenses............................................... .11
----
Total Class S Shares Operating Expenses**........................... .71%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXAMPLE:
<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 peri-
od........................................... $ 7 $22 $39 $89
=== === === ===
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE INTERNATIONAL
FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .75%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .23%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .03
---
Total Other Expenses............................................... .29
----
Total Class S Shares Operating Expenses**........................... 1.04%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 peri-
od........................................... $10 $32 $58 $131
=== === === ====
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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 Class S Shares 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 FRIMCo to the shareholder. Accordingly, the
expense information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE FIXED INCOME I
FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .30%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .06%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .03
---
Total Other Expenses............................................... .12
----
Total Class S Shares Operating Expenses**........................... .42%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 peri-
od........................................... $ 4 $13 $23 $53
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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 Class S Shares 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 FRIMCo to the shareholder.
Accordingly, the expense information does not reflect an amount for fees
paid directly by an investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES OF THE FIXED INCOME II
FUND*
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .50%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .08%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .06
---
Total Other Expenses............................................... .20
----
Total Class S Shares Operating Expenses**........................... .70%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 peri-
od........................................... $ 7 $21 $39 $88
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the
expense information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES 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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES 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......................................................... .06
---
Total Other Expenses............................................... .18
----
Total Class S Shares Operating Expenses (1)**....................... .73%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 peri-
od........................................... $ 7 $22 $41 $92
=== === === ===
</TABLE>
- ---------------------
(1) 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 Class S Shares total operating expenses exceed 0.75% of the
Class S Shares 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 thereafter without notice to shareholders.
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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 .15% under the
asset management services agreements entered into by shareholders of the
Class S Shares 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 FRIMCo to the shareholder. Accordingly, the
expense information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
** Investors purchasing Class S Shares of the Fund 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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18 $ 28.53
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .42 .52 .62 .60 .61 .75 .91 .88 .81 1.12
Net realized and
unrealized gain (loss)
on investments........ 5.96 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46 1.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 6.38 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27 2.62
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.42) (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77) (1.26)
Net realized gain on
investments........... (3.62) (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48) (9.71)
In excess of net
realized gain on
investments........... -- -- (.24) (.16) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (4.04) (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25) (10.97)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 23.58 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42 5.97
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .71 .59 .12 .14 .15 .19 .23 .18 .17 .14
Net investment income
to average net assets
(a)................... 1.38 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68 3.11
Portfolio turnover..... 99.51 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59 86.22
Net assets, end of year
($000 omitted)........ 961,953 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691 266,371
Average commission rate
paid per share of
security ($ omitted).. .0464 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
13
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $ 22.50 $ 19.99 $ 23.54
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .16 .27 .36 .32 .30 .41 .51 .61 .52 .50
Net realized and
unrealized gain (loss)
on investments........ 4.96 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51 2.17
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 5.12 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03 2.67
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.16) (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52) (.61)
Net realized gain on
investments........... (3.79) (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) -- (5.61)
In excess of net
realized gain on
investments........... -- -- (.56) (.39) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (3.95) (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52) (6.22)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $ 22.50 $ 19.99
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 18.51 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22 10.32
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .95 .83 .23 .34 .32 .37 .48 .41 .35 .29
Net investment income
to average net
assets (a)............ .52 .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40 1.94
Portfolio turnover..... 120.78 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38 130.36
Net assets, end of year
($000 omitted)........ 365,955 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903 68,968
Average commission rate
paid per share of
security ($ omitted).. .0381 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
14
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03 $ 20.74 $ 31.27
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .70 .82 .93 .89 .98 1.08 1.33 1.26 1.15 1.21
Net realized and
unrealized gain (loss)
on investments........ 5.10 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40 (.74)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... 5.80 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55 .47
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.71) (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14) (1.61)
Net realized gain on
investments........... (4.52) (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12) (9.39)
In excess of net
realized gain on
investments........... -- -- (.10) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (5.23) (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26) (11.00)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03 $ 20.74
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 20.90 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19 (1.48)
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .79 .65 .17 .16 .20 .25 .27 .23 .20 .17
Net investment income
to average net assets
(a)................... 2.23 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96 4.11
Portfolio turnover..... 100.78 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28 97.54
Net assets, end of year
($000 omitted)........ 221,778 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695 102,716
Average commission rate
paid per share of
security ($ omitted).. .0447 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
(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%.
15
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 Q FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.40 $ 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.. .58 .59 .69 .66 .67 .75 .81 .78 .69 .39
Net realized and
unrealized gain (loss)
on investments........ 6.33 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15 (3.39)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 6.91 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84 (3.00)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.58) (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66) (.28)
In excess of net
investment income..... (.01) -- -- -- -- -- -- -- -- --
Net realized gain on
investments........... (3.78) (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) -- (.05)
In excess of net
realized gain on
investments........... -- -- (.22) (.06) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (4.37) (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66) (.33)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20 $ 22.45 $ 18.85 $ 16.67
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)(b).. 23.67 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)................ .71 .58 .11 .15 .18 .23 .31 .33 .33 .24
Net investment income
to average net assets
(b)(c)................ 1.80 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82 3.56
Portfolio turnover
(c)................... 74.59 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21 46.10
Net assets, end of year
($000 omitted)........ 818,281 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320 66,618
Average commission rate
paid per share of
security ($ omitted).. .0332 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
++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.
16
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50 $ 50.23
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .44 .48 .61 .58 .67 .73 1.23 .85 .95 .93
Net realized and
unrealized gain (loss)
on investments (a).... 2.41 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46 5.77 5.49
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 2.85 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72 6.42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.35) (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11) (1.39)
In excess of net
investment income..... -- (.08) -- (.16) -- -- -- -- -- --
Net realized gain on
investments........... (1.37) (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21) (5.67) (19.76)
In excess of net
realized gain on
investments........... -- -- (.23) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.72) (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23) (6.78) (21.15)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(b)..... 7.98 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13 14.42
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average net
assets (b)............ 1.04 .88 .32 .39 .45 .48 .50 .44 .45 .43
Operating expenses,
gross, to average net
assets (b)............ 1.05 .89 .34 .41 .46 .48 .50 .44 .45 .43
Net investment income
to average net
assets (b)............ 1.20 1.41 1.63 1.83 2.46 2.61 3.14 2.38 2.52 1.83
Portfolio turnover..... 42.69 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17 96.31
Net assets, end of year
($000 omitted)........ 944,380 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064 160,975
Per share amount of
fees waived
($ omitted)........... .0025 .0041 .0093 .0091 .0030 -- -- -- -- --
Average commission rate
paid per share of
security ($
omitted)(c)........... .0038 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
(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%.
(c) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
17
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48 $ 24.26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.38 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73 1.71
Net realized and
unrealized gain (loss)
on investments........ (.62) 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01 (1.40)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .76 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74 .31
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.36) (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72) (2.08)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.62) (.08) -- (.31) -- (2.01)
In excess of net
realized gain on
investments........... -- -- (.11) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.36) (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72) (4.09)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 3.75 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76 1.49
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets (a)............ .42 .35 .10 .09 .10 .10 .11 .12 .13 .11
Net investment income
to average net
assets (a)............ 6.57 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28 8.00
Portfolio turnover..... 147.31 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54 211.26
Net assets, end of year
($000 omitted)........ 662,899 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216 250,606
</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.
(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%.
18
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 II FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $ 18.69 $18.51 $18.63 $19.80
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.04 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61 1.57
Net realized and
unrealized gain (loss)
on investments........ .19 .59 (1.07) .44 (.83) .72 .23 .27 (.12) (.60)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment
Operations............ .85 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49 .97
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.04) (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61) (1.91)
Net realized gain on
investments........... -- -- -- -- (.28) -- -- -- -- (.23)
Tax return of capital.. -- -- -- (.14) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total Distributions.... (1.04) (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61) (2.14)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $18.69 $18.51 $18.63
======= ======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)(A)..... 4.76 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20 5.21
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets (a)............ .70 .58 .19 .16 .19 .13 .15 .17 .13 .12
Net investment income
to average net
assets (a)............ 5.70 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56 8.22
Portfolio turnover..... 264.40 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58 197.77
Net assets, end of year
($000 omitted)........ 222,983 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052 93,896
</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.
(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%.
19
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 III FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993++
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $ 10.34 $ 9.37 $ 10.44 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... .64 .67 .66 .49
Net realized and unrealized gain (loss) on
investments.............................. (.16) .97 (1.07) .52
------- ------- ------- -------
Total From Investment Operations.......... .48 1.64 (.41) 1.01
------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income..................... (.64) (.67) (.66) (.48)
In excess of net investment income........ (.01) -- -- --
Net realized gain on investments.......... -- -- -- (.08)
In excess of net realized gain on
investments.............................. -- -- -- (.01)
------- ------- ------- -------
Total Distributions...................... (.65) (.67) (.66) (.57)
------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............... $ 10.17 $ 10.34 $ 9.37 $ 10.44
======= ======= ======= =======
TOTAL RETURN (%)(a)(c)..................... 4.88 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)(c)............................ .73 .61 .20 .20
Operating expenses, gross, to average net
assets (b)(c)............................ .73 .61 .20 .40
Net investment income to average net
assets (b)............................... 6.32 6.83 7.02 6.30
Portfolio turnover (b).................... 144.26 141.37 134.11 181.86
Net assets, end of year ($000 omitted).... 292,077 252,465 166,620 124,234
Per share amount of fees waived ($
omitted)................................. -- -- -- .0003
Per share amount of fees reimbursed ($
omitted)................................. -- -- -- .0154
</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.
++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%.
20
<PAGE>
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use FRIMCo's and Frank Russell Company's "multi-style, multi-
manager diversification" method of investment, and to obtain FRIMCo's and
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 1,300 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
FRIMCo and Frank Russell Company believe 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, FRIMCo and Frank Russell Company believe 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
21
<PAGE>
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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo and Frank Russell Company.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors and financial intermediaries
which invest for their own account or in a fiduciary or agency capacity and
which have entered into Asset Management Services Agreements (collectively,
the "Agreements," and each, an "Agreement") with FRIMCo, and institutions or
individuals who have acquired shares through such institutions and financial
intermediaries. The initial minimum aggregate investment in any combination of
these Funds is $10 million. An investor may be eligible to purchase these
Funds if it does not meet the required initial minimum investment. FRIMCo, at
its discretion, may waive the initial minimum investment for some employee
benefit plans and other plans or if the requirements are met for a combined
purchase privilege, cumulative quantity discount or statement of intention.
Investors should consult their financial intermediary for details.
Institutions and financial intermediaries which may have a particular interest
in the Funds include:
. Bank trust departments managing discretionary institutional or personal
trust accounts
. Banks, other than through their trust departments
. 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 FRIMCo,
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
22
<PAGE>
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 FRIMCo may enter into Agreements with individual
investors. Bank trust departments, registered investment advisors, broker-
dealers and other eligible investors ("Financial Intermediaries") which have
entered into Agreements with FRIMCo may acquire shares of the Funds for their
customers. FRIMCo 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 FRIMCo 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
FRIMCo for other services or reports provided by FRIMCo to the shareholder.
