<PAGE>
FILED PURSUANT TO RULE 485(a)
REGISTRATION NO. 2-71299
811-3153
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
Pre-Effective Amendment No.
------ -----
Post-Effective Amendment No. 38 X
------ -----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----
Amendment No. 38
------
FRANK RUSSELL INVESTMENT COMPANY
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
909 A Street, Tacoma, Washington 98402
--------------------------------------- ----------
(Address of Principal Executive Office) (ZIP Code)
Registrant's Telephone Number, including area code: 253/627-7001
Gregory J. Lyons, Associate General Counsel
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402 253/596-2406
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, WA 19103 215/564-8074
- --------------------------------------------------------------------------------
Approximate Date of Proposed Public Offering: .
It is proposed that this filing will become effective (check appropriate
box)
( ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(i)
(X) on (May 1, 1998) pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
( ) this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Frank Russell Investment Company
File No. 2-71299
P/E Amd. #38
FORM N-1A
---------
Cross-Reference Sheet Required By
Rule 481(a) under Securities Act of 1933
<TABLE>
<CAPTION>
FORM N-1A
ITEM No. ITEM CAPTION LOCATION
- --------- ----------------------- ---------------------------------------------------------
Information Required Prospectus Caption
Part A in a Prospectus [unless otherwise noted]
- --------- ----------------------- ---------------------------------------------------------
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis
(a) Summary
(b) Highlights and Table of Contents
3 Condensed Financial
Information
(a) Financial Highlights
(b) Not Applicable
(c) Investment Objectives, Restrictions and Policies
(d) Annual reports to be filed.
4 General Description of
Registrant
(a)(i) Cover page; Additional Information - Organization,
Capitalization and Voting
(ii) Investment Objectives, Restrictions and Policies
(b) Investment Objectives, Restrictions and Policies
(c) Investment Objectives, Restrictions and Policies
5 Management of the Funds
(a) General Management of the Funds
(b) Money Manager Profiles; General Management of the Funds
(c) General Management of the Funds
(d) General Management of the Funds; Additional Information -
Distributor, Custodian, Accountants and Reports
(e) General Management of the Funds
(f) Expenses of the Funds
(g) Portfolio Transaction Policies
5A Management's Discussion of Annual Report to be filed.
Fund Performance
6 Capital Stock and Other
Securities
(a) Eligible Investors; Additional Information - Organization,
Capitalization and Voting
(b) Additional Information - Organization, Capitalization and
Voting
(c) Not Applicable
(d) Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Information Required Prospectus Caption
Part A in a Prospectus [unless otherwise noted]
- --------- ----------------------- ---------------------------------------------------------
<S> <C> <C>
(e) Back Cover
(f) Dividends and Distributions
(g) Taxes
(h) Not Applicable
7 Purchase of Securities
Being Offered
(a) Additional Information - Distributor, Custodian,
Accountants and Reports
(b) Eligible Investors; How Net Asset Value is Determined;
How to Purchase Shares
(c) Not Applicable
(d) Eligible Investors
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
8 Redemption or Repurchase
(a) How to Redeem Shares
(b) Not Applicable
(c) Eligible Investors
(d) How to Redeem Shares
9 Pending Legal Proceedings Not Applicable
</TABLE>
<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 "Trust") is an open-end, management
investment company with 28 different investment series or portfolios
("Funds"). This Prospectus describes and offers interests in the Class S
Shares of seven Funds "Funds":
<TABLE>
<S> <C>
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
</TABLE>
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each
Fund's investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class S Shares are sold at their net asset value, with
no sales load, no commissions, no Rule 12b-1 fees and no exchange fees. There
is no specified minimum investment in the Funds, but investors must qualify as
Eligible Investors, as described in this Prospectus.
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 SECURITIES
AND EXCHANGE 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
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET FUND, U.S.
GOVERNMENT MONEY MARKET FUND AND TAX FREE MONEY MARKET FUND (TOGETHER, THE
"MONEY MARKET FUNDS") WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER IN SUCH STATE OR OTHER JURISDICTION.
This Prospectus sets forth concisely the information about the Funds that
you should know before investing. Please read it before investing and retain
it for future reference. A Statement of Additional Information ("SAI"), dated
, 1998, has been filed with the Securities and Exchange Commission ("SEC").
The SAI is incorporated into this Prospectus by reference and is available
without charge by writing to the address listed above or by telephoning (800)
972-0700.
This Prospectus relates only to the Class S Shares of the Funds. Two
Funds -- Real Estate Securities Fund and Emerging Markets Fund -- also offer
interests in another class of shares, the Class C Shares, through another
prospectus. For more information concerning Class C Shares, contact the person
or organization from whom you obtained this Prospectus, or write or telephone
the Trust.
The SAI, material incorporated by reference into this Prospectus, and
further information regarding the Trust and the Funds is maintained
electronically with the SEC at its Internet Website (http://WWW.sec.gov).
PROSPECTUS DATED , 1998
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary..................................................................... 3
Financial Highlights........................................................ 6
The Purpose of the Funds--Multi-Style, Multi-Manager Diversification........ 13
Eligible Investors.......................................................... 14
General Management of the Funds............................................. 15
Expenses of the Funds....................................................... 17
The Money Managers.......................................................... 17
Investment Objectives, Policies and Practices............................... 18
Portfolio Transaction Policies.............................................. 28
Dividends and Distributions................................................. 30
Taxes....................................................................... 31
Performance Information..................................................... 32
How Net Asset Value Is Determined........................................... 34
How to Purchase Shares...................................................... 35
How to Redeem Shares........................................................ 37
Additional Information...................................................... 39
Money Manager Profiles...................................................... 40
Glossary.................................................................... 43
</TABLE>
2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's ("Russell") "multi-style, multi-manager
diversification" techniques and money manager evaluation services. Unlike most
investment companies that have a single organization that acts as both
administrator and investment adviser, the Trust divides responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds" and "Multi-Style,
Multi-Manager Diversification."
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.
The Trust's Board of Trustees has approved, subject to the approval of
shareholders, changing the Limited Volatility Tax Free Fund's investment
objective, as described in more detail under "Investment Objectives, Policies
and Practices, Limited Volatility Tax Free Fund."
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 U.S.
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. See "Investment Objectives, Policies and
Practices."
See "Investment Objectives, Policies and Practices."
The Trust's Portfolios had aggregate net assets of approximately $ billion
on , 1998. The net assets of the Funds described in this Prospectus on ,
1998 were:
<TABLE>
<S> <C> <C> <C>
Real Estate Securities............... $ Money Market.............. $
Emerging Markets..................... $ U.S. Government Money
Equity T............................. $ Market................... $
Limited Volatility Tax Free.......... $ Tax Free Money Market..... $
</TABLE>
3
<PAGE>
All Class S Shares are sold without a sales charge, commission, or Rule 12b-
1 fee. Except as indicated below, Class S Shares are redeemed at net asset
value. You may also exchange shares of one Fund for shares of another Fund.
See "How to Purchase Shares" and "How to Redeem Shares."
You should be aware of the general risks associated with investments in
mutual funds. One or more Funds may make investments and engage in investment
practices and techniques that involve risks, including entering into
repurchase agreements, lending portfolio securities and entering into hedging
transactions. Also, foreign securities in which Emerging Markets Fund may
invest may be subject to certain risks in addition to those inherent in U.S.
investments. These risks are described in "Risk Considerations" in "Investment
Objectives, Policies and Practices" and in the Glossary.
SHAREHOLDER TRANSACTION EXPENSES
You would pay the following charges when buying or redeeming Class S Shares
of a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES
LOAD IMPOSED LOAD IMPOSED ON DEFERRED REDEMPTION EXCHANGE
ON PURCHASES REINVESTED DIVIDENDS SALES LOAD* FEES + FEES
- ------------- -------------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
None None None Equity T Fund None
</TABLE>
- ---------------------
* Shareholders of Emerging Markets, Equity T and Money Market Funds may pay a
quarterly shareholder investment services fee ("Services Fee") directly to
FRIMCo, based on the amount you have invested in the Funds. While FRIMCo
does not currently assess a Services Fee in connection with those Funds, it
may do so in the future.
+ Equity T Fund only: The Fund charges a redemption fee of 1% of the value of
the shares redeemed, which the Fund retains. Your redemption proceeds are
accordingly reduced. The proceeds of this fee are retained by the Funds to
offset tax consequences to the Fund that result from their redemption.
SPECIALTY PROSPECTUS
ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVER)
<TABLE>
<CAPTION>
TOTAL FUND
OTHER EXPENSES OPERATING
(AFTER EXPENSES (AFTER
MANAGEMENT REIMBURSEMENT REIMBURSEMENT,
FEE UNLESS NOTED) UNLESS NOTED)
---------- -------------- ---------------
<S> <C> <C> <C>
Real Estate Securities
Fund................... 0.85% 0.17% 1.02%
Emerging Markets Fund... 1.20% 0.44% 1.64%
Equity T Fund*.......... 0.67% 0.33% 1.00%
Limited Volatility Tax
Free Fund**............ 0.50% 0.21% 0.71%
Money Market Fund*...... 0.10% 0.05% 0.15%
U.S. Government Money
Market Fund**.......... 0.12% 0.16% 0.28%
Tax Free Money Market
Fund*.................. 0.15% 0.13% 0.28%
</TABLE>
- ---------------------
* FRIMCo has voluntarily agreed to waive a portion of its 0.75% management
fee for the Equity T Fund, up to the full amount of that fee, for all fund
expenses that exceed 1.00% of its average daily net assets on an annual
basis. Additionally, FRIMCo has voluntarily agreed to waive 0.15% of its
0.25%, 0.13% of its 0.25%, and 0.10% of its 0.25% managements fees for the
Money Market Fund, U.S. Government Money Market Fund, and the Tax Free
Money Market Fund, respectively. The waiver for each respective fund is
intended
4
<PAGE>
to be in effect for the current fiscal year, but may be revised or
eliminated at any time without notice to shareholders. The gross annual
total operating expenses absent the waiver would be 1.05%, .30%, .41% and
.38% of average net assets of the Equity T Fund, Money Market Fund, U.S.
Government Money Market Fund and Tax Free Money Market Fund, respectively.
** The Board of Trustees has approved, subject to shareholder approval, which
will be sought at a shareholder meeting expected to be held during 1998,
reducing the management fee to 0.3%.
These tables are intended to assist you in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's assets and share price. Each fund estimates that
it will have the expenses listed (expressed as a percentage of average net
assets) for the current fiscal year.
The reimbursements/waivers for each respective fund may be revised or
eliminated at anytime without notice to shareholders.
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Fund's annual return is 5% and that its operating expenses
are as described above, and that you sell your shares after the number of
years shown. These are projected expenses for each $1,000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Real Estate Securities Fund..................... $10 $31 $56 $128
Emerging Markets Fund........................... $16 $50 $91 $206
Equity T Fund +................................. $21 $42 $68 $142
Limited Volatility Tax Free Fund................ $ 7 $22 $39 $ 89
Money Market Fund............................... $ 2 $ 5 $ 8 $ 19
U.S. Government Money Market Fund............... $ 3 $ 9 $15 $ 35
Tax Free Money Market Fund...................... $ 3 $ 9 $15 $ 35
</TABLE>
- --------------------
+ You would pay the following expenses on an investment in Equity T Fund,
assuming no redemption: 1 year -- $10, 3 years -- $31, 5 years -- $55 and 10
years -- $126.
5
<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 Trust'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 Trust.
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING 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 Trust'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.
6
<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 Trust'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 Trust.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ------- ------- ------- ------
<S> <C> <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 in-
vestments............................ -- (.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 ($000
omitted)(d).......................... 271,490 172,673 127,271 65,457
Average commission rate paid per share
of security ($ 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 Trust'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.
7
<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 Trust'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 Trust.
LIMITED VOLATILITY TAX FREE FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .85 .81 .86 .94 1.01 1.17 1.25 1.21 1.15
Net realized and
unrealized gain (loss)
on investments........ (.21) .77 (.97) .42 .18 .35 (.03) .17 (.10)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... .64 1.58 (.11) 1.36 1.19 1.52 1.22 1.38 1.05
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10)
Total Distributions... (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 21.02 $ 21.24 $ 20.48 $ 21.45 $ 21.03 $ 20.85 $ 20.49 $ 20.51 $ 20.41
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 3.07 7.81 (0.54) 6.58 5.85 7.64 6.12 6.95 5.23
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses, to
average net assets.... .75 .74 .72 .75 .80 .84 .86 .74 .65
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
Portfolio turnover
(a)................... 74.34 73.91 71.71 24.05 18.21 129.12 99.00 89.93 67.24
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
</TABLE>
- ---------------------
* See notes to Financial Statements which appear in the Trust'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.
8
<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 Trust'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 Trust.
MONEY MARKET FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING 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.. .0549 .0601 .0447 .0342 .0403 .0618 .0823 .0922 .0759
LESS DISTRIBUTIONS:
Net investment income.. (.0922) (.0759) (.0549) (.0601) (.0447) (.0342) (.0403) (.0618) (.0823)
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
TOTAL RETURN (%)(A)..... 5.63 6.19 4.57 3.48 4.11 6.38 8.55 9.61 7.86
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets (a)........ .05 .06 .05 .07 .08 .07 .07 .06 .06
Operating expenses,
gross, to average
daily net assets (a).. .30 .26 .05 .07 .08 .07 .07 .06 .06
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
Net assets, end of year
($000 omitted)........ 496,932 533,643 502,302 415,998 347,464 316,426 226,339 145,550 116,369
Per share amount of
fees waived ($ omit-
ted).................. .0025 -- .0020 -- -- -- -- -- --
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust'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%.
9
<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 Trust'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 Trust.
U.S. GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .0526 .0580 .0380 .0284 .0347 .0573 .0773 .0861 .0693
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.0526) (.0580) (.0380) (.0284) (.0347) (.0573) (.0773) (.0861) (.0693)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 5.40 5.98 3.87 2.88 3.53 5.90 8.04 8.98 7.15
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets............ .25 .32 .57 .49 .41 .38 .41 .42 .33
Operating expenses,
gross, to average
daily net assets...... .50 .51 .57 .49 .41 .38 .41 .42 .33
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
Net assets, end of year
($000 omitted)........ 239,725 149,941 112,077 95,410 153,976 182,747 191,623 108,073 131,333
Per share amount of
fees waived ($
omitted).............. .0025 .0019 -- -- -- -- -- -- --
</TABLE>
- ---------------------
* See notes to Financial Statements which appear in the Trust's Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
10
<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 Trust'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 Trust.
TAX FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .0329 .0370 .0279 .0251 .0304 .0473 .0582 .0623 .0508
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.0329) (.0370) (.0279) (.0251) (.0304) (.0473) (.0582) (.0623) (.0508)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 3.35 3.76 2.83 2.55 3.09 4.84 5.99 6.42 5.24
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets............ .42 .48 .40 .43 .45 .45 .45 .45 .43
Operating expenses,
gross, to average
daily net assets...... .42 .48 .40 .43 .45 .46 .52 .61 .50
Net investment income
to average daily net
assets................ 3.28 3.69 2.84 2.52 3.03 4.73 5.82 6.28 5.36
Net assets, end of year
($000 omitted)........ 102,207 78,000 100,819 68,154 73,203 61,288 59,892 30,873 39,165
Per share amount of
fees waived ($
omitted).............. -- -- -- -- -- -- -- -- --
Per share amount of
fees reimbursed ($
omitted).............. -- -- -- -- -- .0001 .0007 .0016 .0007
</TABLE>
- ---------------------
* See notes to Financial Statements which appear in the Trust Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
(a) Periods less than one year are not annualized.
11
<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., Trust'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 Trust.
EQUITY T FUND
<TABLE>
<CAPTION>
1997 1996*
---- ------
<S> <C> <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 Trust'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.
12
<PAGE>
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCo's and
Russell's "multi-style, multi-manager diversification" investment method and
to obtain FRIMCo's and Russell's money manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936 and has
been providing comprehensive asset management consulting services for almost
30 years to institutional investors, principally large corporate employee
benefit plans. Russell and its affiliates have offices around the world -- in
Tacoma, New York, Toronto, London, Zurich, Paris, Sydney, Auckland and Tokyo.
Three functions form the core of Russell's consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
. 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 a way most
likely to achieve the client's objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both the investors' individual investment time
horizons and their ability to accept risk. FRIMCo and Russell believe that for
many, this can be accomplished through strategically purchasing shares in one
or more of the Funds, which have been structured to provide access to specific
asset classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities over the past 50 years have outperformed corporate debt in
absolute terms. However, what is generally true of performance over extended
periods will not necessarily be true at any given time during a market cycle,
and from time to time, asset classes with greater risk may also underperform
lower risk asset classes, on either a risk adjusted or absolute basis.
Investors should select a mix of asset classes that reflects their ability to
withstand market fluctuations over their investment horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary
13
<PAGE>
investment styles within an asset class, investors are better able to reduce
their exposure to an investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their
own accounts or in a fiduciary or agency capacity, which have entered
into asset management services agreements ("Agreements") with FRIMCo.
"Financial Intermediaries" include bank trust departments, registered
investment advisers, broker-dealers and other financial service
organizations; and
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries.
There is no specific minimum amount that must be invested in the Funds or in
the Trust.
The Funds generally offer their shares directly to individual (i.e., retail)
investors, although they may choose to do so. Financial Intermediaries which
have entered into Service Agreements with FRIMCo may acquire shares of the
Funds for their customers. Under the Agreements FRIMCo provides objective-
setting and asset-allocation assistance and services to Financial
Intermediaries, which in turn provide similar services to their customers.
Financial Intermediaries receive no compensation from FRIMCo or Class S Shares
of the Funds. However, Financial Intermediaries may charge their customers a
fee for providing these services and other trust or investment-related
services.
In the case of the Emerging Markets, Equity T and Money Market Funds, the
Agreement provides that a shareholder investment services fee (the "Services
Fee") may be paid to FRIMCo. The Services Fee is usually expressed as a
percentage of the client's assets invested in the Funds. The Services Fee may
include a fixed-dollar fee for certain specific services. The client and
FRIMCo agree to the Services Fee, which is determined by the amount of assets
the client expects to invest in the Funds, the nature and extent of services
that FRIMCo agrees to provide to the client, and other factors.
Either the client or FRIMCo may terminate an Agreement upon written notice.
FRIMCo does not anticipate terminating any 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 its services. If an Agreement is terminated,
FRIMCo will no longer provide asset-allocation, objective-setting or other
services to the client.
14
<PAGE>
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds' operations, including reviewing and approving
the Funds' contracts with FRIMCo, Russell and the money managers. The Trust'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:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers' investment
programs and results;
. manages, or hires money manager to manage, the Fund's Liquidity
Portfolios (see, The Glossary); and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCo's officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson jointly with another
portfolio manager identified herein has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, Multistrategy Bond, and Core Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge jointly with another portfolio manager identified
herein has primary responsibility for management of the Fixed I,
Diversified Bond, Fixed II, Volatility Constrained Bond, Fixed III,
Multistrategy Bond, Core Bond, and Emerging Markets Funds
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter jointly with another portfolio manager
identified herein has primary responsibility for management of the
International, International Securities and Non-US Equity Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Non-US
Equity Funds.
15
<PAGE>
. James M. Imhof, Manager of FRIMCo's Portfolio Trading, who manages the
Trust on a day to day basis, and has been responsible for ongoing
analysis and monitoring of the Fund's 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 Russell. Mr. Jornlin jointly with another
portfolio manager identified herein has primary responsibility for
management of the Emerging Markets and Real Estate Securities.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin jointly with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Diversified Equity, Equity II, Special
Growth, Equity III, Equity Income, Equity Q, Quantitative Equity, Equity
T, Multi-Style, and Aggressive Equity 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 1998 to 1994, Ms. Williams was Senior Research
Analyst with Russell. Ms. Williams jointly with another portfolio manager
identified herein has primary responsibility for management of the Equity
I, Diversified Equity, Equity II, Special Growth, Equity III, Equity
Income, Equity Q, Quantitative Equity, Equity T Funds, Multi-Style, and
Aggressive Equity Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services -- including objective-setting and asset-allocation technology, and
money manager research and evaluation assistance -- that Russell provides to
its other consulting clients. Russell does not receive any compensation from
the Funds for its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the
money managers of each Fund. On January 22, 1996, the shareholders of the
Trust's Funds voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as the
Trust's agent, pays the money managers for their investment selection
services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable to FRIMCo monthly on a pro rata basis, are
the following percentages of each Fund's average daily net assets: 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 Real Estate Securities and Emerging Markets Funds may be higher
than the fees charged by some mutual funds with similar objectives that use
only a single money manager.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fees for certain Funds. This arrangement is not part of the Management
Agreement with the Trust and may be changed or discontinued at any time.
FRIMCo currently calculates its management fee based on Funds average daily
net assets for each Fund less any Management Fee incurred on assets invested
in the Money Market Fund.
16
<PAGE>
The Board of Trustees has approved, subject to the approval of the
shareholders of the applicable Funds, which will be sought at a shareholder
meeting expected to be held during 1998, an increase in FRIMCo's Management
Fee for each of the Funds described in this prospectus. If the increase which
is designed to compensate FRIMCo for its services in managing assets as part
of securities lending, reverse repurchase and similar transactions is approved
by Shareholders the Management Fee for each Fund will remain unchanged except
as follows: Real Estate Securities Fund, %; Emerging Markets Fund, %;
Equity T Fund, %; Limited Volatility Tax Free Fund, %; U.S. Government
Money Market Fund, %; and Tax Free Money Market Fund, %.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other
than those expressly assumed by FRIMCo. The Funds' expenses for Class S Shares
for the year ended December 31, 1997, as a percentage of each Fund's average
net assets, are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent and record keeping fees payable to FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian;
. fees for independent auditing and legal services; and
. filing and registration fees payable to the SEC.
THE MONEY MANAGERS
Each Fund's assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Fund's assets among money managers at any time. FRIMCo may employ or terminate
a money manager at any time, subject to the approval by the Trust's Board of
Trustees (the "Board"). A Fund will notify its shareholders within 60 days of
when a money manager begins providing services. The money managers are
selected for the Funds based primarily upon the research and recommendations
of FRIMCo and Russell. FRIMCo and Russell evaluate 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 for any Fund.
From its management fees, FRIMCo, as the Trust's agent, pays fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average of
all the assets allocated to the manager for the quarter. For the year ended
December 31, 1997, management fees paid to the money managers were equivalent
to the following annual rates, expressed as a percentage of each Fund's
average daily net assets: Real Estate Securities Fund, 0.31%; Emerging Markets
Fund, 0.72%; Equity T Fund, 0.34%; Limited Volatility Tax Free Fund, 0.25%;
Money Market Fund, 0.0%; U.S. Government Money Market Fund, 0.00%; and Tax
Free Money Market Fund, 0.15%.
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after the Trust has paid FRIMCo. Fees paid
to the money managers are not affected by any voluntary or legal expense
limitations. Some money managers may receive investment research prepared by
Russell as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds.
17
<PAGE>
Equity T Fund is managed by J.P. Morgan Investment Management, Inc.
("Morgan"). The individual responsible for the management of the Fund is James
C. Weiss, who is a Vice President and Portfolio Manager in the U.S. Structured
Equity area. Mr. Weiss joined Morgan in 1992; prior to that, he 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. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies, and the more specific strategies developed by FRIMCo. Although the
money managers' activities are subject to general oversight by the Board and
the Trust's officers, neither the Board, the officers, FRIMCo (except with
respect to Money Market Fund and U.S. Government Money Market Fund), nor
Russell evaluate the investment merits of the money managers' individual
security selections.
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of portfolio securities that may
be purchased by the Funds are described in "Fund Investment Securities."
Specific investment practices that may be employed by the Funds are identified
in "Other Investment Practices." The risks associated with portfolio
investments by the Funds are described in those sections, as well as in "Risk
Considerations." Certain terms used in these sections are described in the
Glossary in this Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
FUND EXPOSURE EXPOSURE FOCUS
---- ----------- -------- -------------------------
<S> <C> <C> <C>
Real Estate Securities Fund.... 65-100% 35% Total return
Emerging Markets Fund.......... 65-100% 35% Maximum total return
Equity T Fund.................. 65-100% 35% Capital growth
Limited Volatility Tax Free
Fund.......................... 0% 100% Federal tax-exempt income
Money Market Fund.............. 0% 100% Maximum current income
U.S. Government Money Market
Fund.......................... 0% 100% Maximum current income
Tax Free Money Market Fund..... 0% 100% Maximum current income
</TABLE>
INVESTMENT OBJECTIVES
Each Fund's investment objective is "fundamental," which means each
investment objective may not be changed without the approval of a majority of
each Fund's shareholders. Certain investment policies may also be fundamental.
Ordinarily, each Fund will invest more than 65% of its total assets in the
types of securities identified in its investment objective. However, the Funds
may hold assets as cash reserves for temporary and defensive purposes when
their money managers believe a conservative approach is desirable, or when
suitable investments are unavailable.
18
<PAGE>
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. These 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.
These may include shares of real estate investment trusts ("REITs"),
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. For information on risks, see "Risk
Considerations."
The Fund will attempt to be fully invested at all times. However, the Fund
is permitted to hold up to 20% of the Fund's assets in liquid investments to
meet redemption requests.
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
(these companies are referred to as "Emerging Market Companies"). For purposes
of the Fund's operations, an "emerging market" country will be a country
having an economy and market that the World Bank or the United Nations would
consider 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 invest in all emerging markets at all times. Lack of
adequate custody arrangements or current legal requirements make investing in
some developing markets unfeasible. In the future, the Fund's money managers
may determine, based on information then available, to expand the 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.
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 and American Depository Receipts and European Depository Receipts
("Depository Receipts").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 U.S.
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 U.S. dollars.
19
<PAGE>
Certain emerging markets are closed in whole or in part to equity
investments by foreigners. The Fund may be able to invest in those markets
solely or primarily through governmentally authorized investment vehicles. For
information on risks, see "Risk Considerations."
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. To be fully exposed to the equity
markets, the Fund may purchase S&P 500 Index futures contracts. These
contracts may be considered to be derivative securities.
Most stock mutual funds are managed to maximize pre-tax total return,
without regard to the shareholder tax consequences of portfolio activity that
may result in taxable distributions. In contrast, the Fund seeks to achieve
its investment objective while minimizing shareholder tax consequences in
connection with the Fund's portfolio investment income and realized capital
gains. The Fund is designed for taxable investors who seek to minimize the
impact of taxes on their investment returns by participating on a long-term
basis in a broadly-diversified investment portfolio of equity securities. The
Fund is not recommended for either short-term investors, or for assets that
are already tax-deferred (such as assets held in 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 may sell portfolio securities whenever the money
manager deems it appropriate, the Fund will typically buy stocks with the
intention of holding the stocks 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. These losses can be used to
offset realized capital gains (whether long or short-term) and thereby reduce
capital gains distributions to shareholders.
The Fund intends to remain as fully invested as possible to enhance the
potential for attractive total returns. While the Fund is permitted to invest
its cash reserves in money market instruments, U.S. government obligations and
high-quality debt securities, the money manager will seek to be fully invested
in equity securities.
The Fund retains a redemption fee equal to 1% of the value of the shares
redeemed from all redemptions (other than redemptions in kind). The redemption
fee is intended to offset the potentially negative impact that redemptions can
have on the Fund's portfolio strategy and to contain costs. The 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 fee tends to be
advantageous to long-term investors and disadvantageous to short-term
investors.
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<PAGE>
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 Board of Trustees has approved, subject to
shareholder approval, which will be sought at a shareholder meeting expected
to be held during 1998, changing the Fund's investment objective to the
following, "to provide a high level of federal tax-exempt current income by
investing primarily in a diversified portfolio of investment grade municipal
securities." In conjunction with these and other changes, the Fund intends to
change its name to Tax Free Bond Fund. The Fund intends to invest 100% and
will always invest 80% of its net assets in municipal obligations, including
variable rate obligations.
The Fund may also invest up to 15% of its net assets in Securities subject
to legal or contractual restrictions on disposition or for which no readily
available market exists.
"Municipal obligations" are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia, and their
political subdivisions, agencies, and instrumentalities, or multi-state
agencies or authorities, the interest from which is exempt from federal income
tax, including the alternative minimum tax, in the opinion of the issuer's
bond counsel. Municipal obligations include floating or variable rate
obligations that have a demand feature.
The Fund may purchase from financial institutions (such as banks and
insurance companies) participation interests in 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 concludes meets the Fund's quality standards. The Fund may 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 on (i) a default under the terms of the municipal obligations,
(ii) when necessary to provide liquidity to meet redemptions, or (iii) to
maintain the required portfolio quality.
The Fund may purchase municipal obligations with a "put" or "standby
commitment." A put or "standby commitment" obligates the seller to buy the
underlying municipal obligation from the Fund at an agreed upon price and
time. If the seller does not honor the put or standby commitment for financial
reasons, the Fund may be a general creditor of the seller.
For information on risks, see "Portfolio Securities" and "Risk
Considerations."
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<PAGE>
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) U.S. government
obligations; (2) instruments of U.S. and foreign banks and branches ("bank
instruments"); (3) commercial paper of U.S. and foreign companies;
(4) corporate obligations; (5) variable amount master demand notes and (6)
U.S. government securities 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. See "Portfolio Securities" and
"Risk Considerations."
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 U.S. government obligations. The Fund may purchase
U.S. government obligations on a forward commitment basis. See "Portfolio
Securities."
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 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.
The Fund will purchase municipal obligations with demand features only when
the demand instrument and the underlying municipal obligations meet the Fund's
quality standards. The Fund may purchase municipal obligations with a put or
standby commitment. See "Portfolio Securities" and "Risk Considerations."
FUND INVESTMENT SECURITIES
In pursuing their investment objectives, the Funds described in this
Prospectus may invest principally in the securities described below.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Emerging Markets Fund, do not invest
in debt 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 to be "investment grade" securities, although Moody's and S&P
consider securities rated Baa and BBB, respectively, to have some speculative
22
<PAGE>
characteristics. The Funds, other than Emerging Markets Fund, will sell
securities whose ratings drop below these minimum ratings, in a prudent manner
as determined by the money managers. The market value of debt securities
generally varies inversely with interests rates.
DEPOSITORY RECEIPTS
The Emerging Markets Fund may invest in Depository Receipts. These are
securities traded in the United States that are issued typically in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be connected.
EQUITY SECURITIES
The Real Estate Securities, Emerging Markets and Equity T Funds invest
primarily in equity securities, and Emerging Markets and Equity T Funds may
invest in common stock equivalents. The following constitute common stock
equivalents: rights and warrants, convertible securities and Depository
Receipts. Common stock equivalents may be converted into or provide the holder
with the right to common stock. The Emerging Markets and Equity T Funds may
also invest in other types of equity securities, including preferred stocks
and equity derivative securities.
INVESTMENT COMPANY SECURITIES
Each Fund may invest up to 10% of its total assets in shares of other
investment companies that invest in securities which a Fund may otherwise
invest. Each Fluctuating Fund may invest its cash reserves in the Money Market
Fund. Because of restrictions on direct investment by U.S. entities in certain
countries, other investments may provide the most practical or only way for
Emerging Markets Fund to invest in certain markets. These investments may
involve the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations
under the 1940 Act. Emerging Markets Fund also may incur tax liability to the
extent it invests in the stock of a foreign issuer that is a "passive foreign
investment company" ("PFIC"), regardless of whether the PFIC makes
distributions to the Fund. See "Taxes" in this Prospectus and in the SAI.
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate U.S.
government obligations. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and GNMA participation certificates, are issued or
guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency
or instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of
credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury,
there is no guarantee that the U.S. government will provide support to such
agencies or instrumentalities. Accordingly, such U.S. government securities
may involve risk of loss of principal and interest.
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<PAGE>
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
U.S.
REAL LIMITED GOVERNMENT TAX FREE
ESTATE EMERGING VOLATILITY MONEY MONEY MONEY
SECURITIES MARKETS EQUITY T TAX FREE MARKET MARKET MARKET
TYPE OF PORTFOLIO SECURITY FUND FUND FUND FUND FUND FUND FUND
- -------------------------- ---------- -------- -------- ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stocks...........
Common stock equivalents
(warrants).............
Common stock equivalents
(options)..............
Common stock equivalents
(convertible debt
securities)............
Common stock equivalents
(depository receipts)..
Preferred stocks........
Equity derivative secu-
rities.................
Debt securities (below
investment grade or
junk bonds)............
U.S. government obliga-
tions..................
Municipal obligations...
Investment company secu-
rities.................
Foreign securities......
</TABLE>
24
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each
of which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed
to reduce risks.
<TABLE>
<CAPTION>
U.S.
REAL LIMITED GOVERNMENT TAX FREE
ESTATE EMERGING VOLATILITY MONEY MONEY MONEY
SECURITIES MARKETS EQUITY T TAX FREE MARKET MARKET MARKET
TYPE OF PRACTICE FUND FUND FUND FUND FUND FUND FUND
---------------- ---------- -------- -------- ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves...........
Repurchase
agreements(1)..........
When-issued and forward
commitment securities..
Reverse repurchase
agreements.............
Lending portfolio
securities, not to
exceed 33 1/3% of total
Fund assets............
Illiquid securities
(limited to 15% of
Fund's net assets).....
Illiquid securities
(limited to 10% of
Fund's net assets).....
Forward currency
contracts(2)...........
Write (sell) call and
put options on
securities, securities
indexes and foreign
currencies(3)..........
Purchase options on
securities, securities
indexes, and
currencies(3)..........
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures(4)..........
Credit and liquidity
enhancements...........
Liquidity Portfolios....
</TABLE>
- ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize
upon the security, may incur a loss if the value of the security declines
and may incur disposition costs in liquidating the security.
(2) Emerging Markets Fund may not invest more than one-third of its assets in
these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
Investment Restrictions. If a Fund changes its investment objective or
policies, you should consider whether the Fund remains right for you. The
Funds are subject to additional investment policies and restrictions described
in the SAI, some of which are fundamental.
Money Market, U.S. Government Money Market and Tax Free Money Market
Funds. Each of the Money Market Funds seeks to maintain a stable net asset
value of $1.00 per share for purposes of purchases and
25
<PAGE>
redemptions by valuing its portfolio securities at "amortized cost" in
compliance with the 1940 Act's Rule 2a-7 (the "Rule"). Each Money Market Fund
maintains a dollar-weighted average portfolio maturity of 90 days or less, and
invests only in securities with a remaining maturity, as determined under the
Rule, of 397 days or less. The Money Market Funds limit their investments to
those securities that their money managers determine present minimal credit
risk, in accordance with Board-adopted procedures.
The Money Market Funds will invest in money market instruments (in the case
of Tax Free Money Market Fund, in municipal obligations) that have been rated
in one of the two highest rating categories by two NRSROs, such as S&P and
Moody's. A "Tier 1" security is one that has been rated by either S&P or
Moody's in the highest rating category, or, if unrated, is of comparable
quality. A "Tier 2" security is one that has been rated in the second highest
category by either S&P or Moody's, or, if unrated, is of comparable quality. Up
to 5% of the total assets of a Money Market Fund may be invested in a single
Tier 1 security (other than U.S. Government obligations). In addition, a Money
Market Fund may not invest more than 5% of its total assets on Tier 2
securities, and may not invest more than 1% of its total assets in any single
Tier 2 security. See the SAI for a description of the NRSROs.
RISK CONSIDERATIONS
Concentration in Real Estate Industry. Real Estate Securities Fund will
concentrate more than 25% of its total assets in the real estate and real
estate related industries. The Fund is subject to the risks associated with
direct ownership of real estate. Additional risks include declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding 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, equity REITs may be affected by changes in the value of the
underlying properties owned by the REITs, while mortgage REITs may be affected
by the quality of any credit extended. Moreover, the underlying portfolios of
equity and mortgage REITs may not be diversified, and therefore are subject to
the risk of financing a single or a limited number of projects. REITs 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 Code or to maintain
their exemption from the 1940 Act.
Municipal Obligations. The Tax Free Funds may invest in municipal
obligations, which involve certain risks. Municipal obligations may be affected
by economic, business or political developments. These securities 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 legislation is adopted, the
Board will reevaluate the Tax Free Funds' investment objectives and may submit
possible changes in the structure of the Funds to their shareholders.
High Risk Bonds. 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.
26
<PAGE>
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. While this debt may have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions. Emerging Markets Fund's money managers will
seek to reduce the risks associated with investing in lower-rated debt
securities by limiting the Fund's holding in the securities and by the depth of
the managers' credit analysis. For additional information, refer to the SAI.
Credit and Liquidity Enhancements. Money Market and Tax Free Money Market
Funds may invest in securities supported by credit and liquidity enhancements
from third parties. These enhancements are generally letters of credit from
foreign or domestic banks. Adverse changes in the banks' credit quality could
cause losses to the Funds and may affect their net asset values.
Investment in Foreign Securities. The Funds, other than the Money Market
Funds, may invest in foreign securities traded on U.S. or foreign exchanges or
in the over-the-counter market. Investing in securities issued by foreign
governments and corporations involves considerations and risks not typically
associated with investing in obligations issued by the U.S. 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 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 U.S. 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 U.S. dollar will result
in a corresponding change in the U.S. 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 U.S. dollar.
Further, certain emerging market currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Many emerging market countries have experienced substantial,
and in some periods extremely high,
27
<PAGE>
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.
The Money Market Fund may invest in bank instruments, which include European
certificates of deposit ("ECDs", European time deposits ("ETDs") and Yankee
certificates of deposit ("Yankee CDs"). 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 U.S.
and foreign banks; ETDs are U.S. dollar denominated time deposits in a foreign
branch of a U.S. bank or a foreign bank; and Yankee CDs are certificates of
deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars
and held in the United States. 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 Money Market Fund.
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange
rate or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds (except the Money Market Funds) may
employ certain risk management practices using certain derivative securities
and techniques (known as "derivatives"). Markets in some countries currently
do not have instruments available for hedging transactions. To the extent that
such instruments do not exist, a money manager may not be able to hedge its
investment effectively in such countries. Furthermore, a Fund engages in
hedging activities only when its money managers deem it to be appropriate, and
does not necessarily engage in hedging transactions with respect to each
investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if
it had not entered into a hedging position. If the correlation between a
hedging position and a portfolio position is not properly protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
PORTFOLIO TRANSACTION POLICIES
Money managers make decisions to buy and sell securities for the Fund assets
assigned to them. FRIMCo makes determinations for any other Fund assets.
Limited Volatility Tax Free Fund seeks to realize long-term (rather than
short-term) capital gains when making portfolio management decisions, and
Equity T Fund seeks to minimize the impact of taxes on its shareholders'
returns. These factors will effect the two Funds' portfolio turnover rates.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another money manager for the Fund (or for another Fund) is
purchasing the same security. Also, when a money manager's services are
terminated, the new money manager may significantly restructure an investment
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
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 Equity T Fund. The annual
28
<PAGE>
portfolio turnover rates for the Funds (other than the Money Market Funds) are
shown in the Financial Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the
Trust's securities and the selection of brokers and dealers (including
affiliates) ("Brokers") that, in the best judgment of FRIMCo and the money
managers, provide prompt and reliable execution at favorable prices and
reasonable commission rates. In addition to price and commission rates,
Brokers may be selected based on research, statistical or other services that
they provide. The Trust may pay commission rates that exceed rates that other
Brokers may have charged if the Trust concludes the commissions are reasonable
in relation to the value of the brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money
manager believes a Fund will receive competitive execution, price, and
commissions. When these transactions are completed, Russell Securities will
refund up to 70% of the commissions paid by the Fund after reimbursement for
research services provided to FRIMCo. Also, the Funds may effect portfolio
transactions through and pay brokerage commissions to Brokers that are
affiliates of the money managers.
29
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed--all distributions are at the Board's
discretion. Currently, the Board intends to declare dividends from net
investment income and, in the case of the Money Market Funds, net short-term
capital gains (if any), according to the following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE FUNDS
-------- ------- -----
<S> <C> <C>
Daily...... 1st business day of following Money Market Funds
month
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 their net asset values. This occurs at the close of the
New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time) on each
business day. Net investment income is credited daily to the accounts of
shareholders of record prior to the net asset value calculation. The income is
paid monthly.
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains distributions through
October 31 (excess of capital gains over capital losses), generally in mid-
December. To meet certain legal requirements, a Fund may declare special year-
end dividend and capital gains distributions during October, November or
December to shareholders of record in that month. These latter distributions
are deemed to have been paid by a Fund and received by you on December 31 of
the prior year, provided that you receive them by January 31. Capital gains
realized during November and December will be distributed to you during
February of the following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account
is a tax-deferred account, dividends paid to you would be included in your
gross income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you
reinvested the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by
delivering written notice no later than ten days prior to the payment date to
the Transfer Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
30
<PAGE>
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital
gains to shareholders and meet other requirements of the Code relating to the
sources of its income and diversification of assets. Accordingly, a Fund will
generally not be liable for federal income or excise taxes based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code. Emerging Markets
Fund may incur tax liability to the extent it invests in PFICs. See "Portfolio
Securities" and the SAI. The Funds may be subject to nominal, if any, state
and local taxes.
For federal income tax purposes, the dividends from net investment income
(except those of the Tax Free Funds) and any excess of net short-term capital
gains over net long-term capital loss that you receive from the Funds are
considered ordinary income. However, depending upon the relevant state tax
rules, a portion of the dividends paid by the Money Market and U.S. Government
Money Market Funds attributable to direct U.S. Treasury and agency obligations
may be exempt from state and local taxes. 28% or 20% capital gains
distributions declared by the Board are taxed at the respective capital gains
rates regardless of the length of time you have held the shares. Distributions
of income and capital gains are taxed in the manner described above, whether
you receive them in cash or reinvest them in additional shares of the Funds.
Distributions paid in excess of a Fund's earnings will be treated as a
nontaxable return of capital.
A Fund will notify you of the source of its dividends and distributions at
the time they are paid. After the close of each calendar year, the Funds will
advise their shareholders of the amounts:
. of ordinary income dividends, 28% capital gains dividends, and 20%
capital gains distributions, including any amounts which are deemed paid
on December 31 of the prior year;
. of dividends which qualify for the 70% dividends-received deduction
available to corporations;
. of the Emerging Markets Fund's foreign taxes withheld;
. of the Tax Free 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 U.S. government, Treasury and agency
securities.
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 its money manager's control. Shareholder
purchase and redemption activity, as well as the Fund's performance, will
impact the amount of capital gains realized. Capital gains distributions by
Equity T Fund may vary considerably from year to year.
If you are a corporate investor, a portion of the dividends from net
investment income paid by the Real Estate Securities or Equity T Funds will
generally qualify for the dividends-received deduction. However, the portion
depends on the aggregate qualifying dividend income received by either Fund
from domestic (U.S.) sources. Certain holding period and debt financing
restrictions may apply to corporate investors seeking to claim the deduction.
You should consult your tax adviser.
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
31
<PAGE>
two portfolios of a mutual fund). Except for shareholders of the Tax Free
Funds, any loss incurred on the 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 the shares. For
shareholders of the Tax Free Funds, any loss incurred on the sale or exchange
of the Funds' shares, held for six months or less, will be disallowed to the
extent of exempt-interest dividends (described below) paid with respect to the
shares. Any loss not disallowed will be treated as a long-term capital loss to
the extent of capital gain dividends received with respect to such shares.
The Tax Free Funds intend to continue to qualify to pay "exempt-interest
dividends" to their shareholders by maintaining, as of the close of each
quarter of their taxable years, at least 50% of the value of their total
assets in municipal obligations. If the Funds satisfy this requirement,
distributions from net investment income to shareholders will be exempt from
federal income taxation to the extent net investment income is represented by
interest on municipal obligations. 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, the dividends are treated as ordinary income, whether paid in cash
or reinvested in additional shares.
Each Fund is required to withhold 31% of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate 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.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
PERFORMANCE INFORMATION
From time to time, the Funds may publish their total return and average
annual total return and, in the case of certain Funds, current yield and tax
equivalent yield, in advertisements and investor communications. Total return
information generally will include a Fund's average annual compounded rate 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. The average
annual total returns for Class S Shares 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, 1997 1997 1997 INCEPTION
1997 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Real Estate Securities.. 18.99% 17.84% -- 14.03% 07/28/89
Emerging Markets*....... (3.45) -- -- 5.95 01/29/93
Equity T**.............. 31.73 -- -- 31.31 10/07/96
Limited Volatility Tax
Free................... 4.92 4.33 5.34% 5.48 09/05/85
Money Market*........... 5.79 5.13 6.21 7.40 10/15/81
U.S. Government Money
Market................. 5.59 4.74 5.72 5.90 09/05/85
Tax Free Money Market... 3.61 3.22 4.16 4.21 05/08/87
</TABLE>
32
<PAGE>
- ---------------------
* The performance for the Emerging Markets and Money Market Funds prior to
April 1, 1995 is reported gross of management fees. For periods after that
date, performance results are reported net of management fees, but gross of
any shareholder investment services fees. Descriptions of these shareholder
investment services fees can be obtained from FRIMCo 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 -- 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 on the
stated dividend rate of each security in the Fund's portfolio. The calculation
includes all recurring fees that are charged. The 30-day yield for the year
ended December 31, 1997 for the shares of the Limited Volatility Tax Free Fund
was 3.53%.
The Limited Volatility Tax Free Fund may also utilize tax equivalent yields
computed in the same manner as yield, 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, 1997, based on a tax rate of 39.6%, was 5.85%.
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 a Money Market Fund refers to the
income generated by an investment in the Money Market Fund over a seven-day
period (the period will be stated in the advertisement). The yield is
calculated by determining the net change, excluding 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 -- 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 1997 for the
seven-day (and thirty-day, in the case of the Tax Free Money Market Fund)
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............ 5.58% 5.74% 5.76% 5.93% 5.70% 5.86% 5.73% 5.90%
U.S. Government Money
Market................. 5.48% 5.63% 5.57% 5.73% 5.44% 5.59% 5.50% 5.65%
Tax Free Money Market
7 day period........... 3.32% 3.37% 3.87% 3.94% 3.85% 3.92% 3.89% 3.96%
30 day period........... 3.18% 3.23% 3.70% 3.77% 3.66% 3.73% 3.70% 3.76%
</TABLE>
The Tax Free Money Market Fund may also utilize tax equivalent yields,
computed in the same manner as yield, with adjustment for a stated income tax
rate. The following are the current and effective tax equivalent
33
<PAGE>
yields for shares of the Tax Free Money Market Fund, based on a tax rate of
39.6%, during 1997 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............. 5.49% 5.58% 6.41% 6.53% 6.37% 6.49% 6.44% 6.56%
30 day period........... 5.27% 5.35% 6.13% 6.24% 6.07% 6.17% 6.13% 6.23%
</TABLE>
Each Fund may also advertise nonstandardized performance information that is
for periods in addition to those that are legally required by the SEC.
HOW NET ASSET VALUE IS DETERMINED
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 redemption orders are
tendered. For the Real Estate Securities, Emerging Markets, Equity T and
Limited Volatility Tax Free Funds, a business day is one on which the NYSE is
open for trading. A business day for the Money Market Funds includes any day on
which the NYSE is open for trading and the Boston Federal Reserve Bank is open.
Net asset value per share is computed for Class S Shares of 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
their net asset value as of the close of regular trading on of the NYSE
(currently 4:00 p.m. Eastern time). Money Market Fund and U.S. Government Money
Market Fund also determine their net asset values as of 1:00 p.m. Eastern time,
and Tax Free Money Market Fund as of 12:00 noon Eastern time.
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value their portfolio securities
at "fair market value." This generally means that equity securities and fixed-
income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price or, if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. U.S. 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 often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
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. If there is
no last sale or mean bid price, the securities may be valued on the basis of
prices provided by a pricing service when the prices are believed to be
reliable.
The Money Market Funds' portfolio investments are valued using the amortized
cost method. Under this method, a portfolio instrument is initially valued at
cost, and thereafter a constant accretion/amortization to
34
<PAGE>
maturity of any discount or premium is assumed. The Money Market Funds utilize
the amortized cost valuation method in accordance with the Rule. Money market
instruments maturing within 60 days of the valuation date held by the
Fluctuating Funds are also valued at "amortized cost," unless the Board
determines that amortized cost does not represent fair value. While amortized
cost provides certainty in valuation, it may result in periods when the value
of an instrument is higher or lower than the price a Fund would receive if it
sold the instrument.
Municipal obligations are appraised or priced by an independent pricing
source, approved by the Board, which utilizes relevant information, such as
bond transactions, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
HOW TO PURCHASE SHARES
Shares of the Funds are sold without a sales load on each business day at the
next determined net asset value after receipt of an order in proper form, and
the order has been accepted. All purchases must be made in U.S. dollars. The
Funds reserve the right to reject any purchase order.
ORDER PROCEDURES
Orders by investors (except participants in the Three Day Settlement Program
(the "Settlement Program") described below) to purchase Fund shares must be
received by the Transfer Agent on any day when Fund shares are offered, prior
to the following deadlines:
<TABLE>
<S> <C>
Close of the NYSE (currently 4:00 Real Estate Securities, Emerging Markets, Equity T
p.m. Eastern Time) and Limited Volatility Tax Free Funds
11:45 a.m. Eastern Time Tax Free Money Market Fund
12:15 p.m. Eastern Time U.S. Government Money Market Fund
12:45 p.m. Eastern Time Money Market Fund
</TABLE>
You may transmit your purchase orders to the Transfer Agent by telephone,
mail, or entry into the shareholder recordkeeping system.
Orders for the Money Market Funds' shares placed prior to the deadlines noted
above and in proper form can be accepted for pricing and investment, and will
begin earning income, on that day. Money Market Funds' orders received after
the designated deadlines will not be accepted for pricing and investment until
the next business day. Orders for shares of any Fund that are not accepted
prior to the designated time for the Fund cannot be invested in the Fund nor
begin to earn income until the next business day.
35
<PAGE>
Payment Procedures: The Custodian or Transfer Agent (depending on your method
of payment) must receive payment for the purchase of shares on the day the
order is accepted (except for participants in the Settlement Program). You may
pay for Fund orders in several ways:
Federal Funds Wire. You may wire federal funds to the Custodian.
Automated Clearing House ("ACH"). You may pay for purchases through ACH to
the Custodian. However, funds transferred by ACH 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. In that case, your order would be
placed on the next business day.
Automated Investment Program. You 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 your bank account.
A separate transfer is required for each Fund in which you purchase shares. You
may terminate an automatic investment program at any time. Contact your
Financial Intermediary 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 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 U.S. funds and must be drawn in U.S. dollars
on a U.S. bank. Investments in a Money Market Fund will be effected only when
the check or draft is converted to federal funds. The investment will not begin
to earn dividend income until the receipt of federal funds by the Fund.
Investments in the Fluctuating 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 NYSE (currently 4:00 p.m. Eastern time). When the check or
draft is received by the Transfer Agent after the close of the NYSE, the order
will be effected on the next business day.
IN-KIND EXCHANGE OF SECURITIES
The Transfer Agent may, at its discretion, permit you to purchase Fund shares
by exchanging securities you currently own for Fund shares. Any securities
exchanged must: meet the investment objective, policies and limitations of the
particular Fund, have a readily ascertainable market value, be liquid and not
be subject to restrictions on resale, and have market value, plus any cash,
equal to at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. Investors contemplating an in-kind exchange should consult their tax
advisers.
The basis of the exchange will depend upon the relative net asset value of
the Fund 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.
36
<PAGE>
THREE DAY SETTLEMENT PROGRAM
The Trust will accept orders from financial institutions to purchase shares
of the Fluctuating 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 resulting from non-receipt of
payment. For further information on the Settlement Program, contact the Trust.
THIRD PARTY TRANSACTIONS
If you are purchasing Fund shares through a program offered by a Financial
Intermediary, you may be required to pay additional fees to the Financial
Intermediary. You should contact your Financial Intermediary for information
concerning additional fees.
EXCHANGE PRIVILEGE
You may exchange shares of any Fund for shares of any other 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 Trust through another prospectus under certain conditions and only in
states where the exchange may be legally made. For additional information,
including prospectuses for other Funds, contact a Financial Intermediary or the
Trust. Exchanges may be made (i) by telephone if the registrations of the two
accounts are identical; or (ii) in writing addressed to the Trust.
An exchange is a redemption of shares and is treated as a sale for income tax
purposes. Thus, 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).
You should consult your tax adviser. Exchanges from the Equity T Fund will be
considered to be redemptions and will be subject to a redemption fee (see "How
to Redeem Shares" in this Prospectus).
HOW TO REDEEM SHARES
If you are uncertain of the redemption requirements, you should telephone
your Financial Intermediary or the Funds at (800) 972-0700; in Washington (253)
627-7001.
Fund shares may be redeemed on any business day at the next determined net
asset value after receipt of a redemption request in proper form as described
below. In the case of 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 Equity T Fund. See "Investment Objectives and
Practices -- Equity T Fund" in this Prospectus for more information. As with
the other Funds, shares of Equity T Fund may be redeemed on any business day
after the receipt of a redemption request in proper form.
Payment will ordinarily be made in seven days. Generally, redemption proceeds
will be wire-transferred to your 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 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 made by check may be withheld for up to 15 days after
the date of purchase to assure that the check clears. Upon request, redemption
proceeds will be mailed to your address of
37
<PAGE>
record or to an alternate address you designate, provided your request is sent
to the Transfer Agent in proper form.
Request Procedures. Requests by investors to redeem Fund shares must be
received by the Transfer Agent on a business day, prior to the following
deadlines:
<TABLE>
<S> <C>
Close of the NYSE (currently 4:00 Real Estate Securities, Emerging
p.m. Eastern Time) Markets, Equity T and Limited
Volatility Tax Free Funds
11:45 a.m. Eastern Time Tax Free Money Market Fund
12:15 p.m. Eastern Time U.S. Government Money Market Fund
12:45 p.m. Eastern Time Money Market Fund
</TABLE>
You may tender your redemption request to the Transfer Agent by telephone,
mail, or by entry into the shareholder recordkeeping system. You may also
redeem shares through the Systematic Withdrawal Payment Program, which is
described below.
Redemption requests placed for the Money Market Funds prior to the above
times will be tendered that day. While redemption requests for the Money Market
Funds will be taken until 4:00 p.m. Eastern time, they will not be tendered
until the next business day.
Requests for redemption by telephone or entry into the shareholder
recordkeeping system must follow the procedures set forth in the Account
Registration and Investment Instruction Form. 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, you should use
the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to your Financial
Intermediary or to FRIMCo, 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 after receipt by FRIMCo of all
required documents in good order. In the case of 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:
A. A letter of instruction or a stock assignment specifically designating
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. Any 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 Program
provides an automated method for you to redeem a predetermined dollar amount
from your Fund shareholder account, in order to meet a standing request. The
SWP Program can be used to meet any request for periodic distributions of
assets from Fund shareholder accounts. Because of its investment objective and
management strategies, Equity T Fund does not participate in the SWP Program,
and the Fund's shareholder's may not arrange for SWP distributions from the
Fund.
38
<PAGE>
SWP Offering Date and Payment Procedures. SWP distributions occur once a
month and are paid by wire or check, according to the instructions you provide
on the SWP form. If you have more than one Fund from which an SWP is to be
received, you 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. You can schedule monthly, quarterly, semiannual or
annual distribution payments.
SWP Distribution by Wire. Federal funds wire payments will be sent to a bank
you designate on the payment date.
SWP Distribution by Check. Checks will be sent on the payment date by U.S.
Postal Service first class mail, from Boston, Massachusetts, to the address you
request.
SWP Distribution by Electronic Fund Transfer. Electronic fund transfer
payments will be sent to a bank you designate on the payment date.
You must complete and mail a SWP form to your Financial Intermediary or to
FRIMCo, Attention: Frank Russell Investment Company, Operations Department,
P.O. Box 1591, Tacoma, WA 98401-1591. The SWP form must be received by FRIMCo
five business days before the initial distribution date.
Redemption in Kind. A Fund may pay any portion of its redemption proceeds in
excess of $250,000 by distributing portfolio securities to you, rather than
paying you in cash. This is called redemption in kind. You will incur brokerage
charges on the sale of these portfolio securities. The Funds reserve the right
to suspend redemptions or to postpone payment dates if any unlikely emergency
conditions develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal distributor for Trust shares. The Distributor receives no
compensation from the Trust for its services with respect to Class S Shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, prepares tax
records and provides portfolio recordkeeping services. The Custodian may
deposit securities in securities depositories or use subcustodians. The
Custodian has no responsibility for the supervision and management of the
Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds'
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from FRIMCo.
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ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust.
Russell has the right to grant (and withdraw) the nonexclusive use of the name
"Frank Russell" or any variation of the name to any other investment company
or other business enterprise.
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Fund's shares may be offered in multiple classes. Shares of each
class of a Fund represent proportionate interests in the assets of that Fund,
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 the
dividends and distributions earned on the assets belonging to the Fund that
the Board declares. Each share of a class of a Fund has one vote in Trustee
elections and other matters submitted for shareholder vote. There are no
cumulative voting rights. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Special meetings may be called
by the Trustees at their discretion, but must be called by the Trustees upon
the written request of shareholders owning at least 10% of the Trust's
outstanding shares. On any matter which affects only a particular Fund or
class, only shares of that Fund or class are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
In addition to offering Class S Shares, Emerging Markets and Real Estate
Securities Funds offer beneficial interests in Class C Shares, which are
described in a separate prospectus. Class C Shares are designed to meet
different investor needs and are subject to both a Rule 12b-1 distribution fee
and a shareholder servicing fee. These fees may effect the performance of the
Class C Shares. To obtain more information about Class C Shares, contact your
Financial Intermediary, or write or telephone the Trust.
At , 1998, the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their names because they own more than 25% of
the voting shares of the indicated Funds:
[TO BE FILED BY AMENDMENT]
MONEY MANAGER PROFILES
The money managers, other than the money manager for Money Market and U.S.
Government Money Market Funds, have no other affiliations with the Funds,
FRIMCo, or with Russell. Each money manager has been in business for at least
three years and is principally engaged in managing institutional investment
accounts. The money managers may also serve as managers or advisers to other
Portfolios, or to other clients of Russell, 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
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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%.
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.P., 101 California Street, San Francisco, CA
94111, is a California limited partnership and a registered investment adviser.
Montgomery Asset Management, Inc. is the general partner of Montgomery Asset
Management, L.P. and Montgomery Group Holdings, Inc. is the sole limited
partner. Montgomery Asset Management, Inc. and Montgomery Group Holdings, Inc.
may be deemed control persons of Montgomery Asset Management, L.P.
EQUITY T FUND
J.P. Morgan Investment Management Inc. See: Emerging Markets Fund.
LIMITED VOLATILITY TAX FREE FUND
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, MA 02116, is a
wholly owned, indirect subsidiary of Sun Life Assurance Company of Canada
(U.S.), 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.
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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 is authorized to give any information or
make any representation 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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GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries
Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs")
Cash reserves -- Real Estate Securities, Emerging Markets, Equity T and
Limited Volatility Tax Free Funds may invest their cash reserves (i.e., funds
awaiting investment) in money market instruments and in debt securities of
comparable quality to each Fund's permitted investments. As an alternative to
a Fund directly investing in money market instruments, the Funds and their
money managers may elect to invest the Funds' cash reserves in the Trust's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its
management fee on that portion of a Fund's assets invested in the Trust's
Money Market Fund.
Board -- The Board of Trustees of the Trust
Code -- Internal Revenue Code of 1986, as amended
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trust's custodian and
portfolio accountant
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. 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.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into an Agreement with FRIMCo, and
institutions or individuals who have acquired Fund shares through institutions
or Financial Intermediaries
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Emerging market companies -- 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.
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Service Agreements with FRIMCo
Fluctuating Funds -- Real Estate Securities, Emerging Markets, Equity T and
Limited Volatility Tax Free Funds, each a Portfolio of the Trust. The
Fluctuating Funds have fluctuating net asset values, in contrast to the Money
Market Funds, which seek to maintain a stable net asset value of $1 per share.
FNMA -- Federal National Mortgage Association
Forward Commitments -- Each Fund may agree 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 the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at
a future date. Emerging Markets Fund generally does not enter into forward
contracts with terms greater than one year, and typically enters into forward
contracts only under two circumstances. First, if the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Fund's money managers believe
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of the Fund's
portfolio securities denominated in the currency. Emerging Markets Fund will
not enter into a forward contract if, as a result, it would have more than
one-third of its assets committed to such contracts (unless it owns the
currency that it is obligated to deliver or has caused the Custodian to
segregate segregable assets having a value sufficient to cover its
obligations). Although forward contracts are used primarily to protect
Emerging Markets Fund from adverse currency movements, they involve the risk
that currency movements will not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trust's
administrator, manager and transfer and dividend paying agent
Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax
purposes, and each Fund has its own investment objective, policies and
restrictions. Seven Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
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interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. A Fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA -- Government National Mortgage Association
Illiquid securities -- Real Estate Securities, Emerging Markets, Equity T and
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
maturing in more than seven days, that are illiquid because of the absence of a
readily available market or because of legal or contractual resale
restrictions. In the case of the Money Market Funds, this restriction is 10% of
each Fund's net assets. No Fund will invest more than 10% of its respective net
assets (taken at current value) in securities of issuers that may not be sold
to the public without registration under 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.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service
Lending portfolio securities -- Real Estate Securities, Emerging Markets,
Equity T, Money Market and 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), U.S. government or U.S. government
agency securities as collateral in an amount equal to at least 102% for loans
of U.S. securities and 105% for Non-U.S. securities, of the current market
value of loaned securities. The collateral will be "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 the respective percentages set
forth above of the market value of the loaned securities. If the borrower of
the securities fails 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.
Liquidity Portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of Real Estate
Securities, Emerging Markets and Equity T Funds' assets assigned to a Liquidity
Portfolio. The Liquidity Portfolio will be used to temporarily create an equity
exposure for cash balances until those balances are invested in securities or
used for Fund transactions.
Money Market Funds -- Money Market, U.S. Government Money Market and Tax-Free
Money Market Funds, each a Portfolio of the Trust. Each Money Market Fund seeks
to maintain a stable net asset value of $1 per share.
Moody's -- Moody's Investors Service, Inc., an NRSRO
municipal obligations -- 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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<PAGE>
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 U.S. government or fully collateralized by U.S. government obligations;
industrial development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
net asset value (NAV) -- The value of a mutual fund is determined by
deducting the Fund's liabilities from the total assets of the portfolio. The
net asset value per share is determined by dividing the net asset value of the
Fund by the number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as S&P
or Moody's
NYSE -- New York Stock Exchange
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indexes in order to hedge against
risks of stock market or industry-wide stock price fluctuations.
PFIC -- A passive foreign investment company. Emerging Markets Fund may
purchase interests in an issuer that is considered a PFIC under the Code.
Prime Rate -- The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers
REITs -- Real estate investment trusts
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 "Illiquid Securities" in this Glossary, a Fund will
not invest more than 15% (10%, in the case of each Money Market Fund) of its
net assets (taken at current market value) in repurchase agreements maturing in
more than seven days.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction where 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.
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The Fund retains record ownership of the transferred security, 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, are segregated on the Fund's records
while a reverse repurchase agreement is in effect.
the Rule -- Rule 2a-7 under the 1940 Act, which governs the operations of the
Money Market Funds
Russell -- Frank Russell Company, consultant to the Trust and to the Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- The Trust's Statement of Additional Information, dated as noted on the
first page of this prospectus
SEC -- U.S. Securities and Exchange Commission
Services Fee -- The quarterly investment services fee that may be assessed in
the future by Emerging Markets, Equity T and Money Market Funds, and which
would be paid to FRIMCo
Shares -- The Class S Shares in the Funds. Each Class S Share of a Fund
represents a share of beneficial interest in the Fund
Tax Free Funds -- Limited Volatility Tax Free and Tax Free Money Market Funds
Transfer Agent -- FRIMCo, in its capacity as the Trust's transfer and
dividend paying agent
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
U.S. -- United States
U.S. government obligations -- These include U.S. Treasury bills, notes,
bonds and other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature that
typically may be exercised within 30 days. The rate of return on variable rate
obligations is readjusted periodically according to a market rate, such as the
Prime Rate. Also called floating rate obligations
Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
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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 CONSULTANT
Cohen & Steers Capital Management Frank Russell Company
AEW Capital Management, L.P. 909 A Street
Tacoma, Washington 98402
EMERGING MARKETS FUND
Genesis Asset Managers, Ltd. DISTRIBUTOR
J.P. Morgan Investment Management Inc. Russell Fund Distributors, Inc.
Montgomery Asset Management, L.P. 909 A Street
Tacoma, Washington 98402
EQUITY T FUND
J.P. Morgan Investment Management Inc. INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
LIMITED VOLATILITY TAX FREE FUND One Post Office Square
MFS Institutional Advisors, Inc. Boston, MA 02109
T. Rowe Price Associates, Inc.
LEGAL COUNSEL
MONEY MARKET FUND Stradley, Ronon, Stevens & Young, LLP
Frank Russell Investment Management 2600 One Commerce Square
Company Philadelphia, PA 19103-7098
U.S. GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management
Company
OFFICE OF SHAREHOLDER INQUIRIES
TAX FREE MONEY MARKET FUND 909 A Street
Weiss, Peck & Greer, L.L.C. Tacoma, Washington 98402
(800) 832-6688
In Washington, (253) 627-7001
MANAGER, TRANSFER AND DIVIDEND
PAYING AGENT
Frank Russell Investment Management
Company
909 A Street
Tacoma, Washington 98402
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CLASS C FUNDS
Frank Russell Investment Company
Supplement dated May 1, 1998
To the Prospectus Dated May 1, 1998
Effective May 1, 1998, the following statement is added to the Prospectus:
"CLASS C SHARES OF FRANK RUSSELL INVESTMENT COMPANY FUNDS
ARE NOT CURRENTLY OFFERED OR AVAILABLE FOR INVESTMENT
EXCEPT TO EXISTING CLASS C SHAREHOLDERS."
. As the third sentence of the first paragraph on page (1)
. As the second sentence of the last paragraph on page (2)
. As the second sentence of the SIXTH paragraph on page (4)
. As the second sentence under "ELIGIBLE INVESTORS" on page (24)
. As the first sentence under "HOW TO PURCHASE SHARES" on page (48)
<PAGE>
PROSPECTUS CLASS C SHARES
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Trust") is an open-end management
investment company with 28 different investment series or portfolios
("Funds"). This Prospectus describes and offers interests in the Class C
Shares of ten Funds;
<TABLE>
<S> <C>
Diversified Equity Fund Emerging Markets Fund
Special Growth Fund Real Estate Securities Fund
Equity Income Fund Diversified Bond Fund
Quantitative Equity Fund Volatility Constrained Bond Fund
International Securities Fund Multistrategy Bond Fund
</TABLE>
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each
Fund's investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class C Shares are sold at their net asset value, with
no sales load, no commissions and no exchange fees. Class C Shares are,
however, subject to a Rule 12b-1 fee. There is not specified minimum
investment in the Funds, but investors must qualify as Eligible Investors, as
described in this Prospectus.
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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus does not constitute an offer to sell securities in any state
or other jurisdiction to any person to whom it is unlawful to make such an
offer in such state or other jurisdiction.
This Prospectus sets forth concisely the information about the Funds that
you should know before investing. Please read it before investing and retain
it for future reference. A Statement of Additional Information ("SAI"), dated
, 1998, has been filed with the Securities and Exchange Commission
("SEC"). The SAI is incorporated into this Prospectus by reference and is
available without charge by writing to the address listed above or by
telephoning (800) 972-0700.
This Prospectus relates only to the Class C Shares of the Funds. These Funds
also offer interests in another class of shares, the Class S Shares, through
other prospectuses. For more information concerning Class S Shares, contact
the person or organization from whom you obtained this Prospectus, or write or
telephone the Trust.
The SAIs material incorporated by reference into this Prospectus, and
further information regarding the Trust and the Funds is maintained
electronically with the SEC at its Internet Website (http://wwwseci.gor)
PROSPECTUS DATED , 1998
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE 48 OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary.................................................................... 3
Annual Fund Operating Expenses............................................. 5
Financial Highlights....................................................... 6
The Purpose of the Funds -- Multi-Style, Multi-Manager Diversification..... 16
Eligible Investors......................................................... 17
General Management of the Funds............................................ 17
Expenses of the Funds...................................................... 20
The Money Managers......................................................... 20
Investment Objectives, Policies and Practices.............................. 21
Portfolio Transaction Policies............................................. 33
Dividends and Distributions................................................ 34
Taxes...................................................................... 35
Performance Information.................................................... 36
How Net Asset Value Is Determined.......................................... 37
How to Purchase Shares..................................................... 38
How to Redeem Shares....................................................... 40
Additional Information..................................................... 42
Money Manager Profiles..................................................... 43
Glossary................................................................... 48
</TABLE>
2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's ("Russell") "multi-style, multi-manager
diversification" techniques and money manager evaluation services. Unlike most
investment companies that have a single organization that acts as both
administrator and investment adviser, the Trust divides responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds" and "Multi-Style,
Multi-Manager Diversification."