The Agreement sets forth the shareholder investment services fees to be paid
to FRIMCo 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 FRIMCo 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 FRIMCo to the client with respect
to the assets, and other factors.
Either the client or FRIMCo may terminate the Agreement upon written notice
as provided in the Agreement. FRIMCo does not expect to exercise its right to
terminate the Agreement unless a client does not (i) promptly pay fees due to
FRIMCo; or (ii) invest sufficient assets in the Funds to compensate FRIMCo for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or FRIMCo, FRIMCo 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 FRIMCo, Frank Russell Company and the money managers.
The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo 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.
FRIMCo: (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. FRIMCo 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.
23
<PAGE>
The responsibility of overseeing the money managers rests upon the officers
and employees of FRIMCo. 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 of FRIMCo since
1989.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in the Investment
Group of the Frank Russell Company. Ms. Carter jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Emerging
Markets Funds.
. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed the
day to day management of the FRIMCo Funds and ongoing analysis and
monitoring of Fund money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Frank Russell Company. Mr. Jornlin jointly
with another portfolio manager identified herein has primary
responsibility for management of the Real Estate Securities Fund.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge has primary responsibility for management of
the Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, Limited Volatility Tax
Free, International, International Securities and Emerging Markets Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US Equity
Manager Research Department with Frank Russell Company. Mr. Trittin
jointly with another portfolio manager identified herein has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Williams was Senior Research
Analyst with Frank Russell Company. Ms. Williams jointly with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Equity T,
Diversified Equity, Quantitative Equity, Special Growth and Equity Income
Funds.
Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.
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. FRIMCo is a wholly owned subsidiary of Frank Russell
Company.
24
<PAGE>
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 held on January 22, 1996.
For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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%; and Fixed Income III
Fund, .55%. 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.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain Funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Management fees in respect
of its investment in the Money Market Fund.
EXPENSES OF THE FUNDS
The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, as a percentage of average net
assets, are shown in the Financial Highlights tables. Principal expenses are:
the management, and transfer agency payable to FRIMCo; fees for custodial and
portfolio accounting services payable to State Street Bank and Trust 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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, FRIMCo, 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,
25
<PAGE>
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, .40%; Equity III Fund, .20%; Equity
Q Fund, .21%; International Fund, .42%; Fixed Income I Fund, .08%; Fixed
Income II Fund, .18%; and Fixed Income III Fund, .21%. 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 FRIMCo as agent to make payment of the money manager's fee, that money
manager will look only to FRIMCo 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.
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 FRIMCo. 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, FRIMCO 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 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
total assets in the types of securities identified in its statement of
objectives. However, the Funds may hold assets as cash reserves for temporary
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.")
26
<PAGE>
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 FRIMCo 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
27
<PAGE>
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 objective.
The Fund will seek to achieve its investment objective by using various
quantitative management techniques. FRIMCo believes quantitative management
over a market cycle should provide a portfolio with consistent performance,
diversification, market-like volatility, and limited market under performance.
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 reserves 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 non-US companies.
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
28
<PAGE>
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.
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.
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, FRIMCo 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 issuers. Accordingly, the Fund's portfolio
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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 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
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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 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
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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 by S&P, and debt
rated Ba, B, Caa, Ca and C by Moody's, is regarded 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 total 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 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.
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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, high-grade, money
market instruments. FRIMCo currently waives its management fee for each of the
Funds to the extent a Fund incurs Money Market Fund management fees in respect
of its investment in the Money Market Fund, thereby eliminating any
duplication of fees.
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 $1 billion. 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 FRIMCo'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 FRIMCo 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 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, liquid assets 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
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and principal payments. At an agreed upon future date, the Fund repurchases
the security by paying an agreed upon purchase price plus interest. Liquid
assets 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 33.33% 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 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 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. FRIMCo 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
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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 securities 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. 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.
Depository Receipts. The Funds may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.
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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 liquid assets 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 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
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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 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 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
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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 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
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<PAGE>
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 liquid assets 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.
39
<PAGE>
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 growth of the market for lower
rated debt securities growth has 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 FRIMCo 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 are shown in the
Financial Highlights tables.
FRIMCo and the various money managers arrange for the purchase and sale of
Investment Company's securities and selects brokers and the selection of
brokers and dealers (including affiliates), which in their best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. In addition to price and commission rates, brokers and
dealers may be selected based on research, statistical or other services they
are able to provide. This may cause the Investment Company to pay commissions
at rates that exceed rates that other brokers and dealers may have charged if
it views the commissions as reasonable in relation to the value of the
brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc., an affiliate of FRIMCo, when a money manager determines that
the Fund will receive competitive execution, price, and commissions. Upon
completion of such transactions, Frank Russell Securities, Inc. will refund up
to 70% of the commissions paid by that Fund after reimbursement for research
services provided to FRIMCo. Similarly, the Funds may effect portfolio
transactions through and pay brokerage commissions to the various money
manager affiliated brokers.
40
<PAGE>
INCOME DIVIDENDS
The Board of Trustees presently intends that dividends will be declared from
net investment income, if any, for payment on the following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE
-------- -------
<C> <C> <S>
Quarterly Mid: April, July, October Equity I, Equity II, Equity III,
and December Equity Q, Fixed Income I, Fixed
Income II and Fixed Income III
Funds
Annually Mid-December International Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board intends that distributions will be declared 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, new and old alike, 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.
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 and Fixed Income III attributable to direct US
Treasury and agency obligations may be exempt from
41
<PAGE>
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. FRIMCo
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 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 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-U.S. holdings should also be aware that
for federal income tax purposes, foreign exchange losses realized by the Funds
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
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<PAGE>
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 and Fixed Income III 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.
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 Class S shares
of each of the Funds are as follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1996 1996 1996 INCEPTION
1996 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Equity I............. 23.58% 15.55% 15.20% 15.74% 10/15/81
Equity II............ 18.51 14.45 14.21 13.98 12/28/81
Equity III........... 20.90 16.51 14.84 16.76 11/27/81
Equity Q............. 23.67 16.60 -- 13.71 05/29/87
International........ 7.98 9.90 10.06 16.01 01/31/83
Fixed Income I....... 3.75 7.08 8.30 11.47 10/15/81
Fixed Income II...... 4.76 5.00 7.11 9.50 10/30/81
Fixed Income III..... 4.88 -- -- 7.16 01/29/93
</TABLE>
43
<PAGE>
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 fees.
Descriptions of these services can be obtained from FRIMCo 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, 1996 for shares of the Fixed Income I,
Fixed Income II and Fixed Income III Funds were, respectively, 6.55%, 5.47%
and 6.16%.
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 shares of each class of each
Fund on each business day on which shares are offered or orders to redeem are
tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) 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 attributable to the
Class S Shares, less liabilities attributable to the Class S Shares, by the
number of Class S 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).
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
44
<PAGE>
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 instruments maturing within 60 days of the valuation date
held by the 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. 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 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:
Close of the New York Stock Exchange Equity I, Equity II, Equity III,
(currently 4:00 p.m. Eastern time) Equity Q,
International, Fixed Income I, Fixed
Income II and Fixed Income III Funds
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
45
<PAGE>
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.
Automatic Investment Program. A shareholder may make scheduled investments
(minimum $50.00) in an established account in a Fund on a monthly, quarterly,
semiannual or annual basis by automatic electronic funds transfer from the
shareholder's bank account. A separate transfer is required for each Fund in
which shares are to be purchased. A shareholder may, of course, terminate the
program as to further transfers at any time. Contact the Financial
Intermediary from whom you received this prospectus for further information on
this program and an enrollment form.
Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the
Financial Intermediary or 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 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 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
46
<PAGE>
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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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 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:
Close of the New York Stock Exchange Equity I, Equity II, Equity III,
(currently 4:00 p.m. Eastern time) Equity Q,
International, Fixed Income I, Fixed
Income II and Fixed Income III Funds
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
47
<PAGE>
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 the Financial
Intermediary from whom this prospectus was obtained or 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 FRIMCo 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, to the requested address on the payment date.
SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.
A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obtained or 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.
48
<PAGE>
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 Investment Company Act of 1940 (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 FRIMCo, 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, prepares tax
records, 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 FRIMCo.
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 shares of beneficial interest divisible into
an unlimited number of funds, each of which funds is a separate trust under
Massachusetts law, and the funds' shares may be offered in multiple classes.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund attributable to that class, and have the same voting and other
rights and preferences as the shares of other classes of the Fund. Shares of
each class of a Fund are entitled to such dividends and distributions earned
on the assets belonging to the Fund as may be declared by the Board of
Trustees. Shares of each class of a Fund have a par value of $.01 per share,
are fully paid and nonassessable, and have no preemptive or conversion rights.
Each share of a class of a Fund has one vote; there are no cumulative voting
rights. There are no Annual Meetings of shareholders, but Special Meetings may
be held. On any matter which affects only a particular Fund or class, only
shareholders of that Fund or class, as applicable, will vote, unless otherwise
required by the 1940 Act or the amended Master Trust Agreement.
The Funds described in this Prospectus do not currently offer shares of
beneficial interest in any class other than the Class S Shares.
49
<PAGE>
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 March 31, 1997 the following shareholder may be deemed by the 1940 Act to
"control" the Funds listed after its name because it own more than 25% of the
voting shares of the indicated Funds: U.S. National Bank of Oregon ---- Equity
Q, International and Fixed Income III Funds.
MONEY MANAGER PROFILES
The money managers have no other affiliations with the Funds, FRIMCo 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 Equitable was
owned by Axa, a French insurance holding company.
Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect wholly-owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st 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, is a corporation whose indirect parent is AMVESCO, PLC, is
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.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308. Peachtree is a unit of the Smith Barney Asset
Management division of Smith Barney Mutual Funds Management Inc., which is a
wholly owned subsidiary of Travelers Group Inc.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is a SEC registered investment adviser owned by Arnold Schneider. As of
the date of this supplement, the Investment Company understands that an
injunction is being sought against Arnold Schneider in Massachusetts Middlesex
50
<PAGE>
County Superior Court by partners of Wellington Management Company
("Wellington"). The proceedings were instituted on December 13, 1996. The
Investment Company believes that the injunction request seeks to prevent
Arnold Schneider from engaging in the investment advisory or investment
management business in competition with Wellington.
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.
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, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.
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.
51
<PAGE>
EQUITY Q FUND
Barclays Global Fund Advisors, See: Equity I Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, is 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 FUND
J.P. Morgan Investment Management, Inc., See: Equity Q Fund.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martin's Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, L.L.C., 10500 N.E. 8th Street, Suite 660,
Bellevue, WA 98004, is a Washington Limited Liability Corporation that is
controlled by the following founding members: Thomas M. Garr, Robert L.
Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
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.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein- Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.