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.
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.
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.
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.
3
<PAGE>
The Trust's Funds had aggregate net assets of approximately $ billion on
, 1998. The net assets of the Funds described in this Prospectus on
, 1998 were:
<TABLE>
<S> <C>
Diversified Equity........ $
Special Growth............ $
Equity Income............. $
Quantitative Equity....... $
International Securities.. $
</TABLE>
<TABLE>
<S> <C>
Emerging Markets............. $
Real Estate Securities....... $
Diversified Bond............. $
Volatility Constrained Bond.. $
Multistrategy Bond........... $
</TABLE>
You may buy and sell Class C Shares of the Funds through a authorized
Financial Intermediary. All Class C Shares are sold without a sales charge or
commission. All Class C Shares are subject to Rule 12b-1 fees of up to 0.75%
of average daily net assets. However, the Trustees may periodically limit 12b-
1 fees to a lesser amount -- the rate is currently 0.40% of average daily net
assets. Class C Shares are redeemed at net asset value. You may also exchange
shares of one Fund for shares of another Fund. See "How to Purchase Shares"
and "How to Redeem Shares."
You should be aware of the general risks associated with investments in
mutual funds. One or more Funds may make investments and engage in investment
practices and techniques that involve risks, including entering into
repurchase agreements, lending portfolio securities and entering into hedging
transactions.
Also, foreign securities in which the Funds may invest may be subject to
certain risks in addition to those inherent in U.S. investment. These risks
are described in "Risk Considerations" in "Investment Objectives, Policies and
Practice", and in the Glossary.
SHAREHOLDER TRANSACTION EXPENSES
You would pay the following charges when buying or redeeming Class C Shares
of a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES LOAD
LOAD IMPOSED IMPOSED ON DEFERRED REDEMPTION EXCHANGE
ON PURCHASES REINVEST DIVIDENDS SALES LOAD* FEES FEES
- ------------- ------------------ ----------- ---------- --------
<S> <C> <C> <C> <C>
None None None None None
</TABLE>
If you purchase shares of any of the Funds, you will pay a quarterly
shareholder servicing fee. This fee may range from .00% to .25% of your
average net assets in the Fund.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES EXPENSES (NET
(NET OF RULE 12B-1 SHAREHOLDER (NET OF OF
REIMBURSEMENTS/ DISTRIBUTION SERVICING REIMBURSEMENTS/ REIMBURSEMENTS/
WAIVERS) FEE FEE WAIVERS) WAIVERS)
--------------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Diversified Equity
Fund................... 0.78% 0.40% 0.25% 0.20% 1.63%
Special Growth Fund..... 0.95% 0.40% 0.25% 0.25% 1.83%
Equity Income Fund...... 0.80% 0.40% 0.25% 0.29% 1.74%
Quantitative Equity
Fund................... 0.78% 0.40% 0.25% 0.16% 1.59%
International Securities
Fund................... 0.95% 0.40% 0.25% 0.36% 1.96%
Emerging Markets Fund... 1.20% 0.40% 0.25% 0.44% 2.29%
Real Estate Securities
Fund................... 0.85% 0.40% 0.25% 0.17% 1.67%
Diversified Bond Fund... 0.45% 0.40% 0.25% 0.19% 1.29%
Volatility Constrained
Bond Fund.............. 0.50% 0.40% 0.25% 0.28% 1.43%
Multistrategy Bond
Fund*.................. 0.61% 0.40% 0.25% 0.19% 1.45%
</TABLE>
- ---------------------
* FRIMCo has voluntarily agreed to waive a portion of its 0.75% management fee
for the Multistrategy Bond Fund, up to the full amount of that fee, equal to
the amount by which the Fund's total operating expenses, other than 12b-1
fees, Shareholder Servicing Fees and certain other class-level expenses in
excess of 0.80% of the Fund's average net assets on an annual basis. This
waiver is intended to be in effect for the current year, but may be revised
or eliminated at any time without notice to shareholders. The gross annual
total operating expenses absent the waiver would be 1.49% of average net
assets of Multistrategy Bond Fund.
This table is intended to assist you in understanding the various expenses
of each Fund. Operating expenses are paid out of a Fund's assets and are
factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year.
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Fund's annual return is 5% and that its operating expenses
are as described above, and that you sell your shares after the number of
years shown. These are projected expenses for each $1,000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Equity Fund......................... $16 $50 $ 90 $205
Special Growth Fund............................. $18 $56 $101 $231
Equity Income Fund.............................. $17 $53 $ 96 $219
Quantitative Equity Fund........................ $16 $49 $ 88 $200
International Securities Fund................... $20 $60 $108 $246
Emerging Markets Fund........................... $24 $74 $134 $306
Real Estate Securities Fund..................... $17 $52 $ 94 $215
Diversified Bond Fund........................... $13 $39 $ 71 $162
Volatility Constrained Bond Fund................ $15 $45 $ 82 $186
Multistrategy Bond Fund......................... $15 $47 $ 84 $192
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
DIVERSIFIED EQUITY FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................... $43.48
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... (.02)
Net realized and unrealized gain (loss) on investments......... 1.63
------
Total Income From Investment Operations...................... 1.61
------
LESS DISTRIBUTIONS:
Net realized gain on investments............................... (4.34)
------
Total Distributions.......................................... (4.34)
------
NET ASSET VALUE, END OF YEAR..................................... $40.75
======
TOTAL RETURN (%)(A).............................................. 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets(b)................... 1.89
Net investment income (loss) to average net assets(b).......... (.38)
Portfolio turnover............................................. 118.13
Net assets, end of year ($000 omitted)......................... 910
Avg Commission rate paid per share of security ($ omitted)..... .0384
</TABLE>
- ---------------------
* See the notes to financial statements which appear in Trust's Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS OF THE SPECIAL GROWTH FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
SPECIAL GROWTH FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................... $43.48
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... (.02)
Net realized and unrealized gain (loss)on investments.......... 1.63
------
Total Income From Investment Operations...................... 1.61
------
LESS DISTRIBUTIONS:
Net realized gain on investments............................... (4.34)
------
Total Distributions.......................................... (4.34)
------
NET ASSET VALUE, END OF YEAR..................................... $40.75
======
TOTAL RETURN (%)(a).............................................. 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets(b)................... 1.89
Net investment income (loss) to average net assets(b).......... (.38)
Portfolio turnover............................................. 118.13
Net assets, end of year ($000 omitted)......................... 910
Avg Commission rate paid per share of security ($ omitted)..... .0384
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY INCOME FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
EQUITY INCOME FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................... $41.86
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................................... .10
Net realized and unrealized gain (loss) on investments......... 2.39
------
Total Income From Investment Operations...................... 2.49
------
LESS DISTRIBUTIONS:
Net investment income.......................................... (.18)
Net realized gain on investments............................... (3.95)
------
Total Distributions.......................................... (4.13)
------
NET ASSET VALUE, END OF YEAR..................................... $40.22
======
TOTAL RETURN (%)(a).............................................. 6.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets(b).................... 1.77
Net investment income to average net assets(b)................. 1.50
Portfolio turnover............................................. 106.40
Net assets, end of year ($000 omitted)......................... 122
Avg Commission rate paid per share of security ($ omitted)..... .0441
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS OF THE QUANTITATIVE EQUITY FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 Trust.
QUANTITATIVE EQUITY FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $33.81
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ .05
Net realized and unrealized gain (loss) on investments........... 1.87
------
Total Income From Investment Operations........................ 1.92
------
LESS DISTRIBUTIONS:
Net investment income............................................ (.08)
Net realized gain on investments................................. (2.60)
------
Total Distributions............................................ (2.68)
------
NET ASSET VALUE, END OF YEAR....................................... $33.05
======
TOTAL RETURN (%)(a)................................................ 5.91
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b)..................... 1.65
Net investment income to average net assets (b).................. .81
Portfolio turnover (b)........................................... 74.33
Net assets, end of year ($000 omitted)........................... 322
Avg Commission rate paid per share of security ($ omitted)....... .0331
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL SECURITIES FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 Trust.
INTERNATIONAL SECURITIES FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $58.56
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ (.03)
Net realized and unrealized gain (loss) on investments........... 1.68
------
Total Income From Investment Operations........................ 1.65
------
LESS DISTRIBUTIONS:
Net investment income............................................ (.27)
In excess of net investment income............................... (.16)
Net realized gain on investments................................. (1.31)
------
Total Distributions............................................ (1.74)
------
NET ASSET VALUE, END OF YEAR....................................... $58.47
======
TOTAL RETURN (%)(a)................................................ 2.86
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average assets(b)......................... 2.00
Net investment income (loss) to average net assets(b)............ (.61)
Portfolio turnover............................................... 42.43
Net assets, end of year ($000 omitted)........................... 623
Avg Commission rate paid per share of security ($ omitted)....... .0039
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EMERGING MARKETS CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
EMERGING MARKETS FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $43.48
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... (.02)
Net realized and unrealized gain (loss) on investments........... 1.63
------
Total Income From Investment Operations........................ 1.61
------
LESS DISTRIBUTIONS:
Net realized gain on investments................................. (4.34)
------
Total Distributions............................................ (4.34)
------
NET ASSET VALUE, END OF YEAR....................................... $40.75
======
TOTAL RETURN (%)(a)................................................ 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets(b)..................... 1.89
Net investment income (loss) to average net assets(b)............ (.38)
Portfolio turnover............................................... 118.13
Net assets, end of year ($000 omitted)........................... 910
Avg Commission rate paid per share of security ($ omitted)....... .0384
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS OF THE REAL ESTATE SECURITIES FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 Trust.
REAL ESTATE SECURITIES FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $26.67
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ .24
Net realized and unrealized gain (loss) on investments........... 3.85
------
Total Income From Investment Operations........................ 4.09
------
LESS DISTRIBUTIONS:
Net investment income............................................ (.32)
Net realized gain on investments................................. (1.26)
------
Total Distributions............................................ (1.58)
------
NET ASSET VALUE, END OF YEAR....................................... $29.18
======
TOTAL RETURN (%)(a)................................................ 15.75
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets (b).................... 1.77
Net investment income to average net assets (b).................. 5.31
Portfolio turnover............................................... 51.75
Net assets, end of year ($000 omitted)........................... 101
Avg Commission rate paid per share of security ($ omitted)....... .0631
</TABLE>
- ---------------------
* See notes to Financial Statements which appear in the Trust's Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED BOND FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
DIVERSIFIED BOND FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $23.16
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ .25
Net realized and unrealized gain (loss) on investments........... (.09)
------
Total From Investment Operations............................... .16
------
LESS DISTRIBUTIONS:
Net investment income............................................ (.34)
------
Total Distributions............................................ (.34)
------
NET ASSET VALUE, END OF YEAR....................................... $22.98
======
TOTAL RETURN (%)(a)................................................ .67
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average assets(b)......................... 1.31
Net investment income to average net assets(b)................... 5.75
Portfolio turnover............................................... 138.98
Net assets, end of year ($000 omitted)........................... 962
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
VOLATILITY CONSTRAINED BOND FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $43.48
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... (.02)
Net realized and unrealized gain (loss) on investments........... 1.63
------
Total Income From Investment Operations........................ 1.61
------
LESS DISTRIBUTIONS:
Net realized gain on investments................................. (4.34)
------
Total Distributions............................................ (4.34)
------
NET ASSET VALUE, END OF YEAR....................................... $40.75
======
TOTAL RETURN (%)(a)................................................ 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets(b)..................... 1.89
Net investment income (loss) to average net assets(b)............ (.38)
Portfolio turnover............................................... 118.13
Net assets, end of year ($000 omitted)........................... 910
Avg Commission rate paid per share of security ($ omitted)....... .0384
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS OF THE MULTISTRATEGY BOND FUND CLASS C SHARES*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust'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 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 Trust.
MULTISTRATEGY BOND FUND CLASS C SHARES
<TABLE>
<CAPTION>
1997 1996+
---- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................. $43.48
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... (.02)
Net realized and unrealized gain (loss) on investments........... 1.63
------
Total Income From Investment Operations........................ 1.61
------
LESS DISTRIBUTIONS:
Net realized gain on investments................................. (4.34)
------
Total Distributions............................................ (4.34)
------
NET ASSET VALUE, END OF YEAR....................................... $40.75
======
TOTAL RETURN (%)(a)................................................ 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets(b)..................... 1.89
Net investment income (loss) to average net assets(b)............ (.38)
Portfolio turnover............................................... 118.13
Net assets, end of year ($000 omitted)........................... 910
Avg Commission rate paid per share of security ($ omitted)....... .0384
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
+ For the period November 4, 1996 (commencement of sales) to December 31,
1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period December 31, 1996 are annualized.
15
<PAGE>
THE PURPOSE OF THE FUNDS -- MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCo's and
Russell's "multi-style, multi-manager diversification" investment method and
to obtain FRIMCo's and Russell's money manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936 and has
been providing comprehensive asset management consulting services for almost
30 years to institutional investors, principally large corporate employee
benefit plans. Russell and its affiliates have offices around the world--in
Tacoma, New York, Toronto, London, Zurich, Paris, Sydney, Auckland and Tokyo.
Three functions form the core of Russell's consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns based on a client's unique situation and risk
tolerance.
. 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 a way most
likely to achieve the client's objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. FRIMCo and Russell believe that for many, this
can be accomplished through strategically purchasing shares in one or more of
the Funds which have been structured to provide access to specific asset
classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities, over the past 50 years, have outperformed corporate debt
in absolute terms. However, what is generally true of performance over
extended periods will not necessarily be true at any given time during a
market cycle, and from time to time asset classes with greater risk may also
underperform lower risk asset classes, on either a risk adjusted or absolute
basis. Investors should select a mix of asset classes that reflects their
overall ability to withstand market fluctuations over their investment
horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary
16
<PAGE>
investment styles within an asset class, investors are better able to reduce
their exposure to any one investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their
own accounts or in a fiduciary or agency capacity, which have entered
into asset management services agreements ("Agreements") with FRIMCo.
"Financial Intermediaries" include bank trust departments, registered
investment advisers, broker-dealers, Employee benefit plans, and other
financial service organizations; and
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries.
There is no specific minimum amount that must be invested in the Funds or in
the Trust.
The Funds do not generally offer their shares directly to individual (i.e.,
retail) investors, although they may choose to do so. Financial Intermediaries
who have entered into Agreements with FRIMCo may acquire shares of the Funds
for their customers. Under these Agreements FRIMCo provides objective-setting
and asset-allocation assistance and services to Financial Intermediaries,
which in turn provide similar services to their customers. Financial
Intermediaries may charge their customers a fee for providing these services
and other trust or investment-related services.
With respect to certain Funds, the Agreement provides that a shareholder
investment services fee (the "Services Fee") may be paid to FRIMCo. The
Services Fee is usually expressed as a percentage of the client's assets
invested in the applicable Funds. The Services Fee may include a fixed-dollar
fee for certain specific services. The client and FRIMCo agree to the Services
Fee, which is determined by the amount of assets, the client expects to invest
in the Funds, the nature and extent of services that FRIMCo agrees to provide
to the client, and other factors.
Either the client or FRIMCo may terminate an agreement upon written notice.
FRIMCo does not anticipate terminating any Agreement unless a client does not
(i) promptly pay fees due to FRIMCo, or (ii) invest sufficient assets in the
Trust's Funds to compensate FRIMCo for its services. If an Agreement is
terminated, FRIMCo will no longer provide asset-allocation, objective-setting
or other services to the client.
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds' operations, including reviewing and approving
the Funds' contracts with FRIMCo, Russell and the money managers. The Trust'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.
17
<PAGE>
FRIMCo:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers' investment
programs and results;
. manages, or hires money managers to manage the Fund's Liquidity
Portfolios (see, the Glossary); and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCo's officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo, since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson jointly with another
portfolio manager identified herein has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, Multistrategy Bond, and Core Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge jointly with another portfolio manager identified
herein has primary responsibility for management of the Fixed I, Fixed
II, Fixed III, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond, Core Bond and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter jointly with another portfolio manager
identified herein has primary responsibility for management of the
International, International Securities and Non-U.S. Equity Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Non-US
Equity Funds.
. James M. Imhof, Manager of FRIMCo's Portfolio Trading who manages the
Trust on a day to day basis and has been responsible for ongoing analysis
and monitoring of the 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 the Frank Russell Company. Mr. Jornlin
jointly with another portfolio manager identified herein has primary
responsibility for management of the Emerging Markets and Real Estate
Securities 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 Russell. Mr. Trittin jointly
18
<PAGE>
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, Equity Income, Multi-Style and Aggressive Equity 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 the Russell. 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, Equity Income, Multi-Style
and Aggressive Equity Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services--including objective-setting and asset-allocation technology, and
money manager research and evaluation assistance--that Russell provides to its
other consulting clients. Russell does not receive any compensation from the
Funds for its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the
money managers of each Fund. On January 22, 1996, the shareholders of the
Trust's Funds voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as the
Trust's agent, pays the money managers for their investment selection
services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable to FRIMCo monthly on a pro rata basis, are
the following percentages of each Fund's average daily net assets: 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%;
Emerging Markets Fund, 0.0%; Real Estate Securities Fund, 0.85%; 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 that use only a single money manager.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fees for certain Funds. This arrangement is not part of the Management
Agreement with the Trust and may be changed or discontinued at any time.
FRIMCo currently calculates its Management Fee based on a Fund's average daily
net assets less any management fee incurred on the Fund's assets to the extent
the Fund incurs management fees for investing a portion of its assets in the
Trust's Money Market Fund.
The Board of has approved, subject to the approval of the shareholders of
the applicable Funds, which will be sought at a shareholder meeting expected
to be held during 1998, an increase in FRIMCo's Management Fee of the Fund
described in this Prospectus. If the proposed increases, which are designed to
compensate FRIMCo for its services in managing assets in conjunction with
securities lending, reverse repurchase and similar transactions, is approved
by shareholders, the Management Fee for the Funds will be as follows:
Diversified Equity Fund, %; Special Growth Fund, %; Equity Income Fund, %;
Quantitative Equity Fund, %;
19
<PAGE>
International Securities Fund, % , Emerging Markets Fund, %; Real Estate
Securities Fund, %; Diversified Bond Fund, %; Volatility Constrained Bond
Fund, %; and Multistrategy Bond Fund, %.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other
than those expressly assumed by FRIMCo. The Funds' expenses for Class C Shares
for the year ended December 31, 1997, as a percentage of each Fund's average
net assets, are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent fees and recordkeeping fees payable to
FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian;
. fees for independent auditing and legal services;
. filing and registration fees payable to the SEC;
. Rule 12b-1 fees; and
. shareholder servicing fees.
THE MONEY MANAGERS
Each Fund's assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Fund's assets among money managers at any time. FRIMCo may employ or terminate
a money manager at any time, subject to the approval by the Trust's Board of
Trustees (the "Board"). A Fund will notify its shareholders within 60 days of
when a money manager begins providing services. The money managers are selected
for the Funds based primarily upon the research and recommendations of FRIMCo
and Russell. FRIMCo and Russell evaluate 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 for any Fund.
From its management fees, FRIMCo, as the Trust's agent, pays fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average of
all assets allocated to the manager for the quarter. For the year ended
December 31, 1997, management fees paid to the money managers were equivalent
to the following annual rates, expressed as a percentage of each Fund's average
daily net assets: Diversified Equity Fund, 0.23%; Special Growth Fund, 0.40%;
Equity Income Fund, 0.19%; Quantitative Equity Fund, 0.19%; International
Securities Fund, 0.39%; Emerging Markets Fund, 0.68%; Real Estate Securities
Fund, 0.29%; Diversified Bond Fund, 0.08%; Volatility Constrained Bond Fund,
0.17%; and Multistrategy Bond Fund, 0.21%.
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after the Trust has paid FRIMCo. Fees paid
to the money managers are not affected by any voluntary or legal expense
limitations. Some money managers may receive investment research prepared by
Russell as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds.
20
<PAGE>
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies, and the more specific strategies developed FRIMCo. Although the money
managers' activities are subject to general oversight by the Board and the
Trust's officers, neither the Board, the officers, FRIMCo, nor Russell evaluate
the investment merits of the money managers' individual security
selections.
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of investment securities that may
be purchased by the Funds are described in "Fund Investment Securities."
Specific investment practices that may be employed by the Funds are identified
in "Other Investment Practices." The risks associated with Fund investments by
the Funds are described in those sections, as well as in "Risk Considerations."
Certain terms used in these sections are described in the Glossary in this
Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
EXPOSURE EXPOSURE FOCUS
----------- -------- -------------------------
<S> <C> <C> <C>
Diversified Equity Fund........ 65-100% 35% Income and capital growth
Special Growth Fund............ 65-100% 35% Maximum total return
Equity Income Fund............. 65-100% 35% Current income
Quantitative Equity Fund....... 100% -- Total return
International Securities Fund.. 65-100% 35% Total return
Emerging Markets Fund.......... 65-100% 35% Maximum total return
Real Estate Securities Fund.... 65-100% 35% Total return
Diversified Bond Fund.......... 35% 65-100% Diversification
Volatility Constrained Bond
Fund.......................... 35% 65-100% Preservation of capital
Multistrategy Bond Fund........ -- 100% Maximum total return
</TABLE>
INVESTMENT OBJECTIVES
Each Fund's investment objective is "fundamental," which means each
investment objective may not be changed without the approval of a majority of
each Fund's shareholders. Certain investment policies may also be fundamental.
Ordinarily, each Fund will invest more than 65% of its total assets in the
types of securities identified in its investment objective. However, the Funds
may hold assets as cash reserves for temporary and defensive purposes when
their money managers believe a conservative approach is desirable, or when
suitable investments are unavailable.
DIVERSIFIED EQUITY FUND
Diversified Equity Fund's objective is to provide income and capital growth
by investing principally in equity securities. Diversified Equity Fund may
invest in common and preferred stocks, securities convertible into common
stocks, rights and warrants.
21
<PAGE>
SPECIAL GROWTH FUND
Special Growth Fund's objective is to maximize total return primarily
through capital appreciation and by assuming a higher level of volatility than
the Diversified Equity Fund. Special Growth Fund seeks to achieve its
objective by investing in equity securities.
The Fund also seeks to provide current income. 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 (i.e., 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" or companies
characterized as "special situations." "Emerging growth-type" companies tend
to reinvest most of their earnings, rather than pay significant cash
dividends. "Special situation" companies are those which the money managers
believe present opportunities for capital growth because of cyclical
developments in the securities markets, the industry, or the company.
EQUITY INCOME FUND
Equity Income Fund's objective is to achieve a high level of current income,
while maintaining the potential for capital appreciation. Equity Income Fund
seeks to achieve its objective by investing primarily in income-producing
equity securities.
The income objective of the Fund's aim 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
Quantitative Equity Fund's objectives are to provide a total return greater
than the total return of the U.S. 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. Quantitative Equity Fund
seeks to achieve its objective by investing in equity securities.
The Fund's portfolio will be structured similarly to the Russell Index, as
the Fund will maintain industry weights and economic sector weights near those
of the Index. As a result, the Fund's money managers generally select stocks
from the set of stocks comprising 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 to meet the Fund's investment
objectives. The money managers anticipate that the Fund's average
price/earnings ratio, yield and other fundamental characteristics will be near
the averages of the Russell Index.
The money managers of the Fund use various quantitative management
techniques in selecting investments. A quantitative manager bases its
investment decisions primarily on quantitative investment models. Money
managers use these models to determine the investment potential of a
particular portfolio security and to rank
22
<PAGE>
securities based upon their ability to outperform 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 construct a portfolio that has
superior return prospects with risks similar to the Russell 1000(R) Index.
FRIMCo believes quantitative management over a market cycle should provide
consistent performance, diversification, market-like volatility and limited
market under performance. However, there is no guarantee that the Fund will
have these 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 manger 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 seek to achieve its investment objective by using various
quantitative management techniques.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund is permitted to hold up to 20% of Fund assets in liquid
investments to meet redemption requests.
INTERNATIONAL SECURITIES FUND
International Securities Fund's objectives are to provide favorable total
return and additional diversification for U.S. investors. International
Securities Fund attempts to achieve its objective by investing primarily in
equity and fixed-income securities of foreign companies, and securities issued
by foreign governments.
The Fund may also invest 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 foreign
currencies 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
Emerging Markets Fund's objective is to seek 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
(these companies are referred to as "Emerging Market Companies"). For purposes
of the Fund's operations, an "emerging market" country will be a country having
an economy and market that the World Bank or the United Nations would consider
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.
23
<PAGE>
The Fund may not invest in all emerging markets at all times. Lack of
adequate custody arrangements or current legal requirements make investing in
some developing markets unfeasible. In the future, the Fund's money managers
may determine, based on information then available, to expand the 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.
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,
and American Depository Receipts and European Depository Receipts ("Depository
Receipts"). 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 U.S.
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 U.S. dollars.
Certain emerging markets are closed in whole or in part to equity investments
by foreigners. The Fund may be able to invest in those markets solely or
primarily through governmental authorized investment vehicles. For more
information on risks, see "Risk Considerations."
REAL ESTATE SECURITIES FUND
Real Estate Securities Fund's objective is to seek to generate a high level
of total return through above average current income, while maintaining the
potential for capital appreciation. The Fund seeks to achieve its objective 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. These 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. These may include
shares of real estate investment trusts ("REITs"), partnership units of master
limited partnerships, common and preferred stock, and convertible debt
securities). The Fund may invest up to 35% of its total assets in other debt
securities of real estate companies. For information on risks, see "Risk
Considerations."
The Fund will attempt to be fully invested at all times. However, the Fund is
permitted to hold up to 20% of Fund's assets in liquid reserves for redemption
needs. For more information on risks, see "Risk Considerations."
DIVERSIFIED BOND FUND
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.
24
<PAGE>
The Fund's portfolio will consist primarily of conventional debt instruments,
including bonds, debentures, U.S. government and U.S. 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.) Money managers will select investment selections based on
fundamental economic and market factors. Money managers will evaluate potential
investments by sector, maturity, quality and other criteria. 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; A or Prime-2 by Moody's; or, if unrated, judged by the
money manager to be of at least equal credit quality to those designations.
VOLATILITY CONSTRAINED BOND FUND
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 those fixed-income securities 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.
Although the Fund will invest primarily in debt securities denominated in the
U.S. dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy. Accordingly, the money
managers will allocate the Fund's investments among securities denominated in
the currencies of the U.S. and selected foreign countries. The Fund may also
invest in high-quality, foreign debt securities. The money managers which
invest in foreign denominated securities will maintain a substantially neutral
currency exposure relative to the U.S. 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 U.S. dollar.
Money managers of the Fund will consider fundamental economic strength, credit
quality and interest rate trends in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector. The
Fund will not invest more than 10% of its total assets in debt securities
denominated in a single foreign currency, and FRIMCo currently intends to limit
total investments in non-U.S. dollar securities to no more than 25% of the
Fund's total assets.
The Fund will generally invest in the foreign debt securities of countries
whose governments it considers to be stable (the Fund may invest in countries
considered unstable or undeveloped, provided that it believes it is able to
hedge substantially the risk of a decline in the currency in which the
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) U.S. Government obligations; (b) obligations issued or
guaranteed by a foreign
25
<PAGE>
government or any of its political subdivisions, authorities, agencies, or
instrumentalities; (c) obligations issued or guaranteed 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 to be of comparable quality by the money managers; (d)
investment grade corporate debt securities (or, if unrated, corporate debt
securities which the money managers determine to be of equivalent quality); (e)
bank instruments; and (f) commercial paper.
The Fund intends to use interest rate swaps as a hedge and not as a
speculative investment.
MULTISTRATEGY BOND FUND
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
portfolio. Multistrategy Bond Fund seeks to achieve its objective by investing
in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: U.S. 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 instruments;
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. 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. For
more information on risks, see "Risk Considerations."
FUND INVESTMENT SECURITIES
Commercial Paper
Volatility Constrained Bond and Multistrategy Bond Funds may invest in
commercial paper. Commercial paper represents a debt obligation of a company
which is unsecured. Volatility Constrained Bond and Multistrategy Bond Funds
will invest in commercial paper which is 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.; or TBW-1 or TBW-2 by Thomson Bank Watch, Inc.
Volatility Constrained Bond and Multistrategy Bond Funds may also invest in
commercial paper which is not rated if it is issued by U.S. or foreign
companies which the money managers conclude are of high-quality and have
outstanding debt securities which are rated AAA, AA or A by S&P; or Aaa, Aa or
A by Moody's.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Emerging Markets and Multistrategy
Bond Funds, do not invest in debt 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
26
<PAGE>
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 Emerging Markets and Multistrategy Bond Funds, will sell securities whose
ratings drop below these minimum ratings, in a prudent manner as determined by
the money managers. The market value of debt securities generally varies
inversely with interest rates.
DEPOSITORY RECEIPTS
Emerging Markets Fund may invest in Depository Receipts. These are securities
traded in the United States that are typically issued in connection with a U.S.
or foreign bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted.
EQUITY SECURITIES
Diversified Equity, Special Growth, Equity Income, Quantitative Equity and
International Securities Funds invest primarily in equity securities.
Diversified Equity, Special Growth, Equity Income and Quantitative Equity Funds
may invest in common stock equivalents. The following constitute common stock
equivalents: rights and warrants and convertible securities. Common stock
equivalents may be converted into or provide the holder with the right to
common stock. Diversified Equity, Special Growth, Equity Income and
Quantitative Equity Funds may also invest in other types of equity securities,
including preferred stocks.
FOREIGN DEBT SECURITIES
Multistrategy Bond and International Securities Fund's portfolios may include
debt securities issued by domestic or foreign entities, and denominated in U.S.
dollars or foreign currencies. The Multistrategy Bond Fund anticipates that no
more than 25% of its net assets will be denominated in foreign currencies. The
Funds will only use foreign currency exchange transactions (options on foreign
currencies, foreign currency futures contracts and forward foreign currency
contracts) for the purpose of hedging against foreign currency exchange risk
arising from the Funds' investments, or anticipated investments, 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 "Risk Considerations--
Investment in Foreign Securities." Emerging markets consist of countries
determined by the money managers of the Funds 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 Funds may invest in the following types of
emerging market debt--bonds; notes and debentures of emerging market
governments; debt and other fixed income securities issued or guaranteed by
emerging market government agencies, instrumentalities or central banks; and,
debt and other fixed income securities issued or guaranteed by banks or other
companies in emerging markets which money managers believe are suitable
investments for the Funds. 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.
INTEREST RATE SWAPS
Volatility Constrained Bond and Multistrategy Bond Funds may enter into
interest rate swaps. When a Fund engages in an interest rate swap, it exchanges
its obligations to pay or rights to receive interest payments for the
27
<PAGE>
obligations or rights to receive interest payments of another party (i.e., 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.
INVESTMENT COMPANY SECURITIES
Because of restrictions on direct investment by US entities in certain
countries, other investment companies may provide the most practical or only
way for Emerging Markets Fund to invest in certain markets. To access these
markets, the Fund may invest up to 10% of its total assets in the shares of
other investment companies. These investments may involve the payment of
substantial premiums above the net asset value of those investment companies'
portfolio securities and are subject to limitations under the 1940 Act.
Emerging Markets Fund also may incur tax liability to the extent it invests in
the stock of a foreign issuer that is a "passive foreign investment company"
("PFIC"), regardless of whether the PFIC makes distributions to the Fund. See
"Taxes" in this Prospectus and in the SAI.
OTHER DEBT SECURITIES
Multistrategy Bond Fund may invest in debt securities issued by supranational
organizations such as:
The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.
The European Community -- An organization which consists of certain
European states engaged in cooperative economic activities.
The European Coal and Steel Community -- An economic union of various
European nations' steel and coal industries.
The Asian Development Bank -- An international development bank
established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions.
Multistrategy Bond Fund may also 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 Counsel of Ministers of the European
Community European may adjust specific amounts of currency comprising the ECU
to reflect changes in the relative values of the underlying currencies. The
money managers investing in these securities do not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or the
marketability of the securities.
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate U.S.
government obligations. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and GNMA participation certificates, are issued or
guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency or
instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of credit
with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However the U.S. government does not
guarantee the net asset value of the Funds' shares. With
28
<PAGE>
respect to U.S. government securities supported only by the credit of the
issuing agency or instrumentality or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities. Accordingly, such U.S.
government securities may involve risk of loss of principal and interest.
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
REAL VOLATILITY
DIVERSIFIED SPECIAL EQUITY QUANTITATIVE INTERNATIONAL EMERGING ESTATE DIVERSIFIED CONSTRAINED
EQUITY GROWTH INCOME EQUITY SECURITIES MARKETS SECURITIES BOND BOND
TYPE OF PORTFOLIO SECURITY FUND FUND FUND FUND FUND FUND FUND FUND FUND
- -------------------------- ----------- ------- ------ ------------ ------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks........
Common stock
equivalents
(warrants)..........
Common stock
equivalents
(options)...........
Common stock
equivalents
(convertible
debt securities)....
Common stock
equivalents
(depository
receipts)...........
Preferred stocks.....
Equity derivative
securities
Debt securities
(below
investment
grade or junk
bonds)..............
U.S. government
obligations.........
Municipal
obligations.........
Investment
companies...........
Foreign securities...
<CAPTION>
MULTI-
STRATEGY
BOND
TYPE OF PORTFOLIO SECURITY FUND
- -------------------------- --------
<S> <C>
Common stocks........
Common stock
equivalents
(warrants)..........
Common stock
equivalents
(options)...........
Common stock
equivalents
(convertible
debt securities)....
Common stock
equivalents
(depository
receipts)...........
Preferred stocks.....
Equity derivative
securities
Debt securities
(below
investment
grade or junk
bonds)..............
U.S. government
obligations.........
Municipal
obligations.........
Investment
companies...........
Foreign securities...
</TABLE>
29
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each of
which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed to
reduce risks.
<TABLE>
<CAPTION>
REAL VOLATILITY
DIVERSIFIED SPECIAL EQUITY QUANTITATIVE INTERNATIONAL EMERGING ESTATE DIVERSIFIED CONSTRAINED
EQUITY GROWTH INCOME EQUITY SECURITIES MARKETS SECURITIES BOND BOND
TYPE OF PORTFOLIO SECURITY FUND FUND FUND FUND FUND FUND FUND FUND FUND
- -------------------------- ----------- ------- ------ ------------ ------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves.............
Repurchase agreements(1)..
When-issued and forward
commitment securities....
Reverse repurchase
agreements...............
Lending portfolio
securities, not to
exceed 33 1/3% of
total Fund assets........
Illiquid securities
(limited to 15%
of Fund's net
assets)..................
Illiquid securities
(limited to 10%
of Fund's net
assets)..................
Forward currency
contracts(2).............
Write (sell) call and
put options on
securities,
securities indexes and
foreign currencies(3)....
Purchase options on
securities, securities
indexes, and
currencies(3)............
Interest rate futures
contracts, stock
index futures
contracts, foreign
currency contracts
and options on
futures(4)...............
Liquidity Portfolios......
<CAPTION>
MULTI-
STRATEGY
BOND
TYE OF PORTFOLIO SECURITYP FUND
- -------------------------- --------
<S> <C>
Cash Reserves.............
Repurchase
agreements(1)............
When-issued and forward
commitment securities....
Reverse repurchase
agreements...............
Lending portfolio
securities, not to
exceed 33 1/3% of total
Fund assets..............
Illiquid securities
(limited to 15%
of Fund's net
assets)..................
Illiquid securities
(limited to 10%
of Fund's net
assets)..................
Forward currency
contracts(2).............
Write (sell) call and
put options on
securities,
securities
indexes and
foreign currencies(3)....
Purchase options on
securities,
securities
indexes, and
currencies(3)............
Interest rate futures
contracts, stock
index futures
contracts,
foreign currency
contracts and
options on
futures(4)...............
Liquidity Portfolios......
</TABLE>
- ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and
may incur disposition costs in liquidating the security.
(2) The Emerging Markets, International Securities, Diversified Bond,
Volatility Constrained and Multistrategy Bond Funds may not invest more
than 33% of their assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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. Only the Multistrategy Bond Fund currently intends to write or
purchase options or foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
30
<PAGE>
Investment Restrictions. If a Fund changes its investment objective or
policies, you should consider whether the Fund remains right for you. The Funds
are subject to additional investment policies and restrictions described in the
SAI, some of which are fundamental.
RISK CONSIDERATIONS
Concentration in Real Estate Industry. Real Estate Securities Fund will
concentrate more than 25% of its total assets in the real estate and real
estate related industries. The Fund is subject to the risks associated with
direct ownership of real estate. Additional risks include declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding 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, equity REITs may be affected by changes in the value of the
underlying properties owned by the REITs, while mortgage REITs may be affected
by the quality of any credit extended. Moreover, the underlying portfolios of
equity and mortgage REITs may not be diversified, and therefore are subject to
the risk of financing a single or a limited number of projects. REITs 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 Code or to maintain
their exemption from the 1940 Act.
Foreign Debt Securities. Multistrategy Bond Fund's portfolio may include debt
securities issued by domestic or foreign entities, and denominated in U.S.
dollars or foreign currencies. The Fund anticipates that no more than 25% of
its net assets will be denominated in foreign currencies. The Fund will only
use foreign currency exchange transactions (options on foreign currencies,
foreign currency futures contracts and forward foreign currency contracts) 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.
High Risk Bonds. Emerging Markets Fund may invest up to 5% and Multistrategy
Bond Fund 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
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. While this debt may have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposure to adverse conditions. Emerging Markets and Multistrategy
Bond Funds' money managers will seek to reduce the risks associated with
investing in lower-rated debt securities by limiting the Funds' holding in the
securities and by the depth of the managers' credit analysis. For additional
information, refer to the SAI.
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange
rate or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds may employ certain risk management
practices using certain derivative securities and techniques (known as
"derivatives"). Markets in some countries currently do not have instruments
available for hedging transactions. To the extent that such instruments do not
exist, a money
31
<PAGE>
manager may not be able to hedge its investment effectively in such countries.
Furthermore, a Fund engages in hedging activities only when its money managers
deem it to be appropriate, and does not necessarily engage in hedging
transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if
it had not entered into a hedging position. If the correlation between a
hedging position and a portfolio position is not properly protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on U.S. 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 U.S. 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 U.S. economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the Funds'
foreign securities will generally be denominated in foreign currencies, the
value of such securities to the Funds will be affected by changes in currency
exchange rates and in exchange control regulations. A change in the value of a
foreign currency against the U.S. 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 U.S. dollar. Further, certain emerging market
countries' currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. 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.
Volatility Constrained Bond Fund and Multistrategy Bond Fund may invest in
bank instruments, which include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee Certificates of deposit ("Yankee
CDs"). ECDs, ETDs, and Yankee CDs are subject to somewhat different risks from
the
32
<PAGE>
obligation of domestic banks. ECDs are dollar denominated certificates of
deposit issued by foreign branches of U.S. and foreign banks; ETDs are U.S.
dollar denominated time deposits in a foreign branch of a U.S. bank or a
foreign bank; and Yankee CDs are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States. 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 investment for the Volatility
Constrained Bond Fund and Multistrategy Bond Fund.
Variable and Floating Rate Securities. The Multistrategy Bond Fund may invest
in variable and floating rate securities. The variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon some appropriate interest rate adjustment
index. The adjustment intervals may be regular, (i.e., daily, monthly,
annually, etc.) event based, (i.e., a change in the prime rate). The Fund may
also invest in zero coupon U.S. Treasury, foreign government and U.S. 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 market value fluctuations in response to
changing interest rates than debt obligations of comparable maturities that
make current distributions of interest.
PORTFOLIO TRANSACTION POLICIES
Money managers make decisions to buy and sell securities for the Fund assets
assigned to them. FRIMCo makes determinations for any other Fund assets. The
Funds do not seek to realize long-term (rather than short-term), capital gains
while making portfolio investment decisions.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another manager for the Fund (or for another Fund) is purchasing
the same security. Also, when a money manager's services are terminated, the
new money manager may significantly restructure an investment portfolio. These
practices may increase the Funds' portfolio turnover rates, realization of
gains or losses, brokerage commissions and other transaction costs. The annual
portfolio turnover rates for each of the Funds are shown in the Financial
Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the
Trust's securities and the selection of brokers and dealers (including
affiliates) ("Brokers") that, in the best judgment of FRIMCo and the money
managers provide prompt and reliable execution at favorable prices and
reasonable commission rates. In addition to price and commission rates, Brokers
may be selected based on research, statistical or other services that they
provide. The Trust may pay commission rates that exceed rates that other
Brokers may have charged if the Trust concludes that the commissions are
reasonable in relation to the value of the brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell Securities,
Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money manager
believes a Fund will receive competitive execution, price, and commissions.
When these transactions are completed, Russell Securities will refund up to 70%
of the
33
<PAGE>
commissions paid by the Fund after reimbursement for research services provided
to FRIMCo. Also, the Funds may effect portfolio transactions through and pay
brokerage commissions to Brokers that are affiliates of the money managers.
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed--all distributions are at the Board's
discretion. Currently the Board intends to declare dividends from net
investment income and net short-term capital gains (if any) according to the
following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE
-------- -------
<C> <C> <S>
Monthly Early in the following month Diversified Bond, Volatility
Constrained Bond and
Multistrategy Bond Funds
Quarterly Mid: April, July, October and December Diversified Equity, Special
Growth, Equity Income, Q
Quantitative Equity and Real
Estate Securities Funds
Annually Mid-December International Securities and
Emerging Markets Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains through October 31
(excess of capital gains over capital losses) generally in mid-December. To
meet certain legal requirements, a Fund may declare special year-end dividend
and capital gains distributions during October, November or December to
shareholders of record in that month. These distributions are deemed to have
been paid by a Fund and received by you on December 31 of the prior year,
provided that you receive them by January 31. Capital gains realized during
November and December will be distributed to you during February of the
following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account
is a tax-deferred account, dividends paid to you would be included in your
gross income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you reinvested
the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by delivering
written notice no later than ten days prior to the payment date to the Transfer
Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
34
<PAGE>
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital gains
to shareholders and meet other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, a Fund will generally
not be liable for federal income or excise taxes based on net income except to
the extent its earnings are not distributed or are distributed in a manner that
does not satisfy the requirements of the Code. The Emerging Markets Fund may
incur tax liability to the extent it invests in PFICs. See "Portfolio
Securities" and the SAI. The Funds may be subject to nominal, if any, state and
local taxes.
For federal income tax purposes, the dividends from net investment income and
any excess of net short-term capital gains over net long-term capital loss that
you receive from the Funds are considered ordinary income. However, depending
upon the relevant state tax rules, a portion of the dividends paid by
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
attributable to direct U.S. Treasury and agency obligations may be exempt from
state and local taxes. 28% and 20% capital gains distributions declared by the
Board are taxed at the respective capital gains rates regardless of the length
of time you have held the shares. Distributions of income and capital gains are
taxed in the manner described above, whether you receive them in cash or
reinvest them in additional shares of the Funds. Distributions paid in excess
of a Fund's earnings will be treated as a nontaxable return of capital.
A Fund will notify you of the source of its dividends and distributions at
the time they are paid. After the close of each calendar year, the Funds will
advise their shareholders of the amounts:
. of ordinary income dividends, 28% capital gain dividends and 20% capital
gain distributions, including any amounts which are deemed paid on
December 31 of the prior year;
. of dividends which qualify for the 70% dividends-received deduction
available to corporations;
. of International Securities Diversified Bond, Volatility Constrained Bond
and Multistrategy Bond Fund and Emerging Markets Funds' foreign taxes
withheld;
. of income which is a tax preference item (if any) for alternative minimum
tax purposes; and
. of the percentages of Diversified Bond, Volatility Constrained Bond and
Multistrategy Bond Funds' income attributable to U.S. government,
Treasury and agency securities.
If you are a corporate investor, a portion of the dividends from net
investment income paid by Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and Real Estate Securities Funds will in part generally
qualify for the corporate dividends-received deduction. However, the portion of
the dividend so qualified depends on the aggregate qualifying dividend income
received by either Fund from domestic (U.S.) sources. Certain holding period
and debt financing restrictions may apply to corporate investors seeking to
claim the deduction. You should consult your tax adviser.
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.
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The Diversified Bond, Volatility Constrained Bond and Multistrategy Bond
Funds may acquire zero coupon securities which were issued with an original
issue discount. When holding discounted zero coupon securities, the Funds will
have to include a portion of the original issue discount that accrues on the
security for the taxable year in taxable income. This requirement is imposed
even if the Funds receive no payment on the security during the year. Also,
because the Funds must distribute substantially all of their net investment
income annually, the Funds may be required to distribute a dividend that is
greater than the total amount of cash the Funds actually received in a
particular year. 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.
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.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
PERFORMANCE INFORMATION
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during the
relevant time period, and includes all recurring fees that are charged to all
shareholder accounts. The average annual total returns for each of the Class C
shares of each of the C Funds are as follows:
<TABLE>
<CAPTION>
10 YEARS
5 YEARS ENDED ENDED INCEPTION TO
1 YEAR ENDED DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 INCEPTION
DEC. 31, 1997 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Diversified Equity...... 30.75% 19.22% 16.92% 16.44% 10/10/85
Special Growth.......... 27.90% 16.72% 15.48% 14.71% 09/05/85
Equity Income........... 32.68% 19.85% 17.25% 15.53% 09/05/85
Quantitative Equity..... 31.70% 20.25% 17.29% 15.31% 05/15/87
International Securi-
ties................... (0.41%) 10.55% 8.07% 13.07% 09/05/85
Emerging Markets........
Real Estate Securities.. 18.20% 17.65% -- 13.92% 07/28/89
Diversified Bond........ 8.35% 7.01% 8.43% 8.75% 09/05/85
Volatility Constrained
Bond...................
Multistrategy Bond......
</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--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.
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<PAGE>
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. The 30 day yield for
year ended December 31, 1997 for Class C Shares of the Diversified Bond Fund,
Volatility Contrained Bond and Multistrategy Bond Funds were %, %, %
was 5.17%.
Each Fund may also advertise non-standardized performance information which
is for periods in addition to those that are legally required by the SEC.
HOW NET ASSET VALUE IS DETERMINED
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 redemption orders are
tendered. For the Funds, a business day is one on which the NYSE 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 C Shares, less
liabilities attributable to the Class C Shares, by the number of Class C Shares
of the Fund outstanding, and rounding to the nearest cent. All Funds determine
their net asset value as of the close of the NYSE (currently 4:00 p.m. Eastern
time).
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value their portfolio securities
at "fair market value." This generally means that equity securities and fixed-
income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price, or if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. U.S. 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 often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
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. If there is
no last sale or mean bid price, the securities may be valued on the basis of
prices provided by a pricing service when the prices are believed to be
reliable.
Money market instruments maturing within 60 days of the valuation date held
by Funds are valued on the basis of "amortized cost." Under this a 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 the Rule.
These money market instruments are valued at "amortized cost" unless the Board
determines that amortized cost does not represent fair value. While amortized
cost provides certainty in valuation, it may result in periods when the value
of an instrument is higher or lower than the price a Fund would receive if it
sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
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<PAGE>
HOW TO PURCHASE SHARES
Shares of the Funds are sold on each business day at the next determined net
asset value after receipt of an order in proper form, and the order has been
accepted. All purchases must be made in U.S. dollars. The Funds reserve the
right to reject any purchase order.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
The Trust has adopted a distribution plan in accordance with the 1940 Act's
Rule 12b-1 (the "Distribution Plan"). Under the Distribution Plan, the Trust
may pay a fee ("12b-1 Fee") to its distributor or any selling agents of the
distributor. The 12b-1 Fee is calculated daily. The Trust pays the 12b-1 Fee
quarterly at an annual rate of 0.00% to 0.75% of the average daily net assets
of the Funds' Class C Shares. Currently, the Board has determined to assess a
12b-1 Fee equal to 0.40% of average daily net assets. The 12b-1 Fee may only
be increased if the Board concludes that it is in your best interests to do
so.
The 12b-1 Fees may be used to compensate:
. Selling Agents for sales support services provided and expenses incurred
with respect to Class C Shares; and
. the distributor for distribution services provided and expenses incurred
with respect to Class C Shares (including payments by the distributor to
compensate Selling Agents for providing support services).
The Trust has also adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, the Trust may make payments to the
distributor or any investment advisors, banks, broker-dealers, financial
planners or other financial institutions that have entered into a Shareholder
Services Agreement with the distributor ("Servicing Agents"). Payments under
the Services Plan are calculated daily and paid quarterly by the Trust at an
annual rate of 0.00% to .25% of the average daily net assets of a Fund's Class
C Shares.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of most securities. In the event that the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the administrative
capacities described above or should Congress relax current restrictions on
depository institutions, the Board will consider appropriate changes in the
services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from the Glass-
Steagall Act. Therefore, banks and financial institutions may be required to
register as dealers under state law. In addition, some state securities laws
may require administrators to register as brokers and dealers.
ORDER PROCEDURES
Orders by investors (except participants in the Three Day Settlement Program
(the "Settlement Program") described below) to purchase Fund shares must be
received by the Transfer Agent on any day when Fund shares are offered, before
the close of the NYSE (currently 4:00 p.m. Eastern time).
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<PAGE>
Payment Procedures: The Custodian or Transfer Agent (depending on the method
of payment) must receive payment for the purchase of shares on the day the
order is accepted (except for participants in the Settlement Program). You may
pay for Fund orders in several ways:
Federal Funds Wire. You may wire federal funds to the Custodian.
Automated Clearing House ("ACH"). You may pay for purchases through ACH to
the Custodian. However, funds transferred by ACH 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. In that case, your order would be
placed on the next business day.
Automated Investment Program. You 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 your
bank account. A separate transfer is required for each Fund in which you
purchase shares. You may terminate an automatic investment program at any
time. Contact your Financial Intermediary 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 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 U.S. funds and must be drawn in U.S. dollars
on a U.S. bank. Investments in a Money Market Fund will be effected only when
the check or draft is converted to federal funds. The investment will not
begin to earn dividend income until the receipt of federal funds by the Fund.
Investments in the Fluctuating 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 NYSE (currently 4:00 p.m. Eastern time). When the
check or draft is received by the Transfer Agent after the close of the NYSE,
the order will be effected on the next business day.
IN-KIND EXCHANGE OF SECURITIES
The Transfer Agent may, at its discretion, permit you to purchase Fund
shares by exchanging securities you currently own for Fund shares. Any
securities exchanged must meet the investment objective, policies and
limitations of the particular Fund, have a readily ascertainable market value,
be liquid and not be subject to restrictions on resale, and have market value,
plus any cash, equal to at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. Investors contemplating an in-kind exchange should consult their tax
advisers.
The basis of the exchange will depend upon the relative net asset value of
the Fund 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 Trust will accept orders from financial institutions to purchase shares
of the Fluctuating 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 resulting from
non-receipt of payment. For further information on the Settlement Program,
contact the Trust.
39
<PAGE>
THIRD PARTY TRANSACTIONS
If you are purchasing Fund shares through a program offered by a Financial
Intermediary, you may be required to pay additional fees to the Financial
Intermediary. You should contact your Financial Intermediary for information
concerning additional fees.
EXCHANGE PRIVILEGE
You may exchange shares of any Fund for shares of any other Fund, 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 Trust through another prospectus under certain conditions and
only in states where the exchange may be legally made. For additional
information, including prospectuses for other Funds, contact a Financial
Intermediary or the Trust. Exchanges may be made (i) by telephone if the
registrations of the two accounts are identical; or (ii) in writing addressed
to the Trust.
An exchange is a redemption of shares and is treated as a sale for income tax
purposes. Thus, 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).
You should consult your tax adviser.
HOW TO REDEEM SHARES
Fund shares may be redeemed on any business day at the next determined net
asset value after 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 your 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 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 made by check may be withheld for up to 15 days after
the date of purchase to assure that the check clears. Upon request, redemption
proceeds will be mailed to your address of record or to an alternate address
you designate provided the request is sent to the Transfer Agent in proper
form.
Request Procedures. Requests by investors to redeem Fund shares must be
received by the Funds' Transfer Agent on a business day, prior to the close of
the NYSE (currently 4:00 p.m. Eastern time).
You may tender your redemption request to the Transfer Agent by telephone,
mail, or by entry into the shareholder recordkeeping system. You may also
redeem shares through the Systematic Withdrawal Payment Program, which is
described below.
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. 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, you should use
the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Financial
Intermediary or to FRIMCo, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401.
40
<PAGE>
The redemption price will be the net asset value after receipt by FRIMCo of all
required documents in good order. "Good order" means that the request must
include:
A. A letter of instruction or a stock assignment specifically designating
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. Any 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 Program
provides an automated method for you to redeem a predetermined dollar amount
from your Fund shareholder account, in order to meet a standing request. The
SWP 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 you provide
on the SWP form. If you have more than one Fund from which a SWP is to be
received, you 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. You can schedule monthly, quarterly, semiannual or
annual distribution payments.
SWP Distribution by Wire. Federal funds wire payments will be sent to a bank
you designate on the payment date.
SWP Distribution by Check. Checks will be sent on the payment date by U.S.
Postal Service first class mail, to the address you request.
SWP Distribution by Electronic Fund Transfer. Electronic fund transfer
payments will be sent to a bank you designate bank on the payment date.
You must complete and mail an SWP form to your Financial Intermediary or to
FRIMCo, Attention: Frank Russell Investment Company, Operations Department,
P.O. Box 1591, Tacoma, WA 98401-1591. The SWP 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 its redemption proceeds in
excess of $250,000 by distributing portfolio securities to a shareholder,
rather than paying the shareholder in cash. This is called redemption in kind.
Shareholders will incur brokerage charges on the sale of these portfolio
securities. The Funds reserve the right to suspend redemptions or to postpone
payment dates if any unlikely emergency conditions develop.
41
<PAGE>
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal Distributor for Trust shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. The Custodian may deposit securities in
securities depositories or use subcustodians. The Custodian has no
responsibility for the supervision and management of the Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds'
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from FRIMCo.
ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust.
Russell has the right to grant (and withdraw the nonexclusive use of the name
"Frank Russell" or any variation.
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Fund's shares may be offered in multiple classes. Shares of each
class of a Fund represent proportionate interests in the assets of that Fund
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 the
dividends and distributions earned on the assets belonging to the Fund that the
Board declares. Each share of a class of a Fund has one vote in Trustee
elections and other matters submitted for shareholder vote. There are no
cumulative voting rights. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Special meetings may be called by
the Trustees at their discretion, but must be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares. On any matter which affects only a particular Fund or class, only
shares of that Fund or class are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
In addition to offering Class S Shares, the Funds also offer beneficial
interests in Class C Shares, which are described in a separate prospectus.
Class C Shares are designed to meet different investor needs and are subject to
both a Rule 12b-1 distribution fee and a shareholder servicing fee. These fees
may affect the performance of the Class C Shares. To obtain more information
about Class C Shares, contact your Financial Intermediary, or write or
telephone the Trust.
At , 1998, the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their names because they own more than 25% of
the voting shares of the Funds:
(TO BE FILED BY POST-EFFECTIVE AMENDMENT)
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<PAGE>
MONEY MANAGER PROFILES
The money managers 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.
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P., First Bank Place 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 Advisors N. A. 45 Fremont Street, 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 500,
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
19807, 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 wholly owned subsidiary of Legg
Mason, Inc.
Equinox Capital Management N.A., Inc., See: Diversified Equity Fund.
Trinity Investment Management Corporation, See: Diversified Equity Fund.
QUANTITATIVE EQUITY FUND
Barclays Global Investors N. A., 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., New York, NY 10036,
is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a publicly held bank
holding company.
44
<PAGE>
INTERNATIONAL SECURITIES FUND
J.P. Morgan Investment Management, Inc., See: Quantitative Equity 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, LLC, 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, 23th 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, 14th Floor,
Boston, MA 02108-4402, 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
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%.
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Montgomery Asset Management, LLC, 101 California Street, San Francisco, CA
94111, is a Delaware limited liability company with majority ownership held by
Commerzbank AG, a foreign banking organization.
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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 Franking 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, a wholly owned indirect subsidiary of PNC Bank.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
STW Fixed Income Management, 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 Inc., One City Corp. Center, 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: Diversified Bond Fund.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
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<PAGE>
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.
47
<PAGE>
GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries.
Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs").
Board -- The Board of Trustees of the Trust.
Cash reserves -- The Funds may invest their cash reserves (i.e., funds
awaiting investment) in money market instruments and in debt securities of
comparable quality to each Fund's permitted investments. As an alternative to
a Fund directly investing in money market instruments, the Funds and their
money managers may elect to invest the Fund's cash reserves in the Trust's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its
management fee on that portion of a Fund's assets invested in the Trust's
Money Market Fund.
Code -- Internal Revenue Code of 1986, as amended.
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trust's custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. 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.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
Distributor -- The organization that sells the shares of the Fund's under a
contract with the Trust.
Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into a Services Agreement with
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<PAGE>
FRIMCo, and institutions or individuals who have acquired Fund shares through
institutions or Financial Intermediaries
Emerging market companies -- 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.
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Agreements with FRIMCo
FNMA -- Federal National Mortgage Association
Forward Commitments -- Each Fund may agree 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 the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at
a future date. Emerging Markets Fund generally does not enter into forward
contracts with terms greater than one year, and typically enters into forward
contracts only under two circumstances. First, if the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Fund's money managers believe
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of the Fund's
portfolio securities denominated in the currency. Emerging Markets Fund will
not enter into a forward contract if, as a result, it would have more than
one-third of its assets committed to such contracts (unless it owns the
currency that it is obligated to deliver or has caused the Custodian to
segregate segregable assets having a value sufficient to cover its
obligations). Although forward contracts are used primarily to protect
Emerging Markets Fund from adverse currency movements, they involve the risk
that currency movements will not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trust's
administrator, manager and transfer and dividend paying agent.
Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax
purposes, and each Fund has its own investment objective, policies and
restrictions. The ten Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest
49
<PAGE>
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. A Fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA -- Government National Mortgage Association
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 maturing in more than seven days, that are illiquid because of the
absence of a readily available market or because of legal or contractual
resale restrictions. No Fund will invest more than 10% of its respective net
assets (taken at current value) in securities of issuers that may not be sold
to the public without registration under 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.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service
Lending portfolio securities -- Each Fund may lend portfolio securities with
a value of up to 33 1/3% of each Fund's total assets. These loans may be
terminated at any time. A Fund will receive either cash (and agree to pay a
"rebate" interest rate), U.S. government or U.S. government agency obligations
as collateral in an amount equal to at least 102% (for loans of U.S.
securities) or 105% (for non-U.S. securities) of the current market value of
the loaned securities. The collateral is daily "marked-to-market," 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. If
the borrower of the securities fails 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.
Liquidity Portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of 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 temporarily create an equity exposure for cash
balances until those balances are invested in securities or used for Fund
transactions.
Money Market Funds -- Money Market, U.S. Government Money Market and Tax-
Free Money Market Funds, each a Portfolio of the Trust. Each Money Market Fund
seeks to maintain a stable net asset value of $1 per share.
Moody's -- Moody's Investors Service, Inc., an NRSRO
Municipal obligations -- 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
50
<PAGE>
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 U.S. government or fully collateralized by U.S. government obligations;
industrial development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
net asset value (NAV) -- The value of a mutual fund is determined by
deducting the Fund's liabilities from the total assets of the portfolio. The
net asset value per share is determined by dividing the net asset value of the
Fund by the number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as
S&P or Moody's
NYSE -- New York Stock Exchange
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indexes in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
PFIC -- A passive foreign investment company. Emerging Markets Fund may
purchase interests in an issuer that is considered a PFIC under the Code.
Prime Rate -- The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers
REITs -- Real estate investment trusts
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 "Illiquid Securities" in this Glossary, 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.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction where 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.
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The Fund retains record ownership of the transferred security, 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, are segregated on the Fund's
records while a reverse repurchase agreement is in effect.
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. The
Russell 1000(R) Index is used as the basis for Quantitative Equity Fund's
performance because FRIMCo believes it 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.
Russell -- Frank Russell Company, consultant to the Trust and to the Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- The Trust's Statement of Additional Information, dated as noted on
the first page of this prospectus.
SEC -- U.S. Securities and Exchange Commission
Servicing Agents -- Entities who provide ongoing personal services to
shareholders of the Funds (i.e., recordkeeping). Servicing Agents perform
these services under contract with the Funds' distributor.
Shares -- The Class C Shares in the Funds. Each Class C Share of a Fund
represents a share of beneficial interest in the Fund
Transfer Agent -- FRIMCo, in its capacity as the Trust's transfer and
dividend paying agent
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
U.S. -- United States
U.S. government obligations -- These include U.S. Treasury bills, notes,
bonds and other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature
that typically may be exercised within 30 days. The rate of return on variable
rate obligations is readjusted periodically according to a market rate, such
as the Prime Rate. Also called floating rate obligations
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Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
53
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY DIVERSIFIED BOND
Alliance Capital Management L.P. Lincoln Capital Management Company
Pacific Investment Management
Barclays Global Advisors, N.A. Company
Equinox Capital Management, Inc. Standish, Ayer & Wood, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
VOLATILITY CONSTRAINED BOND
Peachtree Asset Management BlackRock Financial Management
Schneider Capital Management
Standish, Ayer & Wood, Inc.
Suffolk Capital Management STW Fixed Income Management
Trinity Investment Management Corporation
SPECIAL GROWTH MULTISTRATEGY BOND
Delphi Management, Inc.
BEA Associates, Inc.
Fiduciary International, Inc. Pacific Investment Management
GlobeFlex Capital, L.P. Company
Jacobs Levy Equity Management, Inc. Standish, Ayer & Wood, Inc.
Sirach Capital Management, Inc.
Wellington Management Company, LLP MANAGER, TRANSFER AND
DIVIDEND PAYING AGENT
EQUITY INCOME Frank Russell Investment Management
Brandywine Asset Management, Inc. Company
Equinox Capital Management, Inc. 909 A Street
Trinity Investment Management Corporation Tacoma, Washington 98402
QUANTITATIVE EQUITY CONSULTANT
Frank Russell Company
Barclays Global Advisors, N.A. 909 A Street
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc. Tacoma, Washington 98402
INTERNATIONAL SECURITIES DISTRIBUTOR
J.P. Morgan Investment Management, Inc. Russell Fund Distributors, Inc.
Marathon Asset Management Limited 909 A Street
Oechsle International Advisors Tacoma, Washington 98402
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc. INDEPENDENT ACCOUNTANTS
The Boston Company Asset Management, Inc. Coopers & Lybrand L.L.P.
One Post Office Square
EMERGING MARKETS Boston, Massachusetts 02109
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management, Inc. LEGAL COUNSEL
Stradley, Ronon, Stevens & Young,
Montgomery Asset Management, LLC LLP
REAL ESTATE SECURITIES
2600-One Commerce Square
Cohen & Steers Capital Management
AEW Capital Management L.P. Philadelphia, Pennsylvania 19103-
7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) RUSSELL 4
(800) 787-3754
In Washington (253) 627-7001
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<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 "Trust") is an open-end, management
investment company with 28 different investment series or portfolios
("Funds"). This Prospectus describes and offers interests in the Class S
Shares of eight Funds:
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
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each
Fund's investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class S Shares are sold at their net asset value, with
no sales load, no commissions, no Rule 12b-1 fees and no exchange fees. There
is a $10 million minimum aggregate investment in the Funds described in this
Prospectus, and investors must qualify as Eligible Investors, as described in
this Prospectus.
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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus doe not constitute an offer to sell securities in any state
or other jurisdiction to any person to whom it is unlawful to make sure an
offer in such state or other jurisdiction.
This Prospectus sets forth concisely the information about the Funds that
you should know before investing. Please read it before investing and retain
it for future reference. A Statement of Additional Information ("SAI"), dated
, 1998, has been filed with the Securities and Exchange Commission ("SEC").
The SAI is incorporated into this Prospectus by reference and is available
without charge by writing to the address listed above or by telephoning (800)
972-0700.
This Prospectus relates only to the Class S Shares of the Funds. The Funds
listed do not currently offer interests in any other classes of shares.
The SAI, material incorporated by reference into this Prospectus, and
further information regarding the Trust and the Funds is maintained
electronically with the SEC at its Internet Web Site (http://www.sec.gov).
PROSPECTUS DATED , 1998
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGES 43 OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary.................................................................... 3
Annual Fund Operating Expenses............................................. 4
Financial Highlights....................................................... 6
The Purpose of the Funds -- Multi-Style, Multi-Manager Diversification..... 14
Eligible Investors......................................................... 15
General Management of the Funds............................................ 16
Expenses of the Funds...................................................... 18
The Money Managers......................................................... 19
Investment Objectives, Policies and Practices.............................. 20
Portfolio Transactions Policies............................................ 30
Dividends and Distributions................................................ 31
Taxes...................................................................... 32
Fund Performance Information............................................... 33
How Net Asset Value Is Determined.......................................... 34
How to Purchase Shares..................................................... 35
How to Redeem Shares....................................................... 37
Additional Information..................................................... 38
Money Manager Profiles..................................................... 39
Glossary................................................................... 43
</TABLE>
2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's ("Russell") "multi-style, multi-manager
diversification" techniques and money manager evaluation services. Unlike most
investment companies that have a single organization that acts as both
administrator and investment adviser, the Trust divides responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds" and "Multi-Style,
Multi-Manager Diversification."
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.
3
<PAGE>
The Trust's Funds had aggregate net assets of approximately $ billion on
, 1998. The net assets of the Funds described in this Prospectus on ,
1998 were:
<TABLE>
<S> <C>
Equity I................ $
Equity II............... $
Equity III.............. $
Equity Q................ $
</TABLE>
<TABLE>
<S> <C>
International Fund...... $
Fixed Income I.......... $
Fixed Income II......... $
Fixed Income III........ $
</TABLE>
You may buy and sell Class S Shares of the Fund through an authorized
Financial Intermediary. All Class S Shares are sold without a sales charge,
commission, or Rule 12b-1 fee. Except as indicated below, Class S Shares are
redeemed at net asset value. You may also exchange shares of one Fund for
shares of another Fund. See "How to Purchase Shares" and "How to Redeem
Shares."
You should be aware of the general risks associated with investments in
mutual funds. One or more Funds may make investments and engage in investment
practices and techniques that involve risks, including entering into
repurchase agreements, lending portfolio securities and entering into hedging
transactions.
SHAREHOLDER TRANSACTION EXPENSES
You would pay the following charges when buying or redeeming Class S Shares
of a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES
LOAD IMPOSED LOAD IMPOSED ON DEFERRED REDEMPTION EXCHANGE
ON PURCHASES REINVESTED DIVIDENDS SALES LOAD* FEES FEES
- ------------- -------------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
None None None None None
</TABLE>
- ---------------------
* If you purchase shares of any of the Funds, you may pay a quarterly
shareholder investment services fee ("Services Fee") directly to FRIMCo
pursuant to a separate asset management agreement between you and FRIMCo.
The fee is calculated as a percentage of the amount you have invested in the
Funds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL FUND
OTHER EXPENSES OPERATING
(AFTER EXPENSES (AFTER
MANAGEMENT REIMBURSEMENT, REIMBURSEMENT,
FEE UNLESS NOTED) UNLESS NOTED)
---------- -------------- ---------------
<S> <C> <C> <C>
Equity I Fund......................... .60% .10% .70%
Equity II Fund........................ .75% .17% .92%
Equity III Fund....................... .60% .18% .78%
Equity Q Fund......................... .60% .08% .68%
International Fund.................... .75% .25% 1.00%
Fixed Income I Fund................... .30% .12% .42%
Fixed Income II Fund.................. .50% .16% .66%
Fixed Income III Fund................. .54% .16% .70%
</TABLE>
This table is intended to assist you in understanding the various expenses
of each Fund. Operating expenses are paid out of a Fund's assets and are
factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year.
4
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Fund's annual return is 5% and that its operating expenses
are as described above, and that you sell your shares after the number of
years shown. These are projected expenses for each $1000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity I Fund................................... $ 7 $22 $39 $ 88
Equity II Fund.................................. $ 9 $28 $51 $116
Equity III Fund................................. $ 8 $24 $43 $ 98
Equity Q Fund................................... $ 7 $21 $38 $ 86
International Fund.............................. $10 $30 $55 $125
Fixed Income I Fund............................. $ 4 $13 $23 $ 53
Fixed Income II Fund............................ $ 7 $20 $36 $ 83
Fixed Income III Fund........................... $ 7 $22 $39 $ 89
</TABLE>
5
<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 Trust'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 Trust.
EQUITY I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .42 .52 .62 .60 .61 .75 .91 .88 .81
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
------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... 6.38 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.42) (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77)
Net realized gain on
investments........... (3.62) (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48)
In excess of net real-
ized gain on invest-
ments................. -- -- (.24) (.16) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (4.04) (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 23.58 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets(a)............. .71 .59 .12 .14 .15 .19 .23 .18 .17
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
Portfolio turnover..... 99.51 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59
Net assets, end of year
($000 omitted)........ 961,953 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691
Average commission rate
paid per share of
security
($ omitted)........... .0464 N/A N/A N/A N/A N/A N/A N/A N/A
</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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
6
<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 Trust'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 Trust.
EQUITY II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $23.32 $22.50 $19.99
------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .16 .27 .36 .32 .30 .41 .51 .61 .52
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
------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment
Operations........... 5.12 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03
------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.16) (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52)
Net realized gain on
investments........... (3.79) (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) --
In excess of net real-
ized gain on invest-
ments................. -- -- (.56) (.39) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------ ------
Total Distributions... (3.95) (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52)
------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $19.24 $23.32 $22.50
======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)(A)..... 18.51 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .95 .83 .23 .34 .32 .37 .48 .41 .35
Net investment income
to average net assets
(a)................... .52 .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40
Portfolio turnover..... 120.78 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38
Net assets, end of year
($000 omitted)........ 365,955 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903
Average commission rate
paid per share of
security ($ omitted).. .0381 N/A N/A N/A N/A N/A N/A N/A N/A
</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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
7
<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 Trust'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 Trust.
EQUITY III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $26.49 $ 24.03 $ 20.74
------- ------- ------- ------- ------- ------- ------ ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .70 .82 .93 .89 .98 1.08 1.33 1.26 1.15
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
------- ------- ------- ------- ------- ------- ------ ------- -------
Total From Investment
Operations........... 5.80 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55
------- ------- ------- ------- ------- ------- ------ ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.71) (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14)
Net realized gain on
investments........... (4.52) (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12)
In excess of net real-
ized gain on invest-
ments................. -- -- (.10) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------- -------
Total Distributions... (5.23) (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26)
------- ------- ------- ------- ------- ------- ------ ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $23.30 $ 26.49 $ 24.03
======= ======= ======= ======= ======= ======= ====== ======= =======
TOTAL RETURN (%)(A)..... 20.90 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .79 .65 .17 .16 .20 .25 .27 .23 .20
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
Portfolio turnover..... 100.78 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28
Net assets, end of year
($000 omitted)........ 221,778 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695
Average commission rate
paid per share of
security ($ omitted).. .0447 N/A N/A N/A N/A N/A N/A N/A N/A
</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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
8
<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 Trust'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 Trust.
EQUITY Q FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20 $ 22.45 $ 18.85 $16.67
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .58 .59 .69 .66 .67 .75 .81 .78 .69
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME
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
------- ------- ------- ------- ------- ------- ------- ------- ------
Total income from
Investment
Operations........... 6.91 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84
------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income.. (.58) (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66)
In excess of net
investment income..... (.01) -- -- -- -- -- -- -- --
Net realized gain on
investments........... (3.78) (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) --
In excess of net real-
ized gain on invest-
ments................. -- -- (.22) (.06) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total Distributions... (4.37) (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66)
======= ======= ======= ======= ======= ======= ======= ======= ======
NET ASSET VALUE, END OF
YEAR................... $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 24.90 $ 20.20 $ 22.45 $18.85
======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN (%)(A)(B).. 23.67 37.91 .99 13.80 9.97 32.14 (4.81) 27.10 17.16
======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS (%) SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(b)(c)................ .71 .58 .11 .15 .18 .23 .31 .33 .33
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
Portfolio turnover
(c)................... 74.59 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21
Net assets, end of year
($000 omitted)........ 818,281 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320
======= ======= ======= ======= ======= ======= ======= ======= ======
Average commission rate
paid per share of
security ($ omitted).. .0332 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
9
<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 Trust'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 Trust.
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .44 .48 .61 .58 .67 .73 1.23 .85 .95
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
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income From
Investment
Operations........... 2.85 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.35) (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11)
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)
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)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(B)..... 7.98 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average net
assets(b)............. 1.04 .88 .32 .39 .45 .48 .50 .44 .45
Operating expenses,
gross, to average net
assets(b)............. 1.05 .89 .34 .41 .46 .48 .50 .44 .45
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
Portfolio turnover..... 42.69 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17
Net assets, end of year
($000 omitted)........ 944,380 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064
Per share amount of
fees waived ($
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
</TABLE>
- ---------------------
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(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.
* See the notes to financial statements which appear in Trust's Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
10
<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 Trust'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 Trust.
FIXED INCOME I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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
-------- -------- -------- -------- -------- -------- -------- -------- --------
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
Net realized and
unrealized gain (loss)
on investments........ (.62) 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations........... .76 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income.. (1.36) (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.62) (.08) -- (.31) --
In excess of net
realized gain on
investments........... -- -- (.11) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions... (1.36) (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72)
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
YEAR................... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (%)(A)..... 3.75 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .42 .35 .10 .09 .10 .10 .11 .12 .13
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
Portfolio turnover..... 147.31 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54
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
</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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
11
<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 Trust'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 Trust.
FIXED INCOME II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $ 18.69 $18.51 $18.63
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.04 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61
Net realized and
unrealized gain (loss)
on investments........ .19 .59 (1.07) .44 (.83) .72 .23 .27 (.12)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations........... .85 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.04) (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61)
Net realized gain on
investments........... -- -- -- -- (.28) -- -- -- --
Tax return of capital.. -- -- -- (.14) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions... (1.04) (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61)
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $18.69 $18.51
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A)..... 4.76 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .70 .58 .19 .16 .19 .13 .15 .17 .13
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
Portfolio turnover..... 264.40 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58
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
</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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
12
<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 Trust'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 Trust.
FIXED INCOME III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993++
---- -------- -------- -------- --------
<S> <C> <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 Opera-
tions.......................... .48 1.64 (.41) 1.01
-------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income............ (.64) (.67) (.66) (.48)
In excess of net investment in-
come............................ (.01) -- -- --
Net realized gain on invest-
ments........................... -- -- -- (.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 aver-
age net assets (b)(c)........... .73 .61 .20 .20
Operating expenses, gross, to av-
erage 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 reim-
bursed ($ omitted).............. -- -- -- .0154
</TABLE>
- ---------------------
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
13
<PAGE>
THE PURPOSE OF THE FUNDS -- MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCo's and
Frank Russell Company's ("Russell") "multi-style, multi-manager
diversification" investment method and to obtain FRIMCo's and Russell's money
manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936 and has
been providing comprehensive asset management consulting services for almost
30 years to institutional investors, principally large corporate employee
benefit plans. Russell and its affiliates have offices around the world -- in
Tacoma, New York, Toronto, London Zurich, Paris, Sydney, Auckland and Tokyo.
Three functions form the core of Russell's consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
. 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 a way most
likely to achieve the client's objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. FRIMCo and Russell believe that for many, this
can be accomplished through strategically purchasing shares in one or more of
the Funds which have been structured to provide access to specific asset
classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities, over the past 50 years, have outperformed corporate debt
in absolute terms. However, what is generally true of performance over
extended periods will not necessarily be true at any given time during a
market cycle, and from time to time asset classes with greater risk may also
underperform lower risk asset classes, on either a risk adjusted or absolute
basis. Investors should select a mix of asset classes that reflects their
overall ability to withstand market fluctuations over their investment
horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary
14
<PAGE>
investment styles within an asset class, investors are better able to reduce
their exposure to any one investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their
own accounts or in a fiduciary or agency capacity, which have entered
into asset management services agreements ("Agreements") with FRIMCo.
"Financial Intermediaries" include bank trust departments, registered
investment advisers, broker-dealers, employee benefit plans and other
financial services organizations; and
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries.
The initial minimum aggregate investment in any combination of the Funds
described in this Prospectus is $10 million. You may be eligible to purchase
shares of these Funds if you do 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. You should consult your Financial Intermediary for details.
The initial minimum aggregate investment in any combination of the Funds
described in this Prospectus is $10 million.
The Funds do not generally offer their shares directly to individual (i.e.,
retail) investors, although they may choose to do so. Financial Intermediaries
that have entered into Agreements with FRIMCo may acquire shares of the Funds
for their customers. Under the Agreements FRIMCo provides objective-setting
and asset-allocation assistance and services to Financial Intermediaries,
which in turn provide similar services to their customers. Financial
Intermediaries receive no compensation from FRIMCo or Class S Shares of the
Funds. However, Financial Intermediaries may charge their customers a fee for
providing these services and other trust or investment-related services.
Each Agreement with respect to the Funds provides that a shareholder
investment services fee (the "Services Fee") may be paid to FRIMCo. The
Services Fee is usually expressed as a percentage of the client's assets
invested in the Funds. The Services Fee may include a fixed-dollar fee for
certain specific services. The client and FRIMCo agree to the Services Fee,
which is determined by the amount of assets the client expects to invest in
the Funds, the nature and extent of services that FRIMCo agrees to provide to
the client, and other factors.
Either the client or FRIMCo may terminate an Agreement upon written notice.
FRIMCo does not anticipate terminating any Agreement unless a client does not
(i) promptly pay fees due to FRIMCo, or (ii) invest sufficient assets in the
Trust's Funds to compensate FRIMCo for its services. If an Agreement is
terminated, FRIMCo will no longer provide asset-allocation, objective-setting
or other services to the client.
15
<PAGE>
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds' operations, including reviewing and approving
the Funds' contracts with FRIMCo, Russell and the money managers. The Trust'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:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers' investment
programs and results;
. manages, or hires money managers to manage, the Fund's Liquidity
Portfolios (see the Glossary); and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCo's officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo, since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson jointly with another
portfolio manager identified herein has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, Multistrategy Bond, and Core Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge jointly with another portfolio manager identified
herein has primary responsibility for management of the Fixed I, Fixed II,
Fixed III, Diversified Bond, Volatility Constrained Bond, Multistrategy
Bond, Core Bond and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter jointly with another portfolio manager
identified herein has primary responsibility for management of the
International, International Securities and Non-U.S. Equity Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January 1998.
From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst with
Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and portfolio
manager with Avatar Associates. Ms. Duncan jointly with another portfolio
manager identified herein has primary responsibility for management of the
International, International Securities and Non-US Equity Funds.
16
<PAGE>
. James M. Imhof, Manager of FRIMCo's Portfolio Trading who manages the
Trust on a day to day basis and has been responsible for ongoing analysis
and monitoring of the 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 the Frank Russell Company. Mr. Jornlin jointly with
another portfolio manager identified herein has primary responsibility for
management of the Emerging Markets and Real Estate Securities 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. 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, Equity Income, Multi-Style and
Aggressive Equity 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
the Russell. 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, Equity Income, Multi-Style and
Aggressive Equity Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services -- including objective-setting and asset-allocation technology, and
money manager research and evaluation assistance -- that Russell provides to
its other consulting clients. Russell does not receive any compensation from
the Funds for its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the
money managers of each Fund On January 22, 1996, the shareholders of the
Trust's Funds voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as the
Trust's agent, pays the money managers for their investment selection
services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable to FRIMCo monthly on a pro rata basis, are
the following percentages of each Fund's average daily net assets; Equity I
Fund, 0.60%; Equity II Fund, 0.75%; Equity III Fund, 0.60%; Equity Q Fund,
0.60%; International Fund, 1.00%; Fixed Income I Fund, 0.30%; Fixed Income II
Fund, 0.50%; and Fixed Income III Fund, 0.54%.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fees for certain Funds. This arrangement is not part of the Management
Agreement with the Trust and may be changed or discontinued at any time.
FRIMCo currently calculates its Management Fee based on a Fund's average daily
net assets less any management fee incurred on the Fund's assets to the extent
The Fund incurs management fees for investing a portion of its assets in each
of the Trust's Money Market Fund.
17
<PAGE>
The Board has approved, subject to the approval of the shareholders of the
applicable Funds, which will be sought at a shareholder meeting expected to be
held during 1998, an increase in FRIMCo's Management Fee for the Fund
described in this Prospectus. If the proposed increases, which are designed to
compensate FRIMCo for its services in managing assets in conjunction with
securities lending, reverse repurchase agreement and similar transactions, is
approved by shareholders, the Management Fee for the Funds will be as follows:
Equity I Fund, %; Equity II Fund, %; Equity III Fund, %; Equity Q Fund, %;
International Fund, %; Fixed Income I Fund, %; Fixed Income II Fund, %; and
Fixed Income III Fund, %.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other
than those expressly assumed by FRIMCo. The Funds' expenses for Class S Shares
for the year ended December 31, 1997, as a percentage of each Fund's average
net assets, are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent, and recordkeeping fees payable to FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian;
. fees for independent auditing and legal services; and
. filing and registration fees payable to the SEC.
18
<PAGE>
THE MONEY MANAGERS
Each Fund's assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Fund's assets among money managers at any time. FRIMCo may employ or terminate
a money manager at any time, subject to the approval by the Trust's Board of
Trustees (the "Board"). A Fund will notify its shareholders within 60 days of
when a money manager begins providing services. The money managers are
selected for the Funds based primarily upon the research and recommendations
of FRIMCo and Russell. FRIMCo and Russell evaluate 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 for any Fund.
From its management fees, FRIMCo, as the Trust's agent, pays fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average of
all assets allocated to the manager for the quarter. For the year ended
December 31, 1997, management fees paid to the money managers were equivalent
to the following annual rates, expressed as a percentage of each Fund's
average daily net assets: Equity I Fund, 0.23%; Equity II Fund, 0.40%; Equity
III Fund, 0.19%; Equity Q Fund, 0.19%; International Fund, 0.39%; Fixed Income
I Fund, 0.08%; Fixed Income II Fund, 0.17%; and Fixed Income III Fund, 0.21%.
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after the Trust has paid FRIMCo. Fees paid
to the money managers are not affected by any voluntary or legal expense
limitations. Some money managers may receive investment research prepared by
Russell as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies and the more specific strategies developed by FRIMCo. Although the
money managers' activities are subject to general oversight by the Board and
the Trust's officers, neither the Board, the officers, FRIMCo nor Russell
evaluate the investment merits of the money managers' individual security
selections.
19
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of portfolio securities that may
be purchased by the Funds are described in "Fund Investment Securities."
Specific investment practices that may be employed by the Funds are identified
in "Other Investment Practices." The risks associated with portfolio
investments by the Funds are described in those sections, as well as in "Risk
Considerations." Certain terms used in these sections are described in the
Glossary in this Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
FUND EXPOSURE EXPOSURE FOCUS
---- ----------- -------- -----
<S> <C> <C> <C>
Equity I Fund...................... 65-100% 35% Total Return
Equity II Fund..................... 65-100% 35% Maximum Total Return
Equity III Fund.................... 65-100% 35% Current Income
Equity Q Fund...................... 100% -- Total Return
International Fund................. 65-100% 35% Total Return
Fixed Income I..................... 35% 65-100% Diversification
Fixed Income II Fund............... 35% 65-100% Preservation of Capital
Fixed Income III Fund.............. -- 100% Maximum Total Return
</TABLE>
INVESTMENT OBJECTIVES
Each Fund's investment objective is "fundamental," which means each
investment objective may not be changed without the approval of a majority of
each Fund's shareholders. Certain investment policies may also be fundamental.
Ordinarily, each Fund will invest more than 65% of its total assets in the
types of securities identified in its investment objective. However, the Funds
may hold assets as cash reserves for temporary and defensive purposes when
their money managers believe a conservative approach is desirable, or when
suitable investments are unavailable.
EQUITY I FUND
Equity I Fund's objective is to provide income and capital growth by
investing principally in equity securities. Equity I Fund may invest in common
and preferred stocks, securities convertible into common stocks, rights and
warrants.
EQUITY II FUND
Equity II Fund's objective is to maximize total return primarily through
capital appreciation and by assuming a higher level of volatility than Equity
I Fund. Equity II Fund seeks to achieve its objective by investing in equity
securities.
The Fund also seeks to provide current income. The Fund may invest in common
and preferred stock, convertible securities, rights and warrants. The Fund's
investments may include companies whose securities have
20
<PAGE>
been publicly traded for less than five years and smaller companies (i.e.,
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" or companies characterized as "special situations." "Emerging
growth-type" companies tend to reinvest most of their earnings, rather than
pay significant cash dividends. "Special situation" companies are those which
the money managers believe present opportunities for capital growth because of
cyclical developments in the securities markets, the industry, or the issuer.
EQUITY III FUND
Equity III Fund's objective is to achieve a high level of current income,
while maintaining the potential for capital appreciation. Equity III Fund
seeks to achieve its objective by investing primarily in income-producing
equity securities.
The Fund's aim is to exceed the yield on the S&P 500 Index. The Fund may
also invest in preferred stock, convertible securities, rights and warrants.
EQUITY Q FUND
Equity Q Fund's objectives are to provide a total return greater than the
total return of the U.S. 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. Equity Q seeks to achieve its
objective by investing in equity securities.
The Fund's portfolio will be structured similarly to the Russell Index, as
the Fund will maintain industry weights and economic sector weights near those
of the Index. As a result, the Fund's money managers generally select stocks
from the set of stocks comprising 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 to meet the Fund's investment
objectives. The money managers anticipate that the Fund's average
price/earnings ratio, yield and other fundamental characteristics will be near
the averages of the Russell Index.
The money managers of the Fund use various quantitative management
techniques in selecting investments. A quantitative manager bases its
investment decisions primarily on quantitative investment models. Money
managers use these models to determine the investment potential of a
particular portfolio security and to rank securities based upon their ability
to outperform 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 construct a portfolio that has superior return prospects with risks similar
to the Russell 1000(R) Index. FRIMCo believes quantitative management over a
market cycle should provide consistent performance, diversification, market-
like volatility and limited market under performance. However, there is no
guarantee that the Fund will have these characteristics at any one time.
The Fund will seek to achieve its investment objectives by using various
quantitative management techniques.
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
21
<PAGE>
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 is permitted to hold up to 20% of Fund assets in liquid
investments to meet redemption requests.
INTERNATIONAL FUND
International Fund's objectives are to provide favorable total return and
additional diversification for U.S. investors. International Fund attempts to
achieve its objective by investing primarily in equity and fixed-income
securities of foreign companies, and securities issued by foreign governments.
The Fund may also invest 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 foreign
currencies 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
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, U.S. government and U.S. 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.) Money managers will select investment
selections based on fundamental economic and market factors. Money managers
will evaluate potential investments by sector, maturity, quality and other
criteria. 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; A or Prime-2 by Moody's; or, if
unrated, judged by the money managers to be of at least equal credit quality
to those designations.
FIXED INCOME II FUND
Fixed Income II Fund's objectives are the preservation of capital and the
generation of current income consistent with preservation of capital. Fixed
Income II plans to achieve its objectives by investing primarily in fixed-
income securities with low-volatility characteristics.
The Fund will invest primarily in those fixed-income securities 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.
Although the Fund will invest primarily in debt securities denominated in
the U.S. dollar, the money managers will actively manage the Fund's portfolio
in accordance with a multi-market investment strategy.
22
<PAGE>
Accordingly, the money managers will allocate the Fund's investments among
securities denominated in the currencies of the U.S. and selected foreign
countries. The Fund may also invest in high-quality, foreign debt securities.
The money managers which invest in foreign denominated securities will
maintain a substantially neutral currency exposure relative to the U.S.
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 U.S. dollar. Money managers of the
Fund will consider fundamental economic strength, credit quality and interest
rate trends in determining whether to increase or decrease the emphasis placed
upon a particular type of security or industry sector. The Fund will not
invest more than 10% of its total assets in debt securities denominated in a
single foreign currency, and FRIMCo currently intends to limit total
investments in non-U.S. dollar securities to no more than 25% of the Fund's
total assets.
The Fund will generally invest in the foreign debt securities of countries
whose governments it considers to be stable (the Fund may invest in countries
considered unstable or undeveloped, provided that it believes it is able to
hedge substantially the risk of a decline in the currency in which the
securities are denominated). In addition to the U.S. 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) U.S. Government obligations; (b) obligations issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities; (c) obligations issued or
guaranteed 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 to be of comparable quality
by the Money Managers; (d) investment grade corporate debt securities (or, if
unrated, corporate debt securities which the money managers determine to be of
equivalent quality); (e) bank instruments; and (f) commercial paper.
The Fund intends to use interest rate swaps as a hedge and not as a
speculative investment. For more information on risks, see "Risk
Considerations."
FIXED INCOME III FUND
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 the broad fixed-income market.
Fixed Income III Fund seeks to achieve its objective by investing in fixed-
income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: U.S. 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
23
<PAGE>
the Fund); bank instruments; 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. The Fund generally expects to enter into
these transactions for two related purposes: 1) to preserve a return or spread
on a particular investment or portion of its portfolio; and 2) 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. For more information on risks, see "Risk
Considerations."
FUND INVESTMENT SECURITIES
Commercial Paper
Fixed Income II and Fixed Income III Funds may invest in commercial paper.
Commercial paper represents a debt obligation of a company which is unsecured.
Fixed Income II and Fixed Income III Funds will invest in commercial paper
which is 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.; or TBW-1 or TBW-2 by Thomson Bank Watch, Inc. Fixed Income II and Fixed
Income III Funds may also invest in commercial paper which is not rated if it
is issued by U.S. or foreign companies which the money managers conclude are
of high-quality and have outstanding debt securities which are rated AAA, AA
or A by S&P; or Aaa, Aa or A by Moody's.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Fixed Income III Fund, do not invest
in debt 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 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 Fixed Income III
Fund, will sell securities whose ratings drop below these minimum ratings, in
a prudent manner as determined by the money managers. The market value of debt
securities generally varies inversely with interest rates.
EQUITY SECURITIES
Equity I, Equity II, Equity III, Equity Q and International Funds invest
primarily in equity securities. Equity I, Equity II, Equity III and Equity Q
Funds may invest in common stock equivalents. The following constitute common
stock equivalents: rights and warrants and convertible securities. Common
stock equivalents may be converted into or provide the holder with the right
to common stock. Equity I, Equity II, Equity III and Equity Q Funds may also
invest in other types of equity securities, including preferred stocks.
INTEREST RATE SWAPS
Fixed Income II and Fixed Income III Funds may enter into interest rate
swaps. When a Fund engages in an interest rate swap, it exchanges its
obligations to pay or rights to receive interest payments for the obligations
or rights to receive interest payments of another party (i.e., 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.
24
<PAGE>
INVESTMENT COMPANY SECURITIES
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only
way for International Fund to invest in certain markets. To access these
markets, the Fund may invest up to 10% of its total assets in the shares of
other investment companies. These investments may involve the payment of
substantial premiums above the net asset value of those investment companies'
portfolio securities and are subject to limitations under the 1940 Act.
International Fund also may incur tax liability to the extent it invests in
the stock of a foreign issuer that is a "passive foreign investment company"
("PFIC"), regardless of whether the PFIC makes distributions to the Fund. See
"Taxes" in this Prospectus and in the SAI.
OTHER DEBT SECURITIES
Fixed Income II and Fixed Income III Funds may invest in debt securities
issued by supranational organizations such as:
The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.
The European Community -- An organization which consists of certain
European states engaged in cooperative economic activities.
The European Coal and Steel Community -- An economic union of various
European nations' steel and coal industries.
The Asian Development Bank -- An international development bank
established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions.
Fixed Income II Fund may also 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 Counsel of Ministers of the European
Community European may adjust specific amounts of currency comprising the ECU
to reflect changes in the relative values of the underlying currencies. The
money managers investing in these securities do not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or
the marketability of the securities.
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate U.S.
government obligations. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and GNMA participation certificates, are issued or
guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency
or instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of
credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury,
there is no guarantee that the U.S. government will provide support to such
agencies or instrumentalities. Accordingly, such U.S. government securities
may involve risk of loss of principal and interest.
25
<PAGE>
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
FIXED FIXED FIXED
TYPE OF PORTFOLIO EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
SECURITY FUND FUND FUND FUND FUND FUND FUND FUND
----------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks...........
Common stock equivalents
(warrants).............
Common stock equivalents
(options)..............
Common stock equivalents
(convertible debt
securities)............
Common stock equivalents
(depository receipts)..
Preferred stocks........
Equity derivative
securities.............
Debt securities (below
investment grade or
junk bonds)............
U.S. government
obligations............
Municipal obligations...
Investment companies....
Foreign securities......
</TABLE>
26
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each
of which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed
to reduce risks.
<TABLE>
<CAPTION>
FIXED FIXED FIXED
EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
TYPE OF PRACTICE FUND FUND FUND FUND FUND FUND FUND FUND
---------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves...........
Repurchase
agreements(1)..........
When-issued and forward
commitment securities..
Reverse repurchase
agreements.............
Lending portfolio
securities, not to
exceed 33 1/3% of total
Fund assets............
Illiquid securities
(limited to 15% of
Fund's net assets).....
Forward currency
contracts(2)...........
Write (sell) call and
put options on
securities, securities
indexes and foreign
currencies(3)..........
Purchase options on
securities, securities
indexes, and
currencies(3)..........
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures(4)..........
Liquidity Portfolios....
</TABLE>
- ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize
upon the security, may incur a loss if the value of the security declines
and may incur disposition costs in liquidating the security.
(2) International, Fixed Income I, Fixed Income II, and Fixed Income III Funds
may not invest more than 25% of their assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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 33% of the value of its net
assets. Only the Fixed Income III Fund currently intends to write or
purchase options or foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
Investment Restrictions. If a Fund changes its investment objective or
policies, you should consider whether the Fund remains right for you. The
Funds are subject to additional investment policies and restrictions described
in the SAI, some of which are fundamental.
27
<PAGE>
RISK CONSIDERATIONS
Foreign Debt Securities. Fixed Income III Fund's portfolio may include debt
securities issued by domestic or foreign entities, and denominated in U.S.
dollars or foreign currencies. The Fund anticipates that no more than 25% of
its net assets will be denominated in foreign currencies. The Fund will only
use foreign currency exchange transactions (options on foreign currencies,
foreign currency futures contracts and forward foreign currency contracts) 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 in this section under "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 Fund may invest in the following types of emerging market debt--bonds;
notes and debentures of emerging market governments; and debt and other fixed
income securities issued or guaranteed by emerging market government agencies,
instrumentalities or central banks, or by banks or other companies in emerging
markets which money managers believe are 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.
Fixed Income III Fund may invest in bank instruments, which include European
certificates of deposit ("ECDs"), European time deposits ("ETDs") and Yankee
Certificates of deposit ("Yankee CDs"). ECDs, ETDs, and Yankee CDs are subject
to somewhat different risks from the obligation of domestic banks. ECDs are
dollar denominated certificates of deposit issued by foreign branches of U.S.
and foreign banks; ETDs are U.S. dollar denominated time deposits in a foreign
branch of a U.S. bank or a foreign bank; and Yankee CDs are certificates of
deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars
and held in the United States. 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
investment for the Fixed Income III Fund.
High Risk Bonds. Fixed Income III Fund 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 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.
While this debt may have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions. Fixed Income III Fund's money managers will seek to reduce the
risks associated with investing in lower-rated debt securities by limiting the
Fund's holding in the securities and by the depth of the managers' credit
analysis. For additional information, refer to the SAI.
28
<PAGE>
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange
rate or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds may employ certain risk management
practices using certain derivative securities and techniques (known as
"derivatives"). Markets in some countries currently do not have instruments
available for hedging transactions. To the extent that such instruments do not
exist, a money manager may not be able to hedge its investment effectively in
such countries. Furthermore, a Fund engages in hedging activities only when
its money managers deem it to be appropriate, and does not necessarily engage
in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if
it had not entered into a hedging position. If the correlation between a
hedging position and a portfolio position is not properly protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on U.S. 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 U.S. 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, those Funds will consider
emerging markets to be countries with developing economics 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 U.S. economy in such
respects as the rate of growth in gross domestic product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Because the Funds' foreign securities will generally be
denominated in foreign currencies, the value of such securities to the Funds
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S.
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
29
<PAGE>
not free-floating against the U.S. dollar. Further, certain emerging market
countries' currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. 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.
Variable and Floating Rate Securities. Fixed Income III Fund may invest in
variable and floating rate securities. The variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates
are adjusted periodically based upon some appropriate interest rate adjustment
index. The adjustment intervals may be regular, (i.e., daily, monthly,
annually, etc.) event based, (i.e., a change in the prime rate). The Fund may
also invest in zero coupon U.S. Treasury, foreign government and U.S. 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 market value fluctuations in response to
changing interest rates than debt obligations of comparable maturities that
make current distributions of interest.
PORTFOLIO TRANSACTIONS POLICIES
Money managers make decisions to buy and sell securities for the Fund assets
assigned to them. FRIMCo makes determinations for any other Fund assets. The
Funds do not seek to realize long-term (rather than short-term) capital gains
while making portfolio investment decisions.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another money manager for the Fund (or for another Fund) is
purchasing the same security. Also, when a money manager's services are
terminated, the new money manager may significantly restructure an investment
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
costs. The annual portfolio turnover rates for the Funds are shown in the
Financial Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the
Trust's securities and the selection of brokers and dealers (including
affiliates) ("Brokers") that, in the best judgment of FRIMCo and the money
managers, provide prompt and reliable execution at favorable prices and
reasonable commission rates. In addition to price and commission rates,
Brokers may be selected based on research, statistical or other services that
they provide. The Trust may pay commission rates that exceed rates that other
Brokers may have charged if the Trust concludes the commissions are reasonable
in relation to the value of the brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money
manager believes a Fund will receive competitive execution, price, and
commissions. When these transactions are completed, Russell Securities will
refund up to 70% of the commissions paid by the Fund after reimbursement for
research services provided to FRIMCo. Also, the Funds may effect portfolio
transactions through and pay brokerage commissions to Brokers that are
affiliates of the money managers.
30
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed -- all distributions are at the Board's
discretion. Currently the Board intends to declare dividends from net
investment income and net short-term capital gains (if any) according to the
following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE FUNDS
-------- ------- -----
<S> <C> <C>
Quarterly............... Mid: April, July, October and
December
Equity II, Equity Q, Fixed Income
Equity I, Equity II, I, Fixed Income II and Fixed
Funds.................. Income III
Annually................ Mid-December International Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains through October 31
(excess of capital gains over capital losses) generally in mid-December. To
meet certain legal requirements, a Fund may declare special year-end dividend
and capital gains distributions during October, November or December to
shareholders of record in that month. These distributions are deemed to have
been paid by a Fund and received by you on December 31 of the prior year,
provided that you receive them by January 31. Capital gains realized during
November and December will be distributed to you during February of the
following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account
is a tax-deferred account, dividends paid to you would be included in your
gross income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you
reinvested the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by
delivering written notice no later than ten days prior to the payment date to
the Transfer Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
31
<PAGE>
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital
gains to shareholders and meet other requirements of the Code relating to the
sources of its income and diversification of assets. Accordingly, a Fund will
generally not be liable for federal income or excise taxes based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code. International Fund
may incur tax liability to the extent it invests in PFICs. See "Portfolio
Securities" and the SAI. The Funds may be subject to nominal, if any, state
and local taxes.
For federal income tax purposes, the dividends from net investment income
and any excess of net short-term capital gains over net long-term capital loss
that you receive from the Funds are considered ordinary income. However,
depending upon the relevant state tax rules, a portion of the dividends paid
by Fixed Income I, Fixed Income II and Fixed Income III Funds attributable to
direct U.S. Treasury and agency obligations may be exempt from state and local
taxes. 28% and 20% capital gains distributions declared by the Board are taxed
at the respective capital gains rates regardless of the length of time you
have held the shares. Distributions of income and capital gains are taxed in
the manner described above, whether you receive them in cash or reinvest them
in additional shares of the Funds. Distributions paid in excess of a Fund's
earnings will be treated as a nontaxable return of capital.
A Fund will notify you of the source of its dividends and distributions at
the time they are paid. After the close of each calendar year, the Funds will
advise their shareholders of the amounts:
. of ordinary income dividends, 28% capital gains dividend, and 20% capital
gains distributions, including any amounts which are deemed paid on
December 31 of the prior year;
. of dividends which qualify for the 70% dividends-received deduction
available to corporations;
. of International Fund's foreign taxes withheld;
. of income which is a tax preference item (if any) for alternative minimum
tax purposes; and
. of the percentages of Fixed Income I, Fixed Income II and Fixed Income
III Funds' income attributable to U.S. government, Treasury and agency
securities.
If you are a corporate investor, a portion of the dividends from net
investment income paid by Equity I, Equity II, Equity III and Equity Q Funds
will generally qualify in part for the corporate dividends-received deduction.
However, the portion depends on the aggregate qualifying dividend income
received by either Fund from domestic (U.S.) sources. Certain holding period
and debt financing restrictions may apply to corporate investors seeking to
claim the deduction. You should consult your tax adviser.
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 foreign governments.
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FRIMCo expects the International, Fixed Income I, Fixed Income II and Fixed
Income III Funds to invest more than 50% of their total assets in foreign
securities. In connection with those investments, FRIMCo intends to file
specified elections with the IRS. These elections will permit shareholders to
either deduct (as an itemized deduction in the case of an individual) such
foreign taxes in computing taxable income, or to use these withheld foreign
taxes as credits against US income taxes. The Fund's taxable shareholders must
include their pro rata portion of the taxes withheld on their gross income for
federal income tax purposes.
Shareholders of the Funds with foreign holdings should also be aware that
foreign exchange losses realized by a Fund are treated as ordinary losses for
federal income tax purposes. This treatment may reduce Fund income which is
available for distribution to shareholders.
The Fixed Income I, Fixed Income II and Fixed Income III Funds may acquire
zero coupon securities which were issued with an original issue discount. When
holding discounted zero coupon securities, the Funds will have to include a
portion of the original issue discount that accrues on the security for the
taxable year in taxable income. This requirement is imposed even if the Funds
receive no payment on the security during the year. Also, because the Funds
must distribute substantially all of their net investment income annually, the
Funds may be required to distribute a dividend that is greater than the total
amount of cash the Funds actually received in a particular year. 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.
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.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
FUND PERFORMANCE INFORMATION
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during
the relevant time period, and includes all recurring fees that are charged to
all shareholder accounts. The average annual total returns for each of the
Funds are as follows:
<TABLE>
<CAPTION>
10 YEARS
1 YEAR ENDED 5 YEARS ENDED ENDED INCEPTION TO INCEPTION
DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DATE
------------- ------------- ------------- ------------- ---------
(ANNUALIZED) (ANNUALIZED) (ANNUALIZED)
<S> <C> <C> <C> <C> <C>
Equity I................ 32.02% 20.06% 17.76 % 16.70% 10/15/81
Equity II............... 28.66% 17.40% 15.98% 14.87% 12/28/81
Equity III.............. 33.13% 20.54% 18.35% 17.73% 11/27/81
Equity Q................ 33.07% 21.14% 18.31% 15.40% 05/29/87
International........... 0.58 % 11.42% 8.65% 14.92% 01/31/83
Fixed Income I.......... 9.42% 7.51% 9.12% 11.35% 10/15/81
Fixed Income II......... 6.02% 5.66% 7.19% 9.28% 10/30/81
Fixed Income III........ 9.69% --% --% 7.65% 01/29/93
</TABLE>
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<PAGE>
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 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. The 30-day yields for the year ended
December 1, 1997 for the Class S Shares of the Fixed Income I, Fixed Income II
and Fixed Income III Funds were, respectively, 6.13%, 5.56% and 5.80.
Each Fund may also advertise non-standardized performance information which
is for periods in addition to those required to be presented.
HOW NET ASSET VALUE IS DETERMINED
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 redemption orders are
tendered. For the Funds, a business day is one on which the NYSE 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 their net asset value as of the close of the NYSE (currently 4:00
p.m. Eastern time).
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value their portfolio securities
at "fair market value." This generally means that equity securities and fixed-
income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price, or if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. U.S. 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 often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable -- that is, when the prices reflect the fair market value of the
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. If there
is no last sale or mean bid price, the securities may be valued on the basis
of prices provided by a pricing service when the prices are believed to be
reliable.
Money market instruments maturing within 60 days of the valuation date held
by Funds are valued on the basis of "amortized cost." Under this a 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 the Rule.
These money market instruments are valued at "amortized cost"
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<PAGE>
unless the Board determines that amortized cost does not represent fair value.
While amortized cost provides certainty in valuation, it may result in periods
when the value of an instrument is higher or lower than the price a Fund would
receive if it sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
HOW TO PURCHASE SHARES
Shares of the Funds are sold on each business day at the next determined net
asset value after receipt of an order in proper form, and the order has been
accepted. All purchases must be made in U.S. dollars. The Funds reserve the
right to reject any purchase order.
ORDER PROCEDURES
Orders by investors (except participants in the Three Day Settlement Program
(the "Settlement Program") described below) to purchase Fund shares must be
received by the Transfer Agent on any day when Fund shares are offered, before
the close of the NYSE (currently 4:00 p.m. Eastern time).
Payment Procedures: The Custodian or Transfer Agent (depending on the method
of payment) must receive payment for the purchase of shares on the day the
order is accepted (except for participants in the Settlement Program). You may
pay for Fund orders in several ways:
Federal Funds Wire. You may wire federal funds to the Custodian.
Automated Clearing House ("ACH"). You may pay for purchases through ACH to
the Custodian. However, funds transferred by ACH 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. In that case, your order would be
placed on the next business day.
Automated Investment Program. You 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 your
bank account. A separate transfer is required for each Fund in which you
purchase shares. You may terminate an automatic investment program at any
time. Contact your Financial Intermediary 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 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 U.S. funds and must be drawn in U.S. dollars
on a U.S. bank. Investments in a Money Market Fund will be effected only when
the check or draft is converted to federal funds. The investment will not
begin to earn dividend income until the receipt of federal funds by the Fund.
Investments in the Fluctuating 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 NYSE (currently 4:00 p.m. Eastern time). When the
check or draft is received by the Transfer Agent after the close of the NYSE,
the order will be effected on the next business day.
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<PAGE>
IN-KIND EXCHANGE OF SECURITIES
The Transfer Agent may, at its discretion, permit you to purchase Fund
shares by exchanging securities you currently own for Fund shares. Any
securities exchanged must: meet the investment objective, policies and
limitations of the particular Fund, have a readily ascertainable market value,
be liquid and not be subject to restrictions on resale, and have a market
value, plus any cash, equal to at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. Investors contemplating an in-kind exchange should consult their tax
advisers.
The basis of the exchange will depend upon the relative net asset value of
the Fund 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 Trust will accept orders from financial institutions to purchase shares
of the Fluctuating 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 resulting from
non-receipt of payment. For further information on the Settlement Program,
contact the Trust.
THIRD PARTY TRANSACTIONS
If you are purchasing Fund shares through a Financial Intermediary, you may
be required to pay additional fees to the Financial Intermediary. You should
contact your Financial Intermediary for information concerning additional
fees.
EXCHANGE PRIVILEGE
You may exchange shares of any Fund for shares of any other Fund, 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 Trust through another prospectus under certain conditions
and only in states where the exchange may be legally made. For additional
information, including prospectuses for other Funds, contact a Financial
Intermediary or the Trust. Exchanges may be made (i) by telephone if the
registrations of the two accounts are identical; or (ii) in writing addressed
to the Trust.
An exchange is redemption of shares and is treated as a sale for income tax
purposes. Thus, 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). You should consult your tax adviser.
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<PAGE>
HOW TO REDEEM SHARES
Fund shares may be redeemed on any business day at the next determined net
asset value after 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 your 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 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 made by check may be withheld for up
to 15 days after the date of purchase to assure that the check clears. Upon
request, redemption proceeds will be mailed to your address of record or to an
alternate address you designate provided the request is sent to the Transfer
Agent in proper form.
Request Procedures. Requests by investors to redeem Fund shares must be
received by the Funds' Transfer Agent on a business day, prior to the close of
the NYSE (currently 4:00 p.m. Eastern time).
You may tender your redemption request to the Transfer Agent by telephone,
mail, or by entry into the shareholder recordkeeping system. You may also
redeem shares through the Systematic Withdrawal Payment Program, which is
described below.
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. 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, you should use
the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Financial
Intermediary or to FRIMCo, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. The redemption price
will be the net asset value after receipt by FRIMCo of all required documents
in good order. "Good order" means that the request must include:
A. A letter of instruction or a stock assignment specifically designating
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. Any 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 Program
provides an automated method for you to redeem a predetermined dollar amount
from your Fund shareholder account, in order to meet a standing request. The
SWP 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 you provide
on the SWP form. If you have more than one Fund from which a SWP is to be
received, you 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.
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<PAGE>
Distribution Frequency. You can schedule monthly, quarterly, semiannual or
annual distribution payments.
SWP Distribution by Wire. Federal funds wire payments will be sent to a bank
you designate on the payment date.
SWP Distribution by Check. Checks will be sent on the payment date by U.S.
Postal Service first class mail, to the address you request.
SWP Distribution by Electronic Fund Transfer. Electronic fund transfer
payments will be sent to a bank you designate bank on the payment date.
You must complete and mail a SWP form to your Financial Intermediary or to
FRIMCo, Attention: Frank Russell Investment Company, Operations Department,
P.O. Box 1591, Tacoma, WA 98401-1591. The SWP 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 its redemption proceeds in
excess of $250,000 by distributing portfolio securities to a shareholder,
rather than paying the shareholder in cash. This is called redemption in kind.
Shareholders will incur brokerage charges on the sale of these portfolio
securities. The Funds reserve the right to suspend redemptions or to postpone
payment dates if any unlikely emergency conditions develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal Distributor for Trust shares. The Distributor receives no
compensation from the Trust for its services with respect to the Class S
Shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. The Custodian may deposit securities in
securities depositories or use subcustodians. The Custodian has no
responsibility for the supervision and management of the Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds'
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or
their accounts, from FRIMCo.
ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust.
Russell has the right to grant (and withdraw) the nonexclusive use of the name
"Frank Russell" or any variation.
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Fund's shares may be offered in multiple classes. Shares
38
<PAGE>
of each class of a Fund represent proportionate interests in the assets of
that Fund 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 the dividends and distributions earned on the assets belonging to
the Fund that the Board declares. Each share of a class of a Fund has one vote
in Trustee elections and other matters submitted for shareholder vote. There
are no cumulative voting rights. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Special meetings may be
called by the Trustees at their discretion, but must be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares. On any matter which affects only a particular Fund or
class, only shares of that Fund or class are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
At , 1998, the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their names because they own more than 25% of
the voting shares of the Funds:
(To be filed by Amendment)
MONEY MANAGER PROFILES
The money managers 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.
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 500,
Atlanta, GA 30309, is a corporation whose indirect parent is AMVESCO, PLC, is
a London-based financial services holding company.
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.
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<PAGE>
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.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19807, 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.
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 wholly owned subsidiary of Legg
Mason, Inc.
Equinox Capital Management, Inc., See: Equity I Fund.
Trinity Investment Management Corporation, See: Equity I Fund.
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<PAGE>
EQUITY Q FUND
Barclays Global Investors, 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, LLC, 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, 14th Floor
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly
held corporation.
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<PAGE>
FIXED INCOME I FUND
Lincoln Capital Management Company, See: Equity I Fund.
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO Managing Directors.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, 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.
42
<PAGE>
GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries
Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs")
Cash reserves -- The Funds may invest their cash reserves (i.e., funds
awaiting investment) in money market instruments and in debt securities of
comparable quality to each Fund's permitted investments. As an alternative to
a Fund directly investing in money market instruments, the Funds and their
money managers may elect to invest the Funds' cash reserves in the Trust's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its
management fee on that portion of a Fund's assets invested in the Trust's
Money Market Fund.
Board -- The Board of Trustees of the Trust
Code -- Internal Revenue Code of 1986, as amended
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trust's custodian and
portfolio accountant
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. 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.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
distributor -- The organization that sells the shares of the Fund under a
contract with the fund.
Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into a Services Agreement with
43
<PAGE>
FRIMCo, and institutions or individuals who have acquired Fund shares through
institutions or Financial Intermediaries
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Service Agreements with FRIMCo
FNMA -- Federal National Mortgage Association.
Forward Commitments -- Each Fund may agree 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 the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at
a future date. International, Fixed Income I, Fixed Income II, and Fixed
Income III Funds generally do not enter into forward contracts with terms
greater than one year, and typically enters into forward contracts only under
two circumstances. First, if the Funds enter into a contract for the purchase
or sale of a security denominated in a foreign currency, they may desire to
"lock in" the U.S. dollar price of the security by entering into a forward
contract to buy the amount of a foreign currency needed to settle the
transaction. Second, if the Funds' money managers believe that the currency of
a particular foreign country will substantially rise or fall against the U.S.
dollar, they may enter into a forward contract to buy or sell the currency
approximating the value of some or all of the Fund's portfolio securities
denominated in the currency. International, Fixed Income I, Fixed Income II
and Fixed Income III Funds will not enter into a forward contract if, as a
result, they would have more than one-third of its assets committed to such
contracts (unless it owns the currency that it is obligated to deliver or has
caused the Custodian to segregate segregable assets having a value sufficient
to cover its obligations). Although forward contracts are used primarily to
protect International, Fixed Income I, Fixed Income II, and Fixed Income III
Funds from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trust's
administrator, manager and transfer and dividend paying agent
Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax
purposes, and each Fund has its own investment objective, policies and
restrictions. Seven Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. A Fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
44
<PAGE>
GNMA -- Government National Mortgage Association
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 maturing in more than seven days, that are illiquid because of the
absence of a readily available market or because of legal or contractual
resale restrictions. No Fund will invest more than 10% of its respective net
assets (taken at current value) in securities of issuers that may not be sold
to the public without registration under 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.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service
Lending portfolio securities -- Each Fund may lend portfolio securities with
a value of up to 33 1/3% of each Fund's total assets. These loans may be
terminated at any time. A Fund will receive either cash (and agree to pay a
"rebate" interest rate), U.S. government or U.S. government agency obligations
as collateral in an amount equal to at least 102% (for loans of U.S.
securities) or 105% (for non-U.S. securities) of the current market value of
the loaned securities. The collateral is daily "marked-to-market," 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. If
the borrower of the securities fails 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.
Liquidity Portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of Equity I, Equity
II, Equity III, Equity Q and International Funds' assets assigned to a
Liquidity Portfolio. The Liquidity Portfolio will be used to temporarily
create an equity exposure for cash balances until those balances are invested
in securities or used for Fund transactions.
Money Market Funds -- Money Market, U.S. Government Money Market and Tax-
Free Money Market Funds, each a Portfolio of the Trust. Each Money Market Fund
seeks to maintain a stable net asset value of $1 per share.
Moody's -- Moody's Investors Service, Inc., an NRSRO
municipal obligations -- Debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state
agencies or authorities the interest from which is exempt from federal income
tax, including the alternative minimum tax, in the opinion of bond counsel to
the issuer. Municipal obligations include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal obligations may
include project, tax anticipation, revenue anticipation, bond anticipation,
and construction loan notes; tax-exempt commercial paper; fixed and variable
rate notes; obligations whose interest and principal are guaranteed or insured
by the U.S. government or fully collateralized by U.S. government obligations;
industrial development bonds; and variable rate obligations.
45
<PAGE>
NASD -- National Association of Securities Dealers, Inc.
net asset value (NAV) -- The value of a mutual fund is determined by
deducting the Fund's liabilities from the total assets of the portfolio. The
net asset value per share is determined by dividing the net asset value of the
Fund by the number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as
S&P or Moody's
NYSE -- New York Stock Exchange
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indexes in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
PFIC -- A passive foreign investment company. International Fund may
purchase interests in an issuer that is considered a PFIC under the Code.
Prime Rate -- The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers
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 "Illiquid Securities" in this Glossary, 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.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction where 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 transferred security, 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, are segregated on the Fund's records while a reverse
repurchase agreement is in effect.
the Rule -- Rule 2a-7 under the 1940 Act, which governs the operations of
the Money Market Funds
Russell 1000(R) Index. The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization (i.e., market price per share times the
number of shares outstanding). The smallest company in the Index at the time
of selection has a capitalization of approximately $1 billion. The Index does
not include cross-
46
<PAGE>
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. The Russell 1000(R) Index is
used as the basis for Equity Q Fund's performance because FRIMCo believes it
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.
Russell -- Frank Russell Company, consultant to the Trust and to the Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- The Trust's Statement of Additional Information, dated as noted on
the first page of this prospectus.
SEC -- U.S. Securities and Exchange Commission
Shares -- The Class S Shares in the Funds. Each Class S Share of a Fund
represents a share of beneficial interest in the Fund
Transfer Agent -- FRIMCo, in its capacity as the Trust's transfer and
dividend paying agent
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
U.S. -- United States
U.S. government obligations -- These include U.S. Treasury bills, notes,
bonds and other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature
that typically may be exercised within 30 days. The rate of return on variable
rate obligations is readjusted periodically according to a market rate, such
as the Prime Rate. Also called floating rate obligations
Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
47
<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 Investors
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, LLC
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
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) 787-7354
(800) RUSSEL4
In Washington (253) 627-7001
48
<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 "Trust") is an open-end, management
company with 28 different investment series or portfolios ("Funds"). This
Prospectus describes and offers interests in the Class S Shares of the eight
Funds:
Diversified Equity Fund International Securities
Special Growth Fund Fund
Equity Income Fund Diversified Bond Fund
Quantitative Equity Fund Volatility Constrained Bond
Fund
Multistrategy Bond Fund
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each
Fund's investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class S Shares are sold at their net asset value, with
no sales load, no commissions, no Rule 12b-1 fees and no exchange fees. There
is no specified minimum investment in the Funds, but investors must qualify as
Eligible Investors, as described in this Prospectus.
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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus does not constitute an offer to sell securities in any state
or other jurisdiction to any person to whom it is unlawful to make such an
offer in such state or other jurisdiction.
This Prospectus sets forth concisely the information about the Funds that
you should know before investing. Please read it before investing and retain
it for future reference. A Statement of Additional Information ("SAI"), dated
, 1998, has been filed with the Securities and Exchange Commission
("SEC"). The SAI is incorporated into this Prospectus by reference and is
available without charge by writing to the address listed above or by
telephoning (800) 972-0700.
This Prospectus relates only to the Class S Shares of the Funds. These Funds
also offer interests in another class of shares, the Class C Shares, through
other prospectuses. For more information concerning Class C Shares, contact
the person or organization from whom you obtained this Prospectus, or write or
telephone the Trust.
The SAI material incorporated by reference into this Prospectus, and further
information regarding the Trust and the Funds is maintained electronically
with the SEC at its Internet web site (http://www.sec.gov).
PROSPECTUS DATED , 1998
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGES OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary..................................................................... 3
Annual Fund Operating Expenses.............................................. 4
Financial Highlights........................................................ 6
The Purpose of the Funds--Multi-Style, Multi-Manager Diversification........ 14
Eligible Investors.......................................................... 15
General Management of the Funds............................................. 16
Expenses of the Funds....................................................... 18
Money Managers..............................................................
Investment Objectives, Policies and Practices............................... 19
Portfolio Transactions...................................................... 30
Dividends and Distributions................................................. 31
Taxes....................................................................... 32
Performance Information..................................................... 33
How Net Asset Value Is Determined........................................... 34
How to Purchase Shares...................................................... 35
How to Redeem Shares........................................................ 36
Additional Information...................................................... 38
Money Manager Profiles...................................................... 39
Glossary.................................................................... 43
</TABLE>
2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCo's and the Frank Russell Company's ("Russell") "multi-style, multi-
manager diversification" techniques and money manager evaluation services.
Unlike most investment companies that have a single organization that acts as
both administrator and investment adviser, the Trust divides responsibility
for corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds" and "Multi-Style,
Multi-Manager Diversification."
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.
The Trust's Funds had aggregate net assets of approximately $ billion on
, 1998. The net assets of the Funds described in this Prospectus on
, 1998 were:
<TABLE>
<S> <C>
Diversified Equity............. $
Special Growth................. $
Equity Income.................. $
Quantitative Equity............ $
</TABLE>
<TABLE>
<S> <C>
International Securities....... $
Diversified Bond............... $
Volatility Constrained Bond.... $
Multistrategy Bond............. $
</TABLE>
3
<PAGE>
You may buy and sell Class S shares of the Funds through an authorized
Financial Intermediary. All Class S Shares are sold without a sales charge,
commission, or Rule 12b-1 fee. Except as indicated below, Class S Shares are
redeemed at net asset value. You may also exchange shares of one Fund for
shares of another Fund. See "How to Purchase Shares" and "How to Redeem
Shares."
You should be aware of the general risks associated with investments in
mutual funds. One or more Funds may make investments and engage in investment
practices and techniques that involve risks, including entering into
repurchase agreements, lending portfolio securities and entering into hedging
transactions. These risks are described in "Risk Considerations" in
"Investment Objectives, Policies and Practices" and in the Glossary.
SHAREHOLDER TRANSACTIONS EXPENSES
You would pay the following charges when buying or redeeming Class S Shares
of a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES
LOAD IMPOSED LOAD IMPOSED ON DEFERRED EXCHANGE
ON PURCHASES REINVESTED DIVIDENDS SALES LOAD FEES
- ------------- -------------------- ---------- --------
<S> <C> <C> <C>
None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT GROSS OPERATING
FEE EXPENSES
(NET OF FEE WAIVERS) OTHER EXPENSES (NET OF FEE WAIVERS)
-------------------- -------------- --------------------
<S> <C> <C> <C>
Diversified Equity
Fund................... 0.78% 0.14% 0.92%
Special Growth Fund..... 0.95% 0.20% 1.15%
Equity Income Fund...... 0.80% 0.24% 1.04%
Quantitative Equity
Fund................... 0.78% 0.13% 0.91%
International Securities
Fund................... 0.95% 0.30% 1.25%
Diversified Bond Fund... 0.45% 0.15% 0.60%
Volatility Constrained
Bond Fund.............. 0.50% 0.28% 0.78%
Multistrategy Bond
Fund*.................. 0.61% 0.19% 0.80%
</TABLE>
- ---------------------
* FRIMCo has voluntarily agreed to waive a portion of its 0.75% management fee
for the Multistrategy Bond Fund, up to the full amount of that fee, for all
fund expenses that exceed 0.80% of the average daily 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. The
gross annual total operating expenses absent the waiver would be 0.84% of
the average net assets of the Multistrategy Bond Fund.
These tables are intended to assist you in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's assets and share price. Each Fund estimates that
it will have the expenses listed (expressed as a percentage of average net
assets) for the current fiscal year.
4
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Fund's annual return is 5% and that its operating expenses
are as described above, and that you sell your shares after the number of
years shown. These are projected expenses for each $1000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Diversified Equity Fund......................... $ 9 $28 $51 $115
Special Growth Fund............................. $12 $35 $64 $145
Equity Income Fund.............................. $10 $32 $58 $131
Quantitative Equity Fund........................ $ 9 $28 $50 $114
International Securities Fund................... $13 $38 $69 $158
Diversified Bond Fund........................... $ 6 $18 $33 $ 76
Volatility Constrained Bond Fund................ $ 8 $24 $43 $ 98
Multistrategy Bond Fund......................... $ 8 $19 $44 $101
</TABLE>
5
<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 Trust'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 Trust.
DIVERSIFIED EQUITY FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .48 .60 .58 .56 .60 .81 .99 .94 .89
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
------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... 8.63 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.48) (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81)
Net realized gain on
investments........... (5.32) (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41)
In excess of net
realized gain on
investments........... -- -- (.26) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (5.80) (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 41.45 $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 23.29 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .94 .95 .95 .96 .98 .98 1.03 1.01 1.00
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
Portfolio turnover..... 99.90 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02
Net assets, end of year
($000 omitted)........ 699,691 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948
Average commission rate
paid per share of
security ($
omitted).............. .0465 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
6
<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 Trust'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 Trust.
SPECIAL GROWTH FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $ 24.71 $29.35 $26.19 $23.58
------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .12 .18 .16 .07 .05 .24 .42 .42 .24
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
------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment
Operations........... 6.99 9.43 (.55) 5.29 4.27 10.58 (4.15) 6.20 3.23
------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.12) (.21) (.10) (.07) (.06) (.24) (.42) (.48) (.21)
Net realized gain on
investments........... (5.25) (3.52) (.85) (6.03) (2.05) (.58) (.07) (2.56) (.41)
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)
------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 40.79 $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $24.71 $29.35 $26.19
======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)........ 18.65 28.52 (3.71) 15.48 12.52 43.11 (14.28) 23.92 13.82
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
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
Net investment income
to average net
assets................ .28 .49 .50 .19 .14 .80 1.57 1.42 .92
Portfolio turnover..... 118.13 87.56 55.40 91.97 42.20 42.81 63.87 85.24 51.75
Net assets, end of year
($000 omitted)........ 393,048 313,678 229,077 188,891 134,913 105,245 62,116 60,146 47,405
Average commission rate
paid per share of
security ($ omitted).. .0384 N/A N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees reimbursed ($
omitted).............. -- -- -- -- -- -- .0093 -- --
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
7
<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 Trust'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 Trust.
EQUITY INCOME FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- -------- -------- -------- -------- -------- -------- ------- -------- -------
<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
-------- -------- -------- -------- -------- -------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .82 .94 .90 .83 .99 1.11 1.43 1.34 1.22
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
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total From Investment
Operations........... 7.85 11.02 .20 4.52 4.07 8.26 (2.40) 7.81 5.18
-------- -------- -------- -------- -------- -------- ------- -------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.82) (.97) (.89) (.83) (1.00) (1.10) (1.37) (1.50) (1.25)
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) --
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total Distributions... (6.06) (4.80) (3.89) (3.94) (5.29) (2.47) (1.76) (3.75) 1.25)
-------- -------- -------- -------- -------- -------- ------- -------- -------
NET ASSET VALUE, END OF
YEAR................... $ 40.22 $ 38.43 $ 32.21 $ 35.90 $ 35.32 $ 36.54 $ 30.75 $ 34.91 $ 30.85
======== ======== ======== ======== ======== ======== ======= ======== =======
TOTAL RETURN (%)........ 21.45 34.76 .69 13.23 11.51 27.52 (6.90) 25.61 19.42
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
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
Portfolio turnover..... 106.40 92.40 89.91 78.72 95.07 61.73 65.97 79.82 58.12
Net assets, end of year
($000 omitted)........ 195,132 180,116 144,285 149,532 134,365 122,689 99,575 101,589 68,998
Average commission rate
paid per share of
security ($ omitted).. .0441 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
8
<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 Trust'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 Trust.
QUANTITATIVE EQUITY FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $ 20.21 $18.08
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .51 .50 .49 .45 .49 .58 .66 .68 .56
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
------- ------- ------- ------- ------- ------- ------- ------- ------
Total From Investment
Operations........... 6.75 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70
------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income.. (.51) (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57)
Net realized gain on
investments........... (3.95) (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total Distributions... (4.46) (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57)
------- ------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF
YEAR................... $ 33.05 $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $20.21
======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN (%)........ 23.08 37.69 .19 12.56 8.67 31.70 (5.60) 26.08 15.05
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .93 .93 .94 .98 1.02 1.03 1.12 1.14 1.16
Net investment income
to average net
assets................ 1.59 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00
Portfolio turnover..... 74.33 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37
Net assets, end of year
($000 omitted)........ 663,925 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858
Average commission rate
paid per share of
security ($ omitted).. .0331 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
9
<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 Trust'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 Trust.
INTERNATIONAL SECURITIES FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- -------- -------- -------- -------- -------- -------- -------- -------- -------
<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
-------- -------- -------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .53 .56 .44 .40 .61 .72 1.05 .67 .86
Net realized and
unrealized gain (loss)
on investments(a)..... 3.72 4.89 1.23 14.53 (4.02) 4.60 (9.53) 0.32 8.98
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total From Investment
Operations........... 4.25 5.45 1.67 14.93 (3.41) 5.32 (8.48) 0.99 9.84
-------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.31) (.88) (.04) (.38) (.68) (.76) (1.08) (.89) (.95)
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)
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total Distributions... (2.38) (2.80) (5.66) (1.73) (.99) (.77) (2.73) (5.67) (4.61)
-------- -------- -------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, END OF
YEAR................... $ 58.48 $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81 $ 50.49
======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL RETURN (%)........ 7.63 10.20 4.86 33.48 (6.94) 11.99 (15.34) 22.24 22.05
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
Operating expenses,
gross, to average
assets................ 1.31 1.31 1.33 1.42 1.47 1.49 1.50 1.54 1.50
Net investment income
to average net
assets................ .91 .97 .70 .82 1.37 1.68 2.28 1.54 1.60
Portfolio turnover..... 42.43 42.96 72.23 60.22 48.93 52.46 68.89 57.16 43.50
Net assets, end of year
($000 omitted)........ 743,615 623,389 563,333 454,482 262,886 243,065 169,818 123,823 91,006
Average commission rate
paid per share of
security ($ omitted).. .0039 N/A N/A N/A N/A N/A N/A N/A N/A
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 Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
10
<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 Trust'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 Trust.
DIVERSIFIED BOND FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
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
Net realized and
unrealized gain (loss)
on investments........ (.71) 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... .76 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.48) (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.69) (.16) -- (.26) --
In excess of net
realized gain on
investments........... -- -- (.02) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (1.48) (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 22.97 $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 3.43 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average
assets................ .61 .59 .56 .58 .62 .74 .88 .93 .93
Operating expenses,
gross, to average
assets................ .61 .59 .56 .58 .67 .74 .88 .93 .93
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
Portfolio turnover..... 138.98 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15
Net assets, end of year
($000 omitted)........ 554,804 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656
Per share amount of
fees waived ($
omitted).............. -- -- -- -- .0115 -- -- -- --
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
11
<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 Trust'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 Trust.
VOLATILITY CONSTRAINED BOND FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.09 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55
Net realized and
unrealized gain (loss)
on investments........ (.22) .58 (1.16) .45 (.88) .80 .13 .30 (.10)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... .87 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.01) (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52)
Net realized gain on
investments........... -- -- -- -- -- -- -- -- --
Tax Return of capital.. -- -- -- (.29) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (1.01) (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 4.66 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .76 .71 .67 .66 .68 .62 .62 .61 .59
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
Portfolio turnover..... 311.51 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69
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
</TABLE>
- ---------------------
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
12
<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 Trust'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 Trust.
MULTISTRATEGY BOND FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993++
---- ------- ------- ------- ------
<S> <C> <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>
- ---------------------
++For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
13
<PAGE>
THE PURPOSE OF THE FUNDS -- MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCo's and
Russell's "multi-style, multi-manager diversification" investment method and
to obtain FRIMCo's and Russell's money manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936, and
has been providing comprehensive asset management consulting services for
almost 30 years to institutional investors, principally large corporate
employee benefit plans. Russell and its affiliates have offices around the
world -- in Tacoma, New York, Toronto, London, Zurich, Paris, Sydney, Auckland
and Tokyo.
Three functions form the core of Russell's consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
. 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 a way most
likely to achieve the client's objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. FRIMCo and Russell believe that for many, this
can be accomplished through strategically purchasing shares in one or more of
the Funds which have been structured to provide access to specific asset
classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities, over the past 50 years, have outperformed corporate debt
in absolute terms. However, what is generally true of performance over
extended periods will not necessarily be true at any given time during a
market cycle, and from time to time asset classes with greater risk may also
underperform lower risk asset classes, on either a risk adjusted or absolute
basis. Investors should select a mix of asset classes that reflects their
overall ability to withstand market fluctuations over their investment
horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary
14
<PAGE>
investment styles within an asset class, investors are better able to reduce
their exposure to any one investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their
own accounts or in a fiduciary or agency capacity, which have entered
into asset management services agreements ("Agreements") with FRIMCo.
"Financial Intermediaries" include bank trust departments, registered
investment advisers, broker-dealers, employee benefit plans and other
financial service organizations; and
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries.
There is no specific minimum amount that must be invested in the Funds or in
the Trust.
The Funds do not generally offer their shares directly individual (i.e.,
retail) investors, although they may choose to do so. Financial Intermediaries
which have entered into Agreements with FRIMCo may acquire shares of the Funds
for their customers. Under the Agreements FRIMCo provides objective-setting
and asset-allocation assistance and services to Financial Intermediaries,
which in turn provide similar services to their customers. Financial
Intermediaries receive no compensation from FRIMCo or Class S Shares of the
Funds. However, Financial Intermediaries may charge their customers a fee for
providing these services and other trust or investment-related services.
With respect to certain Funds, the Agreement provides that a shareholder
investment services fee (the "Services Fee") may be paid to FRIMCo. The
Services Fee is usually expressed as a percentage of the client's assets
invested in the applicable Funds. The Services Fee may include a fixed-dollar
fee for certain specific services. The client and FRIMCo agree to the Services
Fee, which is determined by the amount of assets the client expects to invest
in the Funds, the nature and extent of services that FRIMCo agrees to provide
to the client, and other factors.
Either the client or FRIMCo may terminate an Agreement upon written notice.
FRIMCo does not anticipate terminating an Agreement unless a client does not
(i) promptly pay fees due to FRIMCo, or (ii) invest sufficient assets in the
Trust's Funds to compensate FRIMCo for its services. If an Agreement is
terminated, FRIMCo will no longer provide asset-allocation, objective-setting
or other services to the client.
15
<PAGE>
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds' operations, including reviewing and approving
the Funds' contracts with FRIMCo, Russell and the money managers. The Trust'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:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers' investment
programs and results;
. manages, or hires money managers to manage, the Funds' Liquidity
Portfolios (see, "Investment Policies--Liquidity Portfolios"); and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCo's officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo, since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson jointly with another
portfolio manager identified herein has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, Multistrategy Bond, and Core Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge jointly with another portfolio manager identified
herein has primary responsibility for management of the Fixed I, Fixed
II, Fixed III, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond, Core Bond and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter jointly with another portfolio manager
identified herein has primary responsibility for management of the
International, International Securities and Non-U.S. Equity Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Non-US
Equity Funds.
16
<PAGE>
. James M. Imhof, Manager of FRIMCo's Portfolio Trading who manages the
Trust on a day to day basis and has been responsible for ongoing analysis
and monitoring of the 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 the Frank Russell Company. Mr. Jornlin
jointly with another portfolio manager identified herein has primary
responsibility for management of the Emerging Markets and Real Estate
Securities 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 Russell. 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, Equity
Income, Multi-Style and Aggressive Equity 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 the Russell. 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, Equity Income, Multi-Style
and Aggressive Equity Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services--including objective-setting and asset-allocation technology, and
money manager research and evaluation assistance--that Russell provides to its
other consulting clients. Russell does not receive any compensation from the
Funds for its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the
money managers of each Fund. On January 22, 1996, the shareholders of the
Trust's Funds voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as the
Trust's agent, pays the money managers for their investment selection
services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable to FRIMCo monthly on a pro rata basis, are
the following percentages of each Fund's average daily net assets: 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 that use only a
single money manager.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fees for certain Funds. This arrangement is not part of the Management
Agreement with the Trust and may be changed or discontinued at
17
<PAGE>
any time. FRIMCo currently calculates its Management Fee based on a Fund's
average daily net assets less any management fee incurred on the Fund's assets
invested to the extent the Fund incurs management fees for investing a portion
of its assets in the Trust's Money Market Fund.
The Board has approved, subject to the approval of the shareholders of the
applicable Funds, which will be sought at a shareholder meeting expected to be
held during 1998, an increase in FRIMCo's Management Fee for each Fund
described in this Prospectus. If the proposed increases, which are designed to
compensate FRIMCo for its services in managing assets in conjunction with
securities lending, reverse repurchase and similar transactions, are approved
by shareholders, the Management Fee for the following Funds will be as
follows: Diversified Equity Fund, %; Special Growth Fund, %; Equity Income
Fund, %; Quantitative Equity Fund, %; International Securities Fund, % ,
Diversified Bond Fund, %; Volatility Constrained Bond Fund, %; and
Multistrategy Bond Fund, %.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other
than those expressly assumed by FRIMCo. The Funds' expenses for Class S Shares
for the year ended December 31, 1997, as a percentage of each Fund's average
net assets, are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent and recordkeeping fees payable to FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian;
. fees for independent auditing and legal services; and
. filing and registration fees payable to the SEC.