The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.
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.
52
<PAGE>
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, is a
company 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, is 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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.
FIXED INCOME III FUND
BEA Associates, 153 East 53rd Street, 58th Floor, 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.
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.
53
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
EQUITY I FUND
Alliance Capital Management L.P.
Barclays Global Fund Advisors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Peachtree Asset Management
Schneider Capital Management
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
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 LLP
EQUITY III FUND
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation
EQUITY Q FUND
Barclays Global Fund Advisors
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc.
INTERNATIONAL FUND
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Mastholm Asset Management, L.L.C.
Oechsle International Advisors
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, 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.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Company
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
54
<PAGE>
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 -- One Commerce Square
Philadelphia, PA 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (253) 627-7001
55
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 28 different investment portfolios referred to as the
"Funds." This Prospectus describes and offers shares of beneficial interest in
the Class S Shares of the eight Funds listed below.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company. 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 individual
Funds. There is no sales charge for investing in the Class S Shares of 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, which interests
may be offered in one or more classes. 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 the Class S Shares of 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, 1997, 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.
This Prospectus relates only to the Class S Shares of the eight Funds
described herein. These Funds also offer shares of beneficial interest in
another class of shares, the Class C Shares, through a separate prospectus.
For more information concerning Class C Shares of the Funds, contact the
person or organization from which you obtained this prospectus or write to the
Secretary, Frank Russell Investment Company, at the address shown above, or
telephone (800) 972-0700.
The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the Investment Company
and the Funds is maintained electronically with the SEC at its Internet web
site (http://www.sec.gov).
PROSPECTUS DATED MAY 1, 1997,
AS AMENDED THROUGH DECEMBER 15, 1997
<PAGE>
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 Class S Shares of the eight Funds set
forth on the first page of this prospectus. The Investment Company's Funds had
aggregate net assets of approximately $10 billion on April 3, 1997.
The net assets of these eight Funds on April 3 1997, were:
<TABLE>
<S> <C>
Diversified Equity...... $725,869,515
Special Growth.......... $378,841,598
Equity Income........... $185,215,009
Quantitative Equity..... $702,850,798
</TABLE>
<TABLE>
<S> <C>
International
Securities............. $743,069,351
Diversified Bond........ $571,226,204
Volatility Constrained
Bond................... $157,636,687
Multistrategy Bond...... $327,453,730
</TABLE>
2
<PAGE>
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. PAGE 13.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" techniques and money manager evaluation services on an
economical and efficient basis. PAGE 21.
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 21.
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 21.
ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries which invest for their own account or in a fiduciary
or agency capacity, and which have entered into an Asset Management Services
Agreement with FRIMCo; and institutions or individuals who have acquired
shares through such institutions or financial intermediaries. PAGE 22.
GENERAL MANAGEMENT OF THE FUNDS is provided by FRIMCo, 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 FRIMCo comprehensive
consulting and money manager evaluation services. PAGE 23.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. Each Eligible Investor
may pay to FRIMCo directly a fee for other services provided to that Eligible
Investor. PAGE 25.
THE MONEY MANAGERS are evaluated and recommended by FRIMCo and 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 FRIMCo. PAGE 25.
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 disclosed in the context
of policies giving rise to such risks. PAGE 26.
3
<PAGE>
PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE 39.
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 the International Securities Fund.
All Funds declare distributions from net realized capital gains, if any, at
least annually. PAGE 40.
INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of
the Funds will be subject to federal taxes on dividends and capital gains
distributions and may also be subject to state or local taxes. PAGE 41.
FUND PERFORMANCE, including yields and total return information, is
calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 43.
VALUATION OF FUND SHARES occurs each business day. The value of a Class S
share purchased or redeemed is based upon the next computed current market
value of the assets, less liabilities, of each Class S Fund. Unless otherwise
indicated, "shares" in this Prospectus refers to the Class S Shares of the
Funds. PAGE 43.
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE 44.
REDEMPTION OF FUND SHARES may be requested on any business day that shares
are offered. 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 46.
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 47.
THE FUNDS also offer a second class of shares, the Class C Shares, which are
designed to meet different investor needs. PAGE 49.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE DIVERSIFIED EQUITY FUND
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .78%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .07%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .03
---
Total Other Expenses............................................... .16
----
Total Class S Operating Expenses**.................................. .94%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $29 $52 $119
=== === === ====
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE SPECIAL GROWTH FUND
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .95%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .10
Other Fees......................................................... .04
---
Total Other Expenses............................................... .24
----
Total Class S Operating Expenses**.................................. 1.19%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $36 $66 $149
=== === === ====
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY INCOME FUND
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .80%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .13
Other Fees......................................................... .04
---
Total Other Expenses............................................... .27
----
Total Class S Shares Operating Expenses**........................... 1.07%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $59 $134
=== === === ====
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE QUANTITATIVE EQUITY FUND
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES 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 Class S Shares Operating Expenses**........................... .93%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $28 $51 $117
=== === === ====
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE INTERNATIONAL 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 Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES 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......................................................... .04
---
Total Other Expenses............................................... .35
----
Total Class S Shares Operating Expenses**........................... 1.30%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $40 $72 $164
=== === === ====
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE DIVERSIFIED 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 Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .45%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .07%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .03
---
Total Other Expenses............................................... .16
----
Total Class S Shares Operating Expenses**........................... .61%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $34 $76
=== === === ===
</TABLE>
- ---------------------
** Investors purchasing in the Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE VOLATILITY CONSTRAINED 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 Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .50%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .09%
Transfer Agent Fees................................................ .11
Other Fees......................................................... .06
---
Total Other Expenses............................................... .26
----
Total Class S Shares Operating Expenses**........................... .76%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $23 $42 $95
=== === === ===
</TABLE>
- ---------------------
** Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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
</TABLE>
<TABLE>
<S> <C> <C>
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1)............................... .58%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .07%
Transfer Agent Fees................................................ .09
Other Fees......................................................... .06
---
Total Other Expenses............................................... .22
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**.... .80%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $44 $101
=== === === ====
</TABLE>
- ---------------------
(1) 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, other than certain other class
level 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 .87% of average daily 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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46 $ 27.22 $ 31.20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .48 .60 .58 .56 .60 .81 .99 .94 .89 1.37
Net realized and
unrealized gain (loss)
on investments........ 8.15 10.63 (.49) 3.03 2.30 8.36 (3.45) 7.68 3.57 1.05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 8.63 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46 2.42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.48) (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81) (.97)
Net realized gain on
investments........... (5.32) (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41) (5.43)
In excess of net
realized gain
on investments........ -- -- (.26) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (5.80) (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22) (6.40)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 41.45 $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46 $ 27.22
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 23.29 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37 6.94
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .94 .95 .95 .96 .98 .98 1.03 1.01 1.00 .97
Net investment income
to average
net assets............ 1.18 1.56 1.73 1.54 1.69 2.28 2.97 2.65 2.92 2.27
Portfolio turnover..... 99.90 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02 87.69
Net assets, end of year
($000 omitted)........ 699,691 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948 198,902
Average commission rate
paid per share of
security ($ omitted).. .0465 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
SPECIAL GROWTH FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $ 24.71 $29.35 $26.19 $23.58 $26.68
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .12 .18 .16 .07 .05 .24 .42 .42 .24 .30
Net realized and
unrealized gain (loss)
on investments........ 6.87 9.25 (.71) 5.22 4.22 10.34 (4.57) 5.78 2.99 1.59
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total From Investment
Operations............ 6.99 9.43 (.55) 5.29 4.27 10.58 (4.15) 6.20 3.23 1.89
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.12) (.21) (.10) (.07) (.06) (.24) (.42) (.48) (.21) (.35)
Net realized gain on
investments........... (5.25) (3.52) (.85) (6.03) (2.05) (.58) (.07) (2.56) (.41) (4.64)
In excess of net
realized gain on
investments........... -- -- (.85) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total Distributions.... (5.37) (3.73) (1.80) (6.10) (2.11) (.82) (.49) (3.04) (.62) (4.99)
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 40.79 $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $24.71 $29.35 $26.19 $23.58
======= ======= ======= ======= ======= ======= ====== ====== ====== ======
TOTAL RETURN (%)........ 18.65 28.52 (3.71) 15.48 12.52 43.11 (14.28) 23.92 13.82 6.54
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses, net
to average net
assets................ 1.19 1.22 1.20 1.31 1.33 1.36 1.50 1.49 1.47 1.37
Operating expenses,
gross to average net
assets................ 1.19 1.22 1.20 1.31 1.33 1.36 1.53 1.49 1.47 1.37
Net investment income
to average net
assets................ .28 .49 .50 .19 .14 .80 1.57 1.42 .92 1.07
Portfolio turnover..... 118.13 87.56 55.40 91.97 42.20 42.81 63.87 85.24 51.75 161.46
Net assets, end of year
($000 omitted)........ 393,048 313,678 229,077 188,891 134,913 105,245 62,116 60,146 47,405 45,460
Average commission rate
paid per share of
security ($ omitted).. .0384 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees reimbursed
($ omitted)........... -- -- -- -- -- -- .0093 -- -- --
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 INCOME FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .82 .94 .90 .83 .99 1.11 1.43 1.34 1.22 1.18
Net realized and
unrealized gain (loss)
on investments........ 7.03 10.08 (.70) 3.69 3.08 7.15 (3.83) 6.47 3.96 (1.44)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
Total From Investment
Operations............ 7.85 11.02 .20 4.52 4.07 8.26 (2.40) 7.81 5.18 (.26)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.82) (.97) (.89) (.83) (1.00) (1.10) (1.37) (1.50) (1.25) (1.50)
In excess of net
investment income..... (.01) -- -- (.00) -- -- -- -- -- --
Net realized gain on
investments........... (5.23) (3.83) (3.00) (3.11) (4.29) (1.37) (.39) (2.25) -- (5.98)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
Total Distributions.... (6.06) (4.80) (3.89) (3.94) (5.29) (2.47) (1.76) (3.75) 1.25) (7.48)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $40.22 $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92
======= ======= ======= ======= ======= ======= ====== ======= ====== ======
TOTAL RETURN (%)........ 21.45 34.76 .69 13.23 11.51 27.52 (6.90) 25.61 19.42 (2.44)
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... 1.07 1.06 1.04 1.05 1.08 1.11 1.14 1.15 1.13 1.06
Net investment income
to average net
assets................ 2.03 2.51 2.56 2.23 2.68 3.11 4.12 3.94 4.08 3.30
Portfolio turnover..... 106.40 92.40 89.91 78.72 95.07 61.73 65.97 79.82 58.12 98.67
Net assets, end of year
($000 omitted)........ 195,132 180,116 144,285 149,532 134,365 122,689 99,575 101,589 68,998 61,300
Average commission rate
paid per share of
security ($ omitted).. .0441 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
QUANTITATIVE EQUITY FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987++
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.76 $ 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.. .51 .50 .49 .45 .49 .58 .66 .68 .56 .32
Net realized and
unrealized gain (loss)
on investments........ 6.24 8.72 (.19) 2.69 1.67 5.93 (1.99) 4.53 2.14 (1.86)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations............ 6.75 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70 (1.54)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.51) (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57) (.25)