THE MONEY MANAGERS
Each Fund's assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Fund's assets among money managers at any time. FRIMCo may employ or terminate
a money manager at any time, subject to the approval by the Trust's Board of
Trustees (the "Board"). A Fund will notify its shareholders within 60 days of
when a money manager begins providing services. The money managers are
selected for the Funds based primarily upon the research and recommendations
of FRIMCo and Russell. FRIMCo and Russell evaluate 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 for any Fund.
From its management fees, FRIMCo, as the Trust's agent, pays fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average of
all assets allocated to the manager for the quarter. For the year ended
December 31, 1997, management fees paid to the money managers were equivalent
to the following annual rates, expressed as a percentage of each Fund's
average daily net assets: Diversified Equity Fund, .23%; Special Growth Fund,
.40%; Equity Income Fund, .19%; Quantitative Equity Fund, .19%; International
Securities Fund, .39%, Diversified Bond Fund, .08%; Volatility Constrained
Bond Fund, .17%; and Mualtistrategy Bond Fund, .21%.
18
<PAGE>
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after the Trust has paid FRIMCo. Fees paid
to the money managers are not affected by any voluntary or legal expense
limitations. Some money managers may receive investment research prepared by
Russell as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies, and the more specific strategies developed by FRIMCo. Although the
money managers' activities are subject to general oversight by the Board and
the Trust's officers, neither the Board, the officers, FRIMCo, nor Russell
evaluate the investment merits of the money managers' individual security
selections.
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of portfolio securities that may
be purchased by the Funds are described in "Fund Investment Securities."
Specific investment practices that may be employed by the Funds are identified
in "Other Investment Practices." The risks associated with portfolio
investments by the Funds are described in those sections, as well as in "Risk
Considerations." Certain terms used in these sections are described in the
Glossary in this Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
FUND EXPOSURE EXPOSURE FOCUS
---- ----------- -------- -----
<S> <C> <C> <C>
Diversified Equity Fund........ 65-100% 35% Income and Capital Growth
Special Growth Fund............ 65-100% 35% Maximum Total Return
Equity Income Fund............. 65-100% 35% Current Income
Quantitative Equity Fund....... 100% -- Total Return
International Securities Fund.. 65-100% 35% Total Return
Diversified Bond Fund.......... 35% 65-100% Diversification
Volatility Constrained Bond
Fund.......................... 35% 65-100% Preservation of Capital
Multistrategy Bond Fund........ 0% 100% Maximum Total Return
</TABLE>
INVESTMENT OBJECTIVES
Each Fund's investment objective is "fundamental," which means each
investment objective may not be changed without the approval of a majority of
each Fund's shareholders. Certain investment policies may also be fundamental.
Ordinarily, each Fund will invest more than 65% of its total assets in the
types of securities identified in its investment objective. However, the Funds
may hold assets as cash reserves for temporary and defensive purposes when
their money managers believe a conservative approach is desirable, or when
suitable investments are unavailable.
19
<PAGE>
DIVERSIFIED EQUITY FUND
The Diversified Equity Fund's objective is to provide income and capital
growth by investing principally in equity securities. Diversified Equity Fund
may invest in common and preferred stocks, convertible securities, rights and
warrants.
SPECIAL GROWTH FUND
The Special Growth Fund's objective is to maximize total return primarily
through capital appreciation and assuming a higher level of volatility than
the Diversified Equity Fund. Special Growth Fund seeks to achieve its
objective by investing in equity securities.
The Fund also seeks to provide current income. 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 (i.e., 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 or
companies characterized as "special situations." "Emerging growth-type"
companies tend to reinvest most of their earnings, rather than pay significant
cash dividends. "Special situation" companies are those which the money
managers believe present opportunities for capital growth because of cyclical
developments in the securities markets, the industry, or the company.
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. Equity
Income Fund seeks to achieve its objective 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.
20
<PAGE>
QUANTITATIVE EQUITY FUND
The Quantitative Equity Fund's objective is to provide a total return
greater than the total return of the U.S. 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. Quantitative
Equity Fund seeks to achieve its objective by investing in equity securities.
The Fund's portfolio will be structured similarly to the Russell Index, as
the Fund will maintain industry weights and economic sector weights near those
of the Index. As a result, the Fund's money managers generally select stocks
from the set of stocks comprising 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 to meet the Fund's investment
objectives. The money managers anticipate that the Fund's average
price/earnings ratio, yield and other fundamental characteristics will be near
the averages of the Russell Index.
The money managers of the Fund use various quantitative management
techniques in selecting investments. A quantitative manager bases its
investment decisions primarily on quantitative investment models. Money
managers use these models to determine the investment potential of a
particular portfolio security and to rank securities based upon their ability
to outperform 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 construct a portfolio that has superior return prospects with risks similar
to the Russell 1000(R) Index. FRIMCo believes quantitative management over a
market cycle should provide consistent performance, diversification, market-
like volatility and limited market under performance. However, there is no
guarantee that the Fund will have these characteristics at any one time.
The Fund will seek to achieve its investment objectives by using various
quantitative management techniques.
A quantitative manager bases its investments decisions based 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 is permitted to hold up to 20% of Fund assets in liquid
investments to meet redemption requests.
INTERNATIONAL SECURITIES FUND
The International Securities Fund's objectives are to provide favorable
total return and additional diversification for U.S. investors. International
Securities Fund attempts to achieve its objectives by investing primarily in
the equity and fixed-income securities of foreign companies, and securities
issued by foreign governments. The Fund invests primarily in equity securities
issued by Companies domiciled outside the United States.
The Fund may also invest in U.S. 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 foreign
currencies 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, U.S. government and U.S. government
agency securities, preferred and convertible preferred stocks, and variable
amount demand master notes. (These notes represent borrowing arrangements
between commercial paper issuers and institutional lenders, like the Fund.)
Money managers will select investments based on fundamental economic and
market factors. Money managers will evaluate potential investments by sector,
maturity, quality, and other criteria. 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;
A or Prime-2 by Moody's; or, if unrated, 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 those fixed-income securities 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.
Although the Fund will invest primarily in debt securities denominated in
the U.S. dollar, the money managers will actively manage the Fund's portfolio
in accordance with a multi-market investment strategy. Accordingly, the money
managers will allocate the Fund's investments among securities denominated in
the currencies of the U.S. and selected foreign countries. The Fund may also
invest in high-quality, foreign debt securities. The money managers which
invest in foreign denominated securities will maintain a substantially neutral
currency exposure relative to the U.S. 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 U.S. dollar.
Money managers of the Fund will consider fundamental economic strength, credit
quality and interest rate trends in determining whether to increase or
decrease the emphasis placed upon a particular type of security or industry
sector. The Fund will not invest more than 10% of its total assets in debt
securities denominated in a single foreign currency, and FRIMCo currently
intends to limit total investments in non-U.S. dollar securities to no more
than 25% of the Fund's total assets.
The Fund will generally invest in the foreign debt securities of countries
whose governments it considers to be stable (the Fund may invest in countries
considered unstable or undeveloped, provided that it believes it is able to
hedge substantially the risk of a decline in the currency in which the
securities are denominated). In
22
<PAGE>
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) U.S. Government obligations; (b) obligations issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities; (c) obligations issued or
guaranteed 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 to be of comparable
quality by the money managers; (d) investment grade corporate debt securities
(or, if unrated, corporate debt securities which the money managers determine
to be of equivalent quality); (e) bank instruments; and (f) commercial paper.
The Fund intends to use interest rate swaps 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. Multistrategy Bond Fund seeks to achieve its objective 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
instruments; 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. 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. For more information on risks see "Risk Considerations."
FUND INVESTMENT SECURITIES
Commercial Paper
Volatility Constrained Bond and Multistrategy Bond Funds may invest in
commercial paper. Commercial paper represents a debt obligation of a company
which is unsecured. Volatility Constrained Bond and Multistrategy Bond Funds
will invest in commercial paper which is 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.; or TBW-1 or TBW-2 by Thomson Bank Watch,
Inc. Volatility Constrained Bond and Multistrategy Bond Funds
23
<PAGE>
may also invest in commercial paper which is not rated if it is issued by US
or foreign companies which the money managers conclude are of high-quality and
have outstanding debt securities which are rated AAA, AA or A by S&P; or Aaa,
Aa or A by Moody's.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Multistrategy Bond Fund, do not
invest in debt 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 sell securities whose ratings drop below
these minimum ratings, in a prudent manner as determined by the money
managers. The market value of debt securities generally varies inversely with
interest rates.
EQUITY SECURITIES
Diversified Equity, Special Growth, Equity Income, Quantitative Equity and
International Securities Funds invest primarily in equity securities.
Diversified Equity, Special Growth, Equity Income and Quantitative Equity
Funds may invest in common stock equivalents. The following constitute common
stock equivalents: rights and warrants and convertible securities. Common
stock equivalents may be converted into or provide the holder with the right
to common stock. Diversified Equity, Special Growth, Equity Income and
Quantitative Equity Funds may also invest in other types of equity securities,
including preferred stocks.
FOREIGN DEBT SECURITIES
Multistrategy Bond Fund's portfolio may include debt securities issued by
domestic or foreign entities, and denominated in U.S. dollars or foreign
currencies. The Fund anticipates that no more than 25% of its net assets will
be denominated in foreign currencies. The Fund will only use foreign currency
exchange transactions (options on foreign currencies, foreign currency futures
contracts and forward foreign currency contracts) 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 "Risk Considerations -- 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 Fund may
invest in the following types of emerging market debt -- bonds; notes and
debentures of emerging market governments; debt and other fixed income
securities issued or guaranteed by emerging market government agencies,
instrumentalities or central banks; and, debt and other fixed income
securities issued or guaranteed by banks or other companies in emerging
markets which money managers believe are 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.
24
<PAGE>
INTEREST RATE SWAPS
Volatility Constrained Bond and Multistrategy Bond Funds may enter into
interest rate swaps. When a Fund engages in an interest rate swap, it
exchanges its obligations to pay or rights to receive interest payments for
the obligations or rights to receive interest payments of another party (i.e.,
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.
OTHER DEBT SECURITIES
Multistrategy Bond Fund may invest in debt securities issued by
supranational organizations such as:
The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.
The European Community -- An organization which consists of certain
European states engaged in cooperative economic activities.
The European Coal and Steel Community -- An economic union of various
European nations' steel and coal industries.
The Asian Development Bank -- An international development bank
established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions.
Multistrategy Bond Fund may also 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 Counsel of Ministers of the
European Community European may adjust specific amounts of currency comprising
the ECU to reflect changes in the relative values of the underlying
currencies. The money managers investing in these securities do not believe
that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of the securities.
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate U.S.
government obligations. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and GNMA participation certificates, are issued or
guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency
or instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of
credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury,
there is no guarantee that the U.S. government will provide support to such
agencies or instrumentalities. Accordingly, such U.S. government securities
may involve risk of loss of principal and interest.
25
<PAGE>
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
VOLATILITY
DIVERSIFIED SPECIAL EQUITY QUANTITATIVE INTERNATIONAL DIVERSIFIED CONSTRAINED MULTISTRATEGY
TYPE OF PORTFOLIO EQUITY GROWTH INCOME EQUITY SECURITIES BOND BOND BOND
SECURITY FUND FUND FUND FUND FUND FUND FUND FUND
----------------- ----------- ------- ------ ------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks...........
Common stock equivalents
(warrants).............
Common stock equivalents
(options)..............
Common stock equivalents
(convertible debt secu-
rities)................
Common stock equivalents
(depository receipts)..
Preferred stocks........
Equity derivative
securities.............
Debt securities (below
investment grade or
junk bonds)............
U.S. government
obligations............
Municipal obligations...
Foreign securities......
</TABLE>
26
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each
of which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed
to reduce risks.
<TABLE>
<CAPTION>
VOLATILITY
DIVERSIFIED SPECIAL EQUITY QUANTITATIVE INTERNATIONAL DIVERSIFIED CONSTRAINED MULTISTRATEGY
EQUITY GROWTH INCOME EQUITY SECURITIES BOND BOND BOND
TYPE OF PRACTICE FUND FUND FUND FUND FUND FUND FUND FUND
---------------- ----------- ------- ------ ------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves...........
Repurchase
agreements(1)..........
When-issued and forward
commitment securities..
Reverse repurchase
agreements.............
Lending portfolio secu-
rities, not to exceed
33 1/3% of total Fund
assets.................
Illiquid securities
(limited to 15% of
Fund's net assets).....
Illiquid securities
(limited to 10% of
Fund's net assets).....
Forward currency con-
tracts(2)..............
Write (sell) call and
put options on securi-
ties, securities in-
dexes and foreign cur-
rencies(3).............
Purchase options on se-
curities, securities
indexes, and curren-
cies(3)................
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures(4)..........
Liquidity Portfolios....
</TABLE>
- ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize
upon the security, may incur a loss if the value of the security declines
and may incur disposition costs in liquidating the security.
27
<PAGE>
(2) International Securities, Diversified Bond, Volatility Constrained and
Multistrategy Bond Funds may not invest more than 33% of its assets in
these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
Investment Restrictions. If a Fund changes its investment objectives or
policies, you should consider whether the Fund remains right for you. The
Funds are subject to additional investment policies and restrictions described
in the SAI, some of which are fundamental.
RISK CONSIDERATIONS
Variable and Floating Rate Securities. The Multistrategy Bond Fund may
invest in variable and floating rate securities. The variable and floating
rate securities provide for a periodic adjustment in the interest rate paid on
the obligations. The terms of such obligations must provide that interest
rates are adjusted periodically based upon some appropriate interest rate
adjustment index. The adjustment intervals may be regular, (i.e., daily,
monthly, annually, etc.) or event based (i.e., a change in the prime rate).
The Fund may also invest in zero coupon U.S. Treasury, foreign government and
U.S. and foreign corporate debt securities. These instruments are bills, notes
and bonds that have been stripped of their unmatured interest coupons and
receipts or certificates which represent interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, these securities usually trade at a deep
discount from their face or par value. These securities will also be subject
to greater market value fluctuations in response to changing interest rates
than debt obligations of comparable maturities that make current distributions
of interest.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on U.S. 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 U.S. 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
28
<PAGE>
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 U.S. economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the Funds'
foreign securities will generally be denominated in foreign currencies, the
value of such securities to the Funds will be affected by changes in currency
exchange rates and in exchange control regulations. A change in the value of a
foreign currency against the U.S. 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 U.S. dollar. Further, certain emerging market
countries' currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. 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.
Volatility Constrained Bond Fund and Multistrategy Bond Fund may invest in
bank instruments, which include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee Certificates of deposit ("Yankee
CDs"). ECDs, ETDs, and Yankee CDs are subject to somewhat different risks from
the obligation of domestic banks. ECDs are dollar denominated certificates of
deposit issued by foreign branches of U.S. and foreign banks; ETDs are U.S.
dollar denominated time deposits in a foreign branch of a U.S. bank or a
foreign bank; and Yankee CDs are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States. 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 investment for the Volatility
Constrained Bond Fund and Multistrategy Bond Fund.
High Risk Bonds. The Multistrategy Bond Fund 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. While the debt may have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions. Multistrategy Bond Fund's money managers will
seek to reduce the risks associated with investing in lower-rated debt
securities by limiting the Fund's holdings in the securities and by the depth
of their own credit analysis. For additional information, please refer to the
SAI.
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange
rate or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds may employ certain risk management
practices using certain derivative securities and techniques (known as
"derivatives"). Markets in some countries currently do
29
<PAGE>
not have instruments available for hedging transactions. To the extent that
such instruments do not exist, a money manager may not be able to hedge its
investment effectively in such countries. Furthermore, a Fund engages in
hedging activities only when its money managers deem it to be appropriate, and
does not necessarily engage in hedging transactions with respect to each
investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if
it had not entered into a hedging position. If the correlation between a
hedging position and a portfolio position is not properly protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
PORTFOLIO TRANSACTIONS POLICIES
Money managers make decisions to buy and sell securities for Funds assets
assigned to them. FRIMCo makes determination for any other Fund assets. The
Funds do not give significant weight to attempting to realize long term rather
than short term capital gains while making portfolio investment decisions.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another money manager for the Fund (or for another Fund) is
purchasing the same security. Also, when a money manager's services are
terminated, the new money manager may significantly restructure an investment
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
costs. The annual portfolio turnover rates for each of the Funds are shown in
the Financial Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the
Trust's securities and the selection of brokers and dealers (including
affiliates), ("Brokers") that, in the best judgment of FRIMCo and the money
managers, provide prompt and reliable execution at favorable prices and
reasonable commission rates. In addition to price and commission rates,
Brokers may be selected based on research, statistical or other services that
they provide. The Trust may pay commission rates that exceed rates that other
Brokers may have charged if the Trust concludes the commissions are reasonable
in relation to the value of the brokerages and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money
manager believes a Fund will receive competitive execution, price, and
commissions. When these transactions are completed, Russell Securities will
refund up to 70% of the commissions paid by the Fund after reimbursement for
research services provided to FRIMCo. Also, the Funds may effect portfolio
transactions through and pay brokerage commissions to Brokers that are
affiliates of the money managers.
30
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed--all distributions are at the Board's
discretion. Currently, the Board intends to declare dividends from net
investment income and net short-term capital gains (if any), according to the
following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE FUNDS
-------- ------- -----
<S> <C> <C>
Monthly....... Early in the following month Diversified Bond, Volatility
Constrained Bond and
Multistrategy Bond Funds
Quarterly..... Mid: April, July, October and Diversified Equity, Special
December Growth, Equity Income and
Quantitative Equity Funds
Annually...... Mid-December International Securities Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains distributions through
October 31 (excess of capital gains over capital losses) generally in mid-
December. To meet certain legal requirements, a Fund may declare special year-
end dividend and capital gains distributions during October, November or
December to shareholders of record in that month. These latter distributions,
are deemed to have been paid by a Fund and received by you on December 31 of
the prior year, provided that you receive them by January 31. Capital gains
realized during November and December will be distributed during February of
the following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account
is a tax-deferred account, dividends paid to you would be included in your
gross income for tax purposes even though you many not have participated in
the increase of the net asset value of a Fund, regardless of whether you
reinvested the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by
delivering written notice no later than ten days prior to the payment date to
the Transfer Agent at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
31
<PAGE>
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital
gains to shareholders and meet certain other requirements of the Code relating
to the sources or its income and diversification of assets. Accordingly, a
Fund will generally not be liable for federal income or excise taxes based on
net income except to the extent its earnings are not distributed in a manner
that does not satisfy the requirements of the Code. The Funds may be subject
to nominal, if any, state and local taxes.
For federal income tax purposes, the dividends from net investment income
and any excess of net short-term capital gains over net long-term capital loss
that you receive from the Funds are considered ordinary income. However,
depending upon the relevant state tax rules, a portion of the dividends paid
by Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
attributable to direct U.S. Treasury and agency obligations may be exempt from
state and local taxes. 28% and 20% capital gains distributions declared by the
Board are taxed at the respective capital gains rates regardless of the length
of time you have held the shares. Distributions of income and capital gains
are taxed in the manner described above, whether you receive them in cash or
reinvest them in additional shares of the Funds. Distributions paid in excess
of a Fund's earnings will be treated as a non-taxable return of capital.
A Fund will notify you of the source of its dividends and distributions at
the time they are paid. After the close of each calendar year, the Funds will
advise their shareholders of the amounts:
. of ordinary income dividends, 28% capital gain dividends and 20% capital
gain distributions, including any amounts which are deemed paid on
December 31 of the prior year;
. of dividends which qualify for the 70% dividends-received deduction
available to corporations;
. of International Securities foreign taxes withheld;
. of income which is a tax preference item (if any) for alternative
minimum tax purposes; and
. of the percentages of Diversified Bond, Volatility Constrained Bond and
Multistrategy Bond Funds' income attributable to U.S. government,
Treasury and agency securities.
If you are a corporate investor, a portion of the dividends from net
investment income paid by 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 qualify
depends on the aggregate qualifying dividend income received by such Funds
from domestic (U.S.) sources. Certain holding period and debt financing
restrictions may apply to corporate investors seeking to claim the deduction.
You should consult your tax adviser.
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
portfolios of a mutual fund). Any loss incurred on the sale or exchange of a
Funds' shares, held for six months or less, will be disallowed to the extent
of exempt-interest dividends (described below) paid with respect to shares.
Any loss not disallowed will be treated as a long-term capital loss to the
extent of capital gain dividends received with respect to such shares.
32
<PAGE>
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.
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.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
PERFORMANCE INFORMATION
From time to time, the Funds may publish their total return and average
annual total return, and, in the case of certain Funds, current yield, in
advertisements and investor communications. Total return information generally
will include a Fund's 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>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INCEPTION TO INCEPTION
DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DATE
------------- ------------- -------------- ------------- ---------
(ANNUALIZED) (ANNUALIZED) (ANNUALIZED)
<S> <C> <C> <C> <C> <C>
Diversified Equity...... 31.32% 19.32% 16.97% 16.48% 09/05/85
Special Growth.......... 28.77% 16.90% 15.57% 14.78% 09/05/85
Equity Income........... 33.59% 20.04% 17.34% 15.60% 09/05/85
Quantitative Equity..... 32.70% 20.46% 17.39% 15.40% 05/15/87
International Securi-
ties................... .26% 10.73% 8.16% 13.14% 09/05/85
Diversified Bond........ 9.09% 7.18% 8.52% 8.82% 09/05/85
Volatility Constrained
Bond................... 5.90% 5.37% 6.81% 6.81% 09/05/85
Multistrategy Bond...... 9.50% -- -- 7.23% 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. 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
33
<PAGE>
portfolio. The calculation includes all recurring fees that are charged. The
30-day yields for the year ended December 31, 1997 for the Class S shares of
the Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
were, respectively 5.88%, 5.39% and 5.63%.
Each Fund may also advertise non-standardized performance information that
is for periods in addition to those that are legally required by the SEC.
HOW NET ASSET VALUE IS DETERMINED
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 redemption orders to
redeem are tendered. For all Funds, a business day is one on which the NYSE is
open for trading. Net asset value per share is computed for Class S Shares of
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 their portfolio securities
at "fair market value." This generally means that equity securities and fixed-
income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price or, if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. U.S. 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 often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
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. If there
is no last sale or mean bid price, respectively, the securities may be valued
on the basis of prices provided by a pricing service when the prices are
believed to be reliable.
Money market instruments maturing within 60 days of the valuation date held
by Funds are valued using the amortized cost method. Under this method, a
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 the Rule.
The money market instruments are valued at "amortized cost" unless the Board
determines that amortized cost does not represent fair value. While this
amortized cost provides certainty in valuation, it may result in periods when
the value of an instrument is higher or lower than the price a Fund would
receive if it sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
34
<PAGE>
HOW TO PURCHASE SHARES
Shares of the Funds are sold without a sales load next determined on each
business day at the net asset value after receipt of an order in proper form,
and the order has been accepted. All purchases must be made in U.S. dollars.
The Funds reserve the right to reject any purchase order.
ORDER PROCEDURES
Orders by investors (except participants in the Three Day Settlement Program
(the "Settlement Program") described below) to purchase Fund shares must be
received by the Transfer Agent, on any day when Fund Shares are offered before
the close of the New York Stock Exchange (currently 4:00 p.m. Eastern time).
Payment Procedures: The Funds' Custodian or Transfer Agent, (depending on
your method of payment), must receive payment for the purchase of shares on
the day the order is accepted (except for participants in the Settlement
Program). You may pay for Fund orders in several ways:
Federal Funds Wire. You may wire federal funds to the Custodian.
Automated Clearing House ("ACH"). You may pay for purchases through ACH to
the Custodian. However, funds transferred by ACH 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 on the next business day. In that case, your order would be
placed on the next business day.
Automatic Investment Program. You may make scheduled investments (minimum
$50.00) in an established account in a Fund on a monthly, quarterly, semi-
annual or annual basis by automatic electronic funds transfer from the your
bank account. A separate transfer is required for each Fund in which you may
terminated an automatic investment program at any time. Contact your Financial
Intermediary 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 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 U.S. funds and must be drawn in U.S. dollars
on a U.S. 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
before the close of the NYSE (currently 4:00 p.m. Eastern time). When the
check or draft is received by the Transfer Agent after the close of the NYSE,
the order will be effected on the next business day.
IN-KIND EXCHANGE OF SECURITIES
The Transfer Agent may, at its discretion, permit you to purchase Fund
shares by exchanging securities you currently own for Fund shares. 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; and
must have market value plus any cash, equal to at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor,
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you will generally realize a gain or loss for federal income tax purposes upon
the exchange. Investors contemplating an in-kind exchange should to consult
their tax advisers.
The basis of the exchange will depend upon the relative net asset value of
the Fund 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 Trust 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 resulting from nonreceipt of payment.
For further information on the Settlement Program, contact the Trust.
THIRD PARTY TRANSACTIONS
If you are purchasing Fund shares through a program offered by a Financial
Intermediary, you may be required to pay additional fees to the Financial
Intermediary. You should contact your Financial Intermediary for information
concerning additional fees.
EXCHANGE PRIVILEGE
You may exchange shares of any Fund for shares of another Fund 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 Trust through another prospectus under certain conditions and
only in states where the exchange may legally be made. For additional
information, including a prospectus for other Funds, contact a Financial
Intermediary or the Trust. Exchanges may be made (i) by telephone if the
registrations of the two accounts are identical; or (ii) in writing addressed
to the Trust.
An exchange is a redemption of the shares and is treated as a sale for
income tax purposes. Thus, 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). You should consult your tax adviser.
HOW TO REDEEM SHARES
If you are uncertain of the redemption requirements, you should telephone
your Financial Intermediary or the Funds at (800) 972-0700; in Washington
(253) 627-7001.
Fund shares may be redeemed on any business day at the next determined net
asset value after 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 your 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
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not charge 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 made by check may be withheld for up to 15 days after the date of
purchase to assure that the check clears. Upon request, redemption proceeds
will be mailed to your address of record or to an alternate address you
designate provided the request is sent to the Transfer Agent in proper form.
Request Procedures. Requests by investors to redeem Fund shares must be
received by the Funds' Transfer Agent on a business day, prior to the close of
the NYSE (currently 4:00 p.m. Eastern time).
You may tender your redemption request to the Transfer Agent by telephone,
mail, or by entry into the shareholder recordkeeping system. You may also
redeem shares through the Systematic Withdrawal Payment Program, which is
described below.
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. 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, you should use
the mail redemption procedures described below.
Mail. Redemption requests may be made in writing directly to Financial
Intermediary or to FRIMCo, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. The redemption price
will be the net asset value after receipt by FRIMCo of all required documents
in good order. "Good order" means that the request must include:
A. A letter of instruction or a stock assignment specifically designating
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. Any 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 Program
provides an automated method for you to redeem a predetermined dollar amount
from your Fund shareholder account, in order to meet a standing request. The
SWP 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 you provide
on the SWP form. If you have more than one Fund from which a SWP is to be
received, you 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. You can schedule monthly, quarterly, semiannual or
annual distribution payments.
SWP Distribution by Wire. Federal funds wire payments will be sent to a bank
you designate on the payment date.
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SWP Distribution by Check. Checks will be sent on the payment date by U.S.
Postal Service first class mail, to the address you request.
SWP Distribution by Electronic Fund Transfer. Electronic fund transfer
payments will be sent to a bank you designate bank on the payment date.
You must complete and mail an SWP form to your Financial Intermediary or to
FRIMCo, Attention: Frank Russell Investment Company, Operations Department,
P.O. Box 1591, Tacoma, WA 98401-1591. The SWP 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 its redemption proceeds in
excess of $250,000 by distributing portfolio securities to a shareholder,
rather than paying the shareholder in cash. This is called redemption in kind.
Shareholders will incur brokerage charges on the sale of these portfolio
securities. The Funds reserve the right to suspend redemptions or to postpone
payment dates if any unlikely emergency conditions develop.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal Distributor for Trust shares. The Distributor receives no
compensation from the Trust for its services with respect to Class S shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. The Custodian may deposit securities in
securities depositories or use subcustodians. The Custodian has no
responsibility for the supervision and management of the Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds'
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or
their accounts, from FRIMCo.
ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust.
Russell has the right to grant (and withdraw) the nonexclusive use of the name
"Frank Russell" or any variation.
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Fund's shares may be offered in multiple classes. Shares of each
class of a Fund represent proportionate interests in the assets of that Fund
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 the
dividends and distributions earned on the assets belonging to the Fund that
the Board declares. Each share of a class of a Fund has one vote in Trustee
elections and other matters submitted for shareholder vote. There are no
cumulative voting rights. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Special meetings may be called
by the Trustees at their discretion, but must be called by
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the Trustees upon the written request of shareholders owning at least 10% of
the Trust's outstanding shares. On any matter which affects only a particular
Fund or class, only shares of that Fund or class are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
In addition to offering Class S Shares, the Funds also offer beneficial
interests in Class C Shares, which are described in a separate prospectus.
Class C Shares are designed to meet different investor needs and are subject
to both a Rule 12b-1 distribution fee and a shareholder servicing fee. These
fees may affect the performance of the Class C Shares. To obtain more
information about Class C Shares, contact your Financial Intermediary, or
write or telephone the Trust.
At , 1998, the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their names because they own more than 25% of
the voting shares of the Funds:
(TO BE FILED BY POST-EFFECTIVE AMENDMENT)
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., Frist Bank Place, 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 N.A., 45 Fremont Street, 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 500,
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.
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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
19807, 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.
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, DE19801, is a wholly-owned subsidiary of Legg
Mason, Inc.
Equinox Capital Management, Inc., See: Diversified Equity Fund.
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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., 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 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, LLC, 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 Theordore J. Tyson.
Oechsle International Advisors, One International Place, 23rd 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. Berstein, 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, 14th Floor,
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly
held corporation.
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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., 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, P.O. Box
2910 Hamilton HM KX, Bermuda, is a Bermuda exempted company. William H.
Williams III is the sole shareholder.
MULTISTRATEGY BOND FUND
BEA Associates Inc , One Citicorp Center, 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: Diversified Bond Fund.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATION 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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GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries.
Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs").
Board -- The Board of Trustees of the Trust.
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. As an
alternative to a Fund directly investing in money market instruments, the
Funds and their money managers may elect to invest the Fund's cash reserves in
the Trust's Money Market Fund. To prevent duplication of fees, FRIMCo waives
its management fee on that portion of a Fund's assets invested in the Trust's
Money Market Fund.
Code -- Internal Revenue Code of 1986, as amended.
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trust's custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. 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.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
distributor -- The organization that sells the shares of the Funds under a
contract with the Trust.
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Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into an Agreement with FRIMCo, and
institutions or individuals who have acquired Fund shares through institutions
or Financial Intermediaries.
Emerging market companies -- 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.
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Agreements with FRIMCo
FNMA -- Federal National Mortgage Association
Forward Commitments -- Each Fund may agree 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 the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at
a future date. International Securities, Diversified Bond, Volatility
Constrained Bond and Multistrategy Bond Funds generally do not enter into
forward contracts with terms greater than one year, and they typically enter
into forward contracts only under two circumstances. First, if any of the
International Securities, Diversified Bond, Volatility Constrained Bond or
Multistrategy Bond Funds enter into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second, if
any of International Securities, Diversified Bond, Volatility Constrained Bond
or Multistrategy Bond Funds' money managers believe that the currency of a
particular foreign country will substantially rise or fall against the U.S.
dollar, it may enter into a forward contract to buy or sell the currency
approximating the value of some or all of the Fund's portfolio securities
denominated in the currency. International Securities, Diversified Bond,
Volatility Constrained Bond and Multistrategy Bond Funds will not enter into a
forward contract if, as a result, any one of those Funds would have more than
one-fourth of its assets committed to such contracts (unless it owns the
currency that it is obligated to deliver or has caused the Custodian to
segregate segregable assets having a value sufficient to cover its
obligations). Although forward contracts are used primarily to protect
International Securities, Diversified Bond, Volatility Constrained Bond and
Multistrategy Bond Funds from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trust's
administrator, manager and transfer and dividend paying agent.
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Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax
purposes, and each Fund has its own investment objective, policies and
restrictions. Eight Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. A Fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA -- Government National Mortgage Association
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 maturing in more than seven days, that are illiquid because of the
absence of a readily available market or because of legal or contractual
resale restrictions. No Fund will invest more than 10% of its respective net
assets (taken at current value) in securities of issuers that may not be sold
to the public without registration under 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.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service
Lending portfolio securities -- Each Fund may lend portfolio securities with
a value of up to 33 1/3% of each Fund's total assets. These loans may be
terminated at any time. A Fund will receive either cash (and agree to pay a
"rebate" interest rate), U.S. government or U.S. government agency obligations
as collateral in an amount equal to at least 102% (for loans of U.S.
securities) or 105% (for non-U.S. securities) of the current market value of
the loaned securities. The collateral is daily "marked-to-market," 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. If
the borrower of the securities fails 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.
Liquidity Portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of 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 temporarily create an equity exposure for cash
balances until those balances are invested in securities or used for Fund
transactions.
Money Market Funds -- Money Market, U.S. Government Money Market and Tax-
Free Money Market Funds, each a Fund of the Trust. Each Money Market Fund
seeks to maintain a stable net asset value of $1 per share.
45
<PAGE>
Moody's -- Moody's Investors Service, Inc., an NRSRO
municipal obligations -- Debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state
agencies or authorities the interest from which is exempt from federal income
tax, including the alternative minimum tax, in the opinion of bond counsel to
the issuer. Municipal obligations include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal obligations may
include project, tax anticipation, revenue anticipation, bond anticipation,
and construction loan notes; tax-exempt commercial paper; fixed and variable
rate notes; obligations whose interest and principal are guaranteed or insured
by the U.S. government or fully collateralized by U.S. government obligations;
industrial development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
net asset value (NAV) -- The value of a mutual fund is determined by
deducting the Fund's liabilities from the total assets of the portfolio. The
net asset value per share is determined by dividing the net asset value of the
Fund by the number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as
S&P or Moody's
NYSE -- New York Stock Exchange
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indexes in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
Prime Rate -- The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers
REITs -- Real estate investment trusts
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 "Illiquid Securities" in this Glossary, 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.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction where 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.
46
<PAGE>
The Fund retains record ownership of the transferred security, 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, are segregated on the Fund's
records while a reverse repurchase agreement is in effect.
the Rule -- Rule 2a-7 under the 1940 Act, which governs the operations of
the Money Market Funds
Russell 1000(R) Index. The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization (i.e., market price per share times the
number of shares outstanding). The smallest company in the Index at the time
of selection has a capitalization of approximately $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. The
Russell 1000(R) Index is used as the basis for Quantitative Equity Fund's
performance because FRIMCo believes it 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.
Russell -- Frank Russell Company, consultant to the Trust and to the Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- The Trust's Statement of Additional Information, dated as noted on
the first page of this prospectus.
SEC -- U.S. Securities and Exchange Commission
Shares -- The Class S Shares in the Funds. Each Class S Share of a Fund
represents a share of beneficial interest in the Fund
Transfer Agent -- FRIMCo, in its capacity as the Trust's transfer and
dividend paying agent
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
U.S. -- United States
U.S. government obligations -- These include U.S. Treasury bills, notes,
bonds and other obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature
that typically may be exercised within 30 days. The rate of return on variable
rate obligations is readjusted periodically according to a market rate, such
as the Prime Rate. Also called floating rate obligations
Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
47
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY
Alliance Capital Management L.P.
Barclays Global
Investors, N.A.
Peachtree Asset Management
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Schneider Capital Management
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
SPECIAL GROWTH
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company LLP
EQUITY INCOME
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation
QUANTITATIVE EQUITY
Barclays Global Investors, N.A.
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc.
INTERNATIONAL SECURITIES
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Mastholm Asset Management, LLC
Oechsle International Advisors
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, Inc.
DIVERSIFIED BOND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.
MULTISTRATEGY BOND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management 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) 787-7354
(800) Russel4
In Washington (253) 627-7001
48
<PAGE>
LifePoints Funds Class D & E Prospectus
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT DATED MAY 1, 1998
TO THE PROSPECTUS DATED MAY 1, 1998
Effective May 1, 1998, the following statement is added to the Prospectus:
"CLASS D SHARES OF 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 these second-to-last paragraph on page (3)
. As the second sentence of the eighth paragraph on page (5)
. Immediately following the heading "CLASS D SHARES" on page (6)
. As the second sentence under "ELIGIBLE INVESTORS" on page (15)
. As the first sentence under "PURCHASE OF LIFEPOINTS FUND SHARES" on page
(27)
<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 ("Russell"), 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.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER IN SUCH STATE OR OTHER JURISDICTION.
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 , 1998, 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 LifePoints 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 , 1998
<PAGE>
Each LifePoints Fund diversifies its assets by investing, at present, in the
Class S Shares of several 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 aggregate net assets of approximately .
$ on , 1998. The net assets of these Funds on , were as follows:
<TABLE>
<S> <C>
Equity Balanced Strategy.............................................. $
Aggressive Strategy................................................... $
Balanced Strategy..................................................... $
Moderate Strategy..................................................... $
Conservative Strategy................................................. $
</TABLE>
2
<PAGE>
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 .
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 .
FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS has been primarily engaged
since 1969 in providing asset management consulting services to large
corporate employee benefit funds. Major components of its consulting services
are: (i) quantitative and qualitative research and evaluation aimed at
identifying the most appropriate investment management firms to invest large
pools of assets in accord with specific investment objectives and styles; and
(ii) the development of strategies for investing assets using "multi-style,
multi-manager diversification." PAGE .
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing large
pools of assets by dividing the assets into segments to be invested using
different investment styles, and selecting money managers for each segment
based upon their expertise in that style of investment. 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 .
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 together pursue
a variety of investment objectives. PAGE .
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 .
ELIGIBLE INVESTORS are principally institutional investors and those
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 .
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. Russell provides
to the Underlying Funds and FRIMCo comprehensive consulting and money manager
evaluation services. PAGE .
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 .
THE MONEY MANAGERS FOR THE UNDERLYING FUNDS are evaluated and recommended by
FRIMCo and Russell. 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 Russell 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 .
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 .
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 .
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 .
LIFEPOINTS FUND PERFORMANCE, including yields and total return information,
is calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE .
4
<PAGE>
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 .
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 .
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
.
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 .
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 .
5
<PAGE>
ANNUAL FUND OPERATING EXPENSES OF THE CLASS D AND CLASS E SHARES 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 Rein-
vested 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 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*................ 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (After Reim-
bursement)**
Custodian Fees (After Re-
imbursement)**........... None None None None None
Transfer Agent Fees (After
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 , 1998.
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, 1998 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.
7
<PAGE>
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 Rein-
vested 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 Reim-
bursement)**:
Custodian Fees (After Re-
imbursement)**........... None None None None None
Transfer Agent Fees (After
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 its Management Fee of 0.25% of
average net assets. This waiver is intended to be in effect through
December 31, 1998 but may be revised or eliminated at any time without
notice to shareholders.
** 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.
8
<PAGE>
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, 1999. (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, 1997). 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.
<TABLE>
<CAPTION>
TOTAL OPERATING
UNDERLYING FUND EXPENSE RATIOS
--------------- ---------------
<S> <C>
Diversified Equity Fund...................................... .92%
Special Growth Fund.......................................... 1.15%
Quantitative Equity Fund..................................... .91%
International Securities Fund................................ 1.25%
Diversified Bond Fund........................................ .60%
Volatility Constrained Bond Fund............................. .78%
Multistrategy Bond Fund...................................... .80%
Real Estate Securities Fund.................................. 1.02%
Emerging Markets Fund........................................ 1.64%
</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>
9
<PAGE>
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>
10
<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
Russell'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 Russell's money manager evaluation services, on a
pooled and cost-effective basis.
FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS
Russell, 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. Russell and its
affiliates have offices in Tacoma, New York, Toronto, London, Zurich, Paris,
Sydney, Auckland and Tokyo, and have approximately 1350 associates.
Three functions are at the core of Russell 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" investment method with the goals
of reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both the investors' individual investment time
horizons and their ability to accept risk. FRIMCo and Russell believe that for
many this can be accomplished through strategically purchasing shares in one
or more of the Funds which have been structured to provide access to specific
asset classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities over the past 50 years have outperformed corporate debt in
absolute terms. However, what is generally true of performance over extended
periods will not necessarily be true at any given time during a market cycle,
and from time to time, asset classes with greater risk may also underperform
lower risk asset classes, on either a risk adjusted or absolute basis.
Investors should select a mix of asset classes that reflects their ability to
withstand market fluctuations over their investment horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently
11
<PAGE>
outperformed the market over extended periods. While performance cycles tend
to repeat themselves, they do not do so predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary investment styles within an
asset class, investors are better able to reduce their exposure to an
investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
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 several 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.
12
<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 Underlying Funds. The allocation of a LifePoints Fund's
assets among Underlying Funds may be changed at anytime by FRIMCo. Each of the
LifePoints Funds generally will adjust its investments within set limits based
on FRIMCo's outlook for the economy, financial generally 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. However, amounts allocated to each Underlying Fund by each
LifePoints Fund are expected to generally vary only 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>
13
<PAGE>
[INSERT FIVE PIE CHARTS REFLECTING UNDERLYING FUND COMPOSITION
IN GRAPHIC FORM, OF EACH LIFEPOINTS FUND]
14
<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
15
<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.
16
<PAGE>
. 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
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 ("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.
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.
Shares of the Funds generally are not offered or "retailed" directly to or
allowed to be exchanged by, 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.
17
<PAGE>
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, Russell 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 a portion of 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.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson jointly with another
portfolio manager identified herein has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, Multistrategy Bond, and Core Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge jointly with another portfolio manager identified
herein has primary responsibility for management of the Fixed I,
Diversified Bond, Fixed II, Volatility Constrained Bond, Fixed III,
Multistrategy Bond, Core Bond, and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter jointly with another portfolio manager
identified herein has primary responsibility for management of the
International, International Securities and Non-US Equity Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Non-US
Equity Funds.
18
<PAGE>
. James M. Imhof, Manager of FRIMCo's Portfolio Trading, who manages the
Trust on a day to day basis, and has been responsible for ongoing
analysis and monitoring of the Funds' 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 Russell. Mr. Jornlin jointly with another
portfolio manager identified herein has primary responsibility for
management of the Emerging Markets and Real Estate Securities Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of Russell's
U.S. Equity Manager Research Department. Mr. Trittin jointly with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Diversified Equity, Equity II, Special
Growth, Equity III, Equity Income, Equity Q, Quantitative Equity, Equity
T, Multi-Style, and Aggressive Equity 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 Russell. Ms. Williams jointly with another portfolio manager
identified herein has primary responsibility for management of the Equity
I, Diversified Equity, Equity II, Special Growth, Equity III, Equity
Income, Equity Q, Quantitative Equity, Equity T Funds, Multi-Style, and
Aggressive Equity Funds.
Russell provides to the Funds and to FRIMCo the asset management consulting
services--including the objective-setting and asset-allocation technology, and
the money manager research and evaluation assistance--which Russell provides
to its other consulting clients. Russell receives no compensation from the
Funds or FRIMCo for its consulting services. Russell and FRIMCo as affiliated
companies may establish certain intercompany cost allocations for budgeting
and product profitability purposes which may reflect Russell'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 Russell.
FRIMCo is a wholly owned subsidiary of Russell.
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
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
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following percentages of the average daily net assets of each Underlying Fund:
Diversified Equity Fund .78%, Special Growth Fund .95%, Quantitative Equity
Fund .78%, International Securities Fund .95%, Diversified Bond Fund .45%,
Volatility Constrained Bond Fund .50%, Multistrategy Bond Fund .65%, Real
Estate Securities Fund .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 an Underlying Fund 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,
1999. 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.
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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, 1997, 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 23%, Special Growth Fund .40%, Quantitative Equity
Fund .19%, International Securities Fund .39%, Diversified Bond Fund .08%,
Volatility Constrained Bond Fund .17%, Multistrategy Bond Fund .21%, Real
Estate Securities Fund .29%, and Emerging Markets Fund .68%.
Fees paid to the money managers are not affected by any voluntary expense
limitations. Some money managers may receive investment research prepared by
Russell 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 Russell, 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 Russell 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 RUSSELL EVALUATE THE INVESTMENT MERITS OF THE MONEY MANAGERS' INDIVIDUAL
SECURITY SELECTIONS.
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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 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.
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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.
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.
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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. 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.
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.
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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.
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.
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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.
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.
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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
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.
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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 annually, generally in
mid-December from capital gains annually, generally in mid-December through
October 31 (excess of capital gains over capital losses). 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.
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. 28% and 20% capital gains
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distributions declared by the Investment Company's Board are taxed at the
respective capital gains rates 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 28% and 20% 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.
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 average annual total returns
for Class E shares of each of the Funds are as follows
<TABLE>
<CAPTION>
INCEPTION TO
DECEMBER 31, 1997 INCEPTION DATE
----------------- --------------
<S> <C> <C>
Equity Balanced Strategy Fund............... 09/30/97
Aggressive Strategy Fund.................... 09/16/97
Balanced Strategy Fund...................... 09/16/97
Moderate Strategy Fund...................... 10/03/97
Conservative Strategy Fund.................. 11/08/97
</TABLE>
No Class D shares had been issued as of December 1, 1997 and therefore no
performance is reported for Class D shares.
29
<PAGE>
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 information
regarding only their recent investment performance. However, FRIMCo has a
longer 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.
PERCENTAGE TOTAL RETURNS/1/
PERIODS ENDING DECEMBER 31, 1997
(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............ $22.44 17.14 14.88 15.11 10/01/85
AGGRESSIVE STRATEGY MODEL
FRIC Aggressive Strategy Fund comparable........ 18.78 14.89 13.68 14.16 10/01/85
BALANCED STRATEGY MODEL
FRIC Balanced Strategy Fund comparable.......... 16.13 12.81 12.22 12.85 10/01/85
MODERATE STRATEGY MODEL
FRIC Moderate Strategy Fund comparable.......... 12.76 10.89 10.72 11.43 10/01/85
CONSERVATIVE STRATEGY MODEL
FRIC Conservative Strategy Fund comparable...... 9.55 -- -- 8.83 10/01/96
</TABLE>
30
<PAGE>
- ---------------------
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 Distribution Fees 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.
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.
31
<PAGE>
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 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 an authorized Financial Intermediary or 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
32
<PAGE>
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.
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.
33
<PAGE>
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.
Request Procedures. Requests by all investors to redeem Investment Company
Fund shares must be received by an authorized Financial Intermediary or 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.
34
<PAGE>
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 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 (the "Custodian"), Boston,
Massachusetts, holds all portfolio securities and cash assets of the Funds,
and provides portfolio recordkeeping services. The Custodian is authorized to
deposit securities in securities depositories or to use the services of
subcustodians. The Custodian 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
35
<PAGE>
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 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 , 1998, may be deemed by the 1940 Act to control the LifePoints
Funds because it owns more than 25% of the voting shares. (To be filed by
amendment)
MONEY MANAGER PROFILES
The money managers have no other affiliations with the Underlying Funds,
FRIMCo, or with Russell. 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 Russell, including its wholly
owned subsidiary, Frank Russell Trust Company.
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P., First Bank Place, 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. AXA, a French insurance holding
company owns 60.5% of the Equitable.
Barclays Global Investors N.A., 45 Fremont Street, San Francisco, CA 94105,
is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
36
<PAGE>
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 500,
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
19807, is an SEC registered investment adviser owned by Arnold Schneider. As
of the date of this Prospectus, 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 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.
37
<PAGE>
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 Investors N.A., 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., 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'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. members: Thomas A. Garr; Robert L. Gernstetter;
Joseph P. Jordon; Arthur M. Tyson and Theodore J. Tyson.
Oechsle International Advisors, One International Place, 23rd 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.
38
<PAGE>
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor,
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly
held corporation.
EMERGING MARKETS FUND
Genesis Asset Managers, Limited., 21 Knightsbridge, 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., 101 California Street, 35th Floor, San
Francisco, CA 94111, is a Delaware limited liability company with majority
ownership held by Commerzbank AG, a foreign banking organization.
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, 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.
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<PAGE>
VOLATILITY CONSTRAINED BOND FUND
BlackRock Financial Management, 345 Park Ave., 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, Trinity Hall, 43 Cedar Avenue, P. O. Box 2910,
Hamilton HM KX, Bermuda, is a Bermuda exempted company. William H. Williams
III is the sole shareholder.
MULTISTRATEGY BOND FUND
BEA Associates Inc., One Citicorp Center 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.
40
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
DIVERSIFIED EQUITY
Alliance Capital Management L.P.
Barclays Global Investors, N.A.
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
SPECIAL GROWTH
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company, LLP
QUANTITATIVE EQUITY
Barclays Global Investors, N.A.
Franklin Portfolio Associates, LLC
J.P. Morgan Investment Management, Inc.
INTERNATIONAL SECURITIES
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Mastholm Asset Management LLC
Oechsle International Advisors
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, Inc.
REAL ESTATE SECURITIES
AEW Capital Management, L.P.
Cohen & Steers Capital Management
DIVERSIFIED BOND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management
MULTISTRATEGY BOND
BEA Associates, Inc.
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
EMERGING MARKETS
Genesis Asset Managers, Limited
J.P. Morgan Investment Management, Inc.
Montgomery Asset Management, L.P.
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
41
<PAGE>
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) 832-6688
In Washington (253) 627-7001
42
<PAGE>
<TABLE>
<CAPTION>
Information Required in a
Statement of Additional
Part B Information Statement Caption
- -------- --------------------------- ----------------------------------------------------------
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and
Policies
(a) Investment Restrictions, Policies and Certain Investments
(b) Investment Restrictions, Policies and Certain Investments
(c) Investment Restrictions, Policies and Certain Investments
(d) Operation of Investment Company - Portfolio Turnover Rate
14 Management of the Fund
(a) Structure and Governance - Trustees and Officers
(b) Structure and Governance - Trustees and Officers
(c) Not applicable
15 Control Persons and
Principal Holders of
Securities
(a) Structure and Governance - Controlling Shareholders
(b) Structure and Governance - Controlling Shareholders
(c) Structure and Governance - Controlling Shareholders
16 Investment Advisory and
Other Services
(a) Operation of Investment Company - Consultant, Manager;
(Prospectus) - General Management of the Funds; Money
Manager Profiles
(b) Operation of Investment Company - Consultant, Manager;
(Prospectus) - General Management of the Funds; The Money
Managers
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
(h) Operation of Investment Company - Custodian; (Prospectus)
Additional Information - Custodian, Accountants and Reports
(i) Operation of Investment Company - Custodian, Transfer
Agent; (Prospectus) Additional Information - Custodian,
Accountants and Reports
17 Brokerage Allocation and
Other Practices
(a) Operation of Investment Company - Brokerage Allocations,
Brokerage Commissions
(b) Operation of Investment Company - Brokerage Commissions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Information Required in a
Statement of Additional
Part B Information Statement Caption
- -------- --------------------------- ------------------------------------------------------------
<S> <C> <C>
(c) Operation of Investment Company - Brokerage Allocations
(d) Operation of Investment Company - Brokerage Commissions
(e) Operation of Investment Company - Brokerage Commissions
18 Capital Stock and Other
Securities
(a) Structure and Governance - Organization and Business History
(b) Not Applicable
19 Purchase, Redemption and
Pricing of Securities Being
Offered
(a)-(c) Operation of Investment Company - Valuation of Fund Shares;
Annual Report to Shareholders; Financial Statements;
(Prospectus) Eligible Investors; Valuation of Fund Shares;
Redemption of Shares
20 Tax Status Taxes
21 Underwriters
(a) Operation of Investment Company - Distributor
(b) Not Applicable
(c) Not Applicable
22 Calculations of Performance
Data
(a) Money Market Funds Yield and Total Return Quotations
(b) Other Registrations Yield and Total Return Quotations
23 Financial Statements Annual Report to Shareholders; Financial Statements
</TABLE>
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (253) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
_______________, 1998
Frank Russell Investment Company (the "Trust") is a single legal entity
organized as a Massachusetts business trust. The Trust operates investment
portfolios referred to as "Funds." The Trust offers shares of beneficial
interest in the Funds in five separate Prospectuses.
As of the date of this Statement of Additional Information ("Statement" or
"SAI"), the Trust is comprised of the following investment portfolios, each of
which commenced operations on the date indicated:
<TABLE>
<CAPTION>
Fund Inception
Fund Date Prospectus Date
---- -------------- ---------------
<S> <C> <C>
Equity I Fund October 15, 1981 __________, 1998
Equity II Fund December 28, 1981 __________, 1998
Equity III Fund November 27, 1981 __________, 1998
Equity Q Fund May 29, 1987 __________, 1998
Equity T Fund October 7, 1996 __________, 1998
International Fund January 31, 1983 __________, 1998
Emerging Markets Fund January 29, 1993 __________, 1998
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Fixed Income I Fund October 15, 1981 __________, 1998
Fixed Income II Fund October 30, 1981 __________, 1998
Fixed Income III Fund January 29, 1993 __________, 1998
Money Market Fund October 15, 1981 __________, 1998
Diversified Equity Fund September 5, 1985 __________, 1998
Special Growth Fund September 5, 1985 __________, 1998
Equity Income Fund September 5, 1985 __________, 1998
Quantitative Equity Fund May 15, 1987 __________, 1998
International Securities Fund September 5, 1985 __________, 1998
Real Estate Securities Fund July 28, 1989 __________, 1998
Diversified Bond Fund September 5, 1985 __________, 1998
Volatility Constrained Bond Fund September 5, 1985 __________, 1998
Multistrategy Bond Fund January 29, 1993 __________, 1998
Limited Volatility Tax Free Fund September 5, 1985 __________, 1998
U.S. Government Money Market Fund September 5, 1985 __________, 1998
Tax Free Money Market Fund May 8, 1987 __________, 1998
</TABLE>
The Funds had aggregate net assets of $_______________ on _______________, 1998.
A shareholder of the Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, Equity T Fund,
-2
<PAGE>
International Fund, Emerging Markets Fund, Fixed Income I Fund, Fixed Income II
Fund, Fixed Income III Fund, and Money Market Fund may enter into a separate
agreement with Frank Russell Investment Management Company ("FRIMCo") to obtain
certain services from, and pay a separate quarterly individual shareholder
investment services fee directly to, FRIMCo. The amount of the fee is based upon
the assets subject to the applicable agreement and the services obtained under
that agreement. A shareholder of the other Funds does not execute such an
agreement to acquire such services and pays no such fees. In each case, FRIMCo
may charge fees to a shareholder for non-investment services provided directly
to that shareholder.
Each of the Funds presently offers interests in Class S Shares. Ten of the
Funds--the Diversified Equity, Special Growth, Equity Income, Quantitative
Equity, International Securities, Real Estate Securities, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, and Emerging Markets Funds
(collectively, the "Multiple Class Funds")--presently offer interests in another
class of shares, the Class C Shares. This Statement relates to both the Class S
Shares and the Class C Shares of the Funds.
This Statement is not a prospectus; the Statement should be read in conjunction
with the Funds' Prospectuses. Prospectuses may be obtained without charge by
telephoning or writing the Trust at the number or address shown above.
Capitalized terms not otherwise defined in this Statement shall have the
meanings assigned to them in the Prospectuses.
This Statement incorporates by reference the Trust's Annual Reports to
Shareholders for the year ended December 31, 1997. Copies of the Funds' Annual
Reports accompany this Statement.
-3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE....................................
Organization and Business History...................
Shareholder Meetings................................
Controlling Shareholders............................
Trustees and Officers...............................
OPERATION OF THE INVESTMENT COMPANY.........................
Service Providers...................................
Consultant..........................................
Manager.............................................
Money Managers......................................
Distributor.........................................
Custodian...........................................
Transfer and Dividend Disbursing Agent..............
Independent Accountants.............................
Fund Expenses.......................................
Valuation of Fund Shares............................
Portfolio Transaction Policies......................
Portfolio Turnover Rate.............................
Brokerage Allocations...............................
Brokerage Commissions...............................
Yield and Total Return Quotations...................
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS...
Investment Restrictions.............................
</TABLE>
-4
<PAGE>
<TABLE>
<S> <C>
Investment Policies.................................
Certain Investments.................................
TAXES
RATINGS OF DEBT INSTRUMENTS.................................
FINANCIAL STATEMENTS........................................
FINANCIAL HIGHLIGHTS........................................
</TABLE>
-5
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. The Trust commenced business operations as a
Maryland corporation on October 15, 1981. On January 2, 1985, the Trust
reorganized by changing its domicile and legal status to a Massachusetts
business trust.
The Trust is currently organized and operates under an amended Master Trust
Agreement dated July 26, 1984 and the provisions of Massachusetts law governing
the operation of a Massachusetts business trust. The Board of Trustees
("Board") may amend the Master Trust Agreement from time to time; provided,
however, that any amendment which would materially and adversely affect
shareholders of the Trust as a whole, or shareholders of a particular Fund, must
be approved by the holders of a majority of the shares of the Trust or Fund,
respectively.
The Trust is authorized to issue shares of beneficial interest, and may divide
the shares into two or more series, each of which evidences a pro rata ownership
interest in a different investment portfolio -- a "Fund." The Trustees may,
without seeking shareholder approval, create additional Funds at any time. The
amended Master Trust Agreement provides that a shareholder may be required to
redeem shares in a Fund under circumstances set forth in the Master Trust
Agreement.
The Trust's Funds are authorized to issue shares of beneficial interest in one
or more classes. 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 of the Funds presently offers interests in the Class S Shares, and
the Multiple Class Funds offer interests in another class of shares, the Class C
Shares. The Class C Shares and the Class S Shares are designed to meet
different investor needs. The Class C Shares are subject to a Rule 12b-1 fee of
up to .75%, presently limited to .40%, and a shareholder services fee of up to
.25%. The Class S Shares are not subject to either a Rule 12b-1 fee or a
shareholder services fee. Unless otherwise indicated, "shares" in this
Statement refers to the Class C Shares and the Class S Shares of the Funds.
Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that shareholders
shall not be subject to any personal liability for the acts or obligations of a
Fund and that every written agreement, obligation or other undertaking of the
Funds shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The amended Master Trust Agreement also provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of a Fund and satisfy any judgment
thereon. Thus, the risk of any shareholder incurring financial loss beyond his
investment on account of shareholder liability is limited to circumstances in
which a Fund itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. The Trust will not hold annual meetings of shareholders,
but special meetings may be held. Special meetings may be convened by (i) the
Board, (ii) upon written request to the Board by shareholders holding at least
10% of the outstanding shares, or (iii) upon the Board's failure to honor the
shareholders' request described above, by shareholders holding at least 10% of
the outstanding shares by giving notice of the special meeting to shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility to
manage the business of the Trust, and hold office for life unless they resign or
are removed by, in substance, a vote of two-thirds of the Trust shares
outstanding. Under these circumstances, no one person, entity or shareholder
"controls" the
-6
<PAGE>
Trust.
The following shareholders owned 5% or more of the voting shares of the Trust or
of the Funds at _______________, 1998: (TO BE FILED BY AMENDMENT)
-7
<PAGE>
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. A Trustee may be removed at any time by,
in substance, a vote of two-thirds of Trust shares. A vacancy in the Board shall
be filled by a vote of a majority of the remaining Trustees so long as, in
substance, two-thirds of the Trustees have been elected by shareholders. The
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 Trust paid in aggregate $156,315.80 for the year ended
-8
<PAGE>
December 31, 1997 to the Trustees who are not officers or employees of FRIMCo or
its affiliates. Trustees are paid an annual fee plus travel and other expenses
incurred in attending Board meetings. The Trust's officers and employees are
paid by FRIMCo or its affiliates.
The following lists the Trustees and officers and their positions with the
Trust, their ages, their present and principal occupations during the past five
years and the mailing addresses of Trustees who are not affiliated with the
Trust. The mailing address for all Trustees and officers affiliated with the
Trust is Frank Russell Investment Company, 909 A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested person"
of the Trust as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As used in the table, "Frank Russell Company" includes its
corporate predecessor, Frank Russell Co., Inc.
*George F. Russell, Jr.--65 years old--Trustee and Chairman of the Board.
Trustee and Chairman of the Board, Russell Insurance Funds, Inc. Director and
Chairman of the Board, Frank Russell Company; Director, Chief Executive Officer
and Chairman of the Board, Russell Building Management Company, Inc., Director
and Chairman of the Board, Frank Russell Securities, Inc. and Frank Russell
Trust Company, Director, Frank Russell Investment Management Company; Director,
Chairman of the Board and President of Russell 20-20 Association; Director and
Chairman of the Board, Frank Russell Investments (Delaware), Inc.; January 1957
to March 1993, President and Chief Executive Officer of Frank Russell Company;
March 1982 to November 1995, Chairman of the Board of Frank Russell Investment
Management Company.
*Lynn L. Anderson--58 years old--Trustee, President and Chief Executive Officer.
Trustee, President and Chief Executive Officer, Russell Insurance Funds, Inc.
Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc. Trustee, Chairman and President, the SSGA Funds (investment
company); Director, Chief Executive Officer and Chairman of the Board, Frank
Russell Investment Management Company; Director, Chief Executive Officer and
President, Frank Russell Trust Company; Director and Chairman, Frank Russell
Investment Company Public Limited Company; Director of Frank Russell Investments
(Ireland) Limited and Frank Russell Investments (Cayman) Limited and Frank
Russell Investments (UK) Limited; November 1995 to February 1997, Director,
Frank Russell Company; Director and Chairman of the Board, Frank Russell Company
(Delaware); Director, Frank Russell Company; March 1989 to June 1993, Director,
Frank Russell Company, Until September 1994, Director and President, The Laurel
Funds, Inc. (investment company).
Paul E. Anderson--66 years old--Trustee. 23 Forest Glen Lane, Tacoma, Washington
98409. Trustee, Russell Insurance Funds; 1996 to Present, President, Forest
Limited Partnership. 1984 to 1996, President, Vancouver Door Company, Inc.
Paul Anton, Ph.D.--78 years old--Trustee. PO Box 1337, N.W., Gig Harbor,
Washington 98335. Trustee, Russell Insurance Funds. President, Paul Anton and
Associates (Marketing Consultant on emerging international markets for small
corporations). 1991-1994, Adjunct Professor, International Marketing,
University of Washington, Tacoma, Washington.
-9
<PAGE>
William E. Baxter--72 years old--Trustee. Trustee, Russell Insurance Funds, 800
North C Street, Tacoma, Washington 98403. Retired.
Lee C. Gingrich--67 years old--Trustee. 1730 North Jackson, Tacoma, Washington
98406. Trustee, Russell Insurance Funds. President, Gingrich Enterprises, Inc.
(Business and Property Management).
Eleanor W. Palmer--71 years old--Trustee. 2025 Narrows View Circle, P. 0. Box
1057, Gig Harbor, Washington 98335. Trustee, Frank Russell Trust Company and
Russell Insurance Funds. Retired.
*George W. Weber--46 years old--Treasurer and Chief Accounting Officer.
Treasurer and Chief Accounting Officer, Russell Insurance Funds; Director of
Finance and Operations, Frank Russell Trust Company; Director, Fund
Administration and Operations of Frank Russell Investment Management Company and
Russell Fund Distributors, Inc.; Senior Vice President and Fund Treasurer of the
SSga Funds (Investment Company); March 1993 to January 1996, Vice President,
Operations, Funds Management, J.P. Morgan; December 1985 to March 1993, Senior
Vice President, Operations, Frank Russell Investment Company, The Laurel Funds,
Inc. and The Seven Seas Series Fund (investment companies); Director of
Operations, Frank Russell Investment Management Company and Frank Russell Trust
Company; Director, Russell Fund Distributors, Inc.
*Randall P. Lert--44 years old--Director of Investments. Director, Investments
of Russell Insurance Funds; Senior Investment Officer and Director of Investment
Services, Frank Russell Trust Company; Director and Chief Investment Officer,
Frank Russell Investment Management Company; Director and Chief Investment
Officer, Russell Fund Distributors, Inc. April 1990 to November 1995, Director
of Investments of Frank Russell Investment Management Company.
*Karl J. Ege--56 years old--Secretary and General Counsel. Secretary and General
Counsel, Russell Insurance Funds, Inc.; Director, Secretary, General Counsel and
Managing Director Law and Government Affairs of Frank Russell Company; and A
Street Investment Associates, Inc.; Secretary and General Counsel of Frank
Russell Investment Management Company, Frank Russell Trust Company and Russell
Fund Distributors, Inc.; Director and Secretary of Russell Building Management
Company; Director and Assistant Secretary of Frank Russell Company Limited and
Russell Systems Ltd. Director, Frank Russell Investment Company LLC, Frank
Russell Investments (Cayman) Ltd., Frank Russell Investment Company Public
Limited Company and Frank Russell Investments (Ireland) Limited; Director and
Secretary, Frank Russell Investments (Delaware), Inc. and Frank Russell
International Services, Co., Inc.; Director, Secretary and General Counsel,
Russell Fiduciary Services Company and Frank Russell Capital Inc.; Director of
Frank Russell Company, S.A., Frank Russell Japan, Frank Russell Company (N.Z.)
Limited; Russell Investment Nominee Co. PTY Ltd., Frank Russell Company PTY
Limited and Frank Russell Investments (UK) Ltd., Director and Secretary,
Russell 20-20 Association. November 1995 to February 1997, Director and
Secretary, Frank Russell Company (Delaware). From July 1992 to June 1994,
Director, President and Secretary of Frank Russell Shelf Corporation.
*Peter Apanovitch--52 years old--Manager of Short-Term Investment Funds.
Manager of Short-Term Investment Funds, Russell Insurance Funds; Manager of
Short-Term Investment Funds, Frank Russell Investment Management Company and
Frank Russell Trust Company.
-10
<PAGE>
TRUSTEE COMPENSATION TABLE*
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE COMPENSATION BENEFITS ACCRUED AS ESTIMATED ANNUAL TOTAL COMPENSATION FROM
FROM THE INVESTMENT PART OF THE INVESTMENT BENEFITS UPON THE INVESTMENT COMPANY
TRUSTEE COMPANY COMPANY EXPENSES RETIREMENT PAID TO TRUSTEES
- ------- ---------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $ 0 $0 $0 $ 0
Paul E. Anderson $20,000 $0 $0 $31,263.16*
Paul Anton, PhD. $20,000 $0 $0 $31,263.16*
William E. Baxter $20,000 $0 $0 $31,263.16*
Lee C. Gingrich $20,000 $0 $0 $31,263.16*
Eleanor W. Palmer $20,000 $0 $0 $31,263.16*
George F. Russell $ 0 $0 $0 $ 0
</TABLE>
* The Trustees received $11,263 for service on the Russell Insurance Funds
Board. ($4,000 of which is for services during 1996)
OPERATION OF THE TRUST
SERVICE PROVIDERS. Most of the Trust's necessary day-to-day operations are
performed by separate business organizations under contract to the Trust. The
principal service providers are:
<TABLE>
<S> <C>
Consultant Frank Russell Company
Manager, Transfer and Dividend Frank Russell Investment Management
Disbursing Agent Company
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
</TABLE>
-11
<PAGE>
<TABLE>
<S> <C>
Accountant
</TABLE>
CONSULTANT. Frank Russell Company, the corporate parent of FRIMCo, was
responsible for organizing the Trust and provides ongoing consulting services,
described in the Prospectuses, to the Trust and FRIMCo.
Frank Russell Company provides comprehensive consulting and money manager
evaluation services to institutional clients, including FRIMCo and Frank Russell
Trust Company, and to high net worth individuals and families ($100 million)
through its Russell Private Investment Division. Frank Russell Company also
provides: (i) consulting services for international investment to these and
other clients through its International Division and its wholly owned
subsidiaries, Frank Russell Company London (Frank Russell Company Limited),
Frank Russell Canada (Frank Russell Canada Limited/Limitee), Frank Russell
Australia (Frank Russell Company Pty., Limited), Frank Russell Japan, Frank
Russell AG (Zurich), Frank Russell Company S.A. (Paris) and Frank Russell
Company (N.Z.) Limited (Auckland), and Frank Russell Investments (Delaware),
Inc., and (ii) investment account and portfolio evaluation services to corporate
pension plan sponsors and institutional money managers through its Russell Data
Services Division. Frank Russell Securities, Inc., a wholly owned subsidiary of
Frank Russell Company, carries on an institutional brokerage business. Frank
Russell Capital Inc., a wholly owned subsidiary of Frank Russell Company,
carries on an investment banking business as a registered broker-dealer. Frank
Russell Trust Company, a wholly-owned subsidiary of Frank Russell Company,
provides comprehensive trust and investment management services to corporate
pension and profit-sharing plans. Frank Russell Investments (Cayman) Ltd., a
wholly owned subsidiary of Frank Russell Company, provides investment advice and
other services. Frank Russell Investment (Ireland) Ltd., a wholly owned
subsidiary of Frank Russell Company, provides investment advice and other
services. Frank Russell International Services Co., Inc., a wholly owned
subsidiary of Frank Russell Company, provides services to U.S. personnel
secunded to overseas enterprises. Russell Fiduciary Services Company, a wholly
owned subsidiary of Frank Russell Company, provides fiduciary services to
pension and welfare benefit plans and other institutional investors. The
mailing address of Frank Russell Company is 909 A Street, Tacoma, WA 98402.
MANAGER. Frank Russell Investment Management Company provides or oversees the
provision of all general management and administration, investment advisory and
portfolio management, and distribution services for the Funds. FRIMCo provides
the Funds with office space, equipment and the personnel necessary to operate
and administer the Funds' business and to supervise the provision of services by
third parties such as the money managers and custodian. FRIMCo also develops
the investment programs for each of the Funds, selects money managers for the
Funds (subject to approval by the Board), allocates assets among money managers,
monitors the money managers' investment programs and results, and may exercise
investment discretion over assets invested in the Funds' Liquidity Portfolios.
(See, "Investment Policies--Liquidity Portfolios.") FRIMCo also acts as the
Trust's transfer agent, dividend disbursing agent and as the money manager for
the Money Market and U.S. Government Money Market Funds. FRIMCo, as agent for
the Trust, pays the money managers' fees for the Funds, as a fiduciary for the
Funds.
Prior to April 1, 1995, the Equity I, Equity II, Equity III, Equity Q, Equity T,
International, Emerging Markets, Fixed Income I, Fixed Income II, Fixed Income
III and Money Market Funds paid no management fee to FRIMCo. Each shareholder
entered into a written Asset Management Services Agreement with FRIMCo and
agreed to pay annual fees, billed quarterly on a pro rata basis and calculated
as a specified percentage of the average assets which the shareholder had
invested at each month end in any of the Funds. Beginning April 1, 1995, the
Trust's Management Agreement was amended to provide that each of those Funds
will pay an annual management fee directly to FRIMCo, billed monthly on a pro
rata basis and calculated as a specified percentage of the average daily net
assets of each of those Funds. (See the applicable Prospectus for annual
percentage rates.) A shareholder of any of those Funds would continue to enter
into a
-12
<PAGE>
separate written agreement with FRIMCo to obtain separate individual shareholder
services, and therefore would pay fees under such agreement based on a specified
percentage of average assets which are subject to the agreement concerning
FRIMCo's provision of individual shareholder investment services with respect to
that shareholder.
Each of the Funds pays an annual management fee directly to FRIMCo, billed
monthly on a pro rata basis and calculated as a specified percentage of the
average daily net assets of each of the Funds. (See the applicable Prospectus
for the Funds' annual percentage rates.)
The following Funds paid FRIMCo the listed management fees for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
12/31/97 12/31/96 12/31/95
---------- ---------- ----------
<S> <C> <C> <C>
Diversified Equity $6,898,175 $4,728,098 $3,842,471
Special Growth 4,538,822 3,307,757 2,588,270
Equity Income 1,719,787 1,504,153 1,314,461
Quantitative Equity 6,605,488 4,455,041 3,469,134
International Securities 7,741,258 6,498,479 5,723,534
Real Estate Securities 4,426,518 2,943,292 2,065,552
Diversified Bonds 2,748,159 2,360,391 2,308,823
Volatility Constrained Bonds 812,308 836,818 985,215
Multistrategy Bond 2,225,087 1,673,473 1,217,039
Limited Volatility Tax Free 361,226 312,456 294,007
U.S. Government Money Market 260,196 481,642 338,745
Tax Free Money Market 160,163 234,929 214,949
</TABLE>
For the years ended December 31, 1997 and 1996, the following Funds paid FRIMCo
the following management fees:
-13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED
------------------------
12/31/97 12/31/96
---------- ----------
<S> <C> <C>
Equity I $6,457,044 $5,261,926
Equity II 3,226,955 2,448,618
Equity III 1,381,167 1,340,374
Equity Q 6,049,752 4,392,254
Equity T 375,054 21,443
International 7,576,927 6,569,285
Emerging Markets 4,167,163 2,773,817
Fixed Income I 2,149,298 1,977,178
</TABLE>
-14
<PAGE>
<TABLE>
<S> <C> <C>
Fixed Income II 1,184,588 988,312
Fixed Income III 1,835,798 1,483,875
Money Market 722,068 1,437,186
</TABLE>
Equity T Fund commenced operations on October 7, 1996.
The management contract also provides that if any Fund's expenses (exclusive of
interest and taxes) exceed specified limits imposed by the Manager on an annual
basis, such excess will be paid by FRIMCo. The Manager has voluntarily agreed
to waive a portion of its 1.20% management fee for the Emerging Markets Fund, to
the extent total fund level expenses for the Fund exceed 1.95% of its average
daily net assets on an annual basis. There were no waivers by the Manager for
the twelve months ended December 31, 1997.
The Manager has voluntarily agreed to waive a portion of its 0.75% management
fee for the Equity T Fund, 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. In addition, the Manager has
voluntarily agreed to reimburse the Fund for any remaining Fund operating
expenses after the Manager waivers which exceed 1.00% of the Fund's average
daily net assets on an annual basis. The amount of such waiver for the twelve
months ended December 31, 1997 was $45,699.
The Manager has voluntarily agreed to waive its 0.25% management fee for the
Money Market Fund through October 14, 1997 and 0.15% of its management fee from
October 15, 1997 through December 31, 1997. The amount of fees waived for the
twelve months ended December 31, 1997 was $1,611,140.
The Manager has voluntarily agreed to waive its 0.25% management fee for the
U.S. Government Money Market Fund through August 31, 1997 and 0.13% of its
management fee from September 1, 1997 through December 31, 1997. The amount of
fees waived for the twelve months ended December 31, 1997 was $463,787.
Effective January 1, 1997, the Manager has voluntarily agreed to waive 0.10%
management fee for the Tax Free Money Market Fund. The amount of such waiver
for the twelve months ended December 31, 1997 was $106,776.
The management contract also provides that if any Fund's expenses (exclusive of
interest and taxes) exceed specified limits imposed by the Manager on an annual
basis, such excess will be paid by FRIMCo. The Manager has voluntarily agreed
to waive a portion of its 0.65% management fee for the Multistrategy Bond Fund,
to the extent that total fund level expenses for this Fund exceed 0.80% of its
average daily net assets on an annual basis. The total amount of such waivers
for the twelve months ended December 31, 1997 was $126,393.
-15
<PAGE>
The management contract also provides that if any Fund's expenses (exclusive of
interest and taxes) exceed specified limits imposed by the Manager on an annual
basis, such excess will be paid by FRIMCo. The Manager of the Fixed Income III
Fund voluntarily agreed to waive a portion of its 0.55% management fee, to the
extent total fund level expenses for the Fund exceed 0.75% of its average daily
net assets on an annual basis. There were no waivers for the Fixed Income III
Fund for the period ended December 31, 1997.
FRIMCo also provides, through its Russell Private Investment Division,
investment advisory, consulting and money manager evaluation services to high
net worth individuals and families.
FRIMCo is a wholly owned subsidiary of Frank Russell Company. FRIMCo's mailing
address is 909 A Street, Tacoma, WA 98402.
MONEY MANAGERS. Except with respect to the Money Market and U.S. Government
Money Market Funds, the money managers have no affiliations or relationships
with the Trust or FRIMCo other than as discretionary managers for all or a
portion of a Fund's portfolio, except some money managers (and their affiliates)
may effect brokerage transactions for the Funds (see, "Brokerage Allocations"
and "Brokerage Commissions"). Money managers may serve as advisers or
discretionary managers for Frank Russell Trust Company, other investment
vehicles sponsored or advised by Frank Russell Company or its affiliates, other
consulting clients of Frank Russell Company, other off-shore vehicles and/or for
accounts which have no business relationship with the Frank Russell Company
organization.
From its management fees, FRIMCo, as agent for the Trust, pays all fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average for
the quarter of all the assets allocated to the money manager. For the period
ended December 31, 1997, management fees paid to the money managers were: Equity
I $2,425,193; Equity II $1,716,048; Equity III $439,093; Fixed Income I
$542,745; Fixed Income II $410,761; Fixed Income III $692,500; International
$3,947,057; Equity Q $1,958,721; Equity T $170,958; Emerging Markets
$2,396,288; Diversified Equity $1,996,005; Special Growth $1,914,056; Equity
Income $410,481; Diversified Bond $462,945; Volatility Constrained Bond
$282,055; International Securities $3,188,600; Multistrategy Bond $751,497;
Quantitative Equity $1,648,992; Real Estate Securities $1,529,207; Limited
Volatility Tax Free $179,885 and Tax Free Money Market $103,973. Fees paid to
the money managers are not affected by any voluntary or statutory expense
limitations. Some money managers may receive investment research prepared by
Frank Russell Company as additional compensation, or may receive brokerage
commissions for executing portfolio transactions for the Funds through broker-
dealer affiliates.
DISTRIBUTOR. Russell Fund Distributors, Inc. (the "Distributor") serves as the
distributor of the Trust shares. The Distributor receives no compensation from
the Trust for its services except with respect to distribution fee in respect of
its distribution services in connection with Class C shares. The Distributor
is a wholly owned subsidiary of FRIMCo and its mailing address is 909 A Street,
Tacoma, WA 98402.
CUSTODIAN. State Street Bank and Trust Company ("State Street") serves as
custodian for the Trust. State Street also provides the basic portfolio
recordkeeping required by each of the Funds for regulatory and financial
reporting purposes. For these services, State Street is paid an
-16
<PAGE>
annual fee, in accordance with the following: domestic custody - an annual fee,
payable monthly on a pro rata basis, based on the month-end net assets and
geographic classification of the investments in the international funds; fund
accounting -(i) an annual fee of $10,000 - $24,000 per portfolio per fund, (ii)
an annual fee of 0.015% - 0.030%, payable monthly on a pro rata basis, based on
daily average net assets of each Fund; securities transaction charges from $6.50
to $100.00 per transaction; monthly pricing fees of $375.00 per portfolio and
$6.00 to $12.00 per security; multiple class fee of $15,000 per year for each
additional class of shares; and yield calculation fees of $4,200 per fixed
income fund per year. State Street is reimbursed by the Funds for supplying
certain out-of-pocket expenses including postage, transfer fees, stamp duties,
taxes, wire fees, telexes and freight. In addition, interest earned on invested
cash balances is used to offset the Funds' custodian expense. The mailing
address for State Street Bank and Trust Company is 1776 Heritage Drive, North
Quincy, MA 02171.
TRANSFER AND DIVIDEND DISBURSING AGENT. FRIMCo serves as Transfer Agent for the
Trust. For this service, FRIMCo is paid a fee of $20.00 per shareholder
transaction by all Funds except Money Market, U.S. Government Money Market and
Tax Free Money Market Funds. The Money Market, U.S. Government Money Market and
Tax Free Money Market Funds pay $15.00 per shareholder transaction. The Board
of Trustees has approved a new fee arrangement to be effective ______________,
1998 as follows: FRIMCo is also reimbursed by the Trust for certain out-of-
pocket expenses, including postage, taxes, wires, stationery and telephone.
FRIMCo's mailing address is 909 A Street, Tacoma, WA 98402.
ORDER PLACEMENT DESIGNEES. The Investment Company has authorized certain
Financial Intermediaries to accept on its behalf purchase and redemption orders
for Investment Company shares. Some such Financial Intermediaries is authorized,
subject to approval of the Investment Company's distributor, to designate other
intermediaries to accept purchase and redemption orders on the Investment
Company's behalf. The Investment Company will be deemed to have received a
purchase or redemption order when such a Financial Intermediary or, if
applicable, an authorized designee, accepts the order. The customer orders will
be priced at the Investment Company Fund's net asset value next computed after
they are accepted by such a Financial Intermediary or an authorized designee,
provided that Schwab or an authorized designee timely transmits the customer
order to the Investment Company.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the independent
accountants of the Trust. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards and a review of federal
tax returns. The mailing address of Coopers & Lybrand L.L.P. is One Post Office
Square, Boston, MA 02109.
PLAN PURSUANT TO RULE 18f-3. On February 23, 1995, the Securities and Exchange
Commission (the "SEC") adopted Rule 18f-3 under the 1940 Act, which permits a
registered open-end investment company whose shares are registered on Form N-1A
to issue multiple classes of shares in accordance with a written plan approved
by the investment company's board of directors/trustees and filed with the SEC.
At a meeting held on April 22, 1996, the Trust's Board (the "Trustees") adopted
a Plan Pursuant to Rule 18f-3 (the "Rule 18f-3 plan") on behalf of each Multiple
Class Fund. The key features of the Rule 18f-3 plan are as follows: shares of
each class of a Multiple Class Fund represent an equal pro rata interest in the
underlying assets of that Fund, and generally have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions, limitations,
qualifications and terms and conditions, except that: (a) each class of shares
offered in connection with a Rule 12b-1 plan would bear certain fees under its
respective plan and would have exclusive voting rights on matters pertaining to
that plan and any related agreements; (2) each class of shares may contain a
conversion feature; (3) each class of shares may bear differing amounts of
certain class expenses;
-17
<PAGE>
(4) different policies may be established with respect to the payment of
distributions on the classes of shares of a Multiple Class Fund to equalize the
net asset values of the classes or, in the absence of such policies, the net
asset value per share of the different classes may differ at certain times; (5)
each class of shares of a Multiple Class Fund might have different exchange
privileges from another class; (6) each class of shares of a Multiple Class Fund
would have a different class designation from another class of that Fund; and
(7) each class of Shares offered in connection with a shareholder servicing plan
would bear certain fees under its respective plan.
DISTRIBUTION PLAN. Under the 1940 Act, the SEC has adopted Rule 12b-1, which
regulates the circumstances under which the Funds may, directly or indirectly,
bear distribution expenses. Rule 12b-1 provides that the Funds may pay for such
expenses only pursuant to a plan adopted in accordance with Rule 12b-1.
Accordingly, the Multiple Class Funds have adopted a distribution plan (the
"Distribution Plan") for the Multiple Class Funds' Class C Shares, which are
described in the respective Funds' Prospectuses. In adopting the Distribution
Plan, a majority of the Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust and who have
no direct or indirect financial interest in the operation of the Distribution
Plan or in any agreements entered into in connection with the Distribution Plan
(the "Independent Trustees"), have concluded in conformity with the requirements
of the 1940 Act that there is a reasonable likelihood that the Distribution Plan
will benefit each respective Multiple Class Fund and its shareholders. In
connection with the Trustees' consideration of whether to adopt the Plan, the
Distributor, as the Multiple Class Funds' principal underwriter, represented to
the Trustees that the Distributor believes that the Distribution Plan should
result in increased sales and asset retention for the Multiple Class Funds by
enabling the Multiple Class Funds to reach and retain more investors and
financial intermediaries (like brokers, banks, financial planners, investment
advisors and other financial institutions), although it is impossible to know
for certain, in the absence of a Distribution Plan or under an alternative
distribution arrangement, the level of sales and asset retention that a Multiple
Class Fund would have.
The Distribution Plan provides that each Multiple Class Fund may spend annually,
directly or indirectly, up to .75% of the average daily net asset value of its
Class C Shares for any activities or expenses primarily intended to result in
the sale of Class C Shares of a Multiple Class Fund. Such payments by the Trust
will be calculated daily and paid periodically and shall not be made less
frequently than quarterly. The Board has presently determined to limit payment
under the Distribution Plan to .40% of average daily net assets. Any amendment
to increase materially the costs that a Multiple Class Fund's Shares may bear
for distribution pursuant to the Distribution Plan shall be effective upon a
vote of the holders of the lesser of (a) more than fifty percent (50%) of the
outstanding Shares of a Multiple Class Fund or (b) sixty-seven percent (67%) or
more of the Shares of a Multiple Class Fund present at a shareholders' meeting,
if the holders of more than 50% of the outstanding Shares of such Fund are
present or represented by proxy. The Distribution Plan does not provide for the
Multiple Class Funds to be charged for interest, carrying or any other financing
charges on any distribution expenses carried forward to subsequent years. A
quarterly report of the amounts expended under the Distribution Plan, and the
purposes for which such expenditures were incurred, must be made to the Trustees
for their review. The Distribution Plan may not be amended without approval of
the holders of the Class C Shares. The Distribution Plan and material
amendments to it must be approved annually by all of the Trustees and by the
Independent Trustees. While the Distribution Plan is in effect, the selection
and nomination of the Independent Trustees shall be committed to the discretion
of such Independent Trustees. The Distribution Plan is terminable, as to a
Multiple Class Fund's Shares, without penalty at any time by (a) a vote of a
majority of the Independent Trustees, or (b) a vote of the holders of the lesser
of (a) more than fifty percent (50%) of the outstanding Shares of a Multiple
Class Fund or (b) sixty-seven percent (67%) or more of the Shares of a Multiple
Class Fund present at a shareholders' meeting, if the holders of more than 50%
of the outstanding Shares of such Fund are present or
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<PAGE>
represented by proxy.
Under the Distribution Plan, the Multiple Class Funds may also enter into
agreements ("Selling Agent Agreements") with financial intermediaries and with
the Distributor ("Selling Agents"), to provide shareholder servicing with
respect to Multiple Class Fund shares held by or for the customers of the
financial intermediaries. Such arrangements are more fully described in the
Multiple Class Funds' Prospectus under "Distribution and Shareholder Service
Plans."
Under the Distribution Plan, the following Multiple Class Funds' Class C Shares
accrued expenses in the following amounts to Distributor, for the period ended
December 31, 1997 (these amounts were for compensation to dealers):
<TABLE>
<S> <C>
Diversified Equity $4,139
Special Growth 7,653
Equity Income 1,093
Quantitative Equity 5,584
International Securities 4,223
Real Estate Securities 863
Diversified Bond 6,525
</TABLE>
SHAREHOLDER SERVICES PLAN. A majority of the Trustees, including a majority of
the Independent Trustees, has also adopted, on behalf of each Multiple Class
Fund a Shareholder Services Plan pertaining to such Funds' Class C shares (the
"Service Plan"), effective April 22, 1996.
-19
<PAGE>
-20
<PAGE>
Under the Service Plan, the Trust may compensate the Distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions that are dealers of record or holders of record or that
have a servicing relationship with the beneficial owners or record holders of
Shares of any of the Trust's Multiple Class Funds offering such Shares
("Servicing Agents"), for any activities or expenses primarily intended to
assist, support or service their clients who beneficially own or are primarily
intended to assist, support or service their clients who beneficially own or are
record holders of Shares of the Trust's Multiple Class Funds. Such payments by
the Trust will be calculated daily and paid quarterly at a rate or rates set
from time to time by the Trustees, provided that no rate set by the Trustees for
Shares of any Multiple Class Fund may exceed, on an annual basis, .25% of the
average daily net asset value of that Fund's Shares.
Among other things, the Service Plan provides that (1) the Distributor shall
provide to the Trust's officers and Trustees, and the Trustees shall review at
least quarterly, a written report of the amounts expended by it pursuant to the
Service Plan, or by Servicing Agents pursuant to Service Agreements, and the
purposes for which such expenditures were made; (2) the Service Plan shall
continue in effect for so long as its continuance is specifically approved at
least annually by the Trustees, and any material amendment thereto is approved,
by a majority of the Trustees, including a majority of the Independent Trustees,
cast in person at a meeting called for that purpose; (3) while the Service Plan
is in effect, the selection and nomination of the Independent Trustees shall be
committed to the discretion of such Independent Trustees; and (4) the Service
Plan is terminable, as to a Multiple Class Fund's Shares, by a vote of a
majority of the Independent Trustees.
Under the Shareholder Services Plan, the following Multiple Class Funds Class C
Shares accrued expenses in the following amounts to the Distributor, under a
Service Agreement pursuant to Rule 12b-1, for the period ended December 31,
1997:
<TABLE>
<S> <C>
Diversified Equity $2,587
Special Growth 4,783
Equity Income 683
Quantitative Equity 3,490
International Securities 2,640
Real Estate Securities 539
Diversified Bond 4,078
</TABLE>
FUND EXPENSES. The Funds will pay all their expenses other than those expressly
assumed by FRIMCo. The principal expense of the Funds is the annual management
fee payable to FRIMCo. The Funds' other expenses include: fees for independent
accountants, legal, transfer agent, registrar, custodian, dividend disbursement,
and portfolio and shareholder recordkeeping services, and maintenance of tax
records (except for Money Market, Limited Volatility Tax Free, U.S. Government
Money Market, Equity T and Tax Free Money Market Funds); state taxes; brokerage
fees and commissions; insurance premiums; association membership dues; fees for
filing of reports and registering shares with regulatory bodies; and such
extraordinary expenses as may arise, such as federal taxes and expenses incurred
in connection with litigation proceedings and claims and the legal obligations
of the Trust to indemnify the Trustees, officers, employees, shareholders,
distributors and agents with respect thereto.
Whenever an expense can be attributed to a particular Fund, the expense is
charged to that Fund. Other common
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<PAGE>
expenses are allocated among the Funds based primarily upon their relative net
assets.
As of the date of this Statement, FRIMCo has voluntarily agreed to waive all or
a portion of its management fee with respect to certain Funds. These limits may
be changed or rescinded at any time. (See, the applicable Prospectuses for the
expense guarantees.)
VALUATION OF FUND SHARES. The net asset value per share is calculated for each
Fund Class on each business day on which shares are offered or orders to redeem
are tendered. A business day is one on which the New York Stock Exchange is
open for trading, and for the Money Market, U.S. Government Money Market, and
Tax Free Money Market Funds, any day on which both the New York Stock Exchange
is open for trading and the Boston Federal Reserve Bank is open for business.
Currently, the New York Stock Exchange is open for trading every weekday except
New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Boston Federal Reserve Bank is open for business Good Friday and every day
the New York Stock Exchange is open, except Martin Luther King Day, Columbus Day
and Veterans Day.
The International, Emerging Markets, International Securities, Fixed Income I,
Diversified Bond, Fixed Income III and Multistrategy Bond Funds' portfolio
securities actively trade on foreign exchanges which may trade on Saturdays and
on days that the Funds do not offer or redeem shares. The trading of portfolio
securities on foreign exchanges on such days may significantly increase or
decrease the net asset value of Fund shares when the shareholder is not able to
purchase or redeem Fund shares. Further, because foreign securities markets may
close prior to the time the Funds determine net asset value, events affecting
the value of the portfolio securities occurring between the time prices are
determined and the time the Funds calculate net asset value may not be reflected
in the calculation of net asset value unless FRIMCo determines that a particular
event would materially affect the net asset value.
PORTFOLIO TRANSACTION POLICIES. Generally, securities are purchased for the
Equity I, Equity III, Equity Q, International, Emerging Markets, Fixed Income I,
Diversified Equity, Equity Income, Quantitative Equity, International
Securities, Real Estate Securities and Diversified Bond Funds for investment
income and/or capital appreciation and not for short-term trading profits.
However, these Funds may dispose of securities without regard to the time they
have been held when such action, for defensive or other purposes, appears
advisable to their money managers. Equity II, Fixed Income II, Fixed Income
III, Special Growth, Volatility Constrained Bond, Multistrategy Bond and Limited
Volatility Tax Free Funds trade more actively to realize gains and/or to
increase yields on investments by trading to take advantage of short-term market
variations. This policy is expected to result in higher portfolio turnover for
these Funds. Conversely, 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. These policies are
expected to result in a low portfolio turnover rate for the Equity T Fund.
The portfolio turnover rates for certain Funds are likely to be somewhat higher
than the rates for comparable mutual funds with a single money manager.
Decisions to buy and sell securities for each Fund are made by a money manager
independently from other money managers. Thus, one money manager could be
selling a security when another money manager for the same Fund is purchasing
the same security thereby increasing the Fund's portfolio turnover ratios and
brokerage commissions. The Funds' changes of money managers may also result in
a significant number of portfolio sales and purchases as the new money manager
restructures the former money manager's portfolio. In view of the Equity T
Fund's investment objective and policies, the Fund's ability to change money
managers may be constrained.
The Funds, except the Limited Volatility Tax Free and Equity T Funds, do not
give significant weight to attempting to realize long-term, rather than short-
term, capital gains when making portfolio management decisions.
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<PAGE>
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for each Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts,
and repurchase agreements, are excluded.
The portfolio turnover rates for the last two years for each Fund (other than
the Money Market, U.S. Government Money Market and Tax Free Money Market Funds)
were:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------
12/31/97 12/31/96
-------- --------
<S> <C> <C>
Equity I 100%
Equity II 121
Equity III 101
Equity Q 75
Equity T* 9
International 43
Emerging Markets 35
Fixed Income I 147
Fixed Income II 264
Fixed Income III 144
Diversified Equity 100
Special Growth 118
Equity Income 106
Quantitative Equity 74
International Securities 42
Real Estate Securities 52
Diversified Bond 139
Volatility Constrained Bond 312
Multistrategy Bond 145
Limited Volatility Tax Free 74
</TABLE>
* Equity T Fund commenced operations on October 7, 1996.
A high portfolio turnover rate generally will result in higher brokerage
transaction costs and may result in higher levels of realized capital gains or
losses with respect to a Fund's portfolio securities (see "Taxes").
BROKERAGE ALLOCATIONS. Transactions on US stock exchanges involve the payment
of negotiated brokerage commissions; on non-US exchanges, commissions are
generally fixed. There is generally no stated commission in
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<PAGE>
the case of securities traded in the over-the-counter markets, including most
debt securities and money market instruments, but the price includes an
undisclosed payment in the form of a mark-up or mark-down. The cost of
securities purchased from underwriters includes an underwriting commission or
concession.
Subject to the arrangements and provisions described below, the selection of a
broker or dealer to execute portfolio transactions is usually made by the money
manager. The Trust's Management Agreements with FRIMCo and the money managers
provide, in substance and subject to specific directions from officers of the
Trust or FRIMCo, that in executing portfolio transactions and selecting brokers
or dealers, the principal objective is to seek the best overall terms available
to the Fund. Securities will ordinarily be purchased in the primary markets,
and the money manager shall consider all factors it deems relevant in assessing
the best overall terms available for any transaction, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any (for the specific transaction and on a continuing basis).
In addition, the Management Agreements authorize FRIMCo and the money managers,
respectively, in selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, to consider the
"brokerage and research services" (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) provided to the Fund, FRIMCo and/or to
the money manager (or their affiliates). FRIMCo and the money managers are
authorized to cause the Funds to pay a commission to a broker or dealer who
provides such brokerage and research services for executing a portfolio
transaction which is in excess of the amount of commissions another broker or
dealer would have charged for effecting that transaction. FRIMCo or the money
manager, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which FRIMCo or the money manager exercises investment
discretion. Any commission, fee or other remuneration paid to an affiliated
broker-dealer is paid in compliance with the Trust's procedures adopted in
accordance with Rule 17e-1 of the 1940 Act.
FRIMCo arranges for the purchase and sale of Trust's securities and selects
brokers and dealers (including affiliates), which in its best judgment provide
prompt and reliable execution at favorable prices and reasonable commission
rates. FRIMCo may select brokers and dealers which provide it with research
services and may cause Trust to pay such brokers and dealers commissions which
exceed those 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. In selecting a broker, including affiliates, for a
transaction, the primary consideration is prompt and effective execution of
orders at the most favorable prices. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
FRIMCo to supplement its own research and analysis.
Frank Russell Securities, Inc., an affiliate of FRIMCo, refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to FRIMCo. As to brokerage transactions effected
by money managers on behalf of the Funds through Frank Russell Securities, Inc.
at the request of the FRIMCo, research services obtained from third party
service providers at market rates are provided to the Funds by Frank Russell
Securities, Inc. Such research services include performance measurement
statistics, fund analytics systems and market monitoring systems. As to other
brokerage transactions effected by the Funds through Frank Russell Securities,
research services provided by Frank Russell Company and Russell Data Services
are provided to the money managers. Such services include market performance
indices, investment adviser performance information and market analysis. This
arrangement is used by the Equity I, Equity II, Equity III, Equity Q, Equity T,
International, Emerging Markets, Diversified Equity, Special Growth, Equity
Income, Quantitative Equity, International Securities and Real Estate Securities
Funds.
BROKERAGE COMMISSIONS. The Board reviews, at least annually, the commissions
paid by the
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<PAGE>
Funds to evaluate whether the commissions paid over representative periods of
time were reasonable in relation to commissions being charged by other brokers
and the benefits to the Funds. Frank Russell Company maintains an extensive data
base showing commissions paid by institutional investors, which is the primary
basis for making this evaluation. Certain services received by FRIMCo or money
managers attributable to a particular transaction may benefit one or more other
accounts for which investment discretion is exercised by the money manager, or a
Fund other than that for which the particular portfolio transaction was
effected. The fees of the money managers are not reduced by reason of their
receipt of such brokerage and research services.
During the last three years, the brokerage commissions paid by the Funds were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Equity I $ 2,525,291 $ 1,988,671 $1,492,270
Equity II 743,450 863,209 452,355
Equity III 540,862 616,005 470,068
Equity Q 1,323,995 950,684 663,851
Equity T* 40,539 10,305 --
International 2,679,272 1,770,839 1,467,692
Emerging Markets 1,722,534 964,725 1,039,478
Diversified Equity 2,340,509 1,360,214 1,118,548
Special Growth 828,211 893,203 467,162
Equity Income 515,622 507,754 413,220
Quantitative Equity 1,069,927 744,245 561,459
International Securities 2,193,334 1,284,042 1,251,533
Real Estate Securities 641,659 915,952 419,508
----------- ----------- ----------
Total $17,165,205 $12,869,848 $9,817,144
=========== =========== ==========
</TABLE>
* Equity T commenced operations on October 7, 1996.
The principal reasons for changes in several Funds' brokerage commissions for
the three years were (1) changes in Fund asset size, (2) changes in market
conditions, and (3) changes in money managers of certain Funds, which required
substantial portfolio restructurings, resulting in increased securities
transactions and brokerage commissions.
Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond, Volatility
Constrained Bond, Multistrategy Bond, Limited Volatility Tax Free, Money Market,
U.S. Government Money Market and Tax Free Money Market Funds normally do not pay
a stated brokerage commission on transactions.
-25
<PAGE>
During the year ended December 31, 1997, approximately $__________ of the
brokerage commissions of the Funds were directed to brokers who provided
research services to FRIMCo. The research services included industry and
company analysis, portfolio strategy reports, economic analysis, and statistical
data pertaining to the capital markets.
Gross brokerage commissions received by affiliated broker/dealers from
affiliated and non-affiliated money managers for the year ended December 31,
1997 from portfolio transactions effected for the Funds were as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AFFILIATED BROKER/DEALER COMMISSIONS COMMISSIONS
- ------------------------ ----------- ----------------
<S> <C> <C>
Autranet, Inc. $ %
Barclays De Zoete Wedd
Donaldson, Lufkin & Jenrete
Dresdner Bank AG
Frank Russell Securities
Jardine-Fleming Securities (TO BE FILED BY AMENDMENT)
J.P. Morgan Securities, Inc.
Kleinwort Benson North America
Morgan Guaranty Trust
Ord Minnett, Inc.
Robert Fleming, Inc.
Total Affiliated Commissions
</TABLE>
The percentage of total affiliated transactions (relating to trading activity)
to total transactions during fiscal 1997 for the Funds was _____%.
During the year ended December 31, 1997, the Funds purchased securities issued
by the following regular brokers or dealers as defined by Rule 10b-1 of the 1940
Act, each of which is one of the Funds' ten largest brokers or dealers by dollar
amounts of securities executed or commissions received on behalf of the Funds.
The value of broker-dealer securities held as of December 31,
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<PAGE>
1997, was as follows:
-27
<PAGE>
<TABLE>
<CAPTION>
DONALDSON,
BEAR LUFKIN & GOLDMAN MERRILL MORGAN PAINE SALOMON
FUND STEARNS JENRETTE SACHS & CO. LYNCH STANLEY WEBBER BROTHERS
- ---- ------ ---------- ----------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity I
Equity II
Equity III
Equity Q
Equity T
Fixed Income I
Fixed Income II
Fixed Income III (TO BE FILED BY AMENDMENT)
Money Market
Diversified Equity
Special Growth
Equity Income
Quantitative Equity
Diversified Bond
Volatility Constrained Bond
Multistrategy Bond
</TABLE>
At December 31, 1997, the Funds did not have any holdings in the following top
10 broker-dealers:
- -- Frank Russell Securities
YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute their average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission (the "SEC"), and report average annual total return for
each class of shares which they offer. Because the Class C Shares are subject
to a 12b-1 Fee and a shareholder services fee, the average annual total return
performance of the Class C Shares may be different than the average annual total
return performance of the Class S Shares.
Average annual total return is computed by finding the average annual compounded
rates of return on a hypothetical initial investment of $1,000 over the one,
five and ten year periods (or life of the Funds, as
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<PAGE>
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(I+T)n = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one, five or ten year period at
the end of the one, five or ten year period (or fractional
portion thereof).
</TABLE>
The calculation assumes that all dividends and distributions of each Fund are
reinvested at the price stated in the Prospectuses on the dividend dates during
the period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for the Class S Shares and the Class
C Shares, except for the Funds listed below, are reported in the respective
Prospectuses.
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<PAGE>
The returns shown below represent results of these Funds' Class S Shares for the
periods shown. The deduction of their Rule 12b-1 fees and shareholder servicing
fee are not related in the returns shown below. Had such fees been related in
the returns above, the returns would have been lower.
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INCEPTION TO INCEPTION
Dec. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DEC. 31, 1997 DATE
------------- ------------- -------------- ------------- ---------
(ANNUALIZED) (ANNUALIZED) (ANNUALIZED)
<S> <C> <C> <C> <C> <C>
Diversified Equity 31.32 19.32 16.97 16.48 09/05/85
Emerging Markets (3.45) __ __ 5.95 01/29/93
Equity T* 31.73 __ __ 31.31 10/07/96
Volatility Constrained Bond 5.90 5.37 6.81 6.81 09/05/85
Multistrategy Bond 9.50 __ __ 7.23 01/29/93
</TABLE>
* Equity T Fund commenced operations on October 7, 1996.
Yields are computed by using standardized methods of calculation required by the
SEC. Similar to average annual total return calculations, a Fund calculates
yields for each class of shares which it offers. Yields for Funds other than
Funds investing primarily in money market instruments (the "Money Market Funds")
are calculated by dividing the net investment income per share earned during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b+1)/6/-1]
---------------
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period
b = expenses accrued for the
</TABLE>
-30
<PAGE>
<TABLE>
<S> <C> <C> <C>
period (net of reimbursements)
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.
</TABLE>
The yields for the Funds investing primarily in fixed income instruments are
reported in the respective Prospectuses.
Each Money Market Fund computes its current annualized and compound effective
annualized yields using standardized methods required by the SEC. The
annualized yield for each Money Market Fund is computed by (a) determining the
net change in the value of a hypothetical account having a balance of one share
at the beginning of a seven calendar day period; (b) dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return; and (c) annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects
the value of additional shares purchased with dividends declared on both the
original share and such additional shares, but does not include realized gains
and losses or unrealized appreciation and depreciation. Compound effective
yields are computed by adding 1 to the base period return (calculated as
described above), raising that sum to a power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because each Money Market Fund's yield fluctuates, its yield cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed-to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each fund's investment
policies, including the types of investments made, length of maturities of
portfolio securities, the methods used by each fund to compute the yield
(methods may differ) and whether there are any special account charges which may
reduce effective yield.
Current and effective yields for the Class S Shares of the Money Market Funds
are reported in the Funds' respective Prospectuses.
Each Fund may, from time to time, advertise non-standard performances, including
average annual total return.
Each Fund may compare its performance with various industry standards of
performance, including Lipper Analytical Services, Inc. or other industry
publications, business periodicals, rating services and market indices.
Tax-equivalent yields for the Limited Volatility Tax Free and Tax Free Money
Market Funds are calculated by dividing that portion of the yield of the
appropriate Fund as computed above which is tax exempt by one, minus a stated
income tax rate and adding the product to that quotient, if any, of the yield of
the Fund that is not tax exempt. The tax-equivalent yields for the Limited
Volatility Tax Free and Tax Free Money Market Funds are reported in the Class S
Shares' Specialty Funds' Prospectus.
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Each Fund has certain fundamental investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the
shareholders of that Fund. Other policies may be changed by a Fund
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<PAGE>
without shareholder approval. The Funds' investment objectives are set forth in
the respective Prospectuses.
INVESTMENT RESTRICTIONS. Each Fund is subject to the following fundamental
investment restrictions. Unless otherwise noted, these restrictions apply on a
Fund-by-Fund basis at the time an investment is being made.
No Fund will:
1. Invest in any security if, as a result of such investment, less than 75% of
its 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.
Investments by Funds, other than the Tax Free Money Market and U.S. Government
Money Market Funds, in shares of the Money Market Fund are not subject to this
restriction, or to Investment Restrictions 2, 3, 10 and 14. (See, "Investment
Policies -- Cash Reserves.")
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other than the
US government, its agencies and instrumentalities), but such concentration may
occur incidentally as a result of changes in the market value of portfolio
securities. This restriction does not apply to the Real Estate Securities
Fund. The Real Estate Securities Fund may invest 25% or more of its total
assets in the securities of companies directly or indirectly engaged in the
real estate industry. The Money Market Fund may invest more than 25% of its
assets in money market instruments issued by domestic branches of US banks
having net assets in excess of $100,000,000. (Please refer to the description
of the Real Estate Securities Fund and the Money Market Fund in the applicable
Prospectuses for a description of each Fund's policy with respect to
concentration in a particular industry.)
3. Acquire more than 5% of the outstanding voting securities, or 10% of all of
the securities, of any one issuer.
4. Invest in companies for the purpose of exercising control or management.
5. Purchase or sell real estate; provided that a Fund may invest in securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
-32
<PAGE>
6. Purchase or sell commodities or commodities contracts, or interests in oil,
gas or other mineral exploration or development programs, except stock index
and financial futures contracts.
7. Borrow amounts more than 5% of the Fund's total assets taken at cost or at
market value, whichever is lower, and only from banks as a temporary measure
for extraordinary or emergency purposes, except that a Fund may engage in
reverse repurchase agreements to meet redemption requests without immediately
selling any portfolio instruments. The Fund will not mortgage, pledge or in
any other manner transfer as security for any indebtedness, any of its assets.
Collateral arrangements with respect to margin for futures contracts are not
deemed a pledge of assets.
8. Purchase securities on margin or effect short sales (except that a Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases or sales of securities, may trade in futures and related options,
and may make margin payments in connection with transactions in futures
contracts and related options).
9. Engage in the business of underwriting securities issued by others or
purchase securities, except as permitted by the Limited Volatility Tax Free
and Tax Free Money Market Funds' investment objectives.
10. Invest in securities of an issuer which, together with any predecessor,
has been in operation for less than three years if, as a result, more than 5%
of the Fund's total assets would then be invested in such securities.
11. The Trust will not participate on a joint or a joint and several basis in
any trading account in securities except to the extent permitted by the 1940
Act and any applicable rules and regulations and except as permitted by any
applicable exemptive orders from the 1940 Act. The "bunching" of orders for
the sale or purchase of marketable portfolio securities with two or more
Funds, or with a Fund and such other accounts under the management of FRIMCo
or any money manager for the Funds to save brokerage costs or to average
prices among them shall not be considered a joint securities trading account.
The purchase of shares of the Money Market Fund by any other Fund shall also
not be deemed to be a joint securities trading account.
12. Make loans of money or securities to any person or firm; provided,
however, that the making of a loan shall not be construed to include (i) the
acquisition for investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly distributed
or of a type customarily purchased by institutional investors; (ii) the entry
into "repurchase agreements;" or (iii) the lending of portfolio securities in
the manner generally described in the Funds' Prospectuses' section "Investment
Policies -- Lending Portfolio Securities."
13. Purchase or sell options except to the extent permitted by the policies
set forth in the sections "Certain Investments -- Options on Securities and
Indices," "Certain Investments -- Foreign Currency Options," "Certain
Investments -- Futures Contracts and Options on Future Contracts" and "Certain
Investments -- Forward Foreign Currency Contracts" below. The Limited
Volatility Tax Free and Tax Free Money Market Funds may purchase municipal
obligations from an issuer, broker, dealer, bank or other persons accompanied
by the agreement of such seller to purchase, at the Fund's option, the
municipal obligation prior to maturity thereof.
14. The Trust will not purchase the securities of other investment companies
except to the extent permitted by the 1940 Act and any applicable rules and
regulations and except as permitted by any applicable exemptive orders from
the 1940 Act.
15. Purchase from or sell portfolio securities to the officers, Trustees or
other "interested persons" (as defined in the 1940 Act) of the Trust,
including the Fund's money managers and their affiliates, except as permitted
by the 1940 Act, SEC rules or exemptive orders.
-33
<PAGE>
16. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit any Fund from making any otherwise
permissible borrowings, mortgages or pledges, or entering into permissible
reverse repurchase agreements, and options and futures transactions, or
issuing shares of beneficial interest in multiple classes.
Additional fundamental policies are: (a) Equity I, Equity II, Equity III,
Equity Q, Equity T, Emerging Markets, Fixed Income III, Diversified Equity,
Special Growth, Equity Income, Quantitative Equity and Multistrategy Bond
Funds will not invest more than 5% of the current market value of their assets
in warrants nor more than 2% of such value in warrants which are not listed on
the New York or American Stock Exchanges; warrants attached to other
securities are not subject to this limitation. (b) Fixed Income I, Fixed
Income II, Diversified Bond and Volatility Constrained Bond Funds may acquire
convertible bonds which will be disposed of by the Funds in as timely a manner
as is practical after conversion. (c) No Fund will purchase or retain the
securities of an issuer if, to a Fund's knowledge, one or more of the Trustees
or officers of the Trust, or one or more of the officers or directors of the
money manager responsible for the investment, individually own beneficially
more than 1/2 of 1% of the securities of such issuer and together own
beneficially more than 5% of such securities. Compliance with this policy by
the Trust's Trustees and officers is monitored by Fund officers.
For purposes of these Investment Restrictions, the Limited Volatility Tax Free
and Tax Free Money Market Funds will consider as a separate issuer each:
governmental subdivision (i.e., state, territory, possession of the United
States or any political subdivision of any of the foregoing, including
agencies, authorities, instrumentalities, or similar entities, or of the
District of Columbia) if its assets and revenues are separate from those of
the government body creating it and the security is backed by its own assets
and revenues; the non-governmental user of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user. The guarantee of a governmental or some other entity is considered a
separate security issued by the guarantor as well as the other issuer for
Investment Restrictions, industrial development bonds and governmental issued
securities. The issuer of all other municipal obligations will be determined
by the money manager on the basis of the characteristics of the obligation,
the most significant being the source of the funds for the payment of
principal and interest.
THE BOARD OF TRUSTEES HAS APPROVED THE ELIMINATION OF FOLLOWING INVESTMENT
RESTRICTIONS, SUBJECT TO THE APPROVAL OF THE SHAREHOLDERS OF THE AFFECTED
FUNDS, WHICH WILL BE SOUGHT AT A SHAREHOLDER MEETING EXPECTED TO BE HELD IN
1998.
1. no Fund will invest in interest in oil, gas or other mineral exploration or
development programs;
2. no Fund will invest in securities of an issuer which, together with any
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would then be invested in such
securities;
3. Equity I, Equity II, Equity III, Equity Q, Equity T, Emerging Markets,
Fixed Income III, Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and Multistrategy Bond Funds will not invest more than 5%
of the current market value in warrants which are not listed on the New York
or American Stock Exchanges; warrants attached to other securities are not
subject to this limitation; and
4. no Fund will purchase or retain the securities of an issuer if, to the
Fund's knowledge, one or more of the Trustees or officers of the Investment
Company, or one or more of the officers or directors of the money manager
responsible for the investment or its directors or officers, individually own
beneficially more than 1/2 of 1% of the securities of such issuer and together
own beneficially more than % of such securities.
INVESTMENT POLICIES.
CASH RESERVES. Each Fund, except the Money Market, U.S. Government Money
Market and Tax Free Money Market Funds, and their money managers, may elect to
invest the Fund's cash reserves in the Money Market Fund. The Money Market Fund
and the Funds investing in the Money Market Fund treat such investments as the
purchase and redemption of Money Market Fund shares. Any Fund investing in the
Money Market Fund pursuant to this procedure participates equally on a pro rata
basis in all income, capital gains and net assets of the Money Market Fund, and
will have all rights and obligations of a shareholder as provided in the Trust's
Master Trust Agreement, including voting rights. However, shares of the Money
Market Fund issued to other Funds will be voted by the Trustees of the Trust in
the same proportion as the shares of the Money Market Fund which are held by
shareholders that are not Funds. Funds investing in the Money Market Fund
currently do not pay a management fee to the Money Market Fund do not pay a
duplicative management fees, as FRIMCO waives a portion of its management fee
due from those funds in an amount that offsets the Management Fee it receives
from the Money Market Fund in respect of those investments.
LIQUIDITY PORTFOLIOS. A Fund at times has to sell portfolio securities in
order to meet redemption requests. The selling of securities may effect a
Fund's performance since the money manager sells the securities for other than
investment reasons. A Fund can avoid selling its portfolio securities by
holding adequate levels of cash to meet anticipated redemption requests.
The holding of significant amounts of cash is contrary to the investment
objectives of the Equity I, Equity II, Equity III, Equity Q, Equity T,
International, Diversified Equity, Special Growth, Equity Income, Quantitative
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<PAGE>
Equity and International Securities Funds. The more cash these Funds hold, the
more difficult it is for their returns to meet or surpass their respective
benchmarks.
A Liquidity Portfolio addresses this potential detriment by having FRIMCo or a
money manager selected for this purpose create an equity exposure for cash
reserves through the use of options and futures contracts. This will enable the
Funds to hold cash while receiving a return on the cash which is similar to
holding equity securities.
MONEY MARKET INSTRUMENTS. The Money Market, U.S. Government Money Market and
Tax Free Money Market Funds expect to maintain, but do not guarantee, a net
asset value of $1.00 per share for purposes of purchases and redemptions by
valuing their Fund shares at "amortized cost." The three Money Market Funds will
maintain a dollar-weighted average maturity of 90 days or less. Each of the
Funds will invest in securities with maturities of 397 days or less at the time
from the trade date or such other date upon which a Fund's interest in a
security is subject to market action. Each Fund will follow procedures
reasonably designed to assure that the prices so determined approximate the
current market value of the Funds' securities. The procedures also address such
matters as diversification and credit quality of the securities the Funds
purchase, and were designed to ensure compliance by the Funds with the
requirements of Rule 2a-7 of the 1940 Act. For additional information
concerning these Funds, refer to the respective Prospectuses.
RUSSELL 1000 INDEX. The Russell 1000(R) Index consists of the 1,000 largest
US companies by capitalization. The Index does not include cross corporate
holdings in a company's capitalization. For example, when IBM owned
approximately 20% of Intel, only 80% of the total shares outstanding of Intel
were used to determine Intel's capitalization. Also not included in the Index
are closed-end investment companies, companies that do not file a Form 10-K
report with the SEC, foreign securities and American Depository Receipts (ADRs).
The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. These changes are expected to
represent less than 1% of the total market capitalization of the Index. Changes
for mergers and acquisitions are made when trading ceases in the acquirer's
shares. The 1,001st largest US company by capitalization is then added to the
Index to replace the acquired stock.
CERTAIN INVESTMENTS.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
the seller -- a bank or securities dealer -- who agrees to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by the Fund have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. Repurchase agreements assist a Fund in being invested fully while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature. The Funds will limit repurchase transactions to those member banks of
the Federal Reserve System and primary dealers in US government securities whose
creditworthiness is continually monitored and found satisfactory by the Funds'
money managers.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by the Fund's money manager to be inconvenient or
disadvantageous. A reverse repurchase agreement is a transaction whereby a Fund
transfers possession of a portfolio security to a bank or broker-dealer in
return for a percentage of the portfolio securities' market value. The Fund
retains record ownership of the security involved including the right to receive
interest and principal payments. At an agreed upon future date, the Fund
repurchases the security by paying an agreed upon purchase price plus interest.
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.
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<PAGE>
HIGH RISK BONDS. The Funds, other than the Emerging Markets, Fixed Income III
and Multistrategy Bond Funds, do not invest assets in securities rated less than
BBB by Standard & Poor's Ratings Group ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's"), or in unrated securities judged by the money
managers, to be of a lesser credit quality than those designations. Securities
rated BBB by S&P or Baa by Moody's are the lowest ratings which are considered
"investment grade." The Funds, other than the Emerging Markets, Fixed Income
III and Multistrategy Bond Funds, will dispose of securities which they have
purchased which drop below these minimum ratings.
Securities rated BBB by S&P or Baa by Moody's may involve greater risks than
securities in higher rating categories. Securities receiving S&P's BBB rating
are regarded as having adequate capacity to pay interest and repay principal.
Such securities typically exhibit adequate investor protections but adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rating categories.
Securities possessing Moody's Baa rating are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.
RISK FACTORS. The growth of the market for lower rated debt securities has
paralleled a long period of economic expansion. Lower rated debt securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. The prices of low rated
debt securities have been found to be less sensitive to interest rate changes
than investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low rated debt securities defaults, a
Fund may incur additional expenses to seek financial recovery.
In addition, the markets in which low rated debt securities are traded are
generally thinner, more limited and less active than those for higher rated
securities. The existence of limited markets for particular securities may
diminish a Fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect and cause fluctuations in the daily net asset
value of the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of a Fund to
achieve its investment objectives may be more dependent on credit analysis than
would be the case if the Fund was investing only in investment grade securities.
The money managers of the Funds may use ratings to assist in investment
decisions. Ratings of debt securities represent a rating agency's opinion
regarding their quality and are not a guarantee of quality. Rating agencies
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial condition may be better or worse than a
rating indicates.
ILLIQUID SECURITIES. The expenses of registration of restricted securities
that are illiquid (excluding securities that may be resold by the Funds pursuant
to Rule 144A, as explained in the respective Prospectuses) may be negotiated at
the time such securities are purchased by a Fund. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, a
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<PAGE>
Fund may not be able to obtain as favorable a price as that prevailing at the
time of the decision to sell. A Fund also may acquire, through private
placements, securities having contractual resale restrictions, which might lower
the amount realizable upon the sale of such securities.
The guidelines adopted by the Board for the determination of liquidity of
securities take into account trading activity for the 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.
DELAYED DELIVERY TRANSACTIONS. A Fund may make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments" or "when-issued" transactions) consistent with the Fund's
ability to manage its investment portfolio and meet redemption requests. A Fund
may dispose of a commitment or when-issued transaction prior to settlement if it
is appropriate to do so and realize short-term profits or losses upon such sale.
When effecting such transactions, liquid assets of the Fund in a dollar amount
sufficient to make payment for the portfolio securities to be purchased will be
segregated on the Fund's records at the trade date and maintained until the
transaction is settled. Forward commitments and when-issued transactions
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date or the other party to the transaction fails to
complete the transaction.
Additionally, under certain circumstances, the International, International
Securities and Emerging Markets Funds may occasionally engage in "free trade"
transactions in which delivery of securities sold by the Fund is made prior to
the Fund's receipt of cash payment therefor or the Fund's payment of cash for
portfolio securities occurs prior to the Fund's receipt of those securities.
"Free trade" transactions involve the risk of loss to a Fund if the other party
to the "free trade" transaction fails to complete the transaction after a Fund
has tendered cash payment or securities, as the case may be.
LENDING PORTFOLIO SECURITIES. Cash collateral received by a Fund when it
lends its portfolio securities is invested in high-quality short-term debt
instruments, short-term bank collective investment and money market mutual funds
(including funds advised by the Custodian, for which it may receive an asset-
based fee), and other investments meeting certain quality and maturity
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 then to pay for lending transaction costs, and then the remainder is
divided between the Fund and the lending agent.
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. A Fund will call loans to vote proxies if a
material issue affecting the investment is to be voted upon.
The Trust 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.
OPTIONS AND FUTURES. The Funds, other than the Money Market, US Government
Money Market and Tax Free Money Market Funds, may purchase and sell (write) both
call and put options on securities, securities indexes, and foreign currencies,
and enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts for hedging purposes. If
other types of options, futures contracts, or options on futures contracts are
traded in the future, the Funds may also use those instruments, provided that
the Trust's Board determines that their use is consistent with the Funds'
investment objectives, and provided that their use is consistent with
restrictions applicable to options and futures contracts currently eligible for
use by the Funds (i.e., that written call or put options will be "covered" or
"secured" and that futures and options on futures contracts will be used only
for hedging purposes).
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OPTIONS ON SECURITIES AND INDEXES. Each Fund, except as noted above, may
purchase and write both call and put options on securities and securities
indexes in standardized contracts traded on foreign or national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
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.
An option on a security (or securities index) is a contract that gives the
purchaser of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option at a specified exercise price at any time during
the option period. The writer of an option on a security has the obligation
upon exercise of the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of the underlying
security. Upon exercise, the writer of an option on an index is obligated to
pay the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier (established by the exchange upon which
the stock index is traded) for the index option. (An index is designed to
reflect specified facets of a particular financial or securities market, a
specified group of financial instruments or securities, or certain economic
indicators.) Options on securities indexes are similar to options on specific
securities 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.
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 will write call options and put options only if they are "covered." In
the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, liquid assets in such amount are placed in a
segregated account by the Custodian) upon conversion or exchange of other
securities held by the Fund. For a call option on an index, the option is
covered if the Fund maintains with the Custodian liquid assets equal to the
contract value. A call option is also covered if the Fund holds a call on the
same security or index as the call written where the exercise price of the call
held is (1) equal to or less than the exercise price of the call written, or (2)
greater than the exercise price of the call written, provided the difference is
maintained by the Fund in liquid assets in a segregated account with the
Custodian. A put option on a security or an index is "covered" if the Fund
maintains liquid assets equal to the exercise price in a segregated account with
the Custodian. A put option is also covered if the Fund holds a put on the same
security or index as the put written where the exercise price of the put held is
(1) equal to or greater than the exercise price of the put written, or (2) less
than the exercise price of the put written, provided the difference is
maintained by the Fund in liquid assets in a segregated account with the
Custodian.
If an option written by a Fund expires, the Fund realizes a capital gain equal
to the premium received at the time the option was written. If an option
purchased by a Fund expires unexercised, the Fund realizes a capital loss (long
or short-term depending on whether the Fund's holding period for the option is
greater than one year) equal to the premium paid.
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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.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires.
A Fund will realize a capital gain from a closing transaction on an option it
has written if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. With respect to closing
transactions on purchased options, the capital gain or loss realized will be
short or long-term depending on the holding period of the option closed out.
The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of
the Fund. The premium received for an option written by a Fund is recorded as a
liability. The value of an option purchased or written is marked-to-market
daily and is valued at the closing price on the exchange on which it is traded
or, if not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
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.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. If a Fund were unable to close out an option that
it had purchased on a security, it would have to exercise the option in order to
realize any profit or the option may expire worthless. If a Fund were unable to
close out a covered call option that it had written on a security, it would not
be able to sell the underlying security unless the option expired without
exercise.
As the writer of a covered call option, a Fund forgoes, during the option's
life, the opportunity to profit from increases in the market value of the
underlying security above the exercise price, but, as long as its obligation as
a writer continues, has retained a risk
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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.
If trading were suspended in an option purchased by a Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
OPTIONS ON FOREIGN CURRENCY. A Fund may purchase and write put and call
options on foreign currencies either on exchanges or in the over-the-counter
market 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-trade options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund may invest in
interest rate futures contracts, foreign currency futures contracts, or stock
index futures contracts, and options thereon that are traded on a U.S. or
foreign exchange or board of trade, as specified in the Prospectuses. An
interest rate, foreign currency or index futures contract provides for the
future sale by one party and purchase by another party of a specified quantity
of a financial instruments (such as GNMA certificates or Treasury bonds) or
foreign currency or the cash value of an index 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 U.S. 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. Although the value of an index may be a function of the value
of certain specified securities, no physical delivery of these securities is
made. A public market exists in futures contracts covering several indexes as
well as a number of financial instruments and foreign currencies. For example:
the S&P 500; the Russell 2000(R); Nikkei 225; CAC-40; FT-SE 100; the NYSE
composite; US Treasury bonds; US Treasury notes; GNMA Certificates; three-month
US Treasury bills; Eurodollar certificates of deposit; the Australian Dollar;
the Canadian Dollar; the British Pound; the German Mark; the Japanese Yen; the
French Franc; the Swiss Franc; the Mexican Peso; and certain multinational
currencies, such as the European Currency Unit ("ECU"). It is expected that
other futures contracts will be developed and traded in the future.
Each Fund may also purchase and write call and put options on futures
contracts. Options on futures contracts possess many of the same
characteristics as options on securities and indexes (discussed above). A
futures option gives the holder the right, in return for the premium paid, to
assume a long position (in the case of a call) or short position (in the case of
a put) in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is
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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.
As long as required by regulatory authorities, each Fund will limit its use of
futures contracts and options on futures contracts to hedging transactions. For
example, a Fund might use futures contracts to hedge against anticipated changes
in interest rates that might adversely affect either the value of the Fund's
securities or the price of the securities which the Fund intends to purchase.
Additionally, a Fund may use futures contracts to create equity exposure for its
cash reserves for liquidity purposes.
A Fund will only enter into futures contracts and options on futures contracts
which are standardized and traded on a US or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system. A Fund will
enter into a futures contract only if the contract is "covered" or if the Fund
at all times maintains with the 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."
When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with the Custodian (or broker, if legally permitted) a
specified amount of cash or US government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund, but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark-to-
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. A Fund will
not enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's total
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with the Custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or
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higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with the Custodian (and
mark-to-market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Custodian).
When selling a call option on a futures contract, a Fund will maintain with
the Custodian (and mark-tomarket on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may "cover" its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with the
Custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may "cover" the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
In order to comply with applicable regulations of the Commodity Futures
Trading Commission ("CFTC") pursuant to which the Funds avoid being deemed to be
"commodity pools," the Funds are limited in entering into futures contracts and
options on futures contracts to positions which constitute "bona fide hedging"
positions within the meaning and intent of applicable CFTC rules, and with
respect to positions for non-hedging purposes, to positions for which the
aggregate initial margins and premiums will not exceed 5% of the net assets of a
Fund as determined under the CFTC Rules.
The requirements for qualification as a regulated investment company also may
limit the extent to which a Fund may enter into futures, options on futures
contracts or forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND OPTIONS ON FUTURES CONTRACTS. There are
several risks associated with the use of futures and options on futures
contracts as hedging techniques. A purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
There can be no guarantee that there will be a correlation between price
movements in the hedging vehicle and in the portfolio securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and options on futures contracts on
securities, including technical influences in futures trading and options on
futures contracts, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. 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. A
decision as to whether, when and how to hedge involves the exercise of skill
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and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position. 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.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACT AND OPTIONS THEREON.
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign, political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (5) lesser
trading volume.
HEDGING STRATEGIES. Stock index futures contracts may be used by the Equity
I, Equity II, Equity III, Equity Q, International, Emerging Markets, Diversified
Equity, Special Growth, Equity Income, Quantitative Equity, Equity T and
International Securities Funds as an "equitization" vehicle for cash reserves
held by the Funds. For example: equity index futures contracts are purchased to
correspond with the cash reserves in each of the Funds. As a result, a Fund
will realize gains or losses based on the performance of the equity market
corresponding to the relevant indexes for which futures contracts have been
purchased. Thus, each Fund's cash reserves always will be fully exposed to
equity market performance.
Financial futures contracts may be used by the International, Emerging
Markets, Fixed Income I, Fixed Income II, Fixed Income III, International
Securities, Diversified Bond, Volatility Constrained Bond, Multistrategy Bond
and Limited Volatility Tax Free Funds as a hedge during or in anticipation of
interest rate changes. For example: if interest rates were anticipated to rise,
financial futures contracts would be sold (short hedge) which would have an
effect similar to selling bonds. Once interest rates increase, fixed income
securities held in a Fund's portfolio would decline, but the futures contract
value would decrease, partly offsetting the loss in value of the fixed-income
security by enabling the Fund to repurchase
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the futures contract at a lower price to close out the position.
The Funds may purchase a put and/or sell a call option on a stock index
futures contract instead of selling a futures contract in anticipation of market
decline. Purchasing a call and/or selling a put option on a stock index futures
contract is used instead of buying a futures contract in anticipation of a
market advance, or to temporarily create an equity exposure for cash balances
until those balances are invested in equities. Options on financial futures are
used in a similar manner in order to hedge portfolio securities against
anticipated changes in interest rates.
When purchasing a futures contract, a Fund will maintain with the Custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, a Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
FOREIGN CURRENCY FUTURES CONTRACTS. The Funds are also permitted to enter
into foreign currency futures contracts in accordance with their investment
objectives and as limited by the procedures outlined above.
A foreign currency futures contract is a bilateral agreement pursuant to which
one party agrees to make, and the other party agrees to accept delivery of a
specified type of debt security or currency at a specified price. Although such
futures contacts by their terms call for actual delivery or acceptance of debt
securities or currency, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
The Funds may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the US dollar. When a manager anticipates a significant change in a foreign
exchange rate while intending to invest in a foreign security, a Fund may
purchase a foreign currency futures contract to hedge against a rise in foreign
exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate which may add additional costs to acquiring the
foreign security position. The Funds may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate. The
Funds may purchase a call option or write a put option on a foreign exchange
futures contract to hedge against a decline in the foreign exchange rates or the
value of its foreign securities. The Funds may write a call option on a foreign
currency futures contract as a partial hedge against the effects of declining
foreign exchange rates on the value of foreign securities.
RISK FACTORS. There are certain investment risks in using futures contracts
and/or options as a hedging technique. One risk is the imperfect correlation
between price movement of the futures contracts or options and the price
movement of the portfolio securities, stock index or currency subject of the
hedge. The risk increases for the Limited Volatility Tax Free Fund since
financial futures contracts that may be engaged in are on taxable securities
rather than tax exempt securities. There is no assurance that the price of
taxable securities will move in a similar manner to the price of tax exempt
securities. Another risk is that a liquid secondary market may not exist for a
futures contract causing a Fund to be unable to close out the futures contract
thereby affecting the Fund's hedging strategy.
In addition, foreign currency options and foreign currency futures involve
additional risks. Such transactions may not be regulated as effectively as
similar transactions in the United States; may not involve a clearing mechanism
and related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions could also be adversely affected by (1) other complex foreign,
political, legal and economic factors, (2) lesser availability than in the
United States of data on which to make trading decisions, (3) delays in a Fund's
ability to act upon economic events occurring in foreign markets during non-
business hours in the United States, (4) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (5) lesser trading volume.
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FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds may engage in
forward foreign currency exchange transactions to hedge against uncertainty in
the level of future exchange rates. The Funds will conduct their forward
foreign currency exchange transactions either on a spot (i.e. cash) basis at the
rate prevailing in the currency exchange market, or through entering into
forward currency exchange contracts ("forward contract") to purchase or sell
currency at a future date. A forward contract involves an obligation to
purchase or sell a specific currency--for example, to exchange a certain amount
of U.S. dollars for a certain amount of Japanese yen--at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. 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. A Fund may, however, enter into forward
currency contracts containing either or both deposit requirements and
commissions. In order to assure that a 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. The Funds may engage in a forward contract that
involves transacting in a currency whose changes in value are considered to be
linked (a proxy) to a currency or currencies in which some or all of the Funds'
portfolio securities are or are expected to be denominated. A Fund's dealings
in forward contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of foreign currency with respect to specific receivables or payables of the
Funds generally accruing in connection with the purchase or sale of their
portfolio securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in the currency.
A Fund may not position hedge with respect to a particular currency to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in or currency
convertible into that particular currency (or another currency or aggregate of
currencies which act as a proxy for that currency). The Funds may, however,
enter into a position hedging transaction with respect to a currency other than
that held in the Funds' portfolios, if such a transaction is deemed a hedge. If
a Fund enters into this type of hedging transaction, liquid assets will be
placed in a segregated account in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the
value of the securities placed in the segregated account declines, additional
liquid assets will be placed in the account so that the value of the account
will equal the amount of the Fund's commitment with respect to the contract.
Hedging transactions may be made from any foreign currency into US dollars or
into other appropriate currencies.
At or before the maturity of a forward foreign currency contract, a Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
currency contract prices. Should forward prices decline during the period
between the Fund's entering into a forward contract for the sale of a currency
and the date that it enters into an offsetting contract for the purchase of the
currency, the Fund will realize a gain to the extent that the price of the
currency that it has agreed to sell exceeds the price of the currency that it
has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent that the price of the currency it has agreed to purchase
exceeds the price of the currency that it has agreed to sell. There can be no
assurance that new forward currency contracts or offsets will be available to a
Fund.
The cost to a Fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
foreign currency contracts limit the risk of loss due to a decline in the value
of the hedged currency, at the same time, they limit any potential gain that
might result should the value of the currency increase.
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If a devaluation is generally anticipated, a Fund may be able to contract to
sell the currency at a price above the devaluation level that it anticipates. A
Fund will not enter into a currency transaction if, as a result, it will fail to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"), for a given year.
Forward foreign currency contracts are not regulated by the SEC. They are
traded through financial institutions acting as market-makers. In the forward
foreign currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
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 a Fund is engaged in that strategy.
A Fund's ability to dispose of its positions in forward currency contracts
will depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward currency contracts. Forward currency contracts may be closed
out only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that the Fund will be able to utilize these instruments
effectively for the purposes set forth above.
Forward foreign currency transactions are subject to the additional risk of
governmental actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by (1)
other complex foreign, political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in a Fund's ability to act upon economic events occurring
in foreign markets during non-business hours in the United States, (4) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, (5) lesser trading volume and (6) that a
perceived linkage between various currencies may not persist throughout the
duration of the contracts.
DEPOSITORY RECEIPTS. Each Fund may hold securities of foreign issuers in the
form of American Depository Receipts ("ADRs"), American Depository Shares
("ADSs") and European Depository Receipts ("EDRs"), or other securities
convertible into securities of eligible European or Far Eastern issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they maybe exchanged. ADRs and ADSs typically are issued
by an American bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continential Depository Receipts ("CDRs"), are issued in Europe typically
by foreign banks and trust companies and evidence ownership of either foreign or
domestic securities. Generally, ADRs and ADSs in registered form are designed
for use in United States securities markets and EDRs in bearer form are designed
for use in European securities markets. For purposes of a Fund's
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investment policies, the Fund's investments in ADRs, ADSs and EDRs will be
deemed to be investments in the equity securities representing securities of
foreign issuers into which they may be converted.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions, and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
Funds may invest in sponsored and unsponsored ADRs.
INDEXED COMMERCIAL PAPER. Indexed commercial paper is US-dollar denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on indexed commercial paper is established
at maturity as a function of spot exchange rates between the US dollar and a
designated currency as of or about that time. The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on US-dollar denominated commercial
paper, with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity. While such commercial paper entails risk of
loss of principal, the potential risk for realizing gains as a result of changes
in foreign currency exchange rates enables a Fund to hedge (or cross-hedge)
against a decline in the US dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. Currently
only the Fixed Income III and Multistrategy Bond Funds intend to invest in
indexed commercial paper, and then only for hedging purposes. The staff of the
SEC is currently considering whether the purchase of this type of commercial
paper would result in the issuance of a "senior security." If required by the
appropriate authorities to assure that investments in indexed commercial paper
are not used to achieve investment leverage, a Fund will segregate liquid assets
in an amount at all times equal or exceeding the Fund's commitment with respect
to these contracts.