Net realized gain on
investments........... (3.95) (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) -- (.13)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.... (4.46) (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57) (.38)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 33.05 $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $20.21 $18.08
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A)..... 23.08 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 .93 .94 .98 1.02 1.03 1.12 1.14 1.16 .97
Net investment income
to average net
assets(b)............. 1.59 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00 3.38
Portfolio turnover(b).. 74.33 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37 47.78
Net assets, end of year
($000 omitted)........ 663,925 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858 64,182
Average commission rate
paid per share of
security ($ omitted).. .0331 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
INTERNATIONAL SECURITIES FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81 $ 50.49 $45.26 $49.22
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .53 .56 .44 .40 .61 .72 1.05 .67 .86 .55
Net realized and
unrealized gain (loss)
on investments (a).... 3.72 4.89 1.23 14.53 (4.02) 4.60 (9.53) 10.32 8.98 6.84
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations............ 4.25 5.45 1.67 14.93 (3.41) 5.32 (8.48) 10.99 9.84 7.39
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.31) (.88) (.04) (.38) (.68) (.76) (1.08) (.89) (.95) (.45)
In excess of net
investment income..... (.17) (.23) (.02) (.23) -- -- -- -- -- --
Net realized gain on
investments........... (1.90) (1.69) (5.60) (1.12) (.31) (.01) (1.65) (4.78) (3.66) (10.90)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.... (2.38) (2.80) (5.66) (1.73) (.99) (.77) (2.73) (5.67) (4.61) (11.35)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 58.48 $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81 $50.49 $45.26
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)........ 7.63 10.20 4.86 33.48 (6.94) 11.99 (15.34) 22.24 22.05 15.89
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average
assets................ 1.30 1.30 1.30 1.38 1.45 1.49 1.50 1.50 1.50 1.50
Operating expenses,
gross, to average
assets................ 1.31 1.31 1.33 1.42 1.47 1.49 1.50 1.54 1.50 1.50
Net investment income
to average net
assets................ .91 .97 .70 .82 1.37 1.68 2.28 1.54 1.60 .91
Portfolio turnover..... 42.43 42.96 72.23 60.22 48.93 52.46 68.89 57.16 43.50 113.04
Net assets, end of year
($000 omitted)........ 743,615 623,389 563,333 454,482 262,886 243,065 169,818 123,823 91,006 88,321
Average commission rate
paid per share of
security ($ omitted).. .0039 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees waived ($
omitted).............. .0050 .0080 .0178 .0161 .0054 -- -- .0169 -- --
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 BOND FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38 $ 22.38 $ 25.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.47 1.54 1.46 1.48 1.62 1.72 1.74 1.87 1.69 1.55
Net realized and
unrealized gain (loss)
on investments........ (.71) 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02) (1.28)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .76 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67 .27
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.48) (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67) (1.65)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.69) (.16) -- (.26) -- (1.24)
In excess of net
realized gain on
investments........... -- -- (.02) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.48) (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67) (2.89)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 22.97 $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38 $ 22.38
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 3.43 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67 1.25
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average
assets................ .61 .59 .56 .58 .62 .74 .88 .93 .93 .90
Operating expenses,
gross, to average
assets................ .61 .59 .56 .58 .67 .74 .88 .93 .93 .90
Net investment income
to average net
assets................ 6.46 6.69 6.57 6.13 6.79 7.38 7.89 8.16 7.48 7.05
Portfolio turnover..... 138.98 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15 180.54
Net assets, end of year
($000 omitted)........ 554,804 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656 197,730
Per share amount of
fees waived
($ omitted)........... -- -- -- -- .0115 -- -- -- -- --
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
VOLATILITY CONSTRAINED BOND FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14 $ 19.21 $ 20.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.09 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55 1.48
Net realized and
unrealized gain (loss)
on investments........ (.22) .58 (1.16) .45 (.88) .80 .13 .30 (.10) (.67)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .87 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45 .81
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.01) (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52) (1.59)
Net realized gain on
investments........... -- -- -- -- -- -- -- -- -- (.07)
Tax Return of capital.. -- -- -- (.29) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.01) (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52) (1.66)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14 $ 19.21
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 4.66 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77 4.27
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .76 .71 .67 .66 .68 .62 .62 .61 .59 .58
Net investment income
to average net
assets................ 5.69 6.33 5.97 5.79 6.74 7.34 7.88 8.41 7.97 7.75
Portfolio turnover..... 311.51 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69 190.36
Net assets, end of year
($000 omitted)........ 163,197 181,881 195,007 225,672 292,909 293,603 240,887 214,745 234,095 251,702
</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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
MULTISTRATEGY BOND FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993++
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......... $ 10.25 $ 9.29 $ 10.31 $10.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .61 .65 .58 .46
Net realized and unrealized gain (loss) on
investments............................... (.12) .97 (1.03) .40
------- ------- ------- ------
Total From Investment Operations.......... .49 1.62 (.45) .86
------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income...................... (.61) (.66) (.57) (.46)
In excess of net investment income......... (.01) -- -- --
Net realized gain on investments........... (.01) -- -- (.08)
In excess of net realized gain on
investments............................... -- -- -- (.01)
------- ------- ------- ------
Total Distributions....................... (.63) (.66) (.57) (.55)
------- ------- ------- ------
NET ASSET VALUE, END OF YEAR................ $ 10.11 $ 10.25 $ 9.29 $10.31
======= ======= ======= ======
TOTAL RETURN (%)(A)......................... 4.97 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)................................ .81 .85 .85 .85
Operating expenses, gross, to average net
assets (b)................................ .88 .89 .90 1.20
Net investment income to average net assets
(b)....................................... 6.19 6.61 6.26 5.60
Portfolio turnover (b)..................... 145.38 142.26 136.39 188.95
Net assets, end of year ($000 omitted)..... 305,428 218,765 173,035 98,374
Per share amount of fees waived ($
omitted).................................. .0055 -- -- .0002
Per share amount of fees reimbursed ($
omitted).................................. .0005 .0042 .0043 .0286
</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.
++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.
20
<PAGE>
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use FRIMCo's and Frank Russell Company's "multi-style, multi-
manager diversification" method of investment, and to obtain FRIMCo's and
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 1,300 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
FRIMCo and Frank Russell Company believe 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, FRIMCo and Frank Russell Company believe 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
21
<PAGE>
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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo and Frank Russell Company.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors and financial intermediaries
which invest for their own account or in a fiduciary or agency capacity and
which have entered into Asset Management Services Agreements (collectively,
the "Agreements," and each, an "Agreement") with FRIMCo, and institutions or
individuals who have acquired shares through such institutions and financial
intermediaries. There is no specified minimum amount which must be invested.
Institutions and financial intermediaries which may have a particular interest
in the Funds include:
.Bank trust departments managing discretionary institutional or personal
trust accounts
.Banks, other than through their trust departments
.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 FRIMCo,
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 FRIMCo may enter into Agreements with individual
investors. Bank trust departments, registered investment advisors, broker-
dealers and other eligible investors ("Financial Intermediaries") which have
entered into Agreements with FRIMCo may acquire shares of the Funds for the
benefit of their customers. FRIMCo 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 FRIMCo or the Funds;
they may charge their customers a fee for providing these and possibly other
trust or
22
<PAGE>
investment-related services. A shareholder may pay a fixed dollar fee to
FRIMCo for other services or reports provided by FRIMCo to the shareholder.
Either the client or FRIMCo may terminate the Agreement upon written notice
as provided for in the Agreement. FRIMCo does not expect to exercise its right
to terminate the Agreement unless a client does not (i) promptly pay fees due
to FRIMCo; or (ii) invest sufficient assets in the Funds to compensate FRIMCo
for providing services to the client with respect to assets invested in the
Funds. Upon termination of an Agreement by the client or FRIMCo, FRIMCo 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 FRIMCo, Frank Russell Company and the money managers.
The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo 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.
FRIMCo: (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. FRIMCo 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 to prospective
clients.
The responsibility of overseeing the money managers rests upon the officers
and employees of FRIMCo. 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 of FRIMCo since
1989.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in the Investment
Group of the Frank Russell Company. Ms. Carter jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Emerging
Markets Funds.
. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed the
day to day management of the FRIMCo Funds and ongoing analysis and
monitoring of Fund money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Frank Russell Company. Mr. Jornlin jointly
with another portfolio manager identified herein has primary
responsibility for management of the Real Estate Securities Fund.
23
<PAGE>
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge has primary responsibility for management of
the Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, Limited Volatility Tax
Free, International, International Securities and Emerging Markets Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US Equity
Manager Research Department with Frank Russell Company. Mr. Trittin
jointly with another portfolio manager identified herein has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Williams was Senior Research
Analyst with Frank Russell Company. Ms. Williams jointly with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Equity T,
Diversified Equity, Quantitative Equity, Special Growth and Equity Income
Funds.
Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.
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. FRIMCo 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 held on January 22, 1996.
For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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.
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FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Fund management fees in
respect of their investment in the Money Market Fund.
EXPENSES OF THE FUNDS
The Funds, and when appropriate each class, will pay their own expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, as a percentage of average net
assets, are shown in the Financial Highlights tables. Principal expenses are:
the management, transfer agency and recordkeeping fees payable to FRIMCo; fees
for custodial, preparing tax records and portfolio accounting payable to State
Street Bank and Trust 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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, FRIMCo, 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, .40%; Equity Income Fund, .20%; Quantitative Equity Fund, .21%;
International Securities Fund, .42%; Diversified Bond Fund, .08%; Volatility
Constrained Bond Fund, .18%; and Multistrategy Bond Fund, .21%. 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 FRIMCo as agent to make payment of the money manager's fee, the money
manager will look only to FRIMCo 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
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developed by Frank Russell Company and FRIMCo. 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, FRIMCO,
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 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
total 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 @ 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.
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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 FRIMCo
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.
The Fund will seek to achieve its investment objectives by using various
quantitative management techniques. FRIMCo believes quantitative management
over a market cycle should provide a portfolio with consistent performance,
diversification, market-like volatility and limited market under performance.
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.
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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.
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
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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, FRIMCo intends to limit total non-US dollar investments to no more than
25% of total Fund 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 issuers. 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.
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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.
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
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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 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 by S&P, and debt
rated Ba, B, Caa, Ca and C by Moody's, is regarded 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 total 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).
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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, high-grade, money
market instruments. FRIMCo currently waives its management fee for each of the
Funds to the extent a Fund incurs Money Market Fund management fees in respect
of its investment in the Money Market Fund, thereby eliminating any
duplication of fees.
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 $1 billion. 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 Quantitative Equity
Fund's performance because it, in FRIMCo'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 FRIMCo believes that the particular security is an attractive investment.