US GOVERNMENT OBLIGATIONS. The types of US government obligations the Funds
may purchase include: (1) a variety of US Treasury obligations which differ only
in their interest rates, maturities and times of issuance: (a) US Treasury bills
at time of issuance have maturities of one year or less, (b) US Treasury notes
at time of issuance have maturities of one to ten years and (c) US Treasury
bonds at time of issuance generally have maturities of greater than ten years;
(2) obligations issued or guaranteed by US government agencies and
instrumentalities and supported by any of the following: (a) the full faith and
credit of the US Treasury (such as Government National Mortgage Association
participation certificates), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the US Treasury, (c) discretionary
authority of the US government agency or instrumentality or (d) the credit of
the instrumentality (examples of agencies and instrumentalities are: Federal
Land Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association). No assurance can be given that the US government will provide
financial support to such US government agencies or instrumentalities described
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in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth above, since
it is not obligated to do so by law. The Funds may purchase US government
obligations on a forward commitment basis.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security is one whose
terms provide for the automatic adjustment of an interest rate whenever a
specified interest rate changes. A variable rate security is one whose terms
provide for the automatic establishment of a new interest rate on set dates.
The interest rate on floating rate securities is ordinarily tied to and is a
percentage of the prime rate of a specified bank or some similar objective
standard, such as 90-day US Treasury Bill rate, and may change as often as twice
daily. Generally, changes in interest rates on floating rate securities will
reduce changes in the securities' market value from the original purchase price
resulting in the potential for capital appreciation or capital depreciation
being less than for fixed-income obligations with a fixed interest rate.
The U.S. Government Money Market Fund may purchase variable rate US government
obligations which are instruments issued or guaranteed by the US government, or
an agency or instrumentality thereof, which have a rate of interest subject to
adjustment at regular intervals but no less frequently than annually. Variable
rate US government obligations whose interest rates are readjusted no less
frequently than annually will be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
VARIABLE AMOUNT MASTER DEMAND NOTES. The Money Market and U.S. Government
Money Market Funds, consistent with their fundamental investment objectives, may
invest in variable amount master demand notes. Variable amount master demand
notes are unsecured obligations redeemable upon notice that permit investment of
fluctuating amounts at varying rates of interest pursuant to direct arrangements
with the issuer of the instrument. A variable amount master demand note differs
from ordinary commercial paper in that (1) it is issued pursuant to a written
agreement between the issuer and the holders, (2) its amount may, from time to
time, be increased (subject to an agreed maximum) or decreased by the holder of
the issue, (3) it is payable on demand, (4) its rate of interest payable varies
with an agreed upon formula and (5) it is not typically rated by a rating
agency.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that (1) do not pay current interest and are issued at a substantial
discount from par value, (2) have been stripped of their unmatured interest
coupons and receipts or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts. Zero coupon securities trade at
a discount from their par value and are subject to greater fluctuations of
market value in response to changing interest rates.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES. The forms of mortgage-
related and other asset-backed securities the Funds may invest in include the
securities described below:
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are generally made monthly. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest which in effect are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgages, net of any fees paid to the issuer or guarantor. The principal
governmental issuer of such securities is the Government National Mortgage
Association ("GNMA"), which is a wholly-owned US government corporation within
the Department of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an Act of Congress, and
which is owned entirely by the Federal Home Loan Banks, and the Federal National
Mortgage Association ("FNMA"), a government sponsored corporation owned entirely
by private stockholders. Commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential
mortgage loans. Such issuers may be the originators of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities.
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COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are hybrid instruments with characteristics of both mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and
pre-paid principal on a CMO are paid, in most cases, monthly. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage passthrough securities guaranteed by GNMA, FHLMC, or
FNMA. CMOs are structured into multiple classes (or "tranches"), with each
class bearing a different stated maturity.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the securities and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or by priority to
certain of the borrower's other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a fraction of the
security's par value. If the credit enhancement held by a Fund has been
exhausted, and if any required payments of principal and interest are not made
with respect to the underlying loans, the Fund may experience loss or delay in
receiving payment and a decrease in the value of the security.
RISK FACTORS. Prepayment of principal on mortgage or asset-backed securities
may expose a Fund to a lower rate of return upon reinvestment of principal.
Also, if a security subject to prepayment has been purchased at a premium, in
the event of prepayment the value of the premium would be lost. Like other
fixed-income securities, the value of mortgage-related securities is affected by
fluctuations in interest rates.
LOAN PARTICIPATIONS. The Fixed Income III and Multistrategy Bond Funds may
purchase participations in commercial loans. Such indebtedness may be secured
or unsecured. Loan participations typically represent direct participation in a
loan to a corporate borrower, and generally are offered by banks or other
financial institutions or lending syndicates. In purchasing the loan
participations, a Fund assumes the credit risk associated with the corporate
buyer and may assume the credit risk associated with the interposed bank or
other financial intermediary. The participation may not be rated by a
nationally recognized rating service. Further, loan participations may not be
readily marketable and may be subject to restrictions on resale.
MUNICIPAL OBLIGATIONS. "Municipal obligations" are debt obligations issued by
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multi-state agencies or authorities the interest from which is exempt from
federal income tax in the opinion of bond counsel to the issuer. Municipal
obligations include debt obligations issued to obtain funds for various public
purposes and certain industrial development bonds issued by or on behalf of
public authorities. Municipal obligations are classified as general obligation
bonds, revenue bonds and notes.
MUNICIPAL BONDS. Municipal bonds generally have maturities of more than
one year when issued and have two principal classifications -- General
Obligation Bonds and Revenue Bonds.
GENERAL OBLIGATION BONDS - are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
REVENUE BONDS - are payable only from the revenues derived from a
particular facility or group of facilities or from the proceeds of special
excise or other specific revenue service.
INDUSTRIAL DEVELOPMENT BONDS - are a type of revenue bond and do not
generally constitute the pledge of credit of the issuer of such bonds. The
payment of the principal and interest on such bonds is dependent on the
facility's user to meet its financial obligations and the pledge, if any,
of real and personal property financed as security for such payment.
Industrial development bonds are issued by or on behalf of public
authorities to raise money to finance public and private facilities for
business, manufacturing, housing, ports, pollution control, airports, mass
transit and other similar type projects.
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MUNICIPAL NOTES. Municipal notes generally have maturities of one year or
less when issued and are used to satisfy short-term capital needs. Municipal
notes include:
TAX ANTICIPATION NOTES - are issued to finance working capital needs of
municipalities and are generally issued in anticipation of future tax
revenues.
BOND ANTICIPATION NOTES - are issued in expectation of a municipality
issuing a long-term bond in the future. Usually the long-term bonds
provide the money for the repayment of the notes.
REVENUE ANTICIPATION NOTES - are issued in expectation of receipt of
other types of revenues such as certain federal revenues.
CONSTRUCTION LOAN NOTES - are sold to provide construction financing and
may be insured by the Federal Housing Administration. After completion of
the project, FNMA or GNMA frequently provides permanent financing.
PRE-REFUNDED MUNICIPAL BONDS - are bonds no longer secured by the credit
of the issuing entity, having been escrowed with US Treasury securities as
a result of a refinancing by the issuer. The bonds are escrowed for
retirement either at original maturity or at an earlier call date.
TAX FREE COMMERCIAL PAPER - is a promissory obligation issued or
guaranteed by a municipal issuer and frequently accompanied by a letter of
credit of a commercial bank. It is used by agencies of state and local
governments to finance seasonal working capital needs, or as short-term
financing in anticipation of long-term financing.
TAX FREE FLOATING AND VARIABLE RATE DEMAND NOTES - are municipal
obligations backed by an obligation of a commercial bank to the issuer
thereof which allows the issuer to issue securities with a demand feature,
which, when exercised, usually becomes effective within thirty days. The
rate of return on the notes is readjusted periodically according to some
objective standard such as changes in a commercial bank's prime rate.
TAX FREE PARTICIPATION CERTIFICATES - are tax free floating, or variable
rate demand notes which are issued by a bank, insurance company or other
financial institution or affiliated organization that sells a participation
in the note. They are usually purchased by the Limited Volatility Tax Free
and Tax Free Money Market Funds to maintain liquidity. The Funds' money
managers will continually monitor the pricing, quality and liquidity of the
floating and variable rate demand instruments held by the Funds, including
the participation certificates.
A participation certificate gives a Fund an undivided interest in the
municipal obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the municipal obligation
and provides the demand feature described below. Each participation is
backed by: an irrevocable letter of credit or guaranty of a bank which may
be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving
as agent of the issuing bank with respect to the possible repurchase of the
certificate of participation; or insurance policy of an insurance company
that the money manager has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and draw on the letter of credit or
insurance on demand after thirty days' notice for all or any part of the
full principal amount of the Fund's participation interest in the security
plus accrued interest. The Funds' money managers intend to exercise the
demand feature only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Funds in order to make
redemptions of Fund shares, or (3) to maintain the required quality of its
investment portfolios.
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The institutions issuing the participation certificates will retain a
service and letter of credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were
purchased by a Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. The Fund will attempt
to have the issuer of the participation certificate bear the cost of the
insurance. The Fund retains the option to purchase insurance if necessary,
in which case the cost of insurance will be a capitalized expense of the
Fund.
DEMAND NOTES. The Limited Volatility Tax Free and Tax Free Money Market
Funds may purchase municipal obligations with the right to a "put" or "stand-
by commitment." A "put" on a municipal obligation obligates the seller of the
put to buy within a specified time and at an agreed upon price a municipal
obligation the put is issued with. A stand-by commitment is similar to a put
except the seller of the commitment is obligated to purchase the municipal
obligation on the same day the Fund exercises the commitment and at a price
equal to the amortized cost of the municipal obligation plus accrued interest.
The seller of the put or stand-by commitment may be the issuer of the
municipal obligation, a bank or broker-dealer.
The Funds will enter into put and stand-by commitments with institutions
such as banks and broker-dealers that the Funds' money managers continually
believe satisfy the Funds' credit quality requirements. The ability of the
Funds to exercise the put or stand-by commitment may depend on the seller's
ability to purchase the securities at the time the put or stand-by commitment
is exercised or on certain restrictions in the buy back arrangement. Such
restrictions may prohibit the Funds from exercising the put or stand-by
commitment except to maintain portfolio flexibility and liquidity. In the
event the seller would be unable to honor a put or stand-by commitment for
financial reasons, the Funds may, in the opinion of Funds' management, be a
general creditor of the seller. There may be certain restrictions in the buy
back arrangement which may not obligate the seller to repurchase the
securities. (See, "Certain Investments -- Municipal Notes -- Tax Free
Participation Certificates.")
The Limited Volatility Tax Free and Tax Free Money Market Funds may
purchase from issuers floating or variable rate municipal obligations some of
which are subject to payment of principal by the issuer on demand by the Funds
(usually not more than thirty days' notice). The Funds may also purchase
floating or variable rate municipal obligations or participations therein from
banks, insurance companies or other financial institutions which are owned by
such institutions or affiliated organizations. Each participation is usually
backed by an irrevocable letter of credit, or guaranty of a bank or insurance
policy of an insurance company.
INTEREST RATE TRANSACTIONS. The Fixed Income II, Fixed Income III, Volatility
Constrained Bond and Multistrategy Bond Funds may enter into interest rate
swaps, on either an asset-based or liability-based basis, depending on whether
they are hedging their assets or their liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Funds receiving or paying, as the case may be, only the net amount
of the two payments. Inasmuch as these hedging transactions are entered into
for good faith hedging purposes, the money managers and the Funds believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to the Funds' borrowing restrictions. The net amount of
the excess, if any, of the Funds' obligations over their entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid high-grade debt securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Funds' custodian. To the extent that the Funds enter
into interest rate swaps on other than a net basis, the amount maintained in a
segregated account will be the full amount of the Funds' obligations, if any,
with respect to such interest rate swaps, accrued on a daily basis. The Funds
will not enter into any interest rate swaps unless the unsecured senior debt or
the claims-paying ability of the other party thereto is rated in the highest
rating category of at least one nationally recognized rating organization at the
time of entering into such transaction. If there is a default by the other
party to such a transaction, the Funds will have contractual remedies pursuant
to the agreement related to the transaction. The swap market has grown
substantially in recent years with a large
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number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If a money manager using this technique is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of a Fund would diminish compared to what it
would have been if this investment technique was not used.
A Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Funds are contractually obligated to make. If the other party to an interest
rate swap defaults, the Funds' risk of loss consists of the net amount of
interest payments that the Funds are contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Funds expect to achieve an
acceptable degree of correlation between their rights to receive interest on
their portfolio securities and their rights and obligations to receive and pay
interest pursuant to interest rate swaps.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities which the Funds
may invest in generally consist of obligations issued or backed by the national,
state or provincial government or similar political subdivisions or central
banks in foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. These securities also include debt securities of "quasi-government
agencies" and debt securities denominated in multinational currency units of an
issuer.
BRADY BONDS. The Fixed Income III and Multistrategy Bond Funds may invest in
Brady Bonds, the products of the "Brady Plan," under which bonds are issued in
exchange for cash and certain of a country's outstanding commercial bank loans.
The Brady Plan offers relief to debtor countries that have effected substantial
economic reforms. Specifically, debt reduction and structural reform are the
main criteria countries must satisfy in order to obtain Brady Plan status.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily US-dollar) and are actively traded on the over-the-counter
market. Brady Bonds have been issued only recently and accordingly they do not
have a long payment history.
CREDIT AND LIQUIDITY ENHANCEMENTS. The Money Market Funds 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 Money Market
Funds that invest in these securities and may affect their share price.
TAXES
In order to qualify for treatment as a regulated investment company ("RIC")
under Subchapter M of the Code, each Fund must distribute annually to its
shareholders at least 90% of its investment company taxable income (generally,
net investment income plus net short-term capital gain) ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of a Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities or foreign currencies (exclusive of losses), or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (ii)
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at the close of each quarter of a Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, US government
securities, securities of other RICs and other securities, with such other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (iii) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than US government securities or the
securities of other RICs) of any one issuer.
Notwithstanding the Distribution Requirement described above, which only
requires each Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net 28% and 20% capital gain over net short-term capital loss),
each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of its ordinary
income for that year and 98% of its capital gain net income for the one-year
period ending on October 31 of that year, plus prior-year shortfalls. For this
and other purposes, dividends declared by a RIC in October, November or December
of any calendar year and payable to shareholders of record on a date in such a
month will be deemed to have been paid by the RIC and received by shareholders
on December 31 of such year if the dividends are paid by the RIC at any time
through the end of the following January.
At December 31, 1997, certain of the Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains of
each succeeding year until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as
follows:
(TO BE FILED BY AMENDMENT)
THE EQUITY T FUND. The fundamental documents establishing the Equity T Fund
provide that the amount payable upon the redemption of shares of the Fund will
be equal to ninety-nine percent of the net asset value per share. The one
percent retained by the Fund will be treated by the Fund as a contribution to
the capital of the Fund.
EXEMPT INTEREST DIVIDENDS. 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
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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.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The use of hedging
instruments, such as options and futures contracts, involves specialized and
complex rules that will determine the character for income tax purposes of the
income received in connection therewith by a Fund and thereby affect, among
other things, the amount and proportion of distributions that will be taxable to
shareholders as ordinary income or capital gain.
As described above and in the Funds' Prospectuses, the Funds may buy and sell
foreign currencies and options on foreign currencies, and may enter into forward
currency contracts and currency futures contracts. The Funds anticipate that
these investment activities will not prevent the Funds from qualifying as a RIC.
As a general rule, gains or losses on the disposition of debt securities
denominated in a foreign currency that are attributable to fluctuations in
exchange rates between the date that the debt securities are acquired and the
date of disposition, gains and losses from the disposition of foreign
currencies, and gains and losses attributable to options on foreign currencies,
forward currency contracts and currency futures contracts will be treated as
ordinary income or loss.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues interest or other receivables, or expenses or
other liabilities, denominated in a foreign currency and the time the Fund
actually collects such receivables, or pays such liabilities, are generally
treated as ordinary income or loss. Similarly, gains or losses on disposition
of debt securities denominated in a foreign currency between the date of
acquisition of the security and the date of disposition also are treated as
ordinary gain or loss. These gains, referred to under the Code as "Section 988"
gains or losses, may increase or decrease the amount of the Fund's investment
company taxable income to be distributed to its shareholders, rather than
increasing or decreasing the amount of the Fund's capital gains or losses.
As described above and in the Prospectuses, the Funds may acquire forward
currency contracts, currency futures contracts and options on foreign currencies
to hedge their risk of currency fluctuations with regard to property held or to
be held by the Funds, and before the close of the day on which the Funds enter
into the contract or options, the Funds will, as a general rule, identify on
their records that the contracts or options were entered into as part of a
hedging transaction. If the Funds were to invest in a forward currency
contract, currency futures contract or option on a foreign currency and
offsetting positions in such contracts or options, and if the two offsetting
positions were characterized as a straddle (as opposed to a hedge) for federal
income tax purposes, then the Funds might not be able to receive the benefit of
certain realized losses from the liquidation of one of those positions for an
indefinite period of time (i.e., until the gain position and any successor
positions are disposed of). The Funds expect that their activities with respect
to forward foreign currency contracts, currency futures contracts and options on
foreign currencies will not require them, as a general rule, to have to treat
such contracts or options as straddle positions for federal income tax purposes.
Under current law, unless certain requirements are satisfied, the Funds will be
required to calculate separately certain gains and losses attributable to
certain of their forward currency contracts, currency futures contracts and
options on foreign currencies, even if the Funds acquired the contracts or
options to hedge their risk of currency fluctuations with regard to capital
assets held or to be held by the Funds. The Internal Revenue Service, however,
has the authority to issue additional regulations that would permit or require
the Funds either to integrate some or all of their forward currency contracts,
currency futures contracts, options on foreign currencies and hedged investments
as a single transaction or otherwise to treat the contracts or options in the
manner that is consistent with the hedged investments. It is uncertain if or
when these regulations will be issued.
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To the extent that a Fund's forward contracts, currency futures contracts or
options on foreign currencies can be classified as either regulated futures
contracts or foreign currency contracts (as described in section 1256(b) of the
Code) (collectively referred to herein as "section 1256 contracts"), such
investments will be taxed pursuant to a special "mark-to-market" system. Under
the mark-to-market system, the Funds may be treated as realizing a greater or
lesser amount of gains or losses than actually realized. As a general rule,
except for certain currency related activities (as described above) in which
gain or loss is treated as ordinary income or loss, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and accordingly, the mark-to-market system generally will
affect the amount of capital gains or losses taxable to the Funds and the amount
of distributions taxable to a shareholder. Moreover, if the Funds invested in
both section 1256 contracts and offsetting positions with respect to such
contracts, then the Funds might not be able to receive the benefit of certain
realized losses for an indeterminate period of time (i.e., until disposition of
the "gain leg" of the straddle and any successor position). The Funds expect
that their activities with respect to section 1256 contracts and offsetting
positions in such contracts (a) will not cause them or their shareholders to be
treated as receiving a materially greater amount of ordinary income, capital
gains, dividends, or distributions than actually realized or received by the
Funds and (b) will permit them to use substantially all of the losses of the
Funds for the fiscal years in which such losses actually occur.
Generally, the hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by a Fund may result in "straddles" for
U.S. federal income tax purposes. The straddle rules may affect the character
of gains (or losses) realized by a Fund. In addition, losses realized by a Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of transactions in options, futures and forward contracts to a Fund
are not entirely clear. The transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gains, may be increased or decreased substantially in any
given fiscal year as compared to a fund that did not engage in such hedging
transactions.
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If a call option written by a Fund expires, the Fund will realize a capital
gain equal to the amount of the premium it received for writing the option. If
a Fund terminates its obligations under a call option it has written, or if the
Fund writes a put option terminating its rights as the holder of a put option,
the Fund will realize a capital gain or loss, depending on whether the cost of
the closing transaction is less than or exceeds the premium received when the
option was written. If a call option written by a Fund is exercised, the Fund
will be treated as having sold the underlying security and will realize a long-
term or short-term capital gain and loss, depending on the holding period of the
underlying security and on whether the sum of the option price received upon the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the optioned security.
If an option purchased by a Fund expires, the Fund generally will realize a
capital loss equal to the cost of the option, long-term if the option was held
for more than one year. If the Fund sells the option, it generally will realize
a capital gain or loss, depending on whether the proceeds from the sale are
greater or less than the cost of the option plus the transaction costs. If the
Fund exercises a call option, the cost of the option will be added to the basis
of the security purchased. If the Fund exercises a put option, it will realize
a capital gain or loss (depending on the Fund's basis for the underlying
security), which will be long-term or short-term, depending on the holding
period of the underlying security. Any such capital gain will be decreased (or
loss increased) by the premium paid for the option.
Foreign Income Taxes. The Emerging Markets Fund will receive dividends and
interest paid by non-U.S. issuers which will frequently be subject to
withholding taxes by non-U.S. governments. FRIMCo expects the Emerging Markets
Fund to invest more than 50% of its total assets in non-U.S. securities and to
file specified elections with the 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.
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If a Fund invests in an entity that is classified as PFIC for federal income
tax purposes, the application of certain provisions of the Code applying to
PFICs could result in the imposition of certain federal income taxes on the
Fund. Under U.S. Treasury regulations for PFICS, the International, Emerging
Markets and International Securities Funds can elect to mark-to-market their
PFIC holdings in lieu of paying taxes on gains or distributions therefrom.
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 nondeductible 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. Investment income received from sources within
foreign countries may be subject to foreign income taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which would entitle a Fund to a reduced rate on such taxes or exemption from
taxes on such income. It is impossible to determine the effective rate of
foreign tax for a Fund in advance since the amount of the assets to be invested
within various countries is not known.
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.
STATE AND LOCAL TAXES. Depending upon the extent of a Fund's activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which it is otherwise deemed to be
conducting business, a Fund may be subject to the tax laws of such states or
localities. 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.
RATINGS OF DEBT INSTRUMENTS
CORPORATE AND MUNICIPAL BOND RATINGS.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as
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upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
and interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification in its corporate bond rating system. The modifier I indicates
that the security ranks in the higher end of its generic category; the
modifier 2 indicates a mid-range ranking; and modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP ("S&P"):
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. While bonds with this rating normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than debt in higher rated
categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the
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obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB -- Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual implied BBB- rating.
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating. The C rating has been
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in payment default. The D rating is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
appropriate category.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency
exchange and related uncertainties.
STATE, MUNICIPAL NOTES AND TAX EXEMPT DEMAND NOTES.
MOODY'S:
Moody's rating for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run.
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Symbols used are as follows:
MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing or both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
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S&P:
A S&P note rating, reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating, addresses only the demand feature.
The long-term debt rating symbols are used to denote the put option (for
example, "AAA/A-I+") or if the nominal maturity is short, a rating of "SP-
I+/AAA" is assigned.
COMMERCIAL PAPER RATINGS.
MOODY'S:
Commercial paper rated Prime by Moody's is based upon its evaluation of many
factors, including: (1) management of the issuer; (2) the issuer's industry or
industries and the speculative-type risks which may be inherent in certain
areas; (3) the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issue; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative differences in these factors determine whether the
issuer's commercial paper is rated Prime-1, Prime-2, or Prime-3.
Prime-1 - indicates a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: (1) leading market positions in well established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well established access to a range
of financial markets and assured sources of alternative liquidity.
Prime-2 - indicates a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate,
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may be more affected by external conditions. Ample alternative liquidity is
maintained.
S&P:
Commercial paper rated A by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
A or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2, or A-3.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
DUFF & PHELPS, INC.:
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes,
bankers' acceptances, irrevocable letters of credit, and current maturities of
long-term debt. Asset-backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is
the level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional 'I' category. The majority of short-term debt
issuers carries the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of 'I +'
(one plus) and 'I (one minus) to assist investors in recognizing those
differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 2--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
Good Grade
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
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Satisfactory Grade
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
Duff 4--Speculative investment characteristics. Liquidity is not sufficient
to ensure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
Default
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
IBCA, INC.:
In addition to conducting a careful review of an institution's reports and
published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year
with the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While this confidential data cannot be
disclosed in reports, it is taken into account when assigning ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings and
to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+ -- Obligations supported by the highest capacity for timely repayment.
A1 -- Obligations supported by a very strong capacity for timely repayment.
A2 -- Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1 -- Obligations supported by an adequate capacity for timely repayment. Such
capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2 -- Obligations for which the capacity for timely repayment is susceptible
to
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adverse changes in business, economic or financial conditions.
C1 -- Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1 -- Obligations which have a high risk of default or which are currently in
default.
FITCH INVESTORS SERVICE, INC. ("FITCH"):
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ -- Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very strong credit quality. Issues assigned this rating, reflect an
assurance of timely payment only slightly less in degree than issues rated F-
I+.
F-2 -- Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned 'F- I +' and 'F- I' ratings.
F-3 -- Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-5 -- Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D -- Default. Issues assigned this rating are in actual or imminent payment
default.
THOMSON BANKWATCH ("TBW") SHORT-TERM RATINGS:
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
These ratings are derived exclusively from a quantitative analysis of publicly
available information. Qualitative judgments have not been incorporated. The
ratings are intended to be applicable to all operating entities of an
organization but there may be in some cases more credit liquidity and/or risk in
one segment of the business than another.
The TBW short-term rating applies only to unsecured instruments that have a
maturity of one year or less,
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and reflects the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-l."
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
FINANCIAL STATEMENTS
The 1997 annual financial statements of the Funds, including notes to the
financial statements and financial highlights and the Report of Independent
Accountants, are included in the Trust's Annual Reports to Shareholders. Copies
of these Annual Reports accompany this Statement of Additional Information and
are incorporated herein by reference.
-65
<PAGE>
-66
<PAGE>
-67
<PAGE>
-68
<PAGE>
-69
<PAGE>
-70
<PAGE>
-71
<PAGE>
-72
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (253) 627-7001
LIFEPOINTS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
______________, 1998
Frank Russell Investment Company (the "Trust" or the "Investment Company") is
a single legal entity organized as a Massachusetts business trust. The Trust
operates 28 different investment portfolios referred to as "Funds." The Trust
offers shares of beneficial interest in the Funds in five separate
prospectuses.
This Statement of Additional Information ("Statement or SAI") describes both
the Class D and Class E Shares of the five Funds listed below (the "LifePoints
Funds"), each of which invests in different combinations of other Funds (the
"Underlying Funds") which invests in different combinations of stocks, bonds and
cash equivalents. As of the date of the Statement, the Trust offers Class D and
Class E Shares in the following LifePoints Funds:
<TABLE>
<CAPTION>
FUND INCEPTION DATE PROSPECTUS DATE
----------------------------- -------------- ----------------
<S> <C> <C>
Equity Balanced Strategy Fund 09/30/97 __________, 1998
Aggressive Strategy Fund 09/16/97 __________, 1998
Balanced Strategy Fund 09/16/97 __________, 1998
Moderate Strategy Fund 10/03/97 __________, 1998
Conservative Strategy Fund 11/08/97 __________, 1998
</TABLE>
The LifePoints Funds were not offered for public investment prior to the date
of this Statement. The Underlying Funds in which the LifePoints Funds currently
invest commenced operations on the date indicated below opposite the respective
Fund's name:
<TABLE>
<CAPTION>
FUND INCEPTION DATE
-------------------------------- -----------------
<S> <C>
Diversified Equity Fund September 5, 1985
Special Growth Fund September 5, 1985
Quantitative Equity Fund May 15, 1987
International Securities Fund September 5, 1985
Diversified Bond Fund September 5, 1985
Volatility Constrained Bond Fund September 5, 1985
Multistrategy Bond Fund January 29, 1993
Real Estate Securities Fund July 28, 1989
Emerging Markets Fund January 29, 1993
</TABLE>
<PAGE>
Trust's Funds, had aggregate net assets of approximately $__ billion on
_________, 1998.
Each of the LifePoints Funds presently offers interests in Class D and Class E
Shares. While each of the LifePoints Funds is authorized to offer shares of
beneficial interest in one other class of shares, the Class S Shares, such class
of shares is not presently offered for public investment. This Statement
relates solely to the Class D and Class E Shares of the LifePoints Funds.
This Statement supplements or describes in greater detail information
concerning the Trust, the LifePoints Funds, the Underlying Funds and the Class D
and Class E Shares contained in the Prospectus of the LifePoints Funds dated
________. This Statement is not a prospectus; the Statement should be read in
conjunction with the LifePoints Funds' Prospectus. The Prospectus may be
obtained without charge by telephoning or writing your financial intermediary or
to the Trust at the number or address shown above.
Capitalized terms not otherwise defined in this Statement shall have the
meanings assigned to them in the Prospectus.
This statement incorporates by reference the Investment Company's Annual
Reports to Shareholders for the year ended December 31, 1997. Copies of the
Fund's Annual Reports accompany this statement.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE.......................................
Organization and Business History............................
Shareholder Meetings.........................................
Controlling Shareholders.....................................
Trustees and Officers........................................
OPERATION OF THE INVESTMENT COMPANY............................
Service Providers............................................
Consultant...................................................
Manager......................................................
Money Managers...............................................
Distributor..................................................
Custodian....................................................
Transfer and Dividend Disbursing Agent.......................
Independent Accountants......................................
Plan Pursuant to Rule 18f-3..................................
Distribution Plan............................................
Shareholder Services Plan....................................
Underlying Fund Expenses.....................................
LifePoints Fund Operating Expenses...........................
Valuation of the LifePoints Fund Shares......................
Pricing of Securities........................................
Portfolio Turnover Rates of the LifePoints Funds.............
Portfolio Transaction Policies of the Underlying Funds.......
Brokerage Allocations........................................
Brokerage Commissions........................................
Yield and Total Return Quotations............................
INVESTMENT RESTRICTIONS, POLICIES AND PRACTICES OF THE
LIFEPOINTS FUNDS
Investment Restrictions......................................
Investment Policies and Practices of the LifePoints Funds....
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
INVESTMENT POLICIES OF THE UNDERLYING FUNDS....................
INVESTMENT PRATICES............................................
TAXES..........................................................
RATINGS OF DEBT INSTRUMENTS....................................
</TABLE>
4
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. The Trust commenced business operations as
a Maryland corporation in October 1981. On January 2, 1985, the Trust
reorganized by changing its domicile and legal status to a Massachusetts
business trust.
The Trust is currently organized and operates under an amended Master Trust
Agreement dated July 26, 1984 and the provisions of Massachusetts law governing
the operation of a Massachusetts business trust. The Board of Trustees ("Board")
may amend the Master Trust Agreement from time to time; provided, however, that
any amendment which would materially and adversely affect shareholders of the
Trust as a whole, or shareholders of a particular Fund, must be approved by the
holders of a majority of the shares of the Trust or Fund, respectively.
The Trust is authorized to issue shares of beneficial interest, and may divide
the shares into two or more series, each of which evidences a pro rata ownership
interest in a different investment portfolio -- a "Fund." The Trustees may,
without seeking shareholder approval, create additional Funds at any time. The
amended Master Trust Agreement provides that a shareholder may be required to
redeem shares in a Fund under circumstances set forth in the Master Trust
Agreement.
The Trust's Funds are authorized to issue shares of beneficial interest in one
or more classes. 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 of the five LifePoints Funds described in this Statement offers
shares of beneficial interest in the Class D and Class E Shares. The Class D and
Class E Shares are both subject to a shareholder services fee of up to 0.25%.
In addition, the Class D Shares are subject to a Rule 12b-1 fee of up to 0.75%
(presently limited to 0.25%). While the LifePoints Funds are authorized to
offer shares of beneficial interest in another class of shares--the Class S
Shares--those shares are not currently available for public investment. Unless
otherwise indicated, "shares" in this Statement refers to the Class D and Class
E Shares of the LifePoints Funds.
Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that shareholders
shall not be subject to any personal liability for the acts or obligations of a
Fund and that every written agreement, obligation or other undertaking of the
Funds shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The amended Master Trust Agreement also provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of a Fund and satisfy any judgment
thereon. Thus, the risk of any shareholder incurring financial loss beyond his
investment on account of shareholder liability is limited to circumstances in
which a Fund itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. The Trust will not hold annual meetings of shareholders,
but special meetings may be held. Special meetings may be convened by (i) the
Board of Trustees, (ii) upon written request to the Board by shareholders
holding at least 10% of the outstanding shares, or (iii) upon the Board's
failure to honor the shareholders' request described above, by shareholders
holding at least 10% of the outstanding shares by giving notice of the special
meeting to shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility
to manage the business of the Trust, and hold office for life unless they resign
or are removed by, in substance, a vote of two-thirds of the Trust shares
outstanding. Under these circumstances, no one person, entity or shareholder
"controls" the Trust.
The following shareholders owned 5% or more of the voting shares of the
Investment Company or of the Underlying Funds at _________, 1998: (To be filed
by Amendment)
5
<PAGE>
The following shareholders owned 5% or more of the voting shares of the
Investment Company or of the Funds at _________, 1998:
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. A Trustee may be removed at any time by,
in substance, a vote of two-thirds of Trust shares. A vacancy in the Board
shall be filled by a vote of a majority of the remaining Trustees so long as, in
substance, two-thirds of the Trustees have been elected by shareholders. The
officers, all of whom are employed by and are officers of Frank Russell
Investment Management Company ("FRIMCo") or its affiliates, are responsible for
the day-to-day management and administration of the Funds' operations.
The Trust paid $156,315.80 in aggregate for the year ended December 31, 1997
to the Trustees who are not officers or employees of FRIMCo or its affiliates.
Trustees are paid an annual fee plus travel and other expenses incurred in
attending Board meetings. The Trust's officers and employees are paid by FRIMCo
or its affiliates.
The following lists the Trustees and officers and their positions with the
Trust, their ages, their present and principal occupations during the past five
years and the mailing addresses of Trustees who are not affiliated with the
Trust. The mailing address for all Trustees and officers affiliated with the
Trust is Frank Russell Investment Company, 909 A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested
person" of the Trust as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). As used in the table, "Frank Russell Company" includes
its corporate predecessor, Frank Russell Co., Inc.
*George F. Russell, Jr.--65 years old--Trustee and Chairman of the Board.
Trustee and Chairman of the Board, Russell Insurance Funds, Director and
Chairman of the Board, Frank Russell Company; Director, Chief Executive Officer
and Chairman of the Board, Russell Building Management Company, Inc.; Director
and Chairman of the Board, Frank Russell Securities, Inc. and Frank Russell
Trust Company; Director, Frank Russell Investment Management Company; Director,
Chairman of the Board and President, Russell 20-20 Association. Director and
Chairman of the Board, Frank Russell Investments (Delaware), Inc. March 1988 to
April 1992, Director of Russell-Zisler, Inc. (real estate consulting); January
1957 to March 1993, Chief Executive Officer of Frank Russell Company; March 1982
to November 1995, Chairman of the Board of Frank Russell Investment Management
Company.
6
<PAGE>
*Lynn L. Anderson--58 years old--Trustee, President and Chief Executive
Officer. Trustee, President and Chief Executive Officer, Russell Insurance
Funds, Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc.; Trustee and President, The SSgA Funds (investment company);
Director, Chief Executive Officer and Chairman of the Board, Frank Russell
Investment Management Company; Director, Chief Executive Officer and President,
Frank Russell Trust Company; Director and Chairman, Frank Russell Investment
Company Public Limited Company; Director, Frank Russell Company; Director of
Frank Russell Investments (Ireland) Limited; Director, Frank Russell Investments
(Cayman) Ltd. and Frank Russell Investments (UK) Ltd.; November 1995 to February
1997 Director and Chairman of the Board, Frank Russell Company (Delaware); March
1989 to June 1993, Director, Frank Russell Company. Until September 1994,
Director and President, The Laurel Funds, Inc. (investment company).
Paul E. Anderson--66 years old--Trustee. 23 Forest Glen Lane, Tacoma,
Washington 98409. Trustee, Russell Insurance Funds, Forest Limited Partnership;
1984 to 1996, President, Vancouver Door Company, Inc.
Paul Anton, Ph.D.--78 years old--Trustee. PO Box 1337, Gig Harbor, Washington
98335. Trustee, Russell Insurance Funds, President, Paul Anton and Associates
(Marketing Consultant on emerging international markets for small corporations).
1991-1994, Adjunct Professor, International Marketing, University of Washington,
Tacoma, Washington.
William E. Baxter--72 years old--Trustee. 800 North C Street, Tacoma,
Washington 98403. Trustee, Russell Insurance Funds, Retired.
Lee C. Gingrich--67 years old--Trustee. 1730 North Jackson, Tacoma, Washington
98406. Trustee, Russell Insurance Funds, President, Gingrich Enterprises, Inc.
(Business and Property Management).
Eleanor W. Palmer--70 years old--Trustee. 2025 Narrows View Circle, P. O. Box
1057, Gig Harbor, Washington 98335. Trustee, Russell Insurance Funds and Frank
Russell Trust Company, Retired.
*George W. Weber--46 years old--Treasurer and Chief Accounting Officer.
Trustee and Chief Accounting Officer, Russell Insurance Funds, Director of
Finance and Operations, Frank Russell Trust Company; Director, Fund
Administration and Operations of Frank Russell Investment Management Company and
Russell Fund Distributors, Inc.; Senior Vice President and Fund Treasurer of The
SSga Funds (investment company); March 1993 to January 1996, Vice President,
Operations, Funds Management, J.P. Morgan; December 1985 to March 1993, Senior
Vice President, Operations, Frank Russell Investment Company, The Laurel Funds,
Inc. and The Seven Seas Series Fund (investment companies); Director of
Operations, Frank Russell Investment Management Company and Frank Russell Trust
Company; Director, Russell Fund Distributors, Inc.
*Randall P. Lert--44 years old--Director of Investments. Director of
Investments, Russell Insurance Funds, Senior Investment Officer and Director of
Investment Services, Frank Russell Trust Company; Director and Chief Investment
Officer, Frank Russell Investment Management Company; Director and Chief
Investment Officer, Russell Fund Distributors, Inc.; April 1990 to November
1995, Director of Investments of Frank Russell Investment Management
Company.
*Karl J. Ege--56 years old--Secretary and General Counsel. Director, Secretary
and General Counsel, Russell Insurance Funds, Secretary, General Counsel and
Managing Director Law and Government Affairs of Frank Russell Company;
Secretary and General Counsel of Frank Russell Investment Management Company,
Frank Russell Trust Company and Russell Fund Distributors, Inc.; Director and
Secretary of Russell Building Management Company; Director and Assistant
Secretary of Frank Russell Company Limited and Russell Systems Ltd.; Director,
Frank Russell Investment Company LLC, Frank Russell Investments (Cayman) Ltd.,
Frank Russell Investment Company Public Limited Company and Frank Russell
Investments (Ireland) Limited; Director and Secretary, Frank Russell
7
<PAGE>
Investments (Delaware), Inc. and Frank Russell International Services, Co.,
Inc.; Director, Secretary and General Counsel, Russell Fiduciary Services
Company and Frank Russell Capital Inc.; Director of Frank Russell Company, S.A.,
Frank Russell Japan, Frank Russell Company (N.Z.) Limited and Russell Investment
Nominee Co. PTY Ltd., Frank Russell Company PTY Limited, and Frank Russell
Investments (UK) Limited; Director and Secretary, Russell 20-20 Association.
From November 1995 to February 1997, Director and Secretary, Frank Russell
Company (Delaware); July 1992 to June 1994, Director, President and Secretary of
Frank Russell Shelf Corporation. From 1972 to 1991, Partner, Bogle and Gates
(law firm).
*Peter Apanovitch--52 years old--Manager of Short-Term Investment Funds.
Manager of Short-Term Investment Funds, Russell Insurance Funds, Manager of
Short-Term Investment Funds, Frank Russell Investment Management Company and
Frank Russell Trust Company.
TRUSTEE COMPENSATION TABLE
(FOR FISCAL YEAR ENDED 12/31/97)
<TABLE>
<CAPTION>
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT BENEFITS ESTIMATED FROM THE
FROM THE ACCRUED AS PART OF ANNUAL BENEFITS INVESTMENT
INVESTMENT THE INVESTMENT UPON COMPANY PAID
TRUSTEE COMPANY COMPANY EXPENSES RETIREMENT TO TRUSTEES
- ------- ----------- -------------------- --------------- ------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $ 0 $0 $0 $ 0
Paul E. Anderson $20,000 $0 $0 $31,263.16
Paul Anton, PhD. $20,000 $0 $0 $31,263.16
William E. Baxter $20,000 $0 $0 $31,263.16
Lee C. Gingrich $20,000 $0 $0 $31,263.16
Eleanor W. Palmer $20,000 $0 $0 $31,263.16*
George F. Russell $ 0 $0 $0 $ 0
</TABLE>
* The trustee's received $12,000 for service on the Russell Insurance Fund's
Board. ($4,000 of which is for service during 1996.)
8
<PAGE>
OPERATION OF THE TRUST
SERVICE PROVIDERS. Most of the Trust's necessary day-to-day operations are
performed by separate business organizations under contract to the Trust. The
principal service providers are:
Consultant Frank Russell Company
Manager, Transfer and Dividend Frank Russell Investment Management
Disbursing Agent Company
Money Managers for the Multiple professional discretionary
Underlying Funds investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
CONSULTANT. Frank Russell Company, the corporate parent of FRIMCo, was
responsible for organizing the Trust and provides ongoing consulting services,
described in the Prospectus, to the Trust and FRIMCo. FRIMCo does not pay Frank
Russell Company an annual fee for consulting services.
Frank Russell Company provides comprehensive consulting and money manager
evaluation services to institutional clients, including FRIMCo and Frank Russell
Trust Company, and to high net worth individuals and families ($100 million)
through its Russell Private Investment Division. Frank Russell Company also
provides: (i) consulting services for international investment to these and
other clients through its International Division and its wholly owned
subsidiaries, Frank Russell Company London (Frank Russell Company Limited),
Frank Russell Canada (Frank Russell Canada Limited/Limitee), Frank Russell
Australia (Frank Russell Company Pty., Limited), Frank Russell Japan, Frank
Russell AG (Zurich), Frank Russell Company S.A. (Paris) and Frank Russell
Company (N.Z.) Limited (Auckland), and Frank Russell Investments (Delaware),
Inc., and (ii) investment account and portfolio evaluation services to corporate
pension plan sponsors and institutional money managers through its Russell Data
Services Division. Frank Russell Securities, Inc., a wholly owned subsidiary of
Frank Russell Company, carries on an institutional brokerage business. Frank
Russell Capital Inc., a wholly owned subsidiary of Frank Russell Company,
carries on an investment banking business as a registered broker-dealer. Frank
Russell Trust Company, a whollyowned subsidiary of Frank Russell Company,
provides comprehensive trust and investment management services to corporate
pension and profit-sharing plans. Frank Russell Investments (Cayman) Ltd., a
wholly owned subsidiary of Frank Russell Company, provides investment advice and
other services. Frank Russell Investment (Ireland) Ltd., a wholly owned
subsidiary of Frank Russell Company, provides investment advice and other
services. Frank Russell International Services Co., Inc., a wholly owned
subsidiary of Frank Russell Company, provides services to U.S. personnel
secunded to overseas enterprises. Russell Fiduciary Services Company, a wholly
owned subsidiary of Frank Russell Company, provides fiduciary services to
pension and welfare benefit plans and other institutional investors. The mailing
address of Frank Russell Company is 909 A Street, Tacoma, WA 98402.
MANAGER. FRIMCo provides or oversees the provision of all general management
and administration, investment advisory and portfolio management, and
distribution services for the Funds. FRIMCo provides the Funds with office
space, equipment and the personnel necessary to operate and administer the
Funds' business and to supervise the provision of services by third parties such
as the money managers (in the case of the Underlying Funds) and custodian.
FRIMCo also develops the investment programs for each of the Funds, selects
money managers for the Underlying Funds (subject to approval by the Board),
allocates assets among money managers, monitors the money managers' investment
programs and results, and may exercise investment discretion over assets
invested in the Underlying Funds' Liquidity Portfolios. (See, "Investment
Policies of the Underlying Funds -- Liquidity Portfolios.") FRIMCo also acts as
the Trust's transfer agent and dividend disbursing agent. FRIMCo, as agent for
the
9
<PAGE>
Trust, pays the money managers' fees for the Underlying Funds, as a fiduciary
for the Underlying Funds.
Each of the Funds pays an annual management fee directly to FRIMCo, billed
monthly on a pro rata basis and calculated as a specified percentage of the
average daily net assets of each of the Underlying Funds. (See the Prospectuses
for the Underlying Funds' annual percentage rates.)
The Life Points Funds commenced operation during 1997 and therefore paid
management fees to FRIMCo for only the year of 1997.
<TABLE>
<CAPTION>
12/13/97
--------
<S> <C>
Equity Balanced Fund
Aggressive Strategy Fund
Balanced Strategy Fund (To be filed by amendment)
Moderate Strategy Fund
Conservative Strategy Fund
</TABLE>
The Underlying Funds in which the LifePoints Funds currently invest paid
FRIMCo the listed management fees for the years ended December 31, 1997, 1996,
and 1995:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
<S> <C> <C> <C>
12/31/97 12/31/96 12/31/95
---------- ---------- ----------
Diversified Equity $6,898,175 $4,728,098 $3,842,471
Special Growth 4,538,822 3,306,695 2,588,270
Quantitative Equity 6,605,488 4,454,628 3,469,134
International Securities 7,741,258 6,497,074 5,723,534
Diversified Bond 2,748,159 2,359,767 2,308,823
Volatility Constrained Bond 812,308 836,818 985,215
Multistrategy Bond 2,225,087 1,673,473 1,217,039
Real Estate Securities 4,426,518 2,943,165 2,065,552
Emerging Markets* 4,167,163 2,773,817 1,380,549
</TABLE>
*Prior to April 1, 1995, the Emerging Markets Fund paid no management fees to
FRIMCo, as each shareholder of such Funds had entered into a written Asset
Management Services Agreement with the FRIMCo. Under such Agreements, the
shareholders had agreed to pay annual fees, billed quarterly on a pro rata basis
and calculated as a specified percentage of the average assets which the
shareholder had invested at each month end in any of such Funds. Beginning April
1, 1995, the Investment Company's Management Agreement was amended to provide
that the Emerging Markets Fund would pay an annual management fee, billed
monthly on a pro rata basis and calculated as a specified percentage of the
average daily net assets of the Fund. When applicable, a shareholder of the
Emerging Markets Fund or the shareholder's financial intermediary continues to
enter into a separate written agreement with FRIMCo to obtain separate
individual shareholder services, and pays fees under such agreement based on a
specified percentage of average assets which are subject to the agreement
relating to FRIMCo's provision of individual shareholder investment services
with respect to that shareholder.
Effective May 1, 1996, FRIMCo agreed to waive its management fee for the
Emerging Markets and Multistrategy Bond Funds, to the extent Fund level expenses
of these Funds exceed 1.95% and 0.80% of average daily net assets on an annual
basis, respectively. In 1996, waivers and reimbursements for Multistrategy Bond
Fund amounted to $157,752. No waiver nor reimbursement was necessary for the
Emerging Markets Funds. As a result of the waivers and reimbursements,
management fees paid by the Multistrategy Bond Fund amounted to $1,515,721.
10
<PAGE>
Through March 31, 1995, FRIMCo reimbursed the Emerging Markets Fund for all
expenses exceeding 0.80% of average daily net assets on an annual basis.
Effective April, 1995 through April 30, 1996, FRIMCo reimbursed the Emerging
Markets Fund for all expenses exceeding 2.00% of average daily net assets on an
annual basis. In 1995, reimbursements for the Emerging Markets Fund were
$37,115. As a result of the reimbursements, management fees paid by the Emerging
Markets Fund amounted to $1,343,434.
While FRIMCo will perform investment management services for the LifePoints
Funds (i.e., determining the percentages of the Underlying Funds which will be
purchased by each LifePoints Fund, and periodically adjusting the percentages
and the Underlying Funds), FRIMCo presently intends to waive its entire 0.25%
management fee through December 31, 1998 but may terminate its waiver at any
time thereafter without notice to shareholders. Each of the LifePoints Funds
will indirectly bear their proportionate share of 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 the management fees paid by an
Underlying Fund, each of the management fees paid is based upon the services
received by the respective Fund.
FRIMCo also provides, through its Russell Private Investment Division
Investment, investment advisory, consulting and money manager evaluation
services to high net worth individuals and families.
FRIMCo is a wholly owned subsidiary of Frank Russell Company. FRIMCo's
mailing address is 909 A Street, Tacoma, WA 98402.
MONEY MANAGERS. The money managers of the Underlying Funds have no
affiliations or relationships with the Trust or FRIMCo other than as
discretionary managers for all or a portion of a Fund's portfolio, except some
money managers (and their affiliates) may effect brokerage transactions for the
Underlying Funds (see, "Brokerage Allocations" and "Brokerage Commissions").
Money managers may serve as advisors or discretionary managers for Frank Russell
Trust Company, other investment vehicles sponsored or advised by Frank Russell
Company or its affiliates, other consulting clients of Frank Russell Company,
other offshore vehicles and/or for accounts which have no business relationship
with the Frank Russell Company organization.
DISTRIBUTOR. Russell Fund Distributors, Inc. (the "Distributor") serves as
the distributor of the Trust shares. The Distributor receives no compensation
from the Trust for its services. The Distributor is a wholly owned subsidiary of
FRIMCo and its mailing address is 909 A Street, Tacoma, WA 98402.
CUSTODIAN. State Street Bank and Trust Company ("State Street") serves as
custodian for the Trust. State Street also provides the basic portfolio
recordkeeping required by each of the Underlying Funds for regulatory and
financial reporting purposes. For these services, State Street is paid an
annual fee, in accordance with the following: domestic custody - an annual fee,
payable monthly on a pro rata basis, based on the following percentages of the
month end net assets of all domestic funds: $0 up to and including $10 billion
- - .0075%; over $10 billion -.0065%; global custody - an annual fee, payable
monthly on a pro rata basis, based on other month-end net assets and geographic
classification of the investments in the international funds; fund accounting -
(i) an annual fee of $10,000 - $24,000 per portfolio per fund, (ii) an annual
fee of 0.015% - 0.030%, payable monthly on a pro rata basis, based on daily
average net assets of each Fund; securities transaction charges from $6.50 to
$100.00 per transaction; monthly pricing fees of $375.00 per portfolio and $6.00
to $12.00 per security; multiple class fee of $15,000 per year for reach
additional class of shares; and yield calculation fees of $4,200 per fixed
income fund per year. State Street is reimbursed by the Funds for supplying
certain out-ofpocket expenses including postage, transfer fees, stamp duties,
taxes, wire fees, telexes and freight. Additionally, the following fees will be
assessed in the Fund of Funds environment: (i) daily priced accounting fee of
$1,000 per month (ii) monthly priced accounting fee of $500 per month and (iii)
transaction fee of $5 per transaction. In addition, interest earned on
uninvested cash balances is used to offset the custodian expense. The mailing
address for State Street Bank and Trust Company is 1776 Heritage Drive, North
Quincy, MA 02171.
11
<PAGE>
TRANSFER AND DIVIDEND DISBURSING AGENT. FRIMCo serves as Transfer Agent for
the Trust. For this service, FRIMCo is paid a fee of $20.00 per shareholder
transaction by each Underlying Fund. The Board of Trustees has approved a new
fee arrangement to be effective ______________, 1998 as follows: ___. FRIMCo is
also reimbursed by the Trust for certain out-of-pocket expenses including
postage, taxes, wires, stationery and telephone. LifePoints Funds investments
into the Underlying Funds will not be charged a fee. FRIMCo's mailing address is
909 A Street, Tacoma, WA 98402.
ORDER PLACEMENT DESIGNEES. The Investment Company has authorized certain
Financial Intermediaries to accept on its behalf purchase and redemption orders
for Investment Company shares. Such Financial intermediaries are authorized,
subject to approval of the Investment Company's distributor, to designate other
intermediaries to accept purchase and redemption orders on the Investment
Company's behalf. The Investment Company will be deemed to have received a
purchase or redemption order when such a Financial Intermediary or, if
applicable, an authorized designee, accepts the order. The customer orders will
be priced at the Investment Company Fund's net asset value next computed after
they are accepted by Schwab or an authorized designee, provided that the Schwab
or an authorized designee timely transmits the customer order to the Investment
Company.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the independent
accountants of the Trust. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards and a review of federal
tax returns. The mailing address of Coopers & Lybrand L.L.P. is One Post Office
Square, Boston, MA 02109.
PLAN PURSUANT TO RULE 18F-3. On February 23, 1995, the Securities and Exchange
Commission (the "SEC") adopted Rule 18f-3 under the 1940 Act, which permit a
registered open-end investment company whose shares are registered on Form N-1A
to issue multiple classes of shares in accordance with a written plan approved
by the investment company's board of directors/trustees and filed with the SEC.
At a meeting held on April 22, 1996, the Trust's Board adopted and, on November
4, 1996 amended, a plan pursuant to Rule 18f-3 (the "Rule 18f-3 plan") on behalf
of each Fund that issues multiple classes of shares (each a "Multiple Class
Fund"). The key features of the Rule 18f-3 plan are as follows: shares of each
class of a Multiple Class Fund represent an equal pro rata interest in the
underlying assets of that Fund, and generally have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions, limitations,
qualifications and terms and conditions, except that: (1) each class of shares
offered in connection with a Rule 12b-1 plan would bear certain fees under its
respective plan and would have exclusive voting rights on matters pertaining to
that plan and any related agreements; (2) each class of shares may contain a
conversion feature; (3) each class of shares may bear differing amounts of
certain expenses allowable to such class; (4) different policies may be
established with respect to the payment of distributions on the classes of
shares of a Multiple Class Fund to equalize the net asset values of the classes
or, in the absence of such policies, the net asset value per share of the
different classes may differ at certain times; (5) a class of shares of a
Multiple Class Fund might have different exchange privileges from another class;
(6) each class of shares of a Multiple Class Fund would have a different class
designation from another class of that Fund; and (7) each class of shares
offered in connection with a shareholder servicing plan would bear certain fees
under its respective plan.
DISTRIBUTION PLAN. Under the 1940 Act, the SEC has adopted Rule 12b-1 ("Rule
12b-1"), which regulates the circumstances under which the Funds may, directly
or indirectly, bear distribution expenses. Rule 12b-1 provides that the Funds
may pay for such expenses only pursuant to a plan adopted in accordance with
Rule 12b-1. Accordingly, the LifePoints Funds has adopted a distribution plan
(the "Distribution Plan") for the LifePoints Funds' Class D Shares, which are
described in the Prospectus. In adopting the Distribution Plan, a majority of
the Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Distribution Plan or in any
agreements entered into in connection with the Distribution Plan (the
"Disinterested Trustees"), have concluded, in conformity with the requirements
of the 1940 Act, that there is a reasonable likelihood that the Distribution
Plan will benefit each respective LifePoints Fund and its shareholders. In
connection with the Trustees' consideration of whether to adopt the Distribution
Plan, the LifePoints Funds' principal underwriter (the
12
<PAGE>
"Distributor") represented to the Trustees that the Distributor believes that
the Distribution Plan should result in increased sales and asset retention for
the LifePoints Funds by enabling the LifePoints Funds to reach and retain more
investors and financial intermediaries (including brokers, banks, financial
planners, and other financial institutions), although it is impossible to know
for certain, in the absence of the Distribution Plan or under an alternative
distribution agreement, the level of sales and asset retention that a LifePoints
Fund would enjoy.
The Distribution Plan provides that each LifePoints Fund may spend annually,
directly or indirectly, up to 0.75% of the average daily net asset value of its
Class D Shares for any activities or expenses primarily intended to result in
the sale of Class D Shares of a LifePoints Fund. Such payments by the Trust will
be calculated daily and paid periodically and shall not be made less frequently
than quarterly. The Board has presently determined to limit payment under the
Distribution Plan to 0.25% of average daily net assets. Any amendment to
increase materially the amount that may be spent for distribution pursuant to
the Distribution Plan must be approved by a vote of the holders of the lesser of
(a) more than fifty percent (50%) of the outstanding Class D Shares of a
LifePoints Fund or (b) sixty-seven percent (67%) or more of the Class D Shares
of a LifePoints Fund present at a shareholders' meeting, if the holders of more
than 50% of the outstanding shares of such LifePoints Fund are present or
represented by proxy. The Distribution Plan does not provide for the LifePoints
Funds to be charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report of
the amounts expended under the Distribution Plan, and the purposes for which
such expenditures were incurred, must be made to the Trustees for their review.
Continuation of the Distribution Plan must be approved annually by a majority of
the Trustees including a majority of the Independent Trustees. While the
Distribution Plan is in effect, the selection and nomination of the Independent
Trustees shall be committed to the discretion of such Independent Trustees. The
Distribution Plan is terminable, as to a LifePoints Fund's Class D Shares,
without penalty, at any time, by (a) a vote of a majority of the Disinterested
Trustees, or (b) a vote of the holders of the lesser of (i) more than fifty
percent (50%) of the outstanding Class D Shares of a LifePoints Fund or (ii)
sixty-seven (67%) or more of the Class D Shares of a LifePoints Fund present at
a shareholders' meeting, if the holders of more than 50% of the outstanding
shares of such Fund are present or represented by proxy.
Under the Distribution Plan, the LifePoints Funds may through the Distributor
also enter into agreements ("Selling Agent Agreements") with financial
intermediaries ("Selling Agents"), to provide the distribution activities
provided by the Selling Agents with respect to LifePoints Fund Class D Shares
held by or for the customers of the Selling Agents. Such arrangements are more
fully described in the Prospectus under "Distribution and Shareholder Service
Plans."
SHAREHOLDER SERVICES PLAN. A majority of the Trustees has also adopted, on
behalf of each LifePoints Fund, a Shareholder Services Plan pertaining to the
LifePoints Funds' Class D Shares and Class E Shares (the "Service Plan"),
effective November 5, 1996.
Under the Service Plan, the Trust may compensate the Distributor or any
investment advisors, banks, broker-dealers, financial planners or other
financial institutions that are dealers of record or holders of record or that
have a servicing relationship with the beneficial owners or record holders of
Class D or Class E Shares of any of the LifePoints Funds offering such shares
("Servicing Agents"), for any activities or expenses primarily intended to
assist, support or service their clients who beneficially own or are primarily
intended to assist, support or service their clients who beneficially own or are
record holders of Class D or Class E Shares of the LifePoints Funds. Such
payments by the Trust will be calculated daily and paid quarterly at a rate or
rates set from time to time by the Trustees, provided that no rate set by the
Trustees for Class D or Class E Shares of any LifePoints Fund may exceed, on an
annual basis, 0.25% of the average daily net asset value of that Fund's Class D
or Class E Shares.
13
<PAGE>
Among other things, the Service Plan provides that (1) the Distributor shall
provide to the Trust's officers and Trustees, and the Trustees shall review at
least quarterly, a written report of the amounts expended by the Trust pursuant
to the Service Plan, or by Servicing Agents pursuant to the Service Plans, and
the purposes for which such expenditures were made; (2) the Service Plan shall
continue in effect for so long as its continuance is specifically approved at
least annually by the Trustees, including a majority of the Independent
Trustees, cast in person at a meeting called for that purpose; (3) while the
Service Plan is in effect, the selection and nomination of the Independent
Trustees shall be committed to the discretion of such Independent Trustees; and
(4) the Service Plan is terminable, as to a LifePoints Funds' Class D or Class E
Shares, by a vote of a majority of the Independent Trustees.
UNDERLYING FUND EXPENSES. The Underlying Funds will pay all their expenses
other than those expressly assumed by FRIMCo. The principal expense of the
Underlying Funds is the annual management fee payable to FRIMCo. The Underlying
Funds' other expenses include: fees for independent accountants, legal, transfer
agent, registrar, custodian, dividend disbursement, and portfolio and
shareholder recordkeeping services, and maintenance of tax records payable to
Frank Russell Company; state taxes; brokerage fees and commissions; insurance
premiums; association membership dues; fees for filing of reports and
registering shares with regulatory bodies; and such extraordinary expenses as
may arise, such as federal taxes and expenses incurred in connection with
litigation proceedings and claims and the legal obligations of the Trust to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents with respect thereto.
Whenever an expense can be attributed to a particular Underlying Fund, the
expense is charged to that Underlying Fund. Other common expenses are allocated
among the Underlying Funds based primarily upon their relative net assets.
As of the date of this Statement, FRIMCo has voluntarily agreed to waive all
or a portion of its management fee with respect to certain Underlying Funds.
This waiver may be changed or rescinded at any time.
LIFEPOINTS FUND OPERATING EXPENSES. Each LifePoints Fund is expected to have
a low operating expense ratio although, as a shareholder of the Underlying
Funds, each LifePoints Fund indirectly bears its pro rata share of the
management fees charged to, and expenses of operating, the Underlying Funds in
which it invests. It is currently contemplated that all other operating expenses
(shareholder servicing, legal, accounting, etc.) except for the 0.25% management
fee and any Rule 12b-1 Fees and Shareholder Service Fees will be paid for in
accordance with these Special Servicing Agreements (each a "Servicing
Agreement") among each LifePoints Fund, its Underlying Funds and FRIMCo. Under
the Servicing Agreement, FRIMCo arranges for all services pertaining to the
operations of the LifePoints Funds, including transfer agency services but not
including any services covered by the LifePoints Funds' management fee or any
Rule 12b-1 or Shareholder Service Fees. However, it is expected that the
additional assets invested in the Underlying Funds by the LifePoints Funds will
produce economies of operations and other savings for the Underlying Funds which
will exceed the cost of the services required for the operation of the
LifePoints Funds. In this case, the Servicing Agreement provides that, the
officers of the Trust, at the direction of the Trustees, may apply such savings
to payment of the aggregate operating expenses of LifePoints Funds which have
invested in that Underlying Fund, so that the Underlying Fund will bear those
operating expenses in proportion to the average daily value of the shares owned
by the LifePoints Fund, provided that no Underlying Fund will bear such
operating expenses in excess of the estimated savings to it. In the event that
the aggregate financial benefits to the Underlying Funds do not exceed the costs
of the LifePoints Funds, the Agreement provides that either FRIMCo or the
Underlying Funds will bear that portion of costs determined to be greater than
the benefits. Those costs include Fund accounting, custody, auditing, legal,
blue sky and, as well as organizational, transfer agency, prospectus,
shareholder reporting, proxy, general administrative and miscellaneous expenses.
VALUATION OF THE LIFEPOINTS FUND SHARES. The net asset value per share of
Class D and Class E Shares is calculated separately for each LifePoints Fund on
each business day on which shares are offered or orders to redeem are tendered.
A business day is one on which the New York Stock Exchange is open for trading.
Currently, the New York Stock Exchange is open for trading every weekday, except
New
14
<PAGE>
Year's Day, Martin Luther King's Birthday, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
PRICING OF SECURITIES. The Class S Shares of the Underlying Funds held by
each LifePoints Fund are valued at the net asset value of each Underlying Fund.
The Emerging Markets, International Securities, Diversified Bond, and
Multistrategy Bond Funds' portfolio securities actively trade on foreign
exchanges which may trade on Saturdays and on days that the Underlying Funds do
not offer or redeem shares. The trading of portfolio securities on foreign
exchanges on such days may significantly increase or decrease the net asset
value of the Class S Shares of the Underlying Fund when a shareholder (such as a
LifePoints Fund) is not able to purchase or redeem Underlying Fund shares.
Further, because foreign securities markets may close prior to the time the
Underlying Funds determine net asset value, events affecting the value of the
portfolio securities occurring between the time prices are determined and the
time the Underlying Funds calculate net asset value may not be reflected in the
calculation of net asset value unless FRIMCo determines that a particular event
would materially affect the net asset value.
PORTFOLIO TURNOVER RATES OF THE LIFEPOINTS FUNDS. The portfolio turnover
rate for each LifePoints Fund is calculated by dividing the lesser of purchases
or sales of Underlying Fund shares for the particular year, by the monthly
average value of the Underlying Fund shares owned by the Fund during the year.
Each LifePoints Fund's portfolio turnover rate is expected not to exceed 25%.
The LifePoints Funds will purchase or sell Underlying Fund shares to: (i)
accommodate purchases and sales of each Fund's shares; (ii) change the
percentages of each Fund's assets invested in each of the Underlying Funds in
response to market conditions; and (iii) maintain or modify the allocation of
each Fund's assets among the Underlying Funds generally within the percentage
limits described in the Prospectus.
PORTFOLIO TRANSACTION POLICIES OF THE UNDERLYING FUNDS. Decisions to buy and
sell securities for the Underlying Funds are made by the money managers for the
assets assigned to them, and by FRIMCo or the money manager for the Underlying
Funds' Liquidity Portfolios. The Underlying Funds do not give significant weight
to attempting to realize long-term, rather than short-term, capital gains while
making portfolio investment decisions. The portfolio turnover rates for certain
Underlying Funds are likely to be somewhat higher than the rates for comparable
mutual funds with a single money manager. 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
Underlying 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 Underlying 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
Underlying Funds for the periods ended December 31, 1997 and 1996, respectively,
were as follows: Diversified Equity Fund, ___% and ___%; Special Growth Fund,
__% and ___%; Quantitative Equity Fund, ___% and ___%; International Securities
Fund, ___% and ___%; Diversified Bond Fund, ___% and ___%; Volatility
Constrained Bond Fund, ___% and ___%; Multistrategy Bond Fund, ___% and ___%;
Real Estate Securities Fund, ___% and ___%; and Emerging Markets Fund, ___% and
___%.
The Underlying Funds may effect portfolio transactions with or through Frank
Russell Securities, Inc., an affiliate of FRIMCo, only when the applicable money
manager determines that the Underlying Fund will receive competitive execution,
price and commissions. Frank Russell Securities, Inc. refunds to the Underlying
Fund up to 70% of the commissions paid by that Underlying Fund when it effects
such transactions, after reimbursement for research services provided to FRIMCo.
As to brokerage transactions effected by money managers on behalf of the
Underlying Funds through Frank Russell Securities, Inc. at the request of the
money manager, research services obtained from third party service providers at
market rates are provided to the Underlying Funds by Frank Russell Securities,
Inc. Such research services include performance measurement statistics, fund
analytics systems and market monitoring systems. As to other brokerage
transactions effected by the Underlying Funds through Frank Russell Securities,
research services provided by Frank Russell Company and Russell Data Services
are provided to the money managers. Such services include market performance
indices, investment adviser performance information
15
<PAGE>
and market analysis. This arrangement is used by the Diversified Equity, Special
Growth, Quantitative Equity, International Securities, Emerging Markets and Real
Estate Securities Funds. All Underlying Funds may also effect portfolio
transactions through and pay brokerage commissions to the money managers (or
their affiliates). Generally, securities are purchased for Diversified Equity,
Quantitative Equity, International Securities, Diversified Bond, Emerging
Markets and Real Estate Securities Funds for investment income and/or capital
appreciation and not for short-term trading profits. However, these Underlying
Funds may dispose of securities without regard to the time they have been held
when such action, for defensive or other purposes, appears advisable to their
money managers. Special Growth, Volatility Constrained Bond and Multistrategy
Bond Funds trade more actively to realize gains and/or to increase yields on
investments by trading to take advantage of short-term market variations. This
policy is expected to result in higher portfolio turnover for these three
Underlying Funds.
BROKERAGE ALLOCATIONS. Transactions on US stock exchanges involve the
payment of negotiated brokerage commissions; on non-US exchanges, commissions
are generally fixed. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, including most debt
securities and money market instruments, but the price includes an undisclosed
payment in the form of a mark-up or mark-down. The cost of securities purchased
from underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection of a
broker or dealer to execute portfolio transactions is usually made by the money
manager of the Underlying Fund. The Trust's Portfolio Management Agreements with
FRIMCo and the money managers provide, in substance and subject to specific
directions from officers of the Trust or FRIMCo, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Underlying Fund. Securities will
ordinarily be purchased in the primary markets, and the money manager shall
consider all factors it deems relevant in assessing the best overall terms
available for any transaction, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any (for the specific transaction and on a continuing basis).
In addition, the Portfolio Management Agreements authorize FRIMCo and the
money managers, respectively, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms available, to
consider the "brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Underlying
Fund, FRIMCo and/or to the money manager (or their affiliates). FRIMCo and the
money managers are authorized to cause the Underlying Funds to pay a commission
to a broker or dealer who provides such brokerage and research services for
executing a portfolio transaction which is in excess of the amount of
commissions another broker or dealer would have charged for effecting that
transaction. FRIMCo or the money manager, as appropriate, must determine in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided -- viewed in terms of that particular
transaction or in terms of all the accounts over which FRIMCo or the money
manager exercises investment discretion. Any commission, fee or other
remuneration paid to an affiliated broker-dealer is paid in compliance with the
Trust's procedures adopted in accordance with Rule 17e-1 of the 1940 Act.