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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, liquid assets 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. Liquid
assets 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 33.33% 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
33
<PAGE>
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 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. FRIMCo 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 securities 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.
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<PAGE>
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 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.
Depository Receipts. The Funds may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.
Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International Securities, 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 liquid assets 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.
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<PAGE>
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 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
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<PAGE>
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
during the term of the option to a decline in the price of the underlying
security.
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<PAGE>
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 liquid assets equal to or greater
than the fluctuating value of the contract (less any margin or
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<PAGE>
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 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 growth of the market for lower
rated debt securities 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 FRIMCo 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.
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FRIMCo and the various money managers arrange for the purchase and sale of
Investment Company's securities and selects brokers and the selection of
brokers and dealers (including affiliates), which in their best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. In addition to price and commission rates, brokers and
dealers may be selected based on research, statistical or other services they
are able to provide. This may cause the Investment Company to pay commissions
at rates that exceed rates that other brokers and dealers may have charged if
it views the commissions as reasonable in relation to the value of the
brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc., an affiliate of FRIMCo, when a money manager determines that
the Fund will receive competitive execution, price, and commissions. Upon
completion of such transactions, Frank Russell Securities, Inc. will refund up
to 70% of the commissions paid by that Fund after reimbursement for research
services provided to FRIMCo. Similarly, the Funds may effect portfolio
transactions through and pay brokerage commissions to the various money
manager affiliated brokers.
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
The Board of Trustees presently intends that dividends will be declared from
net investment income and net short-term capital gains, if any, for payment on
the following schedule:
<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,
and December Special Growth, Equity
Income and Quantitative
Equity Funds
Annually Mid-December International Securities
Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board intends that distributions will be declared 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, new and old alike, will share in and be taxed on
distributions of gain realized by a Fund on the sale of securities that have
increased in value.
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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 receive dividends and interest paid by non-
US issuers which will frequently be subject to withholding taxes by non-US
governments. FRIMCo 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.
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Shareholders of 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 Class S shares
of each of the Funds are as follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1996 1996 1996 INCEPTION
1996 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Diversified Equity...... 23.29% 14.81% 14.59% 15.24% 09/05/85
Special Growth.......... 18.65 13.79 13.40 13.61 09/05/85
Equity Income........... 21.45 15.78 13.71 14.12 09/05/85
Quantitative Equity..... 23.08 15.74 -- 13.61 05/15/87
International
Securities............. 7.63 9.09 9.74 14.35 09/05/85
Diversified Bond........ 3.43 6.68 7.71 8.79 09/05/85
Volatility Constrained
Bond................... 4.66 4.64 6.64 6.89 09/05/85
Multistrategy Bond...... 4.97 -- -- 6.66 01/29/93
</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, 1996 for the Class S shares of the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
were, respectively, 6.28%, 5.48% and 5.99%.
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 shares of each class of each
Fund on each business day on which shares are offered or orders to redeem are
tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) 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's Class S Shares by dividing the current value of the Fund's assets
attributable to the Class S Shares, less liabilities attributable to the Class
S Shares, by the number of Class S 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 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:
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<PAGE>
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.
Automatic Investment Program. A shareholder may make scheduled
investments (minimum $50.00) in an established account in a Fund on a
monthly, quarterly, semiannual or annual basis by automatic electronic
funds transfer from the shareholder's bank account. A separate transfer is
required for each Fund in which shares are to be purchased. A shareholder
may, of course, terminate the program as to further transfers at any time.
Contact the Financial Intermediary from whom you received this prospectus
for further information on this program and an enrollment form.
Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a
Financial Intermediary or 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 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
45
<PAGE>
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
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 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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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 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 the Financial
Intermediary from whom this prospectus was obtained or 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 FRIMCo of all
required documents in good order. "Good order" means that the request must
include the following:
46
<PAGE>
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, to the requested address on the payment date.
SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.
A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obained or 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 FRIMCo, 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
47
<PAGE>
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 FRIMCo.
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 shares of beneficial interest divisible into
an unlimited number of funds, each of which funds is a separate trust under
Massachusetts law, and the funds' shares may be offered in multiple classes.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund attributable to that class, and have the same voting and other
rights and preferences as the shares of other classes of the Fund. Shares of
each class of a Fund are entitled to such dividends and distributions earned
on the assets belonging to the Fund as may be declared by the Board of
Trustees. Shares of each class of a Fund have a par value of $.01 per share,
are fully paid and nonassessable, and have no preemptive or conversion rights.
Each share of a class of a Fund has one vote; there are no cumulative voting
rights. There are no Annual Meetings of shareholders, but Special Meetings may
be held. On any matter which affects only a particular Fund or class, only
shareholders of that Fund or class, as applicable, will vote, unless otherwise
required by the 1940 Act or the amended Master Trust Agreement.
In addition to offering Class S Shares, the Funds also offer beneficial
interests in Class C Shares, which are described in a separate prospectus
relating to that class. Class C Shares are designed to meet different investor
needs and are subject to a Rule 12b-1 distribution fee and to a shareholder
servicing fee, which may affect the performance of the Class C Shares. To
obtain more information concerning Class C Shares, contact the Financial
Intermediary from whom you obtained this prospectus or write to the Secretary,
Frank Russell Investment Company, at the address listed on the cover of this
Prospectus, or call (800) 972-0700.
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 March 31, 1997, no one Shareholder could deemed by the 1940 Act to
"control" the Funds
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<PAGE>
MONEY MANAGER PROFILES
The money managers have no other affiliations with the Funds, FRIMCo 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, is 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.
Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st 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, is a corporation whose indirect parent is AMVESCO, 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.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308, Peachtree is a unit of the Smith Barney Asset
Management division of Smith Barney Mutual Funds Management Inc., which is a
wholly owned subsidiary of Travelers Group Inc.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is a SEC registered investment adviser owned by Arnold Schneider. As of
the date of this supplement, the Investment Company understands that an
injunction is being sought against Arnold Schneider in Massachusetts Middlesex
County Superior Court by partners of Wellington Management Company
("Wellington"). The proceedings were instituted on December 13, 1996. The
Investment Company believes that the injunction request seeks to prevent
Arnold Schneider from engaging in the investment advisory or investment
management business in competition with Wellington.
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.
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<PAGE>
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, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.
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
Barclays Global Fund Advisors, See: Diversified Equity Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, is 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
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martin Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, L.L.C., 10500 N.E. 8th Street, Suite 660,
Bellevue, WA 98004, is a Washington Limited Liability Corporation that is
controlled by the following founding members: Thomas M. Garr, Robert L.
Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
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.
50
<PAGE>
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.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein- Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.
The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.
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, is 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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.
MULTISTRATEGY BOND FUND
BEA Associates, 153 East 53rd Street, 58th Floor, 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,
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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.
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 (253) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY INTERNATIONAL SECURITIES
Alliance Capital Management L.P. J.P. Morgan Investment Management,
Barclays Global Fund Advisors Inc.
Equinox Capital Management, Inc. Marathon Asset Management Limited
INVESCO Capital Management, Inc. Mastholm Asset Management, L.L.C.
Lincoln Capital Management Company Oechsle International Advisors
Peachtree Asset Management Rowe Price-Fleming International,
Schneider Capital Management Inc.
Suffolk Capital Management, Inc. Sanford C. Bernstein & Co., Inc.
Trinity Investment Management Corporation The Boston Company Asset Management,
Inc.
SPECIAL GROWTH
Delphi Management, Inc. DIVERSIFIED BOND
Fiduciary International, Inc. Lincoln Capital Management Company
GlobeFlex Capital, L.P. Pacific Investment Management
Jacobs Levy Equity Management, Inc. Company
Sirach Capital Management, Inc. Standish, Ayer & Wood, Inc.
Wellington Management Company LLP
VOLATILITY CONSTRAINED BOND
EQUITY INCOME BlackRock Financial Management
Brandywine Asset Management, Inc. Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc. STW Fixed Income Management Ltd.
Trinity Investment Management Corporation
MULTISTRATEGY BOND
QUANTITATIVE EQUITY BEA Associates
Barclays Global Fund Advisors Pacific Investment Management
Franklin Portfolio Associates LLC Company
J.P. Morgan Investment Management, Inc. Standish, Ayer & Wood, Inc.
53
<PAGE>
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Company
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, 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 (253) 627-7001
54
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (253) 627-7001
Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 28 different investment portfolios referred to as the
"Funds." This Prospectus describes and offers shares of beneficial interest in
the Class S Shares of the seven Funds listed below.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company, and
manages the portfolios of the Money Market Fund and the U.S. Government Money
Market Fund. 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 individual Funds. There is no sales charge for investing in the Class S
Shares of the Funds.
Real Estate Securities Fund Money Market Fund
Emerging Markets Fund U.S. Government Money Market Fund
Equity T Fund Tax Free Money Market Fund
Limited Volatility Tax Free 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, THE U.S.
GOVERNMENT MONEY MARKET FUND AND TAX FREE MONEY MARKET FUND (THE "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, which interests
may be offered in one or more classes. 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 the Class S Shares of seven 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, 1997, 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.
This Prospectus relates only to the Class S Shares of the seven Funds
described herein. Two of these Funds -- Real Estate Securities Fund and
Emerging Markets Fund -- also offer shares of beneficial interest in another
class of shares, the Class C Shares, through a separate prospectus. For more
information concerning Class C Shares of the two Funds, contact the person or
organization from which you obtained this prospectus or write to the
Secretary, Frank Russell Investment Company, at the address shown above, or
telephone (800) 972-0700.
The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the Investment Company
and the Funds is maintained electronically with the SEC at its Internet
Website (http://www.sec.gov).
PROSPECTUS DATED MAY 1, 1997,
AS AMENDED THROUGH DECEMBER 15, 1997
<PAGE>
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.
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, high-
grade, money market instruments.
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 Class S Shares of the seven Funds set
forth on the first page of the Prospectus. A shareholder of the Emerging
Markets Fund or Equity T Fund may pay a quarterly shareholder investment
services fee directly to FRIMCo. The fee is computed on the amount the
shareholder has invested in the applicable Fund. No shareholder of any of the
other Funds described herein 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 approximately $10 billion on April 3, 1997. The net assets of
these Funds on April 3, 1997, were as follows:
<TABLE>
<S> <C>
Real Estate Securi-
ties................ $456,918,598
Emerging Markets..... $325,556,668
Equity T............. $ 33,115,098
Limited Volatility
Tax Free............ $ 68,491,850
Money Market......... $513,938,200
U.S. Government Money
Market.............. $260,988,365
Tax Free Money
Market.............. $118,976,087
</TABLE>
2
<PAGE>
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. PAGE 12.
THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" techniques and money manager evaluation services on an
economical and efficient basis. PAGE 19.
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 19.
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 19.
ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries 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 FRIMCo; and institutions or
individuals who have acquired shares through such institutions or financial
intermediaries. PAGE 20.
GENERAL MANAGEMENT OF THE FUNDS is provided by FRIMCo, 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 FRIMCo comprehensive
consulting and money manager evaluation services. PAGE 21.
EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. For the Emerging
Markets and Equity T Funds, each Eligible Investor may pay to FRIMCo directly
a fee for other investment services provided to that Eligible Investor. PAGE
23.
THE MONEY MANAGERS are evaluated and recommended by FRIMCo and 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 FRIMCo. PAGE 23.
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 24.
3
<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 minimize the realization of net long-term capital
gains and subsequent distribution of such gains. PAGE 38.
DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or
received in cash. Dividends from net investment income are declared Daily, by
Money Market, 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 39.
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 40.
FUND PERFORMANCE, including yields and total return information, is
calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 42.
VALUATION OF FUND SHARES occurs each business day (twice a day for the Money
Market, U.S. Government Money Market and Tax Free Money Market Funds). The
value of a Class S share purchased or redeemed is based upon the next computed
current market value of the assets, less liabilities, of each Class S Fund.
The Money Market, 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. Unless otherwise indicated, "shares" in this
Prospectus refers to the Class S Shares of the Funds. PAGE 44.
PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE 45.
REDEMPTION OF FUND SHARES may be requested on any business day that shares
are offered. 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% of the value of the shares
redeemed, 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 47.
ADDITIONAL INFORMATION is also included in this Prospectus concerning:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE 49.
TWO OF THE FUNDS--The Real Estate Securities and Emerging Markets Funds--
also offer a second class of shares, the Class C Shares, which are designed to
meet different investor needs. PAGE 50.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .85%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .04%
Transfer Agent Fees................................................ .11
Other Fees......................................................... .04
---
Total Other Expenses............................................... .19
----
Total Class S Shares Operating Expenses+............................ 1.04%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $57 $131
=== === === ====
</TABLE>
- ---------------------
+ Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... 1.20%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .28%
Transfer Agent Fees................................................ .14
Other Fees......................................................... .09
---
Total Other Expenses............................................... .51
----
Total Class S Shares Operating Expenses+............................ 1.71%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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....................................... $17 $52 $95 $215
=== === === ====
</TABLE>
- ---------------------
* Each shareholder or the financial intermediary through which the
shareholder purchases Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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 Emerging Markets Fund. In addition, a shareholder may
pay additional fees, expressed as fixed dollar amounts for the other
services or reports provided by FRIMCo to the shareholder. Accordingly, the
expense information does not reflect an amount for fees paid directly by an
investor to FRIMCo.
+ Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.................................... None
Sales Load Imposed on Reinvested Dividends......................... None
Deferred Sales Load................................................ None
Redemption Fees.................................................... 1.00%
Exchange Fees...................................................... None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver and Reimbursement) (1)............ .47%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees.................................................... .18%
Transfer Agent Fees............................................... .11
Other Fees........................................................ .24
---
Total Other Expenses.............................................. .53
----
Total Class S Shares Operating Expenses (After Fee Waivers and Re-
imbursement) (1)+................................................. 1.00%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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....................................... $21 $42 $68 $142
=== === === ====
You would pay the following expenses on the
same
investment, assuming no redemption........... $10 $31 $55 $126
=== === === ====
</TABLE>
- ---------------------
(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 Manager has
voluntarily agreed to reimburse the Fund for all remaining expenses after
Manager and Custodian waivers which exceed 1.00% of average daily net
assets on an annual basis. The gross annual total operating expenses
absent the waiver and reimbursement would be 1.28% of average daily net
assets. The management waiver and reimbursement are intended to be in
effect for the current year, but may be revised or eliminated at any time
thereafter 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 FRIMCo, 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 FRIMCo to the shareholder. Accordingly, the expense information
does not reflect an amount for fees paid directly by an investor to FRIMCo.
+ Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .50%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .09%
Transfer Agent Fees................................................ .07
Other Fees......................................................... .09
---
Total Other Expenses............................................... .25
----
Total Class S Shares Operating Expenses+............................ .75%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $23 $42 $95
=== === === ===
</TABLE>
- ---------------------
+ Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES 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 Class S
shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).............................. .10%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees.................................................... .03%
Transfer Agent Fees............................................... None
Other Fees........................................................ .02
----
Total Other Expenses.............................................. .05
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**... .15%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 peri-
od........................................... $ 2 $ 5 $ 8 $19
=== === === ===
</TABLE>
- ---------------------
(1) FRIMCo has voluntarily agreed to waive .15% of its .25% management fee for
the Money Market Fund. The total operating expenses of the Class S Shares
absent the fee waiver would be .30% 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 Class S Shares of the Investment Company enters into
a written Asset Management Services Agreement with FRIMCo, 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,
FRIMCo does not intend to impose a shareholder investment services fee with
respect to the Class S Shares of 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 FRIMCo to the shareholder.
Accordingly, the expense information does not reflect an amount for fees
paid directly by an investor to FRIMCo.
** Investors purchasing Class S shares of the Fund 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 contract the intermediary for
information concerning what additional fees, if any, will be charged.
9
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver)(1)................................ .12%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .05%
Transfer Agent Fees................................................ .15
Other Fees......................................................... .05
---
Total Other Expenses............................................... .25
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+..... .37%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $12 $20 $47
=== === === ===
</TABLE>
- ---------------------
(1) FRIMCo has voluntarily agreed to waive .13% of its .25% management fee.
The total operating expenses of the Fund absent the fee waiver would be
.50% of average daily net assets on an annual basis. This waiver is
intended to be in effect for the current fiscal year, but may be revised
or eliminated at any time thereafter without notice to shareholders.
+ Investors purchasing Class S Shares of the Fund 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>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
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 Class S
Shares of 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>
CLASS S SHARES 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 CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1)............................... .15%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .05%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .06
---
Total Other Expenses............................................... .17
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+..... .32%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $10 $18 $40
=== === === ===
</TABLE>
- ---------------------
(1) The Management Company has voluntarily agreed to waive .10% of its .25%
management fee. The total operating expenses of the Fund absent the fee
waiver would be .42% 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 Class S of the Fund 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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989++
------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 23.51 $ 22.53 $ 22.76 $ 21.50 $19.33 $14.99 $19.31 $20.00
------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.39 1.32 1.25 1.05 1.08 1.11 1.30 .42
Net realized and
unrealized gain (loss)
on investments........ 6.89 1.03 .40 2.68 2.16 4.36 (4.30) (.73)
------- ------- ------- ------- ------ ------ ------ ------
Total From Investment
Operations............ 8.28 2.35 1.65 3.73 3.24 5.47 (3.00) (.31)
------- ------- ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.34) (1.35) (1.23) (1.04) (1.07) (1.13) (1.32) (.38)
Net realized gain on
investments........... (1.26) -- (.45) (1.43) -- -- -- --
In excess of net
realized gain on
investments........... -- -- (.20) -- -- -- -- --
Tax return of capital.. -- (.02) -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Total Distributions.... (2.60) (1.37) (1.88) (2.47) (1.07) (1.13) (1.32) (.38)
------- ------- ------- ------- ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 29.19 $ 23.51 $ 22.53 $ 22.76 $21.50 $19.33 $14.99 $19.31
======= ======= ======= ======= ====== ====== ====== ======
TOTAL RETURN (%)(A)..... 36.81 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 1.04 1.05 1.11 1.20 1.26 .39 --
Operating expenses,
gross, to average net
assets (b)............ 1.04 1.04 1.05 1.11 1.20 1.31 1.60 .32
Net investment income
to average net assets
(b)................... 5.64 6.10 5.65 4.52 5.60 6.50 8.94 6.90
Portfolio turnover
(b)................... 51.75 23.49 45.84 58.38 19.72 13.28 12.11 8.74
Net assets, end of year
($000 omitted)........ 445,619 290,990 209,208 145,167 75,902 42,771 20,845 7,699
Average commission rate
paid per share of
security ($ omitted).. .0631 N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees waived ($
omitted).............. -- -- -- -- -- -- .0491 .0394
Per share amount of
fees reimbursed ($
omitted).............. -- -- -- -- -- .0076 .1327 .1155
</TABLE>
- ---------------------
* See 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.
++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.
12
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993++
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......... $ 11.16 $ 12.25 $ 13.90 $10.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .10 .11 .15 .07
Net realized and unrealized gain (loss) on
investments............................... 1.26 (1.12) (1.24) 4.09
------- ------- ------- ------
Total From Investment Operations........... 1.36 (1.01) (1.09) 4.16
------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income...................... (.08) (.03) (.10) (.07)
In excess of net investment income......... (.09) (.02) (.10) (.01)
Net realized gain on investments........... -- -- (.31) (.18)
In excess of net realized gain on
investments............................... -- (.03) (.05) --
------- ------- ------- ------
Total Distributions........................ (.17) (.08) (.56) (.26)
------- ------- ------- ------
NET ASSET VALUE, END OF YEAR................ $ 12.35 $ 11.16 $ 12.25 $13.90
======= ======= ======= ======
TOTAL RETURN (%)(A)(C)...................... 12.26 (8.21) (5.83) 41.83
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)(c)............................. 1.71 1.75 .80 .80
Operating expenses, gross, to average net
assets (b)(c)............................. 1.72 1.80 .83 1.60
Net investment income to average net assets
(b)(c).................................... .77 .88 1.10 1.33
Portfolio turnover (b)..................... 34.62 71.16 57.47 89.99
Net assets, end of year ($000 omitted)..... 271,490 172,673 127,271 65,457
Average commission rate paid per share of
security ($ omitted) (d).................. .0007 N/A N/A N/A
Per share amount of fees waived ($
omitted).................................. .0006 .0022 .0044 .0016
Per share amount of fees reimbursed ($
omitted).................................. -- .0032 .0017 .0420
</TABLE>
- ---------------------
* See 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.
++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%.
(d) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
13
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY T 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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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 T FUND
<TABLE>
<CAPTION>
1996++
------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. .03
Net realized and unrealized gain (loss) on investments................ .61
------
Total Income From Investment Operations............................... .64
------
LESS DISTRIBUTIONS:
Net investment income................................................. (.03)
------
NET ASSET VALUE, END OF YEAR........................................... $10.61
======
TOTAL RETURN (%)(A)(C)................................................. 6.10
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)................. 1.00
Operating expenses, gross, to average net assets (b)(c)............... 2.83
Net investment income to average net assets (b)(c).................... 1.62
Portfolio turnover (b)................................................ 8.86
Net assets, end of year ($000 omitted)................................ 19,931
Average commission rate paid per share of security ($ omitted)........ .0301
Per share amount of fees waived ($ omitted)........................... .0143
Per share amount of fees reimbursed ($ omitted)....................... .0194
</TABLE>
- ---------------------
* See 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.
++For the period October 7, 1996 (commencement of operations) to December 31,
1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 7, 1996 (commencement of operations) to
December 31, 1996 are annualized.
(c) Fund performance, operating expenses, and net investment income are
reported net of investment management fees paid to the Manager or money
managers, but gross of any investment services fees.