FRIMCo does not expect the Trust ordinarily to effect a significant portion
of the Trust's total brokerage business for the Underlying Funds with broker-
dealers affiliated with its money managers. However, a money manager may effect
portfolio transactions for the segment of an Underlying Fund's portfolio
assigned to the money manager with a broker-dealer affiliated with the manager,
as well as with brokers affiliated with other money managers.
BROKERAGE COMMISSIONS. The Board reviews, at least annually, the commissions
paid by the Underlying Funds to evaluate whether the commissions paid over
representative periods of time were reasonable in relation to commissions being
charged by other brokers and the benefits to the Underlying Funds. Frank Russell
Company maintains an extensive database showing commissions paid by
institutional investors, which is the primary basis for making this evaluation.
Certain services received by FRIMCo or money managers attributable to a
particular transaction may benefit one or more other accounts
16
<PAGE>
for which investment discretion is exercised by the money manager, or a Fund
other than that for which the particular portfolio transaction was effected. The
fees of the money managers are not reduced by reason of their receipt of such
brokerage and research services.
During the last three years, the brokerage commissions paid by the Underlying
Funds in which the LifePoints Funds currently invest were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Diversified Equity $2,492,015 $1,360,214 $1,118,548
Special Growth 845,569 893,203 467,162
Quantitative Equity 1,069,927 744,245 561,459
International Securities 2,270,148 1,284,042 1,251,533
Real Estate Securities 641,659 915,952 419,508
Emerging Markets 1,722,534 964,725 1,039,478
---------- ---------- ----------
Total $9,041,852 $6,162,381 $4,857,688
========== ========== ==========
</TABLE>
The principal reasons for changes in several Underlying Funds' brokerage
commissions for the period were (1) changes in Fund asset size, (2) changes in
market conditions, and (3) changes in money managers of certain Underlying
Funds, which required substantial portfolio restructurings, resulting in
increased securities transactions and brokerage commissions.
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
normally do not pay a stated brokerage commission on transactions.
During the year ended December 31, 1997, approximately $________ of the
brokerage commissions of the Underlying Funds were directed to brokers who
provided research services to FRIMCo. The research services included industry
and company analysis, portfolio strategy reports, economic analysis, and
statistical data pertaining to the capital markets.
Gross brokerage commissions received by affiliated broker/dealers from
affiliated and non-affiliated money managers for the year ended December 31,
1997 from portfolio transactions effected for the Underlying Funds were as
follows: (to be filed by amendment)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AFFILIATED BROKER/DEALER COMMISSIONS COMMISSIONS
------------------------ ----------- ----------------
<S> <C> <C>
To be filed by amendment
</TABLE>
17
<PAGE>
The percentage of total affiliated transactions (relating to trading activity)
to total transactions during fiscal 1997 for the Underlying Funds was
____%.
During the year ended December 31, 1997, the Underlying Funds purchased
securities issued by the following regular brokers or dealers as defined by Rule
10b-1 of the 1940 Act, each of which is one of the Underlying Funds' ten largest
brokers or dealers by dollar amounts of securities executed or commissions
received on behalf of the Underlying Funds. The value of broker-dealer
securities held as of December 31, 1997, was as follows: (to be filed by
amendment)
TABLE 1
HOLDINGS OF TOP 10 BROKER-DEALERS AT 12/31/97
<TABLE>
<CAPTION>
BEAR DAIWA GOLDMAN MERRILL MORGAN PAINE SALOMON
FUND STEARNS SECURITIES SACHS & CO. LYNCH STANLEY WEBBER BROTHERS
---- ------- ---------- ----------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Diversified Equity
Special Growth
Quantitative Equity
Diversified Bond TO BE FILED BY AMENDMENT
Volatility Constrained Bond
Multistrategy Bond
</TABLE>
At 12/31/97, the Funds did not have any holdings in the following top 10
broker-dealers:
YIELD AND TOTAL RETURN QUOTATIONS. The LifePoints Funds compute their average
annual total return by using a standardized method of calculation required by
the SEC, and report average annual total return for each class of shares which
they offer. Because the Class D and Class E Shares are subject to a shareholder
services fee, the average annual total return performance of these classes may
be different from the average annual total return performance of the Class S
Shares (which are not presently offered for public investment). Furthermore,
since the Class D Shares are subject to Rule 12b-1 fees, the average annual
total return performance of the Class D Shares may be different from the Class E
Shares.
Average annual total return is computed by finding the average annual
compounded rates of return on a hypothetical initial investment of $1,000 over
the one, five and ten year periods (or life of the LifePoints Funds, as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)/n/= ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one, five or
ten year period at the end of the one, five or ten year period (or fractional portion thereof).
</TABLE>
The calculation assumes that all dividends and distributions of each
LifePoints Fund are reinvested at the price stated in the Prospectus on the
dividend dates during the period, and includes all recurring fees
18
<PAGE>
that are charged to all shareholder accounts. The average annual total returns
for the Class D and Class E Shares will be reported in the applicable
Prospectuses.
Yields are computed by using standardized methods of calculation required by
the SEC. Similar to average annual total return calculations, a LifePoints Fund
calculates yields for each class of shares which it offers. Yields for the
LifePoints Funds, which do not invest primarily in money market instruments, are
calculated by dividing the net investment income per share earned during a 30day
(or one month) period by the maximum offering price per share on the last day of
the period, according to the following formula:
YIELD= 2[(a-b+1)/6/-1]
---------------
cd
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
</TABLE>
The yields for the LifePoints Funds investing primarily in fixed income
instruments are reported in the respective Prospectus.
Each LifePoints Fund may, from time to time, advertise non-standard
performances, including average annual total return.
Each LifePoints Fund may compare its performance with various industry
standards of performance, including Lipper Analytical Services, Inc. or other
industry publications, business periodicals, rating services and market indices.
INVESTMENT RESTRICTIONS, POLICIES AND
PRACTICES OF THE LIFEPOINTS FUNDS
Each LifePoints Fund has certain fundamental investment objectives,
restrictions and policies which may be changed only with the approval of a
majority of the shareholders of that LifePoints Fund. Other policies may be
changed by a LifePoints Fund without shareholder approval. The LifePoints Funds'
investment objectives are set forth in the respective Prospectus.
INVESTMENT RESTRICTIONS. Each LifePoints Fund is subject to the following
fundamental investment restrictions. Unless otherwise noted, these restrictions
apply on a Fund-by-Fund basis at the time an investment is being made. No
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, except with respect to shares of Trust
Funds.
4. Invest in companies for the purpose of exercising control or management.
19
<PAGE>
5. Purchase or sell real estate; provided that each LifePoints Fund may
invest in the Real Estate Securities Fund, which may own securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein.
6. Purchase or sell commodities or commodities contracts.
7. Borrow amounts in excess of 5% of the LifePoints Fund's total assets taken
at cost or at market value, whichever is lower, and only from banks as a
temporary measure for extraordinary or emergency purposes, except that a
LifePoints Fund may engage in reverse repurchase agreements to meet redemption
requests without immediately selling any portfolio instruments. A LifePoints
Fund will not mortgage, pledge or in any other manner transfer as security for
any indebtedness, any of its assets.
8. Purchase securities on margin or effect short sales (except that a
LifePoints Fund may obtain such short-term credits as may be necessary for the
clearance of purchases or sales of securities).
9. Engage in the business of underwriting securities issued by others or
purchase securities.
10. The Trust will not participate on a joint or a joint and several basis in
any trading account in securities except to the extent permitted by the 1940 Act
and any applicable rules and regulations and except as permitted by any
applicable exemptive orders from the 1940 Act. The "bunching" of orders for the
sale or purchase of marketable portfolio securities with two or more Funds, or
with a Fund and such other accounts under the management of FRIMCo or any money
manager for the Funds to save brokerage costs or to average prices among them
shall not be considered a joint securities trading account.
11. Make loans of money or securities to any person or firm; provided,
however, that the making of a loan shall not be construed to include (i) the
entry into "repurchase agreements;" or (ii) the lending of portfolio securities
in the manner generally described in the LifePoints Funds' Prospectus' section
"Investment Policies, Restrictions and Risks of the LifePoints Funds -- Lending
Portfolio Securities."
12. Purchase or sell options.
13. The Trust will not purchase the securities of other investment companies
except to the extent permitted by the 1940 Act and any applicable rules and
regulations and except as permitted by any applicable exemptive orders from the
1940 Act (and as described below).
14. Purchase from or sell portfolio securities to the officers, the Trustees
or other "interested persons" (as defined in the 1940 Act) of the Investment
Company, including the Underlying Funds' money managers and their affiliates,
except as permitted by the 1940 Act, SEC rules or exemptive orders.
15. No LifePoints Fund will issue senior securities, as defined in the 1940
Act, except that this restriction shall not be deemed to prohibit any Fund from
making any otherwise permissible borrowings, mortgages or pledges, entering into
permissible reverse repurchase agreements, or issuing shares of beneficial
interest in multiple classes.
Because of their investment objectives and policies, the LifePoints Funds will
concentrate more than 25% of their assets in the mutual fund industry. In
accordance with the LifePoints Funds' investment policies set forth in the
Prospectus, each of the LifePoints Funds may invest more than 25% of its assets
in the Underlying Funds. However, each of the Underlying Funds in which each
LifePoints Fund will invest (other than the Real Estate Securities Fund) will
not concentrate more than 25% of its total assets in any one industry. The Real
Estate Securities Fund may invest 25% or more of its total assets in the
securities of companies directly or indirectly engaged in the real estate
industry.
INVESTMENT POLICIES AND PRACTICES OF THE LIFEPOINTS FUNDS
REPURCHASE AGREEMENTS. Each LifePoints Fund may enter into repurchase
agreements with the seller -- a bank or securities dealer -- who agrees to
repurchase the securities at the Fund's cost plus interest within a specified
time (normally the next day). The securities purchased by a LifePoints Fund have
a total value in excess of the value of the repurchase agreement and are held by
the LifePoints Fund's custodian
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bank until repurchased. Repurchase agreements assist a LifePoints Fund in being
invested fully while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. The LifePoints Funds will limit repurchase transactions
to those member banks of the Federal Reserve System and primary dealers in US
government securities whose creditworthiness is continually monitored and found
satisfactory by FRIMCo.
MONEY MARKET INSTRUMENTS. Each LifePoints Fund may invest in securities with
maturities of 397 days or less at the time from the trade date or such other
date upon which a LifePoints Fund's interest in a security is subject to market
action. Each LifePoints Fund will follow procedures reasonably designed to
assure that the prices so determined approximate the current market value of the
Fund's securities. The procedures also address such matters as diversification
and credit quality of the securities the LifePoints Funds purchase, and were
designed to ensure compliance by the Funds with the requirements of Rule 2a-7 of
the 1940 Act.
ILLIQUID SECURITIES. The expenses of registration of restricted securities
that are illiquid (excluding securities that may be resold by the LifePoints
Funds pursuant to Rule 144A, as explained in the Prospectus) may be negotiated
at the time such securities are purchased by a LifePoints Fund. When
registration is required, a considerable period may elapse between a decision to
sell the securities and the time the sale would be permitted. Thus, the
LifePoints Fund may not be able to obtain as favorable a price as that
prevailing at the time of the decision to sell. A LifePoints Fund also may
acquire, through private placements, securities having contractual resale
restrictions, which might lower the amount realizable upon the sale of such
securities.
INVESTMENT POLICIES OF THE UNDERLYING FUNDS
The following is a description of the investment objective and policies for
each of the Underlying Funds.
DIVERSIFIED EQUITY FUND. The 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 Fund's objective is to maximize total return
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from the Diversified Equity Fund, by
investing in equity securities. Current income is a secondary consideration in
selecting securities. The Fund may invest in common and preferred stock,
convertible securities, rights and warrants. The Fund's investments may include
companies whose securities have been publicly traded for less than five years
and smaller companies, such as companies not listed in the Russell 1000/(R)/
Index. A substantial portion of the Fund's portfolio will generally consist of
equity securities of "emerging growth-type" companies which tend to reinvest
most of their earnings, rather than pay significant cash dividends; or companies
characterized as "special situations" where the money manager believes that
cyclical developments in the securities markets, the industry, or the issuer
itself present opportunities for capital growth.
QUANTITATIVE EQUITY FUND. The 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.
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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 underperformance.
However, there is no guarantee the Fund will have such characteristics at any
one time. A quantitative manager bases its investment decisions primarily on
quantitative investment models. These models are used by the money manager to
determine the investment potential of a stock within a particular portfolio and
to rank securities most favorable to having a total return surpassing the total
return of the Russell 1000/(R)/ Index. Once the money manager has ranked the
securities, it then selects the securities most likely to have the
characteristics needed to construct a portfolio that has superior return
prospects with risks similar to the Russell 1000/(R)/ Index.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.
INTERNATIONAL SECURITIES FUND. The Fund's objectives are to provide favorable
total return and additional diversification for US investors by investing
primarily in equity and fixed-income securities of non-US companies, and
securities issued by non-US governments. The Fund invests primarily in equity
securities issued by companies domiciled outside of the United States. The Fund
may also invest in fixed-income securities, including instruments issued by non-
US governments and their agencies, and in US companies which derive, or are
expected to derive, a substantial portion of their revenues from operations
outside the United States.
The Fund may invest in equity and debt securities denominated in other than US
dollars and gold-related equity investments, including gold mining stocks and
gold-backed debt instruments. However, as a matter of fundamental policy, the
Fund will not invest more than 20% of its net assets in gold-related
investments.
EMERGING MARKETS FUND. The 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 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.
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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.
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
Ratings 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. 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, see "High Risk Bonds" below.
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 in Foreign
Securities."
REAL ESTATE SECURITIES FUND. The 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, 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 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.
DIVERSIFIED BOND FUND. The 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
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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 Fund's objectives are the preservation
of capital and the generation of current income consistent with the preservation
of capital by investing primarily in fixed-income securities with low-volatility
characteristics. The Fund will invest primarily in fixed-income securities,
emphasizing those which mature in two years or less from the date of acquisition
or which have similar volatility characteristics. To minimize credit risk and
fluctuations in net asset value per share, the Fund intends to maintain an
average portfolio maturity of less than five years. The Fund's money managers
will seek to identify and invest in a managed portfolio of high-quality debt
securities denominated in the US dollar and a range of foreign currencies. Under
normal circumstances, the Fund will invest in securities of issuers domiciled in
at least three different countries.
Although the Fund will invest primarily in debt securities denominated in the
US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments among
securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities, within each such country, among different types of debt
securities. The money managers which invest in foreign 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 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
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Investors Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1 or TBW-2
by Thomson Bank Watch, Inc., or, if not rated, issued by US or foreign companies
having outstanding debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A by
Moody's and determined by the money managers to be of high-quality.
As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is an organization consisting of certain European states
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specific amounts of currency of member states of the
European Community. The specific amounts of currency comprising the ECU may be
adjusted by the Counsel of Ministers of the European Community to reflect
changes in the relative values of the underlying currencies. The money managers
investing in such securities do not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranationals, in particular, issue ECU-denominated
obligations.
The Fund may enter into interest rate swaps, which involve the exchange by the
Fund with another party of its respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The Fund expects to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities it anticipates purchasing at a
later date. The Fund intends to use these transactions as a hedge and not as a
speculative investment.
MULTISTRATEGY BOND FUND. The 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 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 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.
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 in Foreign Securities."
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The variable and floating rate securities the Fund may invest in provide for a
periodic adjustment in the interest rate paid on the obligations. The terms of
such obligations must provide that interest rates are adjusted periodically
based upon some appropriate interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or may be event based, such as a change in the prime rate.
The Fund may also invest in zero coupon US Treasury, foreign government and US
and foreign corporate debt securities, which are bills, notes and bonds that
have been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt obligations and
coupons. A zero coupon security pays no interest to its holder prior to
maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest.
The Fund's portfolio may include debt securities issued by domestic or foreign
entities, and denominated in US dollars or foreign currencies. It is anticipated
that no more than 25% of the Fund's net assets will be denominated in foreign
currencies. Foreign currency exchange transactions (options on foreign
currencies, foreign currency futures contracts and forward foreign currency
contracts) will only be used by the Fund for the purpose of hedging against
foreign currency exchange risk arising from the Fund's investment, or
anticipated investment, in securities denominated in foreign currencies. Foreign
investment may include emerging market debt. The risks associated with
investment in securities issued by foreign governments and companies are
described under "Investment in Foreign Securities." Emerging markets are
described under "Emerging Markets Fund." 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" 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 "High Risk Bonds."
INVESTMENT PRACTICES. The Underlying Funds use certain investment instruments
and techniques commonly used by institutional investors. The principal practices
are the following:
FORWARD COMMITMENTS. Each Underlying 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
Underlying 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. Forward commitments and
when-issued transactions involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
Additionally, under certain circumstances, the International Securities and
Emerging Markets Funds may occasionally engage in "free trade" transactions in
which delivery of securities sold by the Underlying Fund is made prior to the
Fund's receipt of cash payment therefor or the Fund's payment of cash for
portfolio securities occurs prior to the Fund's receipt of those securities.
"Free trade" transactions involve the risk of loss to an Underlying Fund if the
other party to the "free trade" transaction fails to complete the transaction
after the Fund has tendered cash payment or securities, as the case may be.
LENDING PORTFOLIO SECURITIES. Each underlying fund 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 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 102% for loans of US securities, and
105%, for non-US securities, of the current market value of loaned securities.
The collateral will be "marked-to-market" on a daily basis, and the
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borrower will furnish additional collateral in the event that the value of the
collateral drops below the respective percentages set forth above of the market
value of the loaned securities.
Cash collateral is invested in high-quality short-term debt 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 Underlying 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 Underlying Fund and the Fund's custodian. Each Underlying
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 Underlying 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 Trust 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 Underlying Fund must immediately pay the amount of the shortfall to the
borrower.
ILLIQUID SECURITIES. The Underlying 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 Underlying 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, as amended (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, an Underlying Fund's holding of
that security may be illiquid. There may be undesirable delays in selling
illiquid securities at prices representing their fair value.
CASH RESERVES. Each Underlying Fund is authorized to invest its cash reserves
(i.e., funds awaiting investment in the specific types of securities to be
acquired by an Underlying Fund) in money market instruments and in debt
securities which are at least comparable in quality to the Underlying Fund's
permitted investments. In lieu of having each of the Underlying Funds make
separate, direct investments in money market instruments, each Underlying Fund
and its money managers may elect to invest the Fund's cash reserves in the
Trust's Money Market Fund.
The Money Market Fund seeks to maximize current income to the extent
consistent with the preservation of capital and liquidity, and the maintenance
of a stable $1.00 per share net asset value by investing solely in short-term
money market instruments. The Underlying Funds will use this procedure only so
long as doing so does not adversely affect the portfolio management and
operations of the Money Market Fund and the Trust's other Funds. The Money
Market Fund and the Underlying Funds investing in the Money Market Fund treat
such investments as the purchase and redemption of Money Market Fund shares. Any
Underlying Fund investing in the Money Market Fund pursuant to this procedure
participates equally on a pro rata basis in all income, capital gains and net
assets of the Money Market Fund, and will have all rights and obligations of a
shareholder as provided in the Trust's Master Trust Agreement, including voting
rights. However, shares of the Money Market Fund issued to the Underlying Funds
will be voted by the Trustees of the Trust in the same proportion as the shares
of the Money Market Fund which are held by shareholders which are not
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Underlying Funds. Underlying Funds investing in the Money Market Fund currently
do not pay a management fee to the Money Market Fund.
LIQUIDITY PORTFOLIOS. An Underlying Fund at times has to sell portfolio
securities in order to meet redemption requests. The selling of securities may
effect an Underlying Fund's performance since the money manager sells the
securities for other than investment reasons. An Underlying Fund can avoid
selling its portfolio securities by holding adequate levels of cash to meet
anticipated redemption requests. The holding of significant amounts of cash is
contrary, however, to the investment objectives of the Diversified Equity,
Special Growth, Quantitative Equity and International Securities Funds. The more
cash these Underlying Funds hold, the more difficult it is for their returns to
meet or surpass their respective benchmarks. FRIMCo will exercise investment
discretion or select a money manager to exercise investment discretion for
approximately 5-15% of the Funds' assets assigned to a "Liquidity Portfolio."
A Liquidity Portfolio addresses this potential detriment by having FRIMCo or a
money manager selected for this purpose create temporarily an equity exposure
for cash reserves through the use of options and futures contracts until those
cash reserves are invested in securities or used for Underlying Fund
transactions. This will enable those four Underlying Funds to hold cash while
receiving a return on the cash which is similar to holding equity securities.
MONEY MARKET INSTRUMENTS. Similar to the LifePoints Funds, and as described
earlier in this Statement, the Underlying Funds may invest in money market
instruments.
US GOVERNMENT OBLIGATIONS. The types of US government obligations the
Underlying Funds may purchase include: (1) a variety of US Treasury obligations
which differ only in their interest rates, maturities and times of issuance: (a)
US Treasury bills at time of issuance have maturities of one year or less, (b)
US Treasury notes at time of issuance have maturities of one to ten years and
(c) US Treasury bonds at time of issuance generally have maturities of greater
than ten years; (2) obligations issued or guaranteed by US government agencies
and instrumentalities and supported by any of the following: (a) the full faith
and credit of the US Treasury (such as Government National Mortgage Association
("GNMA") participation certificates), (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury, (c)
discretionary authority of the US government agency or instrumentality or (d)
the credit of the instrumentality (examples of agencies and instrumentalities
are: Federal Land Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks and
Federal National Mortgage Association). No assurance can be given that the US
government will provide financial support to such US government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d) in the future, other
than as set forth above, since it is not obligated to do so by law. The
Underlying Funds may purchase US government obligations on a forward commitment
basis.
RUSSELL 1000 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 10K
report with the SEC, foreign securities and ADRs.
The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. These changes are expected to
represent less than 1% of the total market capitalization of the Index. Changes
for mergers and acquisitions are made when trading ceases in the acquirer's
shares. The 1,001st largest US company by capitalization is then added to the
Index to replace the acquired stock.
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.
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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.
HIGH RISK BONDS. The Underlying Funds, other than the Emerging Markets and
Multistrategy Bond Funds, do not invest their 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 are the lowest ratings which are considered
"investment grade" securities, although Moody's considers securities rated Baa,
and S&P considers bonds rated BBB, to have some speculative characteristics. The
Underlying Funds, other than Emerging Markets and Multistrategy Bond Funds, 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 Emerging Markets and Multistrategy Bond Funds will invest in "investment
grade" securities and may invest up to 5% of its total assets (in the case of
the Emerging Markets Fund) and 25% of its total assets (in the case of the
Multistrategy Bond Fund) 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 Funds to
be of comparable quality. Lower rated debt securities generally offer a higher
yield than that available from higher grade issues. However, lower rated debt
securities involve higher risks, in that they are especially subject to adverse
changes in general economic conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers and to
price fluctuation in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and interest and increase the possibility of default. In
addition, the market for lower rated debt securities has expanded rapidly in
recent years, and its growth paralleled a long economic expansion. The market
for lower rated debt securities is generally thinner and less active than that
for higher quality securities, which would limit the Underlying Funds' 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 Multistrategy Bond and
Emerging Markets Funds will seek to reduce the risks associated with investing
in such securities by limiting the Funds' holdings in such securities and by the
depth of their own credit analysis.
Securities rated BBB by S&P or Baa by Moody's may involve greater risks than
securities in higher rating categories. Securities receiving S&P's BBB rating
are regarded as having adequate capacity to pay interest and repay principal.
Such securities typically exhibit adequate investor protections but adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rating categories.
Securities possessing Moody's Baa rating are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present,
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well. For further description of the various rating categories, see "Ratings of
Debt Instruments."
RISK FACTORS. The growth of the market for lower rated debt securities has
paralleled a long period of economic expansion. Lower rated debt securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. The prices of low rated
debt securities have been found to be less sensitive to interest rate changes
than investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low rated debt securities defaults, a Fund
may incur additional expenses to seek financial recovery.
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In addition, the markets in which low rated debt securities are traded are
more limited than those for higher rated securities. The existence of limited
markets for particular securities may diminish an Underlying Fund's ability to
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets and could
adversely affect and cause fluctuations in the daily net asset value of the
Underlying Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of an Underlying
Fund to achieve its investment objectives may be more dependent on credit
analysis than would be the case if the Fund was investing only in investment
grade securities.
The managers of the Emerging Markets and Multistrategy Bond Funds may use
ratings to assist in investment decisions. Ratings of debt securities represent
a rating agency's opinion regarding their quality and are not a guarantee of
quality. Rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than a rating indicates.
INVESTMENT IN FOREIGN SECURITIES. The Underlying Funds may invest in foreign
securities. The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets. Investments in
emerging or developing markets involve exposure to economic structures that are
generally less diverse and mature, and to political systems which can be
expected to have less stability than those of more developed countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the
Underlying 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 Underlying 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. Each Underlying Fund may hold securities of foreign
issuers in the form of American Depository Receipts ("ADRs"), American
Depository Shares ("ADSs") and European Depository Receipts ("EDRs"), or other
securities convertible into securities of eligible European or Far Eastern
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. ADRs and ADSs
typically are issued by an American bank or trust company and evidence ownership
of underlying securities issued by a foreign corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts ("CDRs"), are issued in
Europe typically by foreign banks and trust companies and evidence ownership of
either foreign or domestic securities. Generally, ADRs and ADSs in registered
form are designed for use in United States securities markets and EDRs in bearer
form are designed for use in European securities markets. For purposes of an
Underlying Fund's investment policies, the Underlying Fund's investments in
ADRs, ADSs and EDRs will be deemed to be investments in the equity securities
representing securities of foreign issuers into which they may be converted.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respect
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish
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an unsponsored facility without participation by (or even necessarily the
acquiescence of) the issuer of the deposited securities, although typically the
depository requests a letter of non-objection from such issuer prior to the
establishment of the facility. Holders of unsponsored ADRs generally bear all
the costs of such facilities. The depository usually charges fees upon the
deposit and withdrawal of the deposited securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distributions, and the
performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
Underlying Funds may invest in sponsored and unsponsored ADRs.
OPTIONS AND FUTURES. The Underlying Funds may purchase and sell (write) both
call and put options on securities, securities indexes, and foreign currencies,
and enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts for hedging purposes. If
other types of options, futures contracts, or options on futures contracts are
traded in the future, the Underlying Funds may also use those instruments,
provided that the Trust's Board determines that their use is consistent with the
Underlying Funds' investment objectives, and provided that their use is
consistent with restrictions applicable to options and futures contracts
currently eligible for use by the Underlying Funds (i.e., that written call or
put options will be "covered" or "secured" and that futures and options on
futures contracts will be used only for hedging purposes).
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.
An Underlying 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.
An Underlying 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.
An Underlying 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, an Underlying 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, an Underlying Fund may make a "closing sale
transaction," which involves liquidating the Fund's position by selling the
option previously purchased. The Underlying 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 Underlying 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 Underlying Funds intend to purchase and write call and put options on
specific securities.
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SECURITIES INDEX OPTIONS. An option on a securities index is a contract which
gives the purchaser of the option, in return for the premium paid, the right to
receive from the writer of the option cash equal to the difference between the
closing price of the index and the exercise price of the option times a
multiplier established by the exchange on which the stock index is traded. It is
similar to an option on a specific security except that settlement is in cash
and gains and losses depend on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price movements
in the specific security. None of the Underlying Funds, other than the
Diversified Equity, Special Growth, Quantitative Equity, International
Securities and Emerging Markets Funds, currently intends to purchase and write
call and put options on securities indexes.
OPTIONS ON FOREIGN CURRENCY. The Underlying 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 an Underlying 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
Underlying Funds, other than the Multistrategy Bond and Emerging Markets Funds,
currently intends to write or purchase such options.
OPTIONS ON SECURITIES AND INDEXES. Each Underlying Fund may purchase and write
both call and put options on securities and securities indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign over-the-
counter market, and agreements, sometimes called cash puts, which may accompany
the purchase of a new issue of bonds from a dealer. The Underlying 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
Underlying Funds' ability to hold illiquid securities. The Underlying Funds
intend to purchase and write call and put options on specific securities.
An option on a security (or securities index) is a contract that gives the
purchaser of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option at a specified exercise price at any time during
the option period. The writer of an option on a security has the obligation upon
exercise of the option to deliver the underlying security upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security. Upon exercise, the writer of an option on an index is obligated to pay
the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier (established by the exchange upon which
the stock index is traded) for the index option. (An index is designed to
reflect specified facets of a particular financial or securities market, a
specified group of financial instruments or securities, or certain economic
indicators.) Options on securities indexes are similar to options on specific
securities 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.
An Underlying Fund may purchase a call option on securities to protect against
substantial increases in prices of securities the Underlying Fund intends to
purchase pending its ability or desire to purchase such securities in an orderly
manner. An Underlying 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.
An Underlying Fund will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Underlying Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration
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(or, if additional cash consideration is required, liquid assets in such amount
are placed in a segregated account by the Custodian) upon conversion or exchange
of other securities held by the Underlying Fund. For a call option on an index,
the option is covered if the Underlying Fund maintains with the Custodian liquid
assets equal to the contract value. A call option is also covered if the
Underlying Fund holds a call on the same security or index as the call written
where the exercise price of the call held is (1) equal to or less than the
exercise price of the call written, or (2) greater than the exercise price of
the call written, provided the difference is maintained by the Fund in liquid
assets in a segregated account with the Custodian. A put option on a security or
an index is "covered" if the Underlying Fund maintains liquid assets equal to
the exercise price in a segregated account with the Custodian. A put option is
also covered if the Underlying Fund holds a put on the same security or index as
the put written where the exercise price of the put held is (1) equal to or
greater than the exercise price of the put written, or (2) less than the
exercise price of the put written, provided the difference is maintained by the
Underlying Fund in liquid assets in a segregated account with the
Custodian.
If an option written by an Underlying Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by an Underlying Fund expires unexercised, the Fund
realizes a capital loss (long or short-term depending on whether the Fund's
holding period for the option is greater than one year) equal to the premium
paid.
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.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Underlying Fund desires.
An Underlying Fund will realize a capital gain from a closing transaction on
an option it has written if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the Underlying Fund
will realize a capital loss. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option, the Underlying
Fund will realize a capital gain or, if it is less, the Fund will realize a
capital loss. With respect to closing transactions on purchased options, the
capital gain or loss realized will be short or long-term depending on the
holding period of the option closed out. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by an Underlying Fund is
an asset of the Fund. The premium received for an option written by an
Underlying Fund is recorded as a liability. The value of an option purchased or
written is marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
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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.
There can be no assurance that a liquid market will exist when an Underlying
Fund seeks to close out an option position. If an Underlying Fund were unable to
close out an option that it had purchased on a security, it would have to
exercise the option in order to realize any profit or the option may expire
worthless. If an Underlying Fund were unable to close out a covered call option
that it had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise. As the writer of a covered
call option, an Underlying Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call.
If trading were suspended in an option purchased by an Underlying Fund, the
Fund would not be able to close out the option. If restrictions on exercise were
imposed, the Underlying Fund might be unable to exercise an option it has
purchased. Except to the extent that a call option on an index written by the
Underlying Fund is covered by an option on the same index purchased by the Fund,
movements in the index may result in a loss to the Fund; however, such losses
may be mitigated by changes in the value of the Fund's securities during the
period the option was outstanding.
FOREIGN CURRENCY. An Underlying Fund may buy or sell put and call options on
foreign currencies either on exchanges or in the over-the-counter market. A put
option on a foreign currency gives the purchaser of the option the right to sell
a foreign currency at the exercise price until the option expires. Currency
options traded on US or other exchanges may be subject to position limits which
may limit the ability of an Underlying Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller, and generally do not have as much market liquidity as exchange-
traded options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. An Underlying Fund may use
interest rate, foreign currency or index futures contracts. 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. An interest rate,
foreign currency or index futures contract provides for the future sale by one
party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. In the case of futures contracts traded on U.S. 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. Although the value of an index may be a function of the value of
certain specified securities, no physical delivery of these securities is made.
A public market exists in futures contracts covering several indexes as well as
a number of financial instruments and foreign currencies. For example: the S&P
500; the Russell 2000(R); Nikkei 225; CAC-40; FT-SE 100; the NYSE composite; US
Treasury bonds; US Treasury notes; GNMA Certificates; three-month US Treasury
bills; Eurodollar certificates of
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deposit; the Australian Dollar; the Canadian Dollar; the British Pound; the
German Mark; the Japanese Yen; the French Franc; the Swiss Franc; the Mexican
Peso; and certain multinational currencies, such as the ECU. It is expected that
other futures contracts will be developed and traded in the future.
An Underlying Fund may also purchase and write call and put options on futures
contracts. Options on futures contracts possess many of the same characteristics
as options on securities and indexes (discussed above). A futures option gives
the holder the right, in return for the premium paid, to assume a long position
(in the case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. An option on a futures contract
may be closed out before exercise or expiration by an offsetting purchase or
sale on option on a futures contract of the same series.
There can be no assurance that a liquid market will exist at a time when an
Underlying 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 an Underlying Fund
from liquidating an unfavorable position and the Fund would remain obligated to
meet margin requirements until the position is closed.
An Underlying 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. An Underlying 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). An Underlying 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 on Securities and Indexes"
above.
An Underlying 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 (the "CFTC"). An Underlying 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.
As long as required by regulatory authorities, each Underlying Fund will limit
its use of futures contracts and options on futures contracts to hedging
transactions. For example, an Underlying Fund might use futures contracts to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Fund's securities or the price of the securities which
the Fund intends to purchase. Additionally, an Underlying Fund may use futures
contracts to create equity exposure for its cash reserves for liquidity
purposes.
When a purchase or sale of a futures contract is made by an Underlying Fund,
the Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or US government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Underlying Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. Each Underlying Fund expects to earn interest income on its initial
margin deposits.
A futures contract held by an Underlying Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Underlying
Fund pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by an Underlying Fund,
but is instead a settlement between the Fund and the broker of the amount one
would owe the other if the futures contract
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expired. In computing daily net asset value, each Underlying Fund will mark-to-
market its open futures positions.
An Underlying Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Underlying Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Underlying Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Underlying Fund realizes a capital gain, or if it is less, the Fund
realizes a capital loss. The transaction costs must also be included in these
calculations.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. An Underlying
Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, an Underlying Fund will maintain with the
Custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Underlying Fund
may "cover" its position by purchasing a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Fund.
When selling a futures contract, an Underlying Fund will maintain with the
Custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Underlying Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the
Underlying Fund to purchase the same futures contract at a price no higher than
the price of the contract written by the Fund (or at a higher price if the
difference is maintained in liquid assets with the Custodian).
When selling a call option on a futures contract, an Underlying Fund will
maintain with the Custodian (and mark-to-market on a daily basis) liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Underlying Fund may "cover" its position by entering
into a long position in the same futures contract at a price no higher than the
strike price of the call option, by owning the instruments underlying the
futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Fund.
When selling a put option on a futures contract, an Underlying Fund will
maintain with the Custodian (and mark-to-market on a daily basis) liquid assets
that equal the purchase price of the futures contract, less any margin on
deposit. Alternatively, the Underlying Fund may "cover" the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Fund.
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In order to comply with applicable regulations of the CFTC pursuant to which
the Underlying Funds avoid being deemed to be a "commodity pools," the Funds are
limited in entering into future contracts and options on future contracts to
positions which constitute "bona fide hedging" positions within the meaning and
intent of applicable CFTC rules, and with respect to positions which do not
qualify under for non-hedging purposes, to positions for which the aggregate
initial margins and premiums will not exceed 5% of the net assets of a Fund as
determined under the CFTC Rules.
The requirements for qualification as a regulated investment company also may
limit the extent to which an Underlying Fund may enter into futures, options on
futures contracts or forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND OPTIONS ON FUTURES CONTRACTS. There are
several risks associated with the use of futures and options on futures
contracts as hedging techniques. A purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract. There
can be no guarantee that there will be a correlation between price movements in
the hedging vehicle and in the portfolio securities being hedged. In addition,
there are significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets, causing a
given hedge not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures and options on futures contracts on securities, including
technical influences in futures trading and options on futures contracts, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities and creditworthiness of issuers. 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. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when an
Underlying Fund seeks to close out a futures or a futures option position, and
that Fund would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACT AND OPTIONS THEREON.
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign, political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in an Underlying Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (5) lesser
trading volume.
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HEDGING STRATEGIES. Stock index futures contracts may be used by the
Diversified Equity, Special Growth, Quantitative Equity, International
Securities and Emerging Markets Funds as an "equitization" vehicle for cash
reserves held by the Funds. For example: equity index futures contracts are
purchased to correspond with the cash reserves in each of the Funds. As a
result, an Underlying Fund will realize gains or losses based on the performance
of the equity market corresponding to the relevant indexes for which futures
contracts have been purchased. Thus, each Underlying Fund's cash reserves always
will be fully exposed to equity market performance.
Financial futures contracts may be used by the International Securities,
Diversified Bond, Volatility Constrained Bond, Multistrategy Bond and Emerging
Markets Funds as a hedge during or in anticipation of interest rate changes. For
example: if interest rates were anticipated to rise, financial futures contracts
would be sold (short hedge) which would have an effect similar to selling bonds.
Once interest rates increase, fixed-income securities held in the Fund's
portfolio would decline, but the futures contract value would decrease, partly
offsetting the loss in value of the fixed-income security by enabling the
Underlying Fund to repurchase the futures contract at a lower price to close out
the position.
The Underlying Funds may purchase a put and/or sell a call option on a stock
index futures contract instead of selling a futures contract in anticipation of
market decline. Purchasing a call and/or selling a put option on a stock index
futures contract is used instead of buying a futures contract in anticipation of
a market advance, or to temporarily create an equity exposure for cash balances
until those balances are invested in equities. Options on financial futures are
used in a similar manner in order to hedge portfolio securities against
anticipated changes in interest rates.
When purchasing a futures contract, an Underlying Fund will maintain with the
Custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, an Underlying Fund
may "cover" its position by purchasing a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Fund.
FOREIGN CURRENCY FUTURES CONTRACTS. The Underlying Funds are also permitted to
enter into foreign currency futures contracts in accordance with their
investment objectives and as limited by the procedures outlined above.
A foreign currency futures contract is a bilateral agreement pursuant to which
one party agrees to make, and the other party agrees to accept delivery of a
specified type of debt security or currency at a specified price. Although such
futures contacts by their terms call for actual delivery or acceptance of debt
securities or currency, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
The Underlying Funds may sell a foreign currency futures contract to hedge
against possible variations in the exchange rate of the foreign currency in
relation to the US dollar. When a manager anticipates a significant change in a
foreign exchange rate while intending to invest in a foreign security, an
Underlying Fund may purchase a foreign currency futures contract to hedge
against a rise in foreign exchange rates pending completion of the anticipated
transaction. Such a purchase would serve as a temporary measure to protect the
Underlying Fund against any rise in the foreign exchange rate which may add
additional costs to acquiring the foreign security position. The Underlying Fund
may also purchase call or put options on foreign currency futures contracts to
obtain a fixed foreign exchange rate. The Underlying Fund may purchase a call
option or write a put option on a foreign exchange futures contract to hedge
against a decline in the foreign exchange rates or the value of its foreign
securities. The Underlying Fund may write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
RISK FACTORS. There are certain investment risks in using futures contracts
and/or options as a hedging technique. One risk is the imperfect correlation
between price movement of the futures contracts or options and the price
movement of the portfolio securities, stock index or currency subject of the
hedge. There is no assurance that the price of taxable securities will move in a
similar manner to the price of tax exempt
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securities. Another risk is that a liquid secondary market may not exist for a
futures contract causing an Underlying Fund to be unable to close out the
futures contract thereby affecting a Fund's hedging strategy.
In addition, foreign currency options and foreign currency futures involve
additional risks. Such transactions may not be regulated as effectively as
similar transactions in the United States; may not involve a clearing mechanism
and related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions could also be adversely affected by (1) other complex foreign,
political, legal and economic factors, (2) lesser availability than in the
United States of data on which to make trading decisions, (3) delays in an
Underlying Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (5) lesser trading volume.
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS ("FORWARD CURRENCY CONTRACTS").
The International Securities, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond and Emerging Markets Funds may engage in forward currency
contracts to hedge against uncertainty in the level of future exchange rates.
The Funds will conduct their forward foreign currency exchange transactions
either on a spot (i.e. cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward currency exchange contracts
("forward contract") to purchase or sell currency at a future date. A forward
contract involves an obligation to purchase or sell a specific currency For
example, to exchange a certain amount of U.S. dollars for a certain amount of
Japanese Yen - at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time of
the contract. 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. A Fund
may, however, enter into forward currency contracts containing either or both
deposit requirements and commissions. In order to assure that a 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. An Underlying Fund's
dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of foreign currency with respect to specific receivables or
payables of the Funds generally accruing in connection with the purchase or sale
of their portfolio securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in the
currency. An Underlying Fund may not position hedge with respect to a particular
currency to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in or currency convertible into that particular currency (or another currency or
aggregate of currencies which act as a proxy for that currency). The Underlying
Funds may, however, enter into a position hedging transaction with respect to a
currency other than that held in the Funds' portfolios, if such a transaction is
deemed a hedge. If an Underlying Fund enters into this type of hedging
transaction, liquid assets will be placed in a segregated account in an amount
equal to the value of the Fund's total assets committed to the consummation of
the forward contract. If the value of the securities placed in the segregated
account declines, additional liquid assets will be placed in the account so that
the value of the account will equal the amount of the Underlying Fund's
commitment with respect to the contract. Hedging transactions may be made from
any foreign currency into US dollars or into other appropriate currencies.
At or before the maturity of a forward foreign currency contract, an
Underlying Fund may either sell a portfolio security and make delivery of the
currency, or retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which the
Underlying Fund will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the Underlying Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward currency contract prices.
Should forward prices decline during the period between the Fund's entering into
a forward contract for the sale of a currency and the date that it enters into
an offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent that the price of the currency that it has agreed to sell
exceeds the price of the currency that it has agreed to purchase. Should
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forward prices increase, the Underlying Fund will suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the price of
the currency that it has agreed to sell. There can be no assurance that new
forward currency or offsets will be available to a Fund.
Upon maturity of a forward currency contract, the Underlying 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. An
Underlying 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 Underlying Funds.
The cost to an Underlying Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. In addition, although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, at the same time, they limit any potential
gain that might result should the value of the currency increase.
If a devaluation is generally anticipated, an Underlying Fund may be able to
contract to sell the currency at a price above the devaluation level that it
anticipates. An Underlying Fund will not enter into a currency transaction if,
as a result, it will fail to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), for a given year.
Forward foreign currency contracts are not regulated by the SEC. They are
traded through financial institutions acting as market-makers. In the forward
foreign currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
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 a Fund is engaged in that
strategy.
A Fund's ability to dispose of its positions in forward currency contracts
will depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward currency contracts. Forward currency contracts may be closed
out only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that the Fund will be able to utilize these instruments
effectively for the purposes set forth above.
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Forward foreign currency transactions are subject to the additional risk of
governmental actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by (1)
other complex foreign, political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in an Underlying Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (5) lesser trading
volume and (6) that a perceived linkage between various currencies may not
persist throughout the duration of the contracts.
The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict an Underlying 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 Underlying Funds are engaged in that strategy.
An Underlying 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 an Underlying Fund will be able to utilize these
instruments effectively for the purposes set forth above.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and debentures
that (1) do not pay current interest and are issued at a substantial discount
from par value, (2) have been stripped of their unmatured interest coupons and
receipts or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts. Zero coupon securities trade at a discount
from their par value and are subject to greater fluctuations of market value in
response to changing interest rates.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES. The forms of mortgage
related and other asset-backed securities the Underlying Funds may invest in
include the securities described below:
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are generally made monthly. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest which in effect are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgages, net of any fees paid to the issuer or guarantor. The principal
governmental issuer of such securities is the GNMA, which is a wholly-owned US
government corporation within the Department of Housing and Urban Development.
Government-related issuers include the Federal Home Loan Mortgage Corporation
("FHLMC"), a corporate instrumentality of the United States created pursuant to
an Act of Congress, and which is owned entirely by the Federal Home Loan Banks,
and the Federal National Mortgage Association ("FNMA"), a government sponsored
corporation owned entirely by private stockholders. Commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the originators of
the underlying mortgage loans as well as the guarantors of the mortgage-related
securities.
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COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are hybrid instruments with characteristics of both mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and
prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA. CMOs are structured into multiple classes (or "tranches"), with each class
bearing a different stated maturity.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the securities and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or by priority to
certain of the borrower's other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a fraction of the
security's par value. If the credit enhancement held by an Underlying Fund has
been exhausted, and if any required payments of principal and interest are not
made with respect to the underlying loans, the Underlying Fund may experience
loss or delay in receiving payment and a decrease in the value of the security.
RISK FACTORS. Prepayment of principal on mortgage or asset-backed securities
may expose an Underlying Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to prepayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost. Like
other fixed-income securities, the value of mortgage-related securities is
affected by fluctuations in interest rates.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities which the
Underlying Funds may invest in generally consist of obligations issued or backed
by the national, state or provincial government or similar political
subdivisions or central banks in foreign countries. Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or backed by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. These securities also
include debt securities of "quasi-government agencies" and debt securities
denominated in multinational currency units of an issuer.
BRADY BONDS. The Multistrategy Bond Fund may invest in Brady Bonds, the
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 Brady Plan
offers relief to debtor countries that have effected substantial economic
reforms. Specifically, debt reduction and structural reform are the main
criteria countries must satisfy in order to obtain Brady Plan status. Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily US-dollar) and are actively traded on the over-the-counter
market. Brady Bonds have been issued only recently and accordingly they do not
have a long payment history.
TAXES
In order to qualify for treatment as a regulated investment company ("RIC")
under Subchapter M of the Code, each LifePoints Fund must distribute annually to
its shareholders at least 90% of its investment company taxable income
(generally, net investment income plus net short-term capital gain)
("Distribution Requirement") and also must meet several additional requirements.
Among these requirements are the following: (i) at least 90% of a LifePoints
Fund's gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (exclusive of losses),
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Income Requirement"); (ii) at the close of each quarter of a
LifePoints Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, US government securities, securities
of other RICs and other securities, with such other securities limited, in
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respect of any one issuer, to an amount that does not exceed 5% of the value of
the LifePoints Fund and that does not represent more than 10% of the outstanding
voting securities of such issuer; and (iii) at the close of each quarter of the
LifePoints Fund's taxable year, not more than 25% of the value of its assets may
be invested in securities (other than US government securities or the securities
of other RICs, including shares of the Underlying Funds) of any one issuer.
Notwithstanding the Distribution Requirement described above, which only
requires each LifePoints Fund to distribute at least 90% of its annual
investment company taxable income and does not require any minimum distribution
of net capital gain (the excess of net 28% and 20% capital gain over net short-
term capital loss), each LifePoints Fund will be subject to a nondeductible 4%
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income for the one-year period ending on October 31 of that year, plus
prior-year shortfalls. For this and other purposes, dividends declared by a RIC
in October, November or December of any calendar year and payable to
shareholders of record on a date in such a month will be deemed to have been
paid by the RIC and received by shareholders on December 31 of such year if the
dividends are paid by the RIC at any time through the end of the following
January.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The use of hedging
instruments, such as options and futures contracts, involves specialized and
complex rules that will determine the character for income tax purposes of the
income received in connection therewith by a Fund and thereby affect, among
other things, the amount and proportion of distributions that will be taxable to
shareholders as ordinary income or capital gain. As described above, the
Underlying Funds may buy and sell foreign currencies and options on foreign
currencies, and may enter into forward currency contracts and currency futures
contracts.
STATE AND LOCAL TAXES. Depending upon the extent of a LifePoints Fund's
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, a LifePoints Fund may be subject to
the tax laws of such states or localities.
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.
RATINGS OF DEBT INSTRUMENTS
CORPORATE AND MUNICIPAL BOND RATINGS.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
43
<PAGE>
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
and interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic category; the
modifier 2 indicates a mid-range ranking; and modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP ("S&P"):
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. While bonds with this rating normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than debt in higher rated
categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB -- Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual implied BBB- rating.
44
<PAGE>
B -- Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating. The C rating has been
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in payment default. The D rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
appropriate category.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
STATE, MUNICIPAL NOTES AND TAX EXEMPT DEMAND NOTES. MOODY'S:
Moody's rating for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run. Symbols
used are as follows:
MIG-1 -- Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing or both.
MIG-2 -- Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
S&P:
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
45
<PAGE>
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used to denote the put option (for example,
"AAA/A-1+") or if the nominal maturity is short, a rating of "SP-1+/AAA" is
assigned.
COMMERCIAL PAPER RATINGS.
MOODY'S:
Commercial paper rated Prime by Moody's is based upon its evaluation of many
factors, including: (l) management of the issuer; (2) the issuer's industry or
industries and the speculative-type risks which may be inherent in certain
areas; (3) the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issue; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Relative differences in these factors determine whether the issuer's
commercial paper is rated Prime-l, Prime-2, or Prime-3.
Prime-1 - indicates a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: (1) leading market positions in well established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well established access to a range
of financial markets and assured sources of alternative liquidity.
Prime-2 - indicates a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
S&P:
Commercial paper rated A by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
A or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-l, A-2, or A-3.
A-1 -- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
46
<PAGE>
A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
DUFF & PHELPS, INC.:
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes,
bankers' acceptances, irrevocable letters of credit, and current maturities of
long-term debt. Asset-backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carries the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those
differences.
Duff 1+ -- Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-
term obligations.
Duff 1 -- Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Good Grade
Duff 2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Satisfactory Grade
Duff 3 -- Satisfactory liquidity and other protection factors qualify issue as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
Duff 4 -- Speculative investment characteristics. Liquidity is not sufficient
to ensure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
Default
Duff 5 -- Issuer failed to meet scheduled principal and/or interest payments.
IBCA, INC.:
In addition to conducting a careful review of an institution's reports and
published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year
with the management of the companies they cover.
47
<PAGE>
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While this confidential data cannot be
disclosed in reports, it is taken into account when assigning ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings and
to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+ -- Obligations supported by the highest capacity for timely repayment.
A1 -- Obligations supported by a very strong capacity for timely repayment.
A2 -- Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1 -- Obligations supported by an adequate capacity for timely repayment. Such
capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2 -- Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1 -- Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1 -- Obligations which have a high risk of default or which are currently in
default.
FITCH INVESTORS SERVICE, INC. ("FITCH"):
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ -- Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F1+.
F-2 -- Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3 -- Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
48
<PAGE>
F-5 -- Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D -- Default. Issues assigned this rating are in actual or imminent payment
default.
THOMSON BANKWATCH ("TBW") SHORT-TERM RATINGS:
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has
been assigned.
These ratings are derived exclusively from a quantitative analysis of publicly
available information. Qualitative judgments have not been incorporated. The
ratings are intended to be applicable to all operating entities of an
organization but there may be in some cases more credit liquidity and/or risk
in one segment of the business than another.
The TBW short-term rating applies only to unsecured instruments that have a
maturity of one year or less, and reflects the likelihood of an untimely
payment of principal or interest.
TBW-1 -- The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2 -- The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
TBW-3 -- The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4 -- The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
FINANCIAL STATEMENTS
The 1997 annual financial statements of the LifePoints Funds, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the LifePoints Funds Annual Report to
Shareholders. A copy of the Annual Report accompanies this Statement of
Additional Information and are incorporated herein by reference.
49
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
--------------------------------
File No. 2-71299 and 811-3153
1933 Act Post-Effective Amend. No. 38
1940 Act Amendment No. 38
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements Audited Financial Statements for the year
ended 12/31/97 for the Equity I, Equity II, Equity III, Equity Q,
Equity T, Fixed Income I, Fixed Income II, Fixed Income III,
International, Emerging Markets, Money Market, Diversified
Equity, Special Growth, Equity Income, Quantitative Equity,
Diversified Bond, Volatility Constrained Bond, Multistrategy
Bond, International Securities, Limited Volatility Tax Free, Real
Estate Securities, U.S. Government Money Market and Tax Free
Money Market Funds, Aggressive Strategy, Balanced Strategy,
Moderate Strategy, Conservative Strategy and Equity Balanced
Strategy Funds. In accordance with an undertaking contained in
Post-Effective No. 37 financial statements of the Aggressive
Strategy, Balanced Strategy, Moderate Strategy, Conservative
Strategy and Equity Balance Strategy Funds are included in the
Exhibits.
Part A (To be filed by Amendment)
Part B (To be filed by Amendment)
(b) Exhibits
--------
1(a) Master Trust Agreement (incorporated by reference to
Post-Effective Amendment No. 32)
1(b) 11/29/84 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
1(c) 5/29/85 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
1(d) 1/26/87 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
1(e) 2/23/89 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
1(f) 5/11/92 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
<PAGE>
1(g) 3/22/96 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
1(h) 4/22/96 Amendment to Master Trust Agreement
(incorporated by reference to Post-Effective Amendment
No. 33)
<PAGE>
Exhibits
--------
1(i) 11/4/96 Amendment to Master Trust
Agreement (incorporated by reference to Post-Effective
Amendment No. 36)
2. Bylaws
<PAGE>
3. Voting Trust Agreement (not applicable)
4. Specimen Securities
4(a) Equity I Fund, Equity II Fund, Equity III Fund, Fixed
Income I Fund, Fixed Income II Fund, International Fund
and Money Market Fund (incorporated by reference to
Post-Effective Amendment No. 7)
4(b) Diversified Equity Fund, Special Growth Fund, Equity
Income Fund, Diversified Bond Fund, Volatility
Constrained Bond Fund, International Securities Fund,
Limited Volatility Tax Free Fund and U.S. Government
Money Market Fund (incorporated by reference to the
Post-Effective Amendment No. 9)
4(c) Quantitative Equity, Equity Q and Tax Free Money Market
Funds (incorporated by reference to Post-Effective
Amendment No. 11)
4(d) Real Estate Securities Fund (incorporated by reference
to the Post-Effective Amendment No. 15 filed on May 1,
1989 ["Post-Effective Amendment No. 15"])
5(a) Amended and Restated Management Agreement with Frank
Russell Investment Management Company (incorporated by
reference to Post-Effective Amendment No. 32)
5(a)(1) Letter Agreement adding Equity T Fund to the Management
Agreement (incorporated by reference to Post-Effective
Amendment No. 32)
5(a)(2) Letter Agreement adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds to the Management
Agreement (incorporated by reference to Post-Effective
Amendment No. 36)
<PAGE>
Exhibits
--------
5(a)(3) Letter Agreement amending the Amended and Restated
Management Agreement amending Section 6A of the
Management Agreement
5(b)(1) Service Agreement with Frank Russell Company and Frank
Russell Investment Management Company
5(b)(2) Letter Agreement adding Real Estate Securities Fund to
the Service Agreement
5(b)(3) Amendment 1 to Service Agreement with Frank Russell
Company and Frank Russell Investment Management Company
changing services and fees
5(b)(4) Letter Agreement adding Fixed Income III, Multistrategy
Bond and Emerging Markets Funds to the Service
Agreement
5(b)(5) Amendment No. 2 to the Service Agreement with Frank
Russell Company and Frank Russell Investment Management
Company amending Section 4 of the Agreement
(incorporated by reference to Post-Effective Amendment
No. 32)
5(b)(6) Letter Agreement adding Equity T Fund to the Service
Agreement (incorporated by reference to Post-Effective
Amendment No. 32)
5(b)(7) Letter Agreement with State Street Bank and Trust
Company for development of a Tax Accounting System
(incorporated by reference to Post-Effective Amendment
No. 32)
5(b)(8) Letter Agreement adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds to the Yield Calculation
Services Agreement(incorporated by reference to Post-
Effective Amendment No. 36)
5(c)(1) Portfolio Management Contract, as amended, with Money
Managers and Frank Russell Investment
<PAGE>
Management Company (incorporated by reference to Post-
Effective Amendment No. 32)
<PAGE>
Exhibits
--------
6(a)(1) Distribution Agreement with Russell Fund Distributors,
Inc.
6(a)(2) Letter Agreement adding Real Estate Securities Fund to
the Distribution Agreement
6(a)(3) Letter Agreement adding Fixed Income III, Multistrategy
Bond and Emerging Markets Funds to the Distribution
Agreement
6(a)(4) Letter Agreement adding Equity T Fund to the
Distribution Agreement (incorporated by reference to
Post-Effective Amendment No. 32)
6(a)(5) Letter Agreement adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds to the Distribution
Agreement(incorporated by reference to Post-Effective
Amendment No. 36)
7. Bonus Plans (none)
8(a) Custodian Agreement with State Street Bank and Trust
Company
8(b) Letter Agreement adding Real Estate Securities Fund to
the Custodian Agreement
8(c) Letter Agreement adding Fixed Income III and
Multistrategy Bond Funds to the Custodian Agreement
8(d) Letter Agreement adding Emerging Markets Fund to the
Custodian Agreement
<PAGE>
8(e) Amendment No. 1 to Custodian Agreement with State
Street Bank and Trust Company amending Section 3.5 of
the Agreement
8(f) Form of Amendment to Custodian Agreement with State
Street Bank and Trust Company amending Sections 2.2 and
2.7 of the Agreement
8(g) Amendment to the Custodian Agreement with State Street
Bank and and 2.7 of the Agreement
8(h) Amendment to the Fee Schedule of the Custodian
Agreement with State Street Bank and Trust Company
<PAGE>
Exhibits
--------
8(i) Amendment to the Custodian Agreement with State Street
Bank and Trust Company for addition of Omnibus accounts
(incorporated by reference to Post-Effective Amendment
No. 32)
8(j) Amendment to the Custodian Agreement with State Street
Bank and Trust Company amending Section 7 of the Fee
Schedule for all Funds except the Emerging Markets Fund
(incorporated by reference to Post-Effective Amendment
No. 32)
8(k) Amendment to the Custodian Agreement with State Street
Bank and Trust Company amending Section 7 of the Fee
Schedule for the Emerging Markets Fund (incorporated by
reference to Post-Effective Amendment No. 32)
8(l) Amendment to the Custodian Agreement with State Street
Bank and Trust Company adding Equity T Fund
(incorporated by reference to Post-Effective Amendment
No. 32)
<PAGE>
8(m) Amendment to the Custodian Agreement with State Street
Bank and Trust Company adding Aggressive Strategy,
Balanced Strategy, Moderate Strategy, Conservative
Strategy and Equity Balanced Strategy Funds.
(incorporated by reference to Post-Effective Amendment
No. 36)
9(a)(1) Agency Agreement with Frank Russell Investment
Management Company
9(a)(2) Letter Agreement adding Real Estate Securities Fund to
the (Transfer) Agency Agreement
9(a)(3) Letter Agreement adding Fixed III Income, Multistrategy
Bond and Emerging Markets Funds to the (Transfer)
Agency Agreement
<PAGE>
Exhibits
--------
9(a)(4) Letter Agreement amending Schedule A of the Transfer
and Dividend Disbursing Agency Agreement with Frank
Russell Investment Management Company (incorporated by
reference to Post-Effective Amendment No. 32)
9(a)(5) Letter Agreement adding Equity T Fund to the Transfer
and Dividend Agency Agreement (incorporated by
reference to Post-Effective Amendment No. 32)
9(a)(6) Letter Agreement adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds to the Transfer and
Dividend Disbursing Agency Agreement. (incorporated by
reference to Post-Effective Amendment No. 36)
9(b) General forms of Frank Russell Investment Management
Company's Asset Management Services Agreements with
Bank Trust Departments and with other clients
9(c) General forms of Frank Russell Investment Management
Company's Asset Management Services Agreement with its
clients
9(d) General form of Frank Russell Investment Management
Company's Asset Management Services Agreement with
Private Investment Consulting clients of Frank Russell
Company
9(e) Shareholder Servicing Plan including forms of related
agreements (incorporated by reference to Post-Effective
Amendment No. 36)
9(f) General Form of Frank Russell Investment Management
Company Asset Management Services Agreement with non-
compete clause customers
<PAGE>
Exhibits
--------
10. Opinion and Consent of Counsel (to be filed by
amendment)
11(a) Other Opinions -Consent of Independent Accountants (to
be filed by Amendment)
11(b) Limited Power of Attorney with respect to Amendments to
the SEC Registration Statements of Frank Russell
Investment Company of Frank Russell Investment Company
Trustees
12. Financial Statements omitted from Item 23 (none)
13. Agreement related to Initial Capital provided by Frank
Russell Company
14. Model Retirement Plans (none)
15. Rule 12b-1 Distribution Financing Plan including forms
of related agreements(incorporated by reference to
Post-Effective Amendment No. 36)
16. Schedule of Computation of Performance Calculation (to
be filed by amendment)
17. Financial Data Schedules for Frank Russell Investment
Funds (to be filed by amendment)
<PAGE>
18. Multiple Class Plan Pursuant to Rule 18f-3(incorporated
by reference to Post-Effective Amendment No. 33)
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders as of January 31, 1998
-------------- -----------------------------------------------
<S> <C>
Shares of beneficial interest
Par Value $0.01
Equity I 6,030
Equity II 5,668
Equity III 1,291
Equity Q 5,371
Equity T 741
International 6,056
Emerging Markets 21,595
Fixed Income I 3,768
Fixed Income II 2,768
Fixed Income III 3,634
Money Market 494
Diversified Equity 19,103
Special Growth 18,834
Equity Income 6,262
Quantitative Equity 18,996
International Securities 18,592
Diversified Bond 7,380
Volatility Constrained Bond 2,691
Multistrategy Bond 10,146
Limited Volatility Tax Free 905
Real Estate Securities Fund 22,670
U.S. Government Money Market 6,750
Tax Free Money Market 927
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Aggressive Strategy 118
Balanced Strategy 110
Moderate Strategy 31
Conservative Strategy 7
Equity Balanced Strategy 62
</TABLE>
Item 27. Indemnification
---------------
Incorporated by reference to Post-Effective Amendment No. 6.
Item 28. Business and Other Connections of Investment Advisor
----------------------------------------------------
See, Registrant's prospectus sections "The Purpose of the Fund--
Multi-Style, Multi-Manager Diversification," "The Money Managers" and
"Money Manager Profiles," the Statement of Additional Information
sections "Structure and Governance--Trustees and Officers," and
"Operation of Investment Company--Consultant."
<PAGE>
Item 29. Principal Underwriters
----------------------
(a) The Seven Seas Series Fund.
(b) Russell Fund Distributors, Inc. is the principal underwriter of
the Registrant. The directors and officers of Russell Fund
Distributors, Inc., their principal business address, and
positions and offices with the Registrant and Russell Fund
Distributors, Inc. are set forth below:
<TABLE>
<CAPTION>
Name and Positions and Position and
Principal Business Officers with Offices with
Address Registrant Underwriter
------------------ ------------- ------------
<S> <C> <C>
George F. Russell, Jr. Chairman of the Board None
Lynn L. Anderson Trustee, President, Chief Director, Chairman of the Board
Executive Officer and Chief Executive Officer
Eric A. Russell None Director and President
George W. Weber Treasurer and Chief Director, Fund Administration and
Accounting Officer Operations
Karl J. Ege Secretary and General Counsel Secretary and General Counsel
Randall P. Lert Director of Investments Director
Linda L. Gutmann None Treasurer
J. David Griswold None Assistant Secretary and Associate
General Counsel and Chief
Compliance Officer
Gregory J. Lyons Assistant Secretary and Assistant Secretary
Associate General Counsel
Mary E. Hughs None Assistant Secretary
Carla L. Anderson None Assistant Secretary
Warren Thompson III None Corporate Tax Counsel
Sandra J. Burke Assistant Secretary None
Deedra S. Walkey Assistant Secretary None
Amy Osler Assistant Secretary None
John James None Assistant Secretary
Rick J. Chase Assistant Treasurer None
Mark E. Swanson Assistant Treasurer None
</TABLE>
(c) Inapplicable.
Item 30. Location of Accounts and Records
--------------------------------
All accounts and records required to be maintained by section 31(a)
of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained
in the following locations:
<TABLE>
<S> <C>
FRIC FRIMCo
- ---- ------
Frank Russell Investment Company Frank Russell Investment
909 A Street Management Company
Tacoma, Washington 98402 909 A Street
Tacoma, Washington 98402
SS MM
- -- --
</TABLE>
<PAGE>
<TABLE>
<S> <C>
State Street Bank & Trust Company Money Managers
1776 Heritage Drive JA4N See, Prospectus Section
North Quincy, Massachusetts 02171 "Money Manager Profiles"
for Names and Addresses
</TABLE>
<PAGE>
Rule 31a-1
- ----------
<TABLE>
<S> <C>
(a) Records forming basis for financial statements - at principal
offices of SS, FRIC, FRIMCo, and MM for each entity
(b) FRIC Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable
(4) FRIC - Corporate charter, etc.
(5) MM - Brokerage orders
(6) MM - Other portfolio purchase orders
(7) SS - Contractual commitments
(8) SS and FRIC - Trial balances
(9) MM - Reasons for brokerage allocations
(10) MM - Persons authorizing purchases and sales
(11) FRIC and MM - Files of advisory material
(12) ---
(c) Inapplicable
(d) FRIMCo - Broker-dealer records, to the extent applicable
(e) Inapplicable
(f) FRIMCo and MM - Investment adviser records
</TABLE>
Item 31. Management Services
-------------------
None except as described in Parts A and B.
Item 32. Undertakings
------------
(c) Registrant has elected to include its Management's discussion of
Fund performance required under N-1A, Item 5A in its annual
report. Registrant therefore undertakes to provide annual reports
without charge to any recipient of a Prospectus who requests the
information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 38 to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Tacoma, and State of
Washington, on the 17th day of February, 1998.
FRANK RUSSELL INVESTMENT COMPANY
Registrant
By: /s/ Lynn L. Anderson
--------------------------------
Lynn L. Anderson, Trustee and
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on February 17, 1998.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ Lynn L. Anderson Trustee and President,
- ------------------------- in his capacity as
Lynn L. Anderson* Chief Executive Officer
/s/ George W. Weber Treasurer, in his capacity
- ------------------------- as Chief Accounting Officer
George W. Weber*
Trustee
- -------------------------
Paul E. Anderson*
Trustee
- -------------------------
Paul Anton, PhD*
Trustee
- -------------------------
William E. Baxter*
Trustee
- -------------------------
Lee C. Gingrich*
Trustee
- -------------------------
Eleanor W. Palmer*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Trustee
- -------------------------
George F. Russell, Jr.*
By: /s/ Gregory J. Lyons Assistant Secretary
---------------------
Gregory J. Lyons
</TABLE>
- --------------
* Original Powers of Attorney authorizing the President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary, and each of
them singly to sign this Amendment on behalf of each member of the Board of
Trustees of Frank Russell Investment Company which have been filed with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Name of Exhibit Exhibit Number
- --------------- --------------
<S> <C>
Bylaws 99-2
Letter Agreement amending the Amended and Restated Management
Agreement amending Section 6A of the Management Agreement 99-5(a)(3)
Service Agreement with Frank Russell Company and Frank Russell
Investment Management Company 99-5(b)(1)
Letter Agreement Adding Real Estate Securities Fund to
Service Agreement 99-5(b)(2)
Amendment 1 to Service Agreement with Frank Russell Company and
Frank Russell Investment Management Company Changing Services
and Fees 99-5(b)(3)
Letter Agreement adding Fixed Income III, Multistrategy Bond and
Emerging Markets Funds to the Service Agreement 99-5(b)(4)
Distribution Agreement with Russell Fund Distributors, Inc. 99-6(a)(1)
Letter Agreement adding Real Estate Securities Fund to the
Distribution Agreement 99-6(a)(2)
Letter Agreement adding Fixed Income III, Multistrategy Bond and
Emerging Markets Funds to the Distribution Agreement 99-6(a)(3)
Custodian Agreement with State Street Bank and Trust Company 99-8(a)
Letter Agreement adding Real Estate Securities Fund
to the Custodian Agreement 99-8(b)
Letter Agreement adding Fixed Income III and Multistrategy
Bond Funds to the Custodian Agreement 99-8(c)
Letter Agreement adding Emerging Markets Fund to the Custodian
Agreement 99-8(d)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Amendment No. 1 to Custodian Agreement with State Street
Bank and Trust Company amending Section 3.5 of the Agreement 99-8(e)
Form of Amendment to Custodian Agreement with State Street
Bank and Trust Company amending Sections 2.2 and 2.7 of the
Agreement 99-8(f)
Amendment to the Custodian Agreement with State Street Bank
and 2.7 of the Agreement 99-8(g)
Amendment to the Fee Schedule of the Custodian Agreement with
State Street Bank and Trust Company 99-8(h)
Agency Agreement with Frank Russell Investment Management Company 99-9(a)(1)
Letter Agreement adding Real Estate Securities Fund to the
(Transfer) Agency Agreement 99-9(a)(2)
Letter Agreement adding Fixed Income III, Multistrategy Bond
and Emerging Markets Funds to the Transfer Agency Agreement 99-9(a)(3)
General form of Frank Russell Investment Management Company's
Asset Management Services Agreements with Bank Trust Departments
and with other clients 99-9(b)
General form of Frank Russell Investment Management Company's
Asset Management Services Agreement with its clients. 99-9(c)
General form of Frank Russell Investment Management Company's
Asset Management Services Agreement with Private Investment
Consulting clients of Frank Russell Company 99-9(d)
General form of Frank Russell Investment Management Company's
Asset Management Services Agreement with Non-compete clause
with its clause 99-9(f)
Limited Power of Attorney with respect to Amendments to the
SEC Registration Statements of Frank Russell Investment
Company of Frank Russell Investment Company Trustees 99-11(b)
Amendment related to Initial Capital Provided by Frank Russell
Company 99-13
Unaudited Financial Statements for the Aggressive Strategy,
Balanced Strategy, Moderate Strategy, Conservative Strategy
and Equity Balanced Strategy Funds 99-24(a)
Financial Data Schedules for Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds 27
</TABLE>
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
FILE NO. 2-71299
FILE NO. 811-3153
-----------------
EXHIBITS
--------
Listed in Part C, Item 1(b)
To Post-Effective Amendment No. 38
and Amendment No. 38
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment Company Act of 1940
<PAGE>
EXHIBIT 99-2
BY-LAWS
OF
FRANK RUSSELL INVESTMENT COMPANY
ARTICLE 1
---------
Agreement and Declaration
-------------------------
of Trust and Principal Office
-----------------------------
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to
the Agreement and Declaration of Trust (also referred to as the Master Trust
Agreement), as from time to time in effect (the "Declaration of Trust"), of
FRANK RUSSELL INVESTMENT COMPANY, the Massachusetts business trust established
by the Declaration of Trust (the "Trust").
1.2 Principal Office of the Trust. The principal office of the Trust
shall be located in Tacoma, Washington.
ARTICLE 2
---------
Meetings of Trustees
--------------------
2.1 Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
2.2 Special Meetings. Special meetings of the Trustees may be held at any
time and at any place designated in the call of the meeting when called by the
Chairman of the Board, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Secretary
or an Assistant Secretary or by the officer of the Trustees calling the meeting.
2.3 Notice. It shall be sufficient notice to a Trustees of a special
meeting to send notice by mail at least forty-eight hours or by telegram at
least twenty-four hours before the meeting addressed to the Trustee at his usual
or last known business or residence address or to give notice to him in person
or by telephone at least twenty-four hours before the meeting. Notice of a
meeting need not be given to any Trustee if a written waiver of notice, executed
by him before or after the meeting, is filed with the records of the meeting, or
to any Trustee who attends the meeting without protesting prior thereto or at
its commencement the lack of notice to him. Neither notice of a meeting nor a
waiver of a notice need specify the purposes of the meeting.
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees
then in office shall constitute a quorum. Any meeting may be adjourned from
time to time by a
-1-
<PAGE>
majority of the votes cast upon the question, whether or not a quorum is
present, and the meeting may be held as adjourned without further notice.
2.5 Participation by Telephone. One or more of the Trustees or of any
committee of the Trustees may participate in a meeting thereof by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
ARTICLE 3
---------
Officers
--------
3.1 Enumeration; Qualification. The officers of the Trust shall be a
Chairman of the Board, a President, a Treasurer, a Secretary and such other
officers, including Vice Presidents, if any, as the Trustees from time to time
may in their discretion elect. The Trust may also have such agents as the
Trustees from time to time may in their discretion appoint. The Chairman of the
Board shall be a Trustee and may, but need not be, a shareholder; and any other
officer may, but need not be, a Trustee or shareholder. Any two or more offices
may be held by the same person.
3.2 Election. The Chairman of the Board, the President, the Treasurer and
the Secretary shall be elected annually by the Trustees at a meeting held within
the first four months of the Trust's fiscal year. The meeting at which the
officers are elected shall be known as the annual meeting of Trustees. Other
officers, if any, may be elected or appointed by the Trustees at said meeting or
at any other time. Vacancies in any office may be filled at any time.
3.3 Tenure. The Chairman of the Board, the President, the Treasurer and
the Secretary shall hold office until the next annual meeting of the Trustees
and until their respective successors are chosen and qualified, or in each case
until he sooner dies, resigns, is removed or becomes disqualified. Each other
officer shall hold office and each agent shall retain authority at the pleasure
of the Trustees.
3.4 Powers. Subject to the other provisions of these By-Laws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to the office occupied by him as if the Trust were organized as a Massachusetts
business corporation and such other duties and powers as the Trustees may from
time to time designate.
3.5 Chairman; President. Unless the Trustees otherwise provide, the
Chairman of the Board, or, if there is no Chairman, or in the absence of the
Chairman, the President, shall preside at all meetings of the shareholders and
of the Trustees. Unless the Trustees otherwise provide, the President shall be
the Chief Executive Officer.
3.6 Vice President. The Vice President, or if there be more than one Vice
President, the Vice Presidents in the order determined by the Trustees (or if
there be no such determination, then in the order of their election) shall in
the absence of the
-2-
<PAGE>
President or in the event of his inability or refusal to act, perform the duties
of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Vice Presidents shall
perform such other duties and have such other powers as the Board of Trustees
may from time to time prescribe.
3.7 Treasurer. The Treasurer shall be the chief financial and accounting
officer of the Trust, and shall, subject to the provisions of the Declaration of
Trust and to any arrangement made by the Trustees with a custodian, investment
adviser or manager, or transfer, shareholder servicing or similar agent, be in
charge of the valuable papers, books of account and accounting records of the
Trust, and shall have such other duties and powers as may be designated from
time to time by the Trustees or by the President.
3.8 Assistant Treasurer. The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers in the order determined by the Trustees
(or if there be no such determination, then in the order of their election),
shall, in the absence of the Treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Board of
Trustees may from time to time prescribe.
3.9 Secretary. The Secretary shall record all proceedings of the
shareholders and the Trustees in books to be kept therefor, which books or a
copy thereof shall be kept at the principal office of the Trust. In the absence
of the Secretary from any meeting of the shareholders or Trustees, an Assistant
Secretary, or if there be none or if he is absent, a temporary secretary chosen
at such meeting shall record the proceedings thereof in the aforesaid books.
3.10 Assistant Secretary. The Assistant Secretary, or if there be more
than one, the Assistant Secretaries in the order determined by the Trustees (or
if there be no determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Trustees may from
time to time prescribe.
3.11 Resignations and Removals. Any Trustee or officer may resign at any
time by written instrument signed by him and delivered to the Chairman of the
Board, the President or the Secretary or to a meeting of the Trustees. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time. The Trustees may remove any officer elected by them with or
without cause. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee or officer resigning and no officer removed shall
have any right to any compensation for any period followi his resignation or
removal, or any right to damages on account of such removal.
-3-
<PAGE>
ARTICLE 4
---------
Committees
----------
4.1 General. The Trustees, by vote of a majority of the Trustees then in
office, may elect from their number an Executive Committee or other committees
and may delegate thereto some or all of their powers except those which by law,
by the Declaration of Trust, or by these By-Laws may not be delegated. Except
as the Trustees may otherwise determine, any such committee may make rules for
the conduct of its business, but unless otherwise provided by the Trustees or in
such rules, its business shall be conducted so far as possible in the same
manner as is provided by these By-Laws for the Trustees themselves. All members
of such committees shall hold such offices at the pleasure of the Trustees. The
Trustees may abolish any such committee at any time. Any committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its action to the Trustees. The Trustees shall have
power to rescind any action of any committee, but no such rescission shall have
retroactive effect.
ARTICLE 5
---------
Reports
-------
5.1 General. The Trustees and officers shall render reports at any time
and in the manner required by the Declaration of Trust or any applicable law.
Officers and committees shall render such additional reports as they may deem
desirable or as may from time to time be required by the Trustees.
ARTICLE 6
---------
Fiscal Year
-----------
6.1 General. The fiscal year of the Trust shall be fixed by resolution of
the Trustees.
ARTICLE 7
---------
Seal
----
7.1 General. The seal of the Trust shall consist of a flat-faced die with
the word "Massachusetts", together with the name of the Trust and the year of
its organization cut or engraved thereon, but, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on, and its absence shall
not impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
-4-
<PAGE>
ARTICLE 8
---------
Execution of Papers
-------------------
8.1 General. Except as the Trustees may generally or in particular cases
authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed by
the President, any Vice President, or by the Treasurer and need not bear the
seal of the Trust.
ARTICLE 9
---------
Issuance of Share Certificates
------------------------------
9.1 Share Certificates. In lieu of issuing certificates for shares, the
Trustees or the transfer agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
The Trustees may at any time authorize the issuance of share certificates
either in limited cases or to all shareholders. In that event, a shareholder
may receive a certificate stating the number of shares owned by him, in such
form as shall be prescribed from time to time by the Trustees. Such certificate
shall be signed by the President or a Vice President and by the Treasurer or
Assistant Treasurer. Such signatures may be facsimiles if the certificate is
signed by a transfer agent, or by a registrar, other than a Trustee, officer or
employee of the Trust. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall cease to be such officer
before such certificate is issued, it may be issued by the Trust with the same
effect as if he were such officer at the time of its issue.
9.2 Loss of Certificates. In case of the alleged loss or destruction or
the mutilation of a share certificate, a duplicate certificate may be issued in
place thereof, upon such terms as the Trustees shall prescribe.
9.3 Issuance of New Certificate to Pledgee. A pledgee of shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificate shall express on its face that it
is held as collateral security, and the name of the pledgor shall be stated
thereon, who alone shall be liable as a shareholder, and entitled to vote
thereon.
9.4 Discontinuance of Issuance of Certificates. The Trustees may at any
time discontinue the issuance of share certificates and may, by written notice
to each shareholder, require the surrender of shares certificates to the Trust
for cancellation. Such surrender and cancellation shall not affect the
ownership of shares in the Trust.
-5-
<PAGE>
ARTICLE 10
----------
Dealings with Trustees and Officers
-----------------------------------
10.1 General. Any Trustee, officer or other agent of the Trust may
acquire, own and dispose of shares of the Trust to the same extent as if he were
not a Trustee, officer or agent; and the Trustees may accept subscriptions to
shares or repurchase shares from any firm or company in which any Trustee,
officer or other agent of the Trust may have an interest.
ARTICLE 11
----------
Amendments to the By-Laws
-------------------------
12.1 General. These By-Laws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
The foregoing By-Laws were adopted by the Board of Trustees on August 8,
1984.
/s/ Philip J. Fina
------------------------------------
Secretary
-6-
<PAGE>
EXHIBIT 99-5(a)(3)
LETTER AGREEMENT
AMENDMENT
Frank Russell Investment Management Company
P.O. Box 1591
Tacoma, WA 98401-1591
Dear Sirs:
This Letter Agreement amends the Amended and Restated Management Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company dated April 1, 1995 ("Management Agreement"). Frank Russell Investment
Company advises you that with respect to its Aggressive Strategy Fund, Balanced
Strategy Fund, Moderate Strategy Fund, Conservative Strategy Fund and Equity
Balanced Strategy Fund (each, a "Fund") each Fund desires Frank Russell
Investment Management Company to manage the Fund pursuant to the terms and
conditions of the Management Agreement. Section 6A of the Management Agreement
hereby is amended with respect to each Fund, to set forth an annual management
fee of 0.25% of average daily net assets, payable as set forth in that Section.
Please indicate your acceptance of the amendment to the Management Agreement by
executing the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Lynn L. Anderson
-------------------------------
Lynn L. Anderson
President
Accepted this 6th day of June, 1997.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/ Eric A. Russell
-------------------------------
Eric A. Russell
President
Frank Russell Company agrees to provide consulting services without charge to
the Investment Company upon the request of the Board of Trustees or Officers of
the Trust, or upon the request of Manager pursuant to Section 2(c).
FRANK RUSSELL COMPANY
By: /s/ Michael J.A. Phillips
--------------------------------
Michael J.A. Phillips,
President
<PAGE>
EXHIBIT 99-5(b)(1)
SERVICES AGREEMENT
FRANK RUSSELL INVESTMENT COMPANY
THIS AGREEMENT made this 1st day of May, 1987 between Frank Russell
Investment Company, a Massachusetts business trust (hereafter the "Trust"); and
Frank Russell Company, a corporation organized under the laws of the State of
Washington (hereafter "Company"):
WITNESSETH
----------
WHEREAS the Trust is a diversified management investment company registered
under the Investment Company Act of 1940 ("1940 Act") offering shares of
nineteen investment funds with different investment objectives and policies
("Sub-Trusts"), and uses one or more money managers to select portfolio
securities; and
WHEREAS Company is registered as an investment advisor under the Investment
Advisors Act of 1940, and prepares and provides to clients statistical,
financial and analytical reports concerning their investment portfolios, which
are referred to as the Portfolio Activity Report ("PAR") and Analysis of
International Management ("AIM"); and
WHEREAS the Trust believes that PAR and AIM provide essential or desirable
assistance to the Trust in conducting its operations, and desires to obtain PAR
and AIM on the terms and conditions set forth in this Agreement; and
WHEREAS Company is willing to provide PAR and AIM to the Trust on the terms
and conditions set forth in this Agreement:
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and Company agree as follows:
1. Employment of Company. Trust hereby employs Company to provide PAR
and AIM with respect to such investment portfolios as Trust shall
designate from time to time.
2. Fees for Company's Services. For the Company's services the Trust
agrees to pay, effective April 1, 1987, the following fees within ten
(10) days after its receipt of the Company's calendar quarter end
billing statement. Annual fees are billed quarterly on a prorated
basis. Fees shall be prorated on a monthly basis for any quarterly
period during which a portfolio is not on the PAR system, or assets
have not been assigned to an investment manager for inclusion in the
AIM report.
<PAGE>
Quarterly fees for domestic PAR portfolios
A. $50 per portfolio; and
B. Per transaction charges
<TABLE>
<CAPTION>
Number Per Quarter Automated Manual
- ------------------ --------- -----
<S> <C> <C>
1st 200 $4 $4
Additional $2 $6
</TABLE>
$13,000 Annual fee per international portfolio on PAR
$ 2,500 Annual fee per international portfolio upon transfer of
assets to an investment manager for AIM report
3. Amendment. This Agreement may be amended at any time by written
agreement between the Company and the Trust, subject to the Trust
obtaining such approvals as may be required by the Investment Company
Act of 1940.
4. Renewal and Termination.
A. This Agreement shall become effective on the date written above
and shall continue in effect as to each Sub-Trust until April 30,
1989. The Agreement is renewable annually thereafter for
successive one year periods: (1) by a vote of a majority of the
Trustees of the Trust; or (2) as to each Sub-Trust, by a vote of
a majority of the outstanding voting securities of that Sub-
Trust, and in either case by a vote of a majority of the Trustees
who are not parties to the Agreement or interested persons of any
parties to the Agreement (other than as Trustees of the Trust)
cast in person at a meeting called for purposes of voting on the
Agreement; provided, however, that if the shareholders of any one
or more Sub-Trusts fail to approve the Agreement as provided
herein, the Company may continue to serve in such capacity in the
manner and to the extent permitted by the 1940 Act and the Rules
and Regulations thereunder.
B. This Agreement:
(1) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust
or, as to any Sub-Trust, by vote of a majority of the
outstanding voting securities of the Sub-Trust, on 60 days'
written notice to the Company;
(2) shall immediately terminate in the event of its assignment;
and
<PAGE>
(3) may be terminated by the Company on 60 days' written notice
to the Trust.
C. As used in this Section 4, the terms of "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms
in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed postpaid, to the other party
at any office of such party.
5. Applicable Law. To the extent that State law shall not have been
preempted by the provisions of any other laws of the United States
heretofore or hereafter enacted, as the same may be amended from time
to time, this Agreement shall be administered, construed, and enforced
according to the laws of the State of Washington.
6. Limitation of Liability. The Master Trust Agreement dated July 26,
1984, as amended from time to time, establishing the Trust, which is
hereby referred to and a copy of which is on file with the Secretary
of the Commonwealth of Massachusetts, provides that the name Frank
Russell Investment Company means the Trustees from time to time
serving (as Trustees but not personally) under said Master Trust
Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust hereunder shall not be binding upon any of
the shareholders, Trustees, officers, employees or agents of the
Trust, personally, but shall bind only the trust property of the
Trust, as provided in its Master Trust Agreement. The execution and
delivery of this Agreement have been authorized by the Trustees of the
Trust and signed by the President of the Trust, acting as such, and
neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT COMPANY
/s/ Philip J. Fina By: /s/ George F. Russell, Jr.
- ----------------------------------- --------------------------------
Philip J. Fina, Secretary George F. Russell, Jr.
FRANK RUSSELL COMPANY
/s/ Philip J. Fina By: /s/ George F. Russell, Jr.
- ----------------------------------- --------------------------------
Philip J. Fina, Secretary George F. Russell, Jr.
<PAGE>
EXHIBIT 99-5(b)(2)
LETTER AGREEMENT
May 1, 1989
Frank Russell Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 3 of the Service Agreement between Frank Russell Investment
Company and Frank Russell Company, dated May 1, 1987, the Frank Russell
Investment Company advises you that it is creating a new fund to be named the
Real Estate Securities Fund (the "Fund") and that the Fund desires Frank Russell
Company to provide Portfolio Activity Reports ("PAR") and Analysis of
International Management ("AIM") to the Fund pursuant to the terms and
conditions of the Service Agreement. The fees to be charged by the
Administrator to the Fund in return for its services are the same as those set
forth in the Service Agreement.
Please indicate your acceptance to provide the service to the Real Estate
Securities Fund by executing the acceptance copy of the Letter Agreement and
returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Vice President - Operations
Accepted this 25th day of April, 1989.
FRANK RUSSELL COMPANY
By: /s/ Thomas A. Early
-------------------------------
Vice President and Chief Financial Services Controller
<PAGE>
EXHIBIT 99-5(b)(3)
Amendments No. 1 to the Service Agreement
between Frank Russell Investment Company
and Frank Russell Company
Amendment No. 1 as of this 1st day of July, 1992 to the Service Agreement
dated May 1, 1987 (the "Agreement") between Frank Russell Investment Company, a
Massachusetts business trust (the "Trust") and Frank Russell Company, a
Washington corporation (hereinafter "Company").
WHEREAS, the Trust is a diversified management investment company
registered under the Investment Company Act of 1940 ("1940 Act") offering shares
of nineteen investment funds with different investment objective and policies
("Sub-Trust"); and
WHEREAS, Company is registered as an investment advisor under the
Investment Advisors Act of 1940, and prepares and provides to clients,
statistical, financial, tax, and analytical reports and information concerning
their investment portfolios; and
WHEREAS, Company furnishes Portfolio Verification System ("PVS") services
to clients providing accounting and tax status information on assets held by the
client; and
WHEREAS, the Company and the Trust desire to change the level of PVS
services provided to the single currency (Domestic) funds, resulting in a
reduction of the aggregate amount of fees payable for such services by the
funds; and
WHEREAS, the Corporation and the Trust desire to increase the aggregate
amount of fees payable by the multi-currency (International) funds to more
accurately reflect the cost of providing services to such funds; and
WHEREAS, the staff of the U.S. Securities and Exchange Commission has
revised its views on service agreements and no longer requires shareholder
action to approve, amend or renew such service agreements; and
WHEREAS, at the meeting held on June 22, 1992, the Trustees approved the
service and fee changes for the single currency and multi-currency funds above
described and amended the renewal section of the Service Agreement to reflect
the SEC's current position on the approval, amendment and renewal of service
agreements;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, it is hereby agreed that Section 2, and Section 4, Paragraphs
A, B, and C, of the Agreement are hereby amended and restated to read as
follows:
2. Fees for Company's Services. For the Company's services the Trust
agrees to pay, effective July 1, 1992, the following fees within ten
(10)
<PAGE>
days after its receipt of the Company's calendar quarter end billing
statement. Annual fees are billed quarterly on a prorated basis. Fees
shall be prorated on a monthly basis for any quarterly period during
which a portfolio is not receiving PVS services, or assets have not
been assigned to an investment manager for inclusion in the AIM report
with the minimum charge to the Fund being the minimum quarterly fee
(1/4 annual minimum fee).
Single Currency
---------------
Equity (including real estate equity)
------
Base Fee $1,500 per portfolio, per year
Transaction Charge $0.10 per transaction
Holdings Charge $1.80 per holding, per year
Annual minimum charges as follows:
<TABLE>
<S> <C>
Diversified Equity Fund $25,000
Equity I Fund $25,000
Equity II Fund $15,000
Special Growth Fund $15,000
Equity III Fund $12,000
Equity Income Fund $12,000
Equity Q Fund $23,000
Quantitative Equity Fund $23,000
Real Estate Securities Fund $ 5,000
</TABLE>
Any additional US equity fund will be billed using the
same fee schedule, with a $20,000 annual minimum fee.
Fixed Income
------------
Base Fee $2,500 per portfolio, per year
Transaction Charge $2 per transaction
Holdings Charge $12 per holding, per year
Annual minimum charges as follows:
<TABLE>
<S> <C>
Diversified Bond Fund $31,000
Fixed Income I Fund $31,000
Fixed Income II Fund $22,000
Volatility Constrained Bond Fund $22,000
</TABLE>
Any additional fixed income funds will be billed using
the same fee schedule, with a $25,000 annual minimum fee.
Master Holding
--------------
Base Fee $500 per portfolio, per year
Transaction Charge charged according to asset class
Holdings Charge charged according to asset class
2
<PAGE>
Multi-Currency
--------------
Portfolio Verification Service
------------------------------
Base Fee $14,000 per portfolio, per year
Transaction Charge $3 per transaction
Holdings Charge $24 per holding, per year
Billing includes a minimum annual fee of $290,000
Analysis of International Management (AIM)
------------------------------------------
Base Fee $2,500 per portfolio, per year*
$5,000 per portfolio, per year**
* Data supplied electronically from Russell's
Portfolio Verification service
** Data supplied by investment advisor or global
custodian
Fee schedule includes annual adjustment no greater than CPI.
4. Renewal and Termination.
------------------------
A. This Agreement shall continue in effect for one year from the
effective date of this amended and restated Agreement, July 1,
1992, and thereafter shall continue in effect from year to year
if such continuance is approved annually by the Board of Trustees
of the Trust.
B. This Agreement:
(1) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust
on 60 days written notice to the Company;
(2) shall immediately terminate in the event of its assignment;
and
(3) may be terminated by the Company on 60 days written notice
to the Trust.
C. As used in this Section 4, the terms of "assignment", and
"interested person" shall have the meanings set forth for any
such terms in the 1940 Act.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by the officers designated below as of the day and year first above
written.
ATTEST: FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Thomas A. Early By: /s/ Lynn L. Anderson
------------------------------- --------------------------------
Thomas A. Early Lynn L. Anderson, President
ATTEST: FRANK RUSSELL COMPANY
By: /s/ Karl J. Ege By: /s/ Michael J.A. Phillips
------------------------------- --------------------------------
Karl J. Ege Michael J.A. Phillips, President
<PAGE>
EXHIBIT 99-5(b)(4)
LETTER AGREEMENT
August 24, 1992
Frank Russell Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 3 of the Service Agreement between Frank Russell Investment
Company and Frank Russell Company, dated May 1, 1987, the Frank Russell
Investment Company advises you that it is creating three new funds to be named
the Fixed Income III, Multistrategy Bond and Emerging Markets Funds (the
"Funds") and that the Funds desires Frank Russell Company to provide PVS
Services with respect to the Funds pursuant to the terms and conditions of the
Service Agreement. The fees to be charged by the Administrator to the Funds in
return for its services are as set forth the Service Agreement.
Please indicate your acceptance to provide the service to the Fixed Income III,
Multistrategy Bond, Emerging Markets and Emerging Markets Securities Funds by
executing the acceptance copy of the Letter Agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Director of Operations
Accepted this 28th day of August, 1992.
FRANK RUSSELL COMPANY
By: /s/ Karl J. Ege
-------------------------------
Karl J. Ege, Secretary
<PAGE>
EXHIBIT 99-6(a)(1)
DISTRIBUTION AGREEMENT
OF
THE FRANK RUSSELL INVESTMENT COMPANY
This Distribution Agreement is made this 7th day of March, 1988 by and
between The Frank Russell Investment Company, a Massachusetts business trust
("Investment Company"), and Russell Fund Distributors, Inc., a Washington
corporation ("Distributor").
WHEREAS, the Investment Company is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and offers for public sale distinct series of shares
of common stock, each corresponding to a distinct portfolio ("Fund"), currently
18; and
WHEREAS, Russell Fund Distributors, Inc. is in the process of registering
as a mutual fund broker-dealer with appropriate regulatory agencies and expects
such registrations to be completed on or about April 2, 1988; and
WHEREAS, the Investment Company wishes to retain Distributor as the
Investment Company's distributor in connection with the offering and sale of the
shares of Funds as now exist and as hereafter may be established ("Shares") and
to furnish certain other services to the Investment Company as specified in this
Agreement; and
WHEREAS, Distributor is willing to furnish such services on the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. The Investment Company hereby appoints Distributor to perform those
services described in this Agreement for each Fund of the Investment Company in
existence as of the date hereof ("Initial Funds"). In the event that the
Investment Company establishes one or more series of shares other than the
Initial Funds with respect to which it desires to retain the Distributor to
serve as distributor and principal underwriter hereunder, it shall so notify the
Distributor in writing, indicating the fee, if any, to be payable with respect
to the additional series of shares. If the Distributor is willing to render
such services, it shall so notify the Investment Company in writing, whereupon
such series of shares shall become a Fund hereunder. In such event a writing
signed by both the Investment Company and the Distributor shall be annexed
hereto as a part hereof indicating that such additional series of shares has
become a Fund hereunder.
2. The Investment Company authorizes Distributor as agent for the
Investment Company, subject to applicable federal and state law and the Master
Trust Agreement, By-Laws and current Prospectus and Statement of Additional
Information of the Investment Company: (a) to promote and offer each Fund and
the Investment
<PAGE>
Company; (b) to solicit orders for the purchase of the Shares of each Fund
subject to such terms and conditions as the Investment Company may specify; and
(c) to accept orders for the purchase of the Shares of each Fund on behalf of
the Investment Company. Distributor shall offer the Shares of each Fund on an
agency or "best efforts" basis under which the Investment Company shall only
issue such Shares as are actually sold.
In connection with such sales and offers of sale, the Investment Company
shall not be responsible in any way for any other information, statements or
representations given or made by Distributor or its representatives or agents,
except such information or representations as are contained in the Prospectus or
in information furnished in writing to Distributor by the Investment Company.
3. The public offering price of the Shares shall be the net asset value
per share (as determined by the Investment Company) of the outstanding Shares of
the Investment Company plus a sales charge (if any) as set forth in the
Investment Company's current Prospectus. The Investment Company shall make
available to Distributor a statement of each computation of net asset value and
of the details entering into such computation.
4. As used in this Agreement, the term "Registration Statement" shall
mean the Registration Statement most recently filed by the Investment Company
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as such Registration Statement is amended by any amendments thereto
at the time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean the form of Prospectus and Statement of Additional
Information filed by the Investment Company as part of the Registration
Statement.
5. The Investment Company agrees, at its own expense, to register the
Shares with the Securities and Exchange Commission, state and other regulatory
bodies, and to prepare and file from time to time such Prospectuses, amendments,
reports and other documents as may be necessary to maintain the Registration
Statement. The Investment Company shall bear all expenses related to preparing
and typesetting such Prospectuses, Statements of Additional Information and
other materials required by law and such other expenses, including printing and
mailing expenses, related to the Investment Company's communications with
persons who are shareholders of each Fund of the Investment Company.
6. The Investment Company agrees to indemnify, defend and hold harmless
Distributor, each person who has been, is, or may hereafter be an officer,
director, or employee or agent of Distributor, and any person who controls
Distributor within the meaning of Section 15 of the 1933 Act from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Distributor, its officers or
Directors, or any such controlling person may incur under the 1933 Act or under
common law which arises out of or is alleged to arise out of or is based upon
violation of any of the terms of this Agreement or otherwise arising out of or
<PAGE>
based upon any alleged untrue statement of a material fact contained in the
Registration Statement, Prospectuses or Statements of Additional Information or
arising out of or based upon any alleged omission to state a material fact
required to be stated in said documents or necessary to make the statements in
said documents not misleading, provided that in no event shall anything
contained in this Agreement be construed so as to protect Distributor against
any liability to the Investment Company or its shareholders to which Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
7. Distributor agrees to indemnify, defend and hold harmless the
Investment Company, each person who has been, is, or may hereafter be an
officer, director, or employee or agent of Distributor, and any person who
controls the Investment Company within the meaning of Section 15 of the 1933 Act
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Investment Company, its officers or Trustees, or any such controlling person may
incur under the 1933 Act or under common law which arises out of or is alleged
to arise out of or is based upon a violation of any of the terms of this
Agreement or otherwise arising out of or based upon any alleged untrue statement
of a material fact contained in information furnished in writing by Distributor
to the Investment Company for use in the Registration Statement, Prospectuses or
Statements of Additional Information or arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement, Prospectuses or Statements of
Additional Information, or necessary to make such information not misleading.
8. The Investment Company reserves the right at any time to withdraw all
offerings of the Shares by written notice to the Distributor at its principal
office.
9. Distributor at its sole discretion may repurchase Shares offered for
sale by the shareholders. Repurchase of Shares by Distributor shall be at the
net asset value next determined after a repurchase order has been received. On
each business day, Distributor shall notify by telex or in writing the
Investment Company or the Investment Company's transfer agent of the orders for
repurchase of shares received by Distributor since the last such report, the
amount to be paid for such Shares, and the identity of shareholders offering
Shares for repurchase. Upon such notice, the Investment Company shall pay
Distributor such amounts as are required by Distributor for the repurchase of
such Shares in cash or in the form of a credit against monies due the Investment
Company from Distributor as proceeds from the sale of Shares. Distributor will
receive no commission or other remuneration for repurchasing Shares. The
Investment Company reserves the right to suspend such repurchases upon written
notice to Distributor. Distributor further agrees to act as agent for the
Investment Company to receive and transmit promptly to the Investment Company's
transfer agent shareholder request for redemption of Shares.
10. Distributor is an independent contractor and shall be agent for the
Investment Company only with respect to the sale and repurchase of the Shares.
11. The services of Distributor to the Investment Company under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render
<PAGE>
similar services or other services to others so long as its services hereunder
are not impaired thereby.
12. Distributor shall prepare reports for the Board of Trustees of the
Investment Company upon request showing information concerning expenditures
related to this Agreement.
13. As used in this Agreement, the term "net asset value" shall have the
meaning ascribed to it in the Investment Company's Master Trust Agreement; and
the terms "assignment," "interested person," and "majority of the outstanding
voting securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the Securities and
Exchange Commission by any rule, regulation or order.
14. This Agreement shall become effective (i) with respect to the Initial
Funds on a date specified by the Investment Company's President; and (ii) with
respect to each additional Fund on the date which the additional Fund commences
offering its shares to the public, so long as the provisions of Section 1 have
been complied with. The Agreement shall continue in effect for each Fund for
two years following the effective date of this Agreement with respect to the
Fund; and thereafter only so long as its continuance is specifically approved at
least annually by a majority of the Trustees of the Investment Company who are
not parties to the Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval, or by
vote of a majority of the outstanding voting securities of the Fund.
15. This Agreement may be terminated at any time:
(a) By the Trustees of the Investment Company or by vote of a
majority of the outstanding voting securities of the Investment Company by
sixty days' notice addressed to the Distributor at its principal place of
business;
(b) By the Distributor by sixty days' written notice addressed to the
Investment Company at its principal place of business; and
(c) Immediately in the event of its assignment.
16. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
vote of a majority of the Board of Trustees, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of such Fund affected by the amendment.
17. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
<PAGE>
18. This Agreement shall be construed in accordance with the laws of the
State of Washington and any applicable federal law.
19. The Master Trust Agreement dated July 26, 1984, as amended from time
to time, establishing the Investment Company, which is hereby referred to and a
copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Frank Russell Investment Company means the
Trustees from time to time serving (as Trustees but not personally) under said
Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Investment Company hereunder shall not be binding upon any of
the shareholders, Trustees, officers, employees or agents of the Investment
Company, personally, but shall bind only the trust property of the Investment
Company, as provided in its Master Trust Agreement. The execution and delivery
of this Agreement have been authorized by the Trustees of the Investment Company
and signed by an officer of the Investment Company, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Investment Company as provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the date written
above.
Attest: FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Michael Caccese By: /s/ Lynn L. Anderson
------------------------------- --------------------------------
Michael Caccese Lynn L. Anderson
President
Attest: RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Michael Caccese By: /s/ Philip J. Fina
------------------------------- --------------------------------
Michael Caccese Philip J. Fina
President
<PAGE>
EXHIBIT 99-6(a)(2)
LETTER AGREEMENT
May 1, 1989
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Introductory Section 1 of the Distribution Agreement between Frank
Russell Investment Company and Russell Fund Distributors, Inc., date March 7,
1988, the Frank Russell Investment Company advises you that it is creating a new
fund to be named the Real Estate Securities Fund (the "Fund") and that the Fund
desires for Russell Fund Distributors, Inc. to serve as Distributor with respect
to the Fund pursuant to the terms and conditions of the Distribution Agreement.
The fees to be charged by the Administrator to the Fund in return for its
services are the same as in the Distribution Agreement.
Please indicate your acceptance to act as Distributor to the Real Estate
Securities Fund by executing the acceptance copy of this letter agreement and
returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Vice President Operations
Accepted this 21st day of April, 1989
RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Philip J. Fina
-------------------------------
Philip J. Fina
President
<PAGE>
EXHIBIT 99-6(a)(3)
LETTER AGREEMENT
August 24, 1992
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Introductory Section 1 of the Distribution Agreement between Frank
Russell Investment Company and Russell Fund Distributors, Inc., dated March 7,
1988, the Frank Russell Investment Company advises you that it is creating three
new funds to be named the Fixed Income III, Multistrategy Bond and Emerging
Markets Funds (the "Funds") and that the Funds desires for Russell Fund
Distributors, Inc. to serve as Distributor with respect to the Funds pursuant to
the terms and conditions of the Distribution Agreement. The fees to be charged
the Funds in return for the Distributor's services are the same as in the
Distribution Agreement.
Please indicate your acceptance to act as Distributor to the Fixed Income III,
Multistrategy Bond and Emerging Market Funds by executing the acceptance copy of
this letter agreement and returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Director of Operations
Accepted this 28th day of August, 1992
RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Thomas A. Early
-------------------------------
Thomas A. Early
Secretary
<PAGE>
EXHIBIT 99-8(a)
CUSTODIAN CONTRACT
Between
FRANK RUSSELL INVESTMENT COMPANY
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
CUSTODIAN CONTRACT
This Contract between Frank Russell Investment Company, a business trust
organized and existing under the laws of Massachusetts, having its principal
place of business at 909 A Street, Tacoma, Washington, 98402, hereinafter called
the "Fund", and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in eighteen series, the
Equity I Fund, Equity II Fund, Equity III Fund, Equity Q Fund, Fixed Income I
Fund, Fixed Income II Fund, International Fund, Diversified Equity Fund, Special
Growth Fund, Equity Income Fund, Quantitative Equity Fund, International
Securities Fund, Diversified Bond Fund, Volatility Constrained Bond Fund,
Limited Volatility Tax Free Fund, U.S. Government Money Market Fund, Money
Market Fund, and Tax Free Money Market Fund (such series together with all other
series subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 14, being herein referred to as the "Portfolio(s)");
WHEREAS, the Fund desires to have the investment securities and cash of
each Portfolio held by the Custodian in accordance with the provisions of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder:
WHEREAS, the Custodian is willing to provide custodial services to the Fund
pursuant to the terms and conditions set forth herein;
NOW THEREFOR, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It The Fund hereby
employs the Custodian as the custodian of the assets of the Portfolios of
the Fund, including securities which the Fund, on behalf of the applicable
Portfolio desires to be held in places within the United States ("domestic
securities") and
<PAGE>
securities it desires to be held outside the United States ("foreign
securities') pursuant to the provisions of the Declaration of Trust. The
Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios, ('Shares')
as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of a Portfolio held or received by the
Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.16), the Custodian shall on behalf of the applicable Portfolio(s) from
time to time employ one or more sub-custodians, located in the United
States but only in accordance with an applicable vote by the Board of
Trustees of the Fund on behalf of the applicable Portfolio(s), and provided
that the Custodian shall have no more or less responsibility or liability
to the Fund on account of any actions or omissions of any sub-custodian so
employed than any such sub-custodian has to the Custodian. The Custodian
may employ as sub-custodian for the Fund's foreign securities on behalf of
the applicable Portfolio(s) the foreign banking institutions and foreign
securities depositories designated in Schedule A hereto but only in
accordance with the provisions of Article 3.
1.1 APPOINTMENT OF' INVESTMENT MANAGER. The Fund shall appoint one or more
independent Investment Managers, pursuant to a written Investment
Management Agreement describing the powers and duties of the Investment
Manager, to direct the investment and reinvestment of the Portfolios.
1.2 SEPARATE INVESTMENT ACCOUNTS. The Fund may direct the Custodian to
segregate the Portfolios into more than one separate Investment Account,
and in that case, the Fund shall appoint one or more independent Investment
Managers, pursuant to such an Investment Management Agreement, to direct
the investment and reinvestment of each such Portfolio's Account.
1.3 NOTICES REGARDING INVESTMENT MANAGER'S TENURE. The Fund on behalf of each
Portfolio shall furnish the Custodian with notice of the appointment of
each Investment Manager hereunder, and of the termination of
<PAGE>
any such appointment. Such notice shall specify whether or not the
Investment Manager's responsibility encompasses the entire Fund or a
separate Portfolio's Account.
1.4 INVESTMENT MANAGER'S APPARENT AUTHORITY. The Custodian shall conclusively
presume that each Investment Manager, under its Investment Management
Agreement, is entitled to act, in directing the investment and reinvestment
of the Fund, or the separate Portfolio for which it is responsible, in its
sole and independent discretion and without limitation, except for any
limitations which from time to time the Fund advises the Custodian shall
modify the scope of the authority which the Investment Manager shall be
presumed to have under this sentence. The Investment Manager's instructions
to the Custodian will be given in such manner and form as the Custodian and
the Investment Manager may mutually agree.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN IN THE UNITED STATES
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 DELIVERY OF SECURITIES. The Custodian shall release an-deliver domestic
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ('Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
<PAGE>
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
'Loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or Conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
<PAGE>
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
11) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
13) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
14) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a
<PAGE>
proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of say nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized in
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from
or for the account of the Portfolio, other than cash maintained by the
Portfolio in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of l940. Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company shall
be qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the Custodian only
in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund
<PAGE>
on behalf of a Portfolio, make federal funds available to such Portfolio
as of specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of such
Portfolio which are deposited into the Portfolio's account.
2.6 COLLECTION OF INCOME. The Custodian shall collect on a timely basis all
income and other payments with respect to registered domestic securities
held hereunder to which each Portfolio shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to bearer
domestic securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to such Portfolio's custodian account.
Without limiting ,he generality of the foregoing, the Custodian shall.
detach and present for payment all coupons and other income items
requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the
Portfolio but only (a) against the delivery of such securities or
evidence of title to such options, futures contracts or options on
futures contracts to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Portfolio or
in the name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case of a
purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of repurchase
agreements entered into between the Fund on behalf of the Portfolio
and the Custodian, or another bank, or a broker-dealer which is a
<PAGE>
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Portfolio
of securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities from
the Portfolio or (e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund as
defined in Section 2.16;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for
the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating expenses of
the Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of Trustees
or of the Executive Committee of the Fund signed by an officer of
the Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom such
payment is to be made.
<PAGE>
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
-------------------------------------------------------------------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit
--------------------------------------------
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with-respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such
<PAGE>
payment and transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Portfolio. Copies of all
advices from the Securities System of transfers of securities for
the account of the Portfolio shall identify the Portfolio, be
maintained-for the Portfolio by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian shall furnish the
Fund on behalf of the Portfolio confirmation of each transfer to or
from the account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any
report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 11 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from use
of the Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if
and to the extent that the Portfolio has not been made whole for any
such loss or damage.
2.10A FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM.
<PAGE>
The Custodian may deposit and/or maintain securities owned by a Portfolio
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions from the Fund
on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transaction in the
Securities System for the account of the Portfolio;.
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.11 SEGREGATED ACCOUNT. The Custodian shall upon receipt Of Proper Instructions
from the Fund on behalf of each applicable Portfolio establish and maintain
a segregated account or accounts for and on behalf of each such Portfolio,
into which account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with
<PAGE>
the provisions of any agreement among the Fund on behalf of the Portfolio,
the Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (-or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.13 PROXIES. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.14 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. The Custodian shall
transmit promptly to the Fund for each Portfolio all written information
(including, without limitation, pendency of calls and maturities of
<PAGE>
domestic securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund on behalf
of the Portfolio and the maturity of futures contracts purchased or sold by
the Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange offers,
the Custodian shall-transmit promptly to the Portfolio all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with
respect to any tender offer, exchange offer or any other similar
transaction, the Portfolio shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.15 AUTHORIZED PERSONS. (a) Authorized Persons shall be deemed to include the
------------------
President, and any Vice President, the Secretary, the Treasurer, or any
other person, whether or not any such person is an officer or employee of
the Fund, duly authorized by the Board of Trustees of the Fund to give oral
instructions and written instructions on behalf of the Fund and listed in
the certification annexed hereto as Appendix A or such other certification
as may be received by the Custodian from time to time. (b) Annexed hereto
as Appendix A is a certification signed by two of the present officers of
the Fund setting forth the names and the signatures of the present
Authorized Persons. The Fund agrees to furnish to the Custodian a new
certification in similar form in the event that any such present Authorized
Person ceases to be such an Authorized Person or in the event that other or
additional Authorized Persons are elected or appointed. Until such new
certification shall be received, the Custodian shall be fully protected in
acting under the provisions of this Contract upon oral instructions or
signatures of the present Authorized Persons as set forth in the last
delivered certification.
2.16 PROPER INSTRUCTIONS. Proper Instructions as used throughout this
-------------------
Article 2 means a writing signed or initialled by one or more Authorized
Persons. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes them to have been
given by an Authorized Person to give such instructions with respect to the
transaction
<PAGE>
involved. The Fund shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board
of Trustees, Proper Instructions may include communications effected
directly between electromechanical or electronic devices provided that the
Board of Trustees and the Custodian are satisfied that such procedures
afford adequate safeguards for the Portfolios' assets. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
2.17 ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in its
-------------------------------------------
discretion, without express authority from the Fund on behalf of each
applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
2.18 EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting upon
---------------------
any instructions, notice, request, consent, certificate or other instrument
or paper believed by it to be genuine and to have been properly executed by
or on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Board of Trustees of the Fund as conclusive evidence
(a) of the authority of any person to act in accordance with such vote or
(b) of any determination or of any action by the Board of Trustees pursuant
to the Declaration of Trust as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
<PAGE>
2.19 AFFILIATION BETWEEN FUND AND CUSTODIAN. It is understood the Trustees,
officers, employees, agents and shareholders of the Fund, and the officers,
directors, employees, agents and shareholders of the Fund's investment
advisor, are or may be interested in the Custodian as directors, officers,
employees, agents, stockholders, or otherwise, and that the directors,
officers, employees, agents or stockholders of the Custodian may interested
in the Fund as Trustees, officers, employees, agents, shareholders, or
otherwise, or in the investment advisor as officers, directors, employees,
agents, shareholders or otherwise.
2.20 PERSONS HAVING ACCESS TO ASSETS OF THE PORTFOLIOS.
(a) No Trustee, officer, employee or agent of the Fund shall have physical
access to the assets of the Fund held by the Custodian or be authorized or
permitted to withdraw any investments of the Fund, nor shall the Custodian
deliver any assets of the Fund to any such person. No officer or director,
employee or agent of the Custodian who holds any similar position with the
Fund or the Advisor shall have access to the assets of the Fund.
(b) Only officers and employees of the Custodian shall have access to the
assets of the Fund. Such officers and employees shall be identified by
certification signed by a duly authorized officer of the Custodian from
time to time. The Custodian shall advise the Fund of any change in the
individuals authorized to have access to the assets of the Fund by written
notice to the Fund.
(c) Nothing in this Section 2.20 shall prohibit any officer, employee or
agent of the Fund, or any officer, director, employee or agent of the
Advisor, from giving oral instructions or written instructions to the
Custodian or executing a Certificate so long as it does not result in
delivery of or access to assets of the Fund prohibited by paragraph (a) of
this Section 2.20.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE
OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS.
The Fund hereby authorizes and instructs the Custodian to employ as sub-
custodians for the Portfolios securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign sub-
custodians"). Upon receipt of 'Proper Instructions", as defined in Section
2.16 of this Contract, together with a certified resolution of the
<PAGE>
Fund's Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian.
Upon receipt of Proper Instructions, the Fund may instruct the Custodian to
cease the employment of any one or more such sub-custodians for maintaining
custody of the Portfolio's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other
-----------------
assets maintained in the-custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions.
3.3 FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise be agreed upon in
-------------------------------
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 SEGREGATION OF SECURITIES.
-------------------------
The Custodian shall identify on its books as belonging to each applicable
Portfolio of the Fund, the foreign securities of such Portfolios held by
each foreign sub-custodian. Each agreement pursuant to which the Custodian
employs a foreign banking institution shall require that such institution
establish a custody account for the Custodian on behalf of the Fund for
each applicable Portfolio of the Fund and physically segregate in each
account, securities and other assets of the Portfolios, and, in the event
that such institution deposits the securities of one or more of the-
Portfolios in a foreign securities depository, that it shall identify on
its books as belonging to the Custodian, as agent for each applicable
Portfolio, the securities so deposited.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with A
foreign banking institution shall be substantially in the form set forth in
Exhibit 1 hereto and shall provide that: (a) the assets of each Portfolio
will not be subject to any right, charge, security interest, lien or claim
of any kind In favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or
<PAGE>
administration; (b) beneficial ownership for the assets of each Portfolio
will be freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to each applicable Portfolio; (d)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to the
books and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e) assets of the
Portfolios held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-
custodian insofar as such books and records relate to the performance of
such foreign banking institution under its agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notificati7ons of
any transfers of securities to or from each custodial account maintained by
a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a Portfolio,
the identity of the entity having physical possession of such securities.
3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provisions of Section 2 of this Contract to the extent relevant shall
apply, mutatis mutandis to the foreign securities of the Fund held outside
the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
<PAGE>
account of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-
custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated t-o the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation,
<PAGE>
nationalization, insurrection, civil strife or armed hostilities) or (b)
other losses (excluding a bankruptcy or insolvency of State Street London
Ltd. not caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolios assets
to the extent necessary to obtain reimbursement.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the
Fund, during the month of June and shall supplement with any material
changes occurring prior to the Fund's November Board of Trustee's Meeting,
information concerning the foreign sub-custodians employed by the
Custodian. Such information shall be similar in kind and scope to that
furnished-to the Fund in connection with the initial approval of this
Contract. In addition, the Custodian will promptly inform the Fund in the
event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the
subject of an exemptive order from the Securities and Exchange Commission
is notified by such foreign sub-custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below
$200 million (U.S. dollars or the equivalent thereof) or that its
shareholders' equity has declined below $200 million (in each case computed
in accordance with generally accepted U.S. accounting principles).
3.13 BRANCHES OF U.S. BANKS.
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Portfolios assets are maintained
in a foreign branch of a banking institution which is a "bank" as defined
<PAGE>
by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction
of the Custodian, State Street London Ltd. or both.
4. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES OF THE FUND.
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued
or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer
Agent of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the
Board of Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares. In connection with
the redemption or repurchase of Shares of a Portfolio, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire
funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. DUTIES OF CUSTODIAN WITH -RESPECT: TO THE BOOKS OF ACCOUNT AND CALCULATION
OF NET ASSET VALUE AND NET INCOME.
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustee3 of the Fund to keep
the boots of account of each Portfolio and/or compute the net
<PAGE>
asset value per share of the outstanding shares of each Portfolio or, if
directed in writing to do so by the Fund on behalf of the Portfolio, shall
itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net
income of the Portfolio as described in the Fund's currently effective
prospectus related to such Portfolio and shall advise the Fund and the
Transfer Agent daily of the total amounts of such net income and, if
instructed in writing by an officer of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and
the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus
related to such Portfolio.
6. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and
Rules 3la-1 and 3la-2 thereunder, applicable federal and state tax laws and
any other law or administrative rules or procedures which may be applicable
to the Fund. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund.
Auditors employed by the Fund and employees and agents of the Securities
and Exchange Commission. The Custodian shall, at the Fund's request,
supply the Fund with a tabulation of securities owned by each Portfolio and
held by the Custodian and shall, when requested to do so by the Fund-and
for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
7. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from
year to year favorable opinions from the Fund's independent accountants
with respect to its activities hereunder in connection with the preparation
of the Fund's Form
<PAGE>
N-lA, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
8. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including securities deposited
and/or maintained in a Securities System, relating to the services provided
by the Custodian under this Contract; such reports, shall be of sufficient
scope and in sufficient detail, as may reasonably be required by the Fund
to provide reasonable assurance that any material inadequacies would be
disclosed by such examination) and, if there are no such inadequacies, the
reports shall so state.
9. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
10. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in
acting upon any notice., request, consent, certificate or other instrument
reasonably believed by it to be genuine and to be signed by the proper
party or parties, including any futures commission merchant acting pursuant
to the terms of a three - party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall
be without liability to the Fund for any action taken or omitted by it in
good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters,
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice. Notwithstanding the
<PAGE>
foregoing, the responsibility of the Custodian with respect to redemptions
effected by check shall be in accordance with a separate Agreement entered
into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to
the same extent as set forth in Article 1 hereof with respect to sub-
custodians located in the United States (except as specifically provided in
Article 3.10) and, regardless of whether assets are maintained in the
custody of a foreign banking institution, a foreign securities depository
or a branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by, the direction of or
authorization by the Fund to maintain custody or any securities or cash of
the Fund in a foreign country including, but not limited to, losses
resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable
for the payment of money or incurring liability of some other form, the
Fund on behalf of the Portfolio, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in
an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose for the benefit of a Portfolio including the purchase or sale of
foreign exchange or of contracts for foreign exchange or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available
cash and to dispose of such Portfolio's assets to the extent necessary to
obtain reimbursement, provided that Custodian shall, with respect to Fund
-------------
assets as to which Custodian has perfected its lien and which
<PAGE>
Custodian proposes to dispose of pursuant to the foregoing right, give the
Fund notice identifying such assets and the-Fund shall have three business
days from receipt of such notice to notify the Custodian if the Fund wishes
the Custodian to dispose of Fund assets of equal value other than those
identified in such notice; in the absence of any contrary notification from
the Fund, Custodian shall be free to dispose of the Fund assets initially
identified to the extent necessary to realize the amounts to which it is
entitled hereunder.
11. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not with respect to a Portfolio
--------
act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees of the Fund has approved the initial use of a particular
Securities System by such Portfolio and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has reviewed the use by such Portfolio of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of
1940, as amended and that the Custodian shall not with respect to a
Portfolio act under Section 2.10A hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System
by such Portfolio and the receipt of an annual certificate of the Secretary
or an Assistant Secretary that the Board of Trustees has reviewed the use
by such Portfolio of the Direct Paper System; provided further, however,
that the Fund shall not amend or terminate this Contract in contravention
of any applicable federal or state regulations, or any provision of the
Declaration of Trust, and further provided, that the Fund on behalf of one
or more of the Portfolios may at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the
<PAGE>
appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of
the date of such termination and shall likewise reimburse the Custodian for
its costs, expenses and disbursements.
12. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian
shall, upon termination, deliver to such successor custodian at the office
of the Custodian, duly endorsed and in the form for transfer, all
securities of each applicable Portfolio then held by it hereunder and shall
transfer to an account of the successor custodian all of the securities of
each such Portfolio held in a Securities System.
If no such successor custodian shall be appointed and the Fund elects to
hold or maintain its assets in its own custody to the extent and in the
manner provided by the Investment Company Act of 1940, as amended, the
Custodian shall, in like manner, upon receipt of a certified copy of a vote
of the Board of Trustees of the Fund evidencing such determination, deliver
at the office of the Custodian and transfer such securities, funds and
other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a 'bank" as defined in the Investment Company Act
of 1940, doing business in Boston, Massachusetts, of its own selection,
having an aggregate capital, surplus, and undivided profits, as shown by
its last published report, of not less than $25,000,000, all securities,
funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative
thereto and all other property held by it under this Contract on behalf of
each applicable Portfolio and to transfer to an account
<PAGE>
of such successor custodian all of the securities of each such Portfolio
held in any Securities System. Thereafter, such bank or trust company shall
be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to
or of the Board of Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period
as the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
13. INTERPRETIVE AND ADDITIONAL PROVISIONS
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor
of this Contract. Any such interpretive or additional provisions shall be
in a writing signed by both parties and shall be annexed hereto, provided
--------
that no such interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the Declaration
of Trust of the Fund. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
14. ADDITIONAL FUNDS
In the event that the Fund establishes one or more series of Shares in
addition to the Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, Fixed Income I Fund, Fixed Income II Fund, International Fund,
Diversified Equity Fund, Special Growth Fund, Equity Income Fund,
Quantitative Equity Fund, International Securities Fund, Diversified Bond
Fund, Volatility Constrained Bond Fund, Limited Volatility Tax Free Fund,
U.S. Government Money Market Fund, Money Market Fund, and Tax Free Money
Market Fund with respect to which it desires to have the Custodian reader
services as custodian under the terms hereof, it shall so notify the
Custodian in writing, and if the Custodian agrees in writing to provide
such services, such series of Shares shall become a Portfolio hereunder.
<PAGE>
15. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
17. LIMITATION OF LIABILITY
The Master Trust Agreement dated July 26, 1984, as amended from time to
time, establishing the Fund, which is hereby referred to and a copy of
which is on file with the Secretary of the Commonwealth of Massachusetts,
provides that the name Frank Russell Investment Company means the Trustees
from time to time serving (as Trustees but not personally) under said
Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Fund hereunder shall not be binding upon any of the
shareholders, Trustees, officers, employees or agents of the Fund,
personally, but shall bind only the trust property of the Fund, as provided
in its Master Trust Agreement. The execution and delivery of this
Agreement have been authorized by the Trustees of the Fund and signed by
the President of the Fund, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property
of the Fund as provided in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 31st day of October, 1988.
ATTEST FRANK RUSSELL INVESTMENT COMPANY
____________________________ By_____________________________________
Secretary President
ATTEST STATE STREET BANK AND TRUST COMPANY
____________________________ By_____________________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT 99-8(b)
LETTER AGREEMENT
May 1, 1989
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02015
Dear Sirs:
Pursuant to Section 14 of the Custodian Contract between Frank Russell
Investment Company and State Street Bank and Trust Company, dated October 31,
1988, the Frank Russell Investment Company advises you that it is creating a new
fund to be named the Real Estate Securities Fund (the "Fund") and that the Fund
desires for State Street Bank and Trust Company to serve as the Custodian with
respect to the Fund pursuant to the terms and conditions of the Custodian
Contract. The fees to be charged by the Administrator to the Fund in return for
its services are the same as in the Custodian Contract.
Please indicate your acceptance to act as Custodian to the Real Estate
Securities Fund by executing the acceptance copy of this letter agreement and
returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Vice President Operations
Accepted this 24th day of April, 1989
STATE STREET BANK AND TRUST COMPANY
By: /s/ signature illegible
-------------------------------
<PAGE>
EXHIBIT 99-8(c)
LETTER AGREEMENT
August 24, 1992
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02015
Dear Sirs:
Pursuant to Section 14 of the Custodian Contract between Frank Russell
Investment Company and State Street Bank and Trust Company, dated October 31,
1988, the Frank Russell Investment Company advises you that it is creating two
new funds to be named the Fixed Income III and Multistrategy Bond (the "Funds")
and that the Funds desires for State Street Bank and Trust Company to serve as
the Custodian with respect to the Funds pursuant to the terms and conditions of
the Custodian Contract. The fees to be charged by the Administrator to the
Funds in return for its services are the same as in the Custodian Contract.
Please indicate your acceptance to act as Custodian to the Fixed Income III and
Multistrategy Bond Funds by executing the acceptance copy of this letter
agreement and returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Director of Operations
Accepted this 22nd day of September, 1992
STATE STREET BANK AND TRUST COMPANY
By: /s/ signature illegible
-------------------------------
Vice President
<PAGE>
EXHIBIT 99-8(d)
LETTER AGREEMENT
October 27, 1992
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02015
Dear Sirs:
Pursuant to Section 14 of the Custodian Contract between Frank Russell
Investment Company and State Street Bank and Trust Company, dated October 31,
1988, the Frank Russell Investment Company advises you that it is creating a new
fund to be named the Emerging Markets Fund (the "Fund") and that the Fund
desires for State Street Bank and Trust Company to serve as the Custodian with
respect to the Fund pursuant to the terms and conditions of the Custodian
Contract. The fees to be charged by the Administrator to the Fund in return for
its services are contained in the Custodian Fee Schedule--FRIC Emerging Markets
Fund.
Please indicate your acceptance to act as Custodian to the Emerging Markets Fund
by executing the acceptance copy of this letter agreement and returning it to
the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Director of Operations
Accepted this 28th day of October, 1992
STATE STREET BANK AND TRUST COMPANY
By: /s/ N. Grady
-------------------------------
Vice President
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
FRIC EMERGING MARKETS FUND
I. Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports.
The custody fee shown below is an annual charge, billed and payable
monthly, based on month end assets.
A. Portfolio Charge $1,500
B. Domestic Custody 2 Basis Points
D. Global Custody - Comprised of asset charges and transaction charges
<TABLE>
<CAPTION>
GROUP I GROUP II GROUP III GROUP IV GROUP V
- ------- -------- --------- -------- -------
<S> <C> <C> <C> <C>
Euroclear Australia Indonesia Korea Argentina
Cedel Canada Italy Mexico Brazil
Japan Netherlands Austria Portugal Chile
Germany New Zealand Belgium Spain Greece
Switzerland Norway Sri Lanka Taiwan
Denmark Hong Kong Turkey Venezuela
France Finland Pakistan
Ireland Singapore India
Sweden Philippines Malaysia
United Kingdom Thailand
</TABLE>
Asset Charge:
(in Basis Points)
<TABLE>
<CAPTION>
*Group I *Group II *Group III *Group IV *Group V
-------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
First $50 Million 6 11 18 25 40
Next $50 Million 5 10 16 20 40
Over $100 Million 4 8 14 18 35
</TABLE>
*Excludes: agent, depository and local auditing fees, stamp duties and
registration fees.
Transaction Charge:
<TABLE>
<CAPTION>
*Group I *Group II *Group III *Group IV *Group V
-------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
$25 $40 $55 $60 $100
</TABLE>
<PAGE>
II. Portfolio Trades - For each line item processed
FRIC Money Market Trade $ 7.50
DTC or Fed Book Entry 18.00
New York Physical Settlements 20.00
Maturity Collections 8.00
PTC Purchase, Sale, Deposit or Withdrawal 20.00
All other trades 20.00
III. Options
Option charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration charge, per issue, per broker 15.00
Option exercised charge, per issue, per broker 15.00
IV. Interest Rate Futures
Transactions -- no security movement $ 8.00
V. Dividend Charges (For items held at the Request
Of Traders over record date in street form) $50.00
VI. Pricing Fee
Per month for each composite quote $ 7.50
VII. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($4.70 per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges (Out-of Pockets issued by Sub-custodians)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
PTC Deposit/Withdrawal for same day turnarounds - $50.00
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY STATE STREET BANK AND TRUST COMPANY
By: /s/ George W. Weber By: /s/ N. Grady
------------------------------- --------------------------------
George W. Weber Vice President
Director - Operations 10/22/92
10/26/92
<PAGE>
EXHIBIT 99-8(e)
Amendment No. 1 to the Custodian Agreement
Between Frank Russell Investment Company
and State Street Bank and Trust Company
Amendment No. 1, dated as of this 31st day of January, 1994, to the Custodian
Agreement dated October 31, 1988 (the "Agreement") between Frank Russell
Investment Company, a Massachusetts business trust (the "Fund"), and State
Street Bank and Trust Company, a Massachusetts trust company (hereinafter
"Custodian").
WHEREAS, the Fund is a diversified management investment company registered
under the Investment Company Act of 1940 offering shares of twenty-two
investment funds with different investment objectives and policies; and
WHEREAS, the Fund desires to have the investment securities and cash of each
Portfolio held by the Custodian in accordance with the provisions of the
Investment Company Act of 1940; and
WHEREAS, the Custodian provides custodial services to the Funds; and
WHEREAS, the Fund and the Custodian desire to amend the Custodian Agreement to
clarify the terms of the agreements between the Custodian and foreign sub-
custodians; and
WHEREAS, at the meeting held on January 31, 1994, the Trustees approved this
Amendment No. 1:
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the Fund and the Custodian hereby agree as follows:
1. Section 3.5 of the Agreement is hereby amended and restated to read as
follows:
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the foreign
banking institution will indemnify or insure the Custodian and the
Portfolio in the event of loss arising from the failure of the foreign
banking institution to exercise reasonable care in performing its
duties; (b) the assets of each Portfolio will not be subject to any
right, charge, security interest, lien or claim of any kind in favor
of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (c)
beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for
custody or administration; (d) adequate records will be maintained
identifying the assets as belonging to each applicable Portfolio; (e)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to
the books and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; (f) the Portfolio
will receive periodic reports with respect to the safekeeping of the
assets of each Portfolio, including, but not necessarily limited to,
notification of any transfer to or from the Portfolio's account; and
(g) assets of the Portfolios held by the foreign sub-custodians will
be subject only to the instructions of the Custodian or its agents.
2. Except as expressly modified by this Amendment No. 1 to the Custodian
Agreement, the Custodian Agreement remains in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by the Officers designated below as of the day and year first above
written.
ATTEST: FRANK RUSSELL INVESTMENT COMPANY
/s/ Eleanor J. Racek /s/ Lynn L. Anderson
- ----------------------------------- ------------------------------------
Eleanor J. Racek Lynn L. Anderson
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ signature illegible /s/ signature illegible
- ----------------------------------- ------------------------------------
<PAGE>
EXHIBIT 99-8(f)
AMENDMENT
This AMENDMENT to the Custodian Agreement between State Street Bank and Trust
Company (the "Bank") and Frank Russell Investment Company (the "Fund") dated
October 31, 1988 (the "Agreement") is effective as of ________, 1994.
WHEREAS, the Bank and the Fund desire to clarify in the Agreement certain
provisions related to the delivery and purchase of Fund cash and securities,
respectively:
NOW, THEREFORE, the Fund and the Bank agree that:
1. Notwithstanding Sections 2.2 and 2.7 of the Agreement, entitled Delivery of
Securities and Payment of Fund Monies, respectively, the Bank can (1) make
payment of Fund monies for the purchase of securities prior to the receipt
of such securities; and (2) deliver Fund securities prior to the receipt of
payment for such securities; provided, that the Bank can pay Fund monies
and purchase Fund securities in accordance with this Amendment only to the
extent that the Fund instructs it to do so in writing (the "Instructions"),
which Instructions shall be standing and effective until such time as the
Fund notifies the Bank otherwise in writing.
2. The Fund agrees to indemnify and hold the Bank harmless for any and all
liability arising out of transactions executed in accordance with the
Instructions, except for losses resulting from the Bank's negligence, lack
of good faith, or willful misconduct.
Frank Russell Investment Company State Street Bank and Trust Company
By: By:
------------------------------- --------------------------------
Title: Title:
---------------------------- -----------------------------
<PAGE>
EXHIBIT 99-8(g)
AMENDMENT
This AMENDMENT to the Custodian Agreement between State Street Bank and Trust
Company (the "Bank") and Frank Russell Investment Company (the "Fund") dated
October 31, 1988 (the "Agreement") is effective as of August 5, 1994.
WHEREAS, the Bank and the Fund desire to clarify in the Agreement certain
provisions related to the delivery and purchase of Fund cash and securities,
respectively:
NOW, THEREFORE, the Fund and the Bank agree that:
1. Notwithstanding Sections 2.2 and 2.7 of the Agreement, entitled Delivery of
Securities and Payment of Fund Monies, respectively, the Bank can (1) make
payment of Fund monies for the purchase of securities prior to the receipt
of such securities; and (2) deliver Fund securities prior to the receipt of
payment for such securities; provided, that the Bank can pay Fund monies
and purchase Fund securities in accordance with this Amendment only to the
extent that the Fund instructs it to do so in writing (the "Instructions"),
which Instructions shall be standing and effective until such time as the
Fund notifies the Bank otherwise in writing.
2. The Fund agrees to indemnify and hold the Bank harmless for any and all
liability arising out of transactions executed in accordance with the
Instructions, except for losses resulting from the Bank's negligence, lack
of good faith, or willful misconduct.
Frank Russell Investment Company State Street Bank and Trust Company
By: /s/ Margaret Barclay By: /s/ signature illegible
------------------------------- --------------------------------
Margaret Barclay
Title: Treasurer and Chief Title: Executive Vice President
Accounting Officer
<PAGE>
EXHIBIT 99-8(h)
STATE STREET BANK & TRUST COMPANY
CUSTODY AND ACCOUNTING FEE SCHEDULE
FRANK RUSSELL INVESTMENT COMPANY
(ADDENDUM A)
I. FUND ACCOUNTING
Maintain investment ledgers, provide selected portfolio transactions,
position and income reports. Maintain general ledger and capital stock
accounts. Prepare daily trial balance. Calculate Net Asset Value daily.
Provide selected general ledger reports. The fee shown below is billed and
payable monthly.
$1400 Per Portfolio (or single fund)
II. CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report trade fails. Determine and collect portfolio income. Make cash
disbursements and report cash transactions. Monitor Corporate Actions.
Report portfolio positions.
DOMESTIC CUSTODY
A fee payable monthly on a pro rata basis, based on the following
percentages of average daily net assets (excluding FRIC Money Market
investment) of the funds referenced on Addendum A:
$0 up to $4.0 billion in assets .02%
Next $1.0 billion in assets .0175%
Over $5 billion in assets .015%
GLOBAL CUSTODY
A fee payable monthly on a pro rata basis, based on the following
percentages of month end net assets of the funds referenced on Addendum A.
Foreign Sub-Custody $0 up to $800 million in global assets .20%
Next $200 million in global assets .18%
Over $1 billion in global assets .16%
Trading Charge
Canada, Euroclear, Germany, Japan
and Austria $25.00 Per Trade
All Other $50.00 Per Trade
III. FUTURES AND OPTIONS
Option charge for each option written
or closing contract, per issue, per broker $25.00
Option expiration or exercised charge
per issue, per broker $25.00
Futures transactions no security $ 8.00
<PAGE>
IV. PORTFOLIO TRANSACTIONS
FRIC Money Market Trade $ 7.50
DTC or FED Book Entry $18.00
DTC charges for trades sent via $ 9.00
electric trade delivery
NY Physical Settlements $20.00
Maturity Collections $ 8.00
PTC purchase, sale, deposit or withdrawal $20.00
Paydowns $10.00
Foreign Exchange Trade $25.00
All other trades $20.00
V. NAVIGATOR AUTOMATED PRICING (EXCLUDES MONEY MARKET FUNDS)
Based on Month End Positions
Monthly Base Charge per Fund (excluding $375.00*
FRIC LTD Volatility Tax Free
Monthly quote charge:
. Municipal Bonds via Kenny/S&P or
Muller Data $16.00
. Corporate, Municipal, Convertible,
Government Bonds and Adjustable rate
Preferred Stocks via IDSI $13.00
. Government, Corporate Bonds via Kenny/S&P
or Muller $11.00
. Government, Corporate and Convertible
Bonds via Merrill Lynch $11.00
. Foreign Bonds via Extel $ 6.00
. Options, Futures and Private Placements $ 6.00
. Listed equities (including International)
and OTC equities $ 6.00
*The monthly base fee will be waived for the first 3 months for new funds