14
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .85 .81 .86 .94 1.01 1.17 1.25 1.21 1.15 1.06
Net realized and
unrealized gain (loss)
on investments........ (.21) .77 (.97) .42 .18 .35 (.03) .17 (.10) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations............ .64 1.58 (.11) 1.36 1.19 1.52 1.22 1.38 1.05 .58
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $21.02 $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)........ 3.07 7.81 (0.54) 6.58 5.85 7.64 6.12 6.95 5.23 2.84
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .75 .74 .72 .75 .80 .84 .86 .74 .65 .63
Net investment income
to average net
assets................ 4.02 3.91 4.14 4.40 4.89 5.68 6.06 5.64 5.50 5.20
Portfolio turnover
(a)................... 74.34 73.91 71.71 24.05 18.21 129.12 99.00 89.93 67.24 75.73
Net assets, end of year
($000 omitted)........ 66,344 63,838 48,975 51,211 38,399 26,173 23,553 25,657 38,151 52,348
</TABLE>
- ---------------------
* See 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.
(a) Beginning in 1992, variable rate daily demand securities were excluded
from the turnover calculation.
15
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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.
MONEY MARKET FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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 $1.000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .0549 .0601 .0447 .0342 .0403 .0618 .0823 .0922 .0759 .0663
LESS DISTRIBUTIONS:
Net investment income.. (.0549) (.0601) (.0447) (.0342) (.0403) (.0618) (.0823) (.0922) (.0759) (.0663)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
BEGINNING OF YEAR...... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 5.63 6.19 4.57 3.48 4.11 6.38 8.55 9.61 7.86 6.84
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets (a)........ .05 .06 .05 .07 .08 .07 .07 .06 .06 .05
Operating expenses,
gross, to average
daily net assets (a).. .30 .26 .05 .07 .08 .07 .07 .06 .06 .05
Net investment income
to average net assets
(a)................... 5.49 6.01 4.49 3.38 4.04 6.13 8.29 9.31 7.59 6.63
Net assets, end of year
($000 omitted)........ 496,932 533,643 502,302 415,998 347,464 316,426 226,339 145,550 116,369 144,344
Per share amount of
fees waived
($ omitted)........... .0025 .0020 -- -- -- -- -- -- -- --
</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.
(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%.
16
<PAGE>
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 information
in the table represents the Financial Highlights for the Fund's Class C Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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.. .0526 .0580 .0380 .0284 .0347 .0573 .0773 .0861 .0693 .0601
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.0526) (.0580) (.0380) (.0284) (.0347) (.0573) (.0773) (.0861) (.0693) (.0601)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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 (%)........ 5.40 5.98 3.87 2.88 3.53 5.90 8.04 8.98 7.15 6.19
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets............ .25 .32 .57 .49 .41 .38 .41 .42 .33 .31
Operating expenses,
gross, to average
daily net assets...... .50 .51 .57 .49 .41 .38 .41 .42 .33 .31
Net investment income
to average daily net
assets................ 5.27 5.82 3.91 2.85 3.47 5.74 7.69 8.69 6.94 6.01
Net assets, end of year
($000 omitted)........ 239,725 149,941 112,077 95,410 153,976 182,747 191,623 108,073 131,333 160,921
Per share amount of
fees waived
($ omitted)........... .0025 .0019 -- -- -- -- -- -- -- --
</TABLE>
- ---------------------
* See 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>
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 information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements
and related notes, which are incorporated by reference into 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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.. .0329 .0370 .0279 .0251 .0304 .0473 .0582 .0623 .0508 .0318
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.0329) (.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 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 3.35 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 daily
net assets (b)........ .42 .48 .40 .43 .45 .45 .45 .45 .43 .22
Operating expenses,
gross, to average
daily net assets (b).. .42 .48 .40 .43 .45 .46 .52 .61 .50 .45
Net investment income
to average daily net
assets (b)............ 3.28 3.69 2.84 2.52 3.03 4.73 5.82 6.28 5.36 4.83
Net assets, end of year
($000 omitted)........ 102,207 78,000 100,819 68,154 73,203 61,288 59,892 30,873 39,165 22,380
Per share amount of
fees waived ($
omitted).............. -- -- -- -- -- -- -- -- -- .0008
Per share amount of
fees reimbursed ($
omitted).............. -- -- -- -- -- .0001 .0007 .0016 .0007 .0015
</TABLE>
- ---------------------
* See 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.
++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.
18
<PAGE>
THE PURPOSE OF THE FUNDS
The Funds have been organized to provide a means for Eligible Investors to
access and use FRIMCo and Frank Russell Company's "multi-style, multi-manager
diversification" method of investment, and to obtain FRIMCo and 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 1,300 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
FRIMCo and Frank Russell Company believe 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, FRIMCo and Frank Russell Company believe 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
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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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo and Frank Russell Company.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors and financial intermediaries
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
FRIMCo, and institutions or individuals who have acquired shares through such
institutions and financial intermediaries. There is no specified minimum
amount which must be invested. Institutions and financial intermediaries which
may have a particular interest in the Funds include:
.Bank trust departments managing discretionary institutional or personal
trust accounts
.Banks, other than through their trust departments
.Registered investment advisers
.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 FRIMCo,
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 FRIMCo may enter into Agreements with individual
investors. Bank trust departments, registered investment advisors, broker-
dealers and other eligible investors ("Financial Intermediaries") which have
entered into Agreements with FRIMCo may acquire shares of the Funds for their
customers. FRIMCo provides objective-setting and asset-
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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 FRIMCo or Class S Shares
of 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 FRIMCo for other services or reports provided by FRIMCo to
the shareholder.
In the case of the Emerging Markets, Equity T and Money Market Funds, the
Agreement sets forth the shareholder investment services fees to be paid to
FRIMCo 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 FRIMCo 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 FRIMCo to the client with respect
to such assets, and other factors.
Either the client or FRIMCo may terminate the Agreement upon written notice
as provided in the Agreement. FRIMCo does not expect to exercise its right to
terminate the Agreement unless a client does not (i) promptly pay fees due to
FRIMCo; or (ii) invest sufficient assets in the Funds to compensate FRIMCo for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or FRIMCo, FRIMCo 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 FRIMCo, Frank Russell Company and the money managers.
The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo 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.
FRIMCo: (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.
FRIMCo 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 FRIMCo. 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 of FRIMCo
since 1989.
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. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since
1994. From 1990 to 1994, Ms. Carter was a Client Executive in the
Investment Group of the Frank Russell Company. Ms. Carter jointly
with another portfolio manager identified herein has primary
responsibility for management of the International, International
Securities and Emerging Markets Funds.
. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed
the day to day management of the FRIMCo Funds and ongoing analysis
and monitoring of Fund money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed
as a Senior Research Analyst with Frank Russell Company. Mr. Jornlin,
jointly with another portfolio manager identified herein, has primary
responsibility for management of the Real Estate Securities Fund.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since
June 1995. From 1990 to 1995, Mr. Burge was a Client Executive for
Frank Russell Australia. Mr. Burge has primary responsibility for
management of the Fixed Income I, Fixed Income II, Fixed Income III,
Diversified Bond, Volatility Constrained Bond, Multistrategy Bond,
Limited Volatility Tax Free, International, International Securities
and Emerging Markets Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US
Equity Manager Research Department with Frank Russell Company. Mr.
Trittin jointly with another portfolio manager identified herein has
primary responsibility for management of the Equity I, Equity II,
Equity III, Equity Q, Equity T, Diversified Equity, Quantitative
Equity, Special Growth and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the
Alpha Strategy Group. From 1988 to 1994, Ms. Williams was Senior
Research Analyst with Frank Russell Company. Ms. Williams jointly
with another portfolio manager identified herein has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.
Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.
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. FRIMCo 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,
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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 held on
January 22, 1996.
For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services as described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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%; Money Market Fund, 0.25%; 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.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain Funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Fund management fees in
respect of its investment in the Money Market Fund.
EXPENSES OF THE FUNDS
The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, as a percentage of average net
assets, are shown in the Financial Highlights tables. Principal expenses are:
the management, and transfer agency payable to FRIMCo; fees for custodial,
preparing tax records, and portfolio accounting payable to State Street Bank
and Trust 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 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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, .31%; Emerging Markets Fund .72%; Equity T Fund .34%; Limited
Volatility Tax Free Fund, .25%; Money Market
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Fund .0%; U.S. Government Money Market Fund, 0%; and Tax Free Money Market
Fund, .10%. 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 FRIMCo as agent to make payment of the money manager's fee, that money
manager will look only to FRIMCo 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 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 J.P. Morgan Investment Management, Inc. in 1992. Prior to
that, Mr. Weiss was a Stock Index Arbitrageur at Oppenheimer & Company.
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 FRIMCo. 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, FRIMCO (EXCEPT WITH
RESPECT TO THE MONEY MARKET FUND AND THE U.S. GOVERNMENT MONEY MARKET FUND),
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 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 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 total 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.")
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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 market" 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
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Fund's money managers may determine, based on information then available, to
include 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 to be
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.
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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 Fund will attempt to limit short-term capital gains, and to minimize the
realization of net 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 (i.e., a long-term capital gain).
When the money manager decides to sell a particular appreciated security,
the manager will generally select for sale those share lots with the highest
cost basis to minimize capital gains. The money manager will also sell
securities in order to realize capital losses. Such losses can be used to
offset realized capital gains (whether long- or short-term), 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 other than redemptions-in-kind. This fee 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 shareholder redemptions or
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
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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 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.
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 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,
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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, 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.
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
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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 in which the Fund may invest are described under
"Limited Volatility Tax Free Fund." 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."
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
(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 total 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
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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 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 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 Money Market Fund. FRIMCo currently waives its management
fee for each of the Funds to the extent a Fund incurs Money Market Fund
management fees in respect of its investment in the Money Market Fund, thereby
eliminating any duplication of fees.
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, liquid assets 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
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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. Liquid assets 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."
Lending Portfolio Securities. The Real Estate Securities, the Emerging
Markets, the Equity T, the Money Market and the U.S. Government Money Market
Funds may lend portfolio securities with a value of up to 33.33% 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 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 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
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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 Real Estate Securities, Emerging Markets and
Equity T 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 securities or used for Fund
transactions.
Investment in Foreign Securities. The Funds, other than the Money Market
Fund, U.S. Government Money Market Fund and Tax Free Money Market Fund, 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 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.
Depository Receipts. Funds may invest in securities of foreign issuers in
the form of American Depository Receipts ("ADRs") or other similar securities
convertible into securities of foreign issuers. These securities may
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not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.
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 liquid assets
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 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
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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.
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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.
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
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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 liquid assets 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.
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The Funds, other than the Emerging Markets 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 interests 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 growth of the market for lower rated debt securities has 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 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.
Credit and Liquidity Enhancements. The Money Market Fund and the Tax Free
Money Market Fund may invest in securities supported by credit and liquidity
enhancements from third parties, generally letters of credit from foreign or
domestic banks. Adverse changes in the credit quality of these institutions
could cause losses to the Funds that invest in these securities and may affect
their share prices.
PORTFOLIO TRANSACTION POLICIES
Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by FRIMCo 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 FRIMCo to change money managers of the Equity T Fund. The
annual portfolio turnover rates for the Funds (other than the Money Market
Funds) are shown in the Financial Highlights tables.
FRIMCo and the various money managers arrange for the purchase and sale of
the Investment Company's securities and the selection of brokers and dealers
(including affiliates), which in their best judgment provide prompt and
reliable execution at favorable prices and reasonable commission rates. In
addition to price and commission rates, brokers and dealers may be selected
based on research, statistical or other services they are
38
<PAGE>
able to provide. This may cause the Investment Company to pay commissions at
rates that exceed rates that other brokers and dealers may have charged if it
views the commissions as reasonable in relation to the value of the brokerage
and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc., an affiliate of FRIMCo, when a money manager determines that
the Fund will receive competitive execution, price, and commissions. Upon
completion of such transactions, Frank Russell Securities, Inc. will refund up
to 70% of the commissions paid by that Fund after reimbursement for research
services provided to FRIMCo. Similarly, the Funds may effect portfolio
transactions through and pay brokerage commissions to the various money
manager affiliated brokers.
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
The Board of Trustees presently intends that dividends will be declared from
net investment income and (for the Money Market Funds only) net short-term
capital gains, if any, for payment on the following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE
-------- -------
<C> <C> <S>
Daily 1st business day of following Money Market, U.S. Government
month 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 Real Estate Securities Fund
December
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 that distributions will be declared 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.
39
<PAGE>
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
Money Market Fund and 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 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 invest. 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 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. Any loss incurred on sale or exchange of a Fund's
shares, held for six months or less, will be treated as 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.
40
<PAGE>
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. FRIMCo 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 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 the 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.
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 Code also
provides that interest on indebtedness incurred, or continued, to purchase or
carry Limited Volatility Tax Free and Tax Free Money Market Funds 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) for alternative
minimum tax purposes; and of the percentages of the Money Market Fund's and
U.S. Government Money Market Fund's income attributable to US government,
Treasury and agency securities.
41
<PAGE>
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 Class S shares
of each of the Funds, are as follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1996 1996 1996 INCEPTION
1996 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Real Estate Securities.. 36.81% 17.50% -- 13.37% 07/28/89
Emerging Markets*....... (12.26) -- -- 8.48 01/29/93
Equity T**.............. -- -- -- 6.42 10/07/96
Limited Volatility Tax
Free................... 3.07 4.51 5.12% 5.53 09/05/85
Money Market*........... 5.63 4.79 6.31 7.46 10/15/81
U.S. Government Money
Market................. 5.40 4.33 5.78 5.92 09/05/85
Tax Free Money Market... 3.35 3.12 -- 4.27 05/08/87
</TABLE>
- ---------------------
* The performance for the Emerging Markets Fund and the Money Market 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. Descriptions of
these services can be obtained from the investment manager upon request.
** Equity T commenced operations on October 7, 1996.
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
42
<PAGE>
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 calculation includes all recurring fees
that are charged to all shareholder accounts. The 30-day yield for the year
ended December 31, 1996 for the shares of Limited Volatility Tax Free Fund was
3.62%.
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 shares of the Fund for
the year ended December 31, 1996, based on a tax rate of 39.6%, was 6.00%.
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 shares of the Money Market Funds during 1996 for the
seven-day (and thirty-day, in the case of Tax Free Money Market) 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>
Money Market Fund....... 5.46% 5.61% 5.47% 5.62% 5.50% 5.65% 5.46% 5.61%
U.S. Government Money
Market................. 5.28% 5.41% 5.21% 5.35% 5.24% 5.38% 5.31% 5.46%
Tax Free Money Market
7 day period......... 3.23% 3.28% 3.29% 3.34% 3.48% 3.54% 3.65% 3.71%
30 day period......... 3.17% 3.21% 3.25% 3.29% 3.35% 3.40% 3.35% 3.41%
</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 for shares of the Tax Free Money Market Fund, based on a tax rate of
39.6%, during 1996 for the seven-day and 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 period......... 5.35% 5.43% 5.45% 5.53% 5.77% 5.86% 6.04% 6.14%
30 day period......... 5.25% 5.31% 5.37% 5.45% 5.55% 5.63% 5.55% 5.65%
</TABLE>
Each Fund may also advertise non-standardized performance information that
is for periods in addition to those required to be presented.
43
<PAGE>
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE
The net asset value per share is calculated for shares of each class of each
Fund on each business day on which shares are offered or orders to redeem are
tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) For the Real Estate Securities, the Emerging 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 a Fund's Class S Shares by dividing the current
value of the Fund's assets attributable to the Class S Shares, less
liabilities attributable to the Class S Shares, by the number of Class S
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 Money Market Fund
and U.S. Government Money Market Fund also determines their net asset values
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. The Money Market 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.
44
<PAGE>
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 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:
Close of the New York Stock Exchange Real Estate Securities, Emerging
(currently 4:00 p.m. Eastern Time) Markets, Equity T and Limited
11:45 a.m. Eastern time Volatility Tax Free Funds
12:15 p.m. Eastern time Tax Free Money Market Fund
12:45 p.m. Eastern time U.S. Government Money Market Fund
Money Market Fund
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 Funds' 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.
Automatic Investment Program. A shareholder may make scheduled investments
(minimum $50.00) in an established account in a Fund on a monthly, quarterly,
semiannual or annual basis by automatic electronic funds transfer from the
shareholder's bank account. A separate transfer is required for each Fund in
which shares are to be purchased. A shareholder may, of course, terminate the
program as to further transfers at any time. Contact the Financial
Intermediary from whom you received this prospectus for further information on
this program and an enrollment form.
45
<PAGE>
Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a Financial
Intermediary or 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 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
46
<PAGE>
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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 627-7001.
For each 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, a redemption
fee, calculated as a 1% discount of net asset value of the shares redeemed
will be imposed. 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:
Close of the New York Stock Exchange Real Estate Securities, Emerging
(currently 4:00 p.m. Eastern Time) Markets, Equity T and Limited
11:45 a.m. Eastern time Volatility Tax Free Funds
12:15 p.m. Eastern time Tax Free Money Market Fund
12:45 p.m. Eastern time U.S Government Money Market Fund
Money Market Fund
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.
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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 the Financial
Intermediary from whom this prospectus was obtained or 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
FRIMCo 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.
SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.
A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obtained or Frank Russell
Investment Management Company, Attention: Frank
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Russell Investment Company, Operations Department, P.O. Box 1591, Tacoma, WA
98401-1591. The Systematic Withdrawal Payment form must be received by FRIMCo
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 FRIMCo, 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, prepares tax
records 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 FRIMCo.
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 shares of beneficial interest divisible into
an unlimited number of funds, each of which funds is a separate trust under
Massachusetts law, and the funds' shares may be offered in multiple classes.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund attributable to that class, and have the same voting and other
rights and preferences as the shares of other classes of the Fund. Shares of
each class of a Fund are entitled to such dividends and distributions earned
on the assets belonging to the Fund as may be declared by the Board of
Trustees. Shares of each class of a Fund have a par value of $.01 per share,
are fully paid and nonassessable, and have no preemptive or conversion rights.
Each share of a class of a Fund has one vote; there are no cumulative voting
rights. There are no Annual Meetings of shareholders, but Special Meetings may
be held. On any matter which affects only a particular Fund or class, only
shareholders of that Fund or class, as applicable, will vote, unless otherwise
required by the 1940 Act or the amended Master Trust Agreement.
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In addition to offering Class S Shares, the Emerging Markets and the Real
Estate Securities Funds also offer beneficial interests in Class C Shares,
which are described in a separate prospectus relating to that class. Class C
Shares of the Emerging Markets and Real Estate Securities Funds are designed
to meet different investor needs and are subject to a Rule 12b-1 distribution
fee and to a shareholder servicing fee, which may effect the performance of
the Class C Shares. To obtain more information concerning Class C Shares,
contact the Financial Intermediary from whom you obtained this prospectus or
write to the Secretary, Frank Russell Investment Company, at the address
listed on the cover of this Prospectus, or call (800) 972-0700.
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 March 31, 1997, the following shareholder may be deemed by the 1940 Act
to "control" the Funds listed after its name because it owns more than 25% of
the voting shares of the indicated Fund: Citizens Bank (Saginaw)--Tax Free
Money Market Fund; Indiana Trust & Investment Company--Equity T Fund.
MONEY MANAGER PROFILES
The money managers other than the Investment Manager for the Money Market
Fund and the U.S. Government Money Market Fund, identified below have no other
affiliations with the Funds, FRIMCo, 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 principals, Robert H. Steers and Martin Cohen, control
the corporation within the meaning of the 1940 Act.
AEW Capital Management, L.P., 225 Franklin Street, Boston, MA 02110-2803, is
a wholly-owned affiliate of New England Investment Companies, L.P. ("NEIC").
NEIC is a publicly-held limited partnership. Metropolitan Life Insurance
Company, a publicly held Corporation, owns approximately 53% of NEIC. AEW
Capital Management, Inc., a wholly-owned subsidiary of NEIC, is the general
partner, and NEIC is the sole limited partner, of AEW Capital Management, L.P.
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X 7LY, 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 International Ltd. is controlled 55% by management
and assorted interests, and the balance held by outside shareholders, with the
largest single holding being 15%.
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J.P. Morgan Investment Management Inc., 522 Fifth Avenue, 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan and Co.
Incorporated, a publicly held bank holding company.
Montgomery Asset Management, L.L.C., 101 California Street, San Francisco,
CA 94111, is a Delaware limited liability company with majority ownership held
by Commerzbank AG, a foreign banking organization.
EQUITY T FUND
J.P. Morgan Investment Management Inc. See: Emerging Markets Fund.
LIMITED VOLATILITY TAX FREE FUND
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, MA 02116, is
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, is
a Company whose stock is publicly traded, and a large portion of its stock is
held by active employees.
MONEY MARKET FUND
Frank Russell Investment Management Company, 909 A Street, Tacoma, WA 98402,
is a registered investment adviser wholly owned by Frank Russell Company.
U.S. GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management Company See: Money Market Fund.
TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C., One New York Plaza, 30th Floor, New York, NY
10004, is 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.
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FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (253) 627-7001
MONEY MANAGERS
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management
AEW Capital Management, L.P.
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management Inc.
Montgomery Asset Management, L.L.C.
EQUITY T FUND
J.P. Morgan Investment Management Inc.
LIMITED VOLATILITY TAX FREE FUND
MFS Institutional Advisors, Inc.
T. Rowe Price Associates, Inc.
MONEY MARKET FUND
Frank Russell Investment Management Company
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 Company 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
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington, (253) 627-7001
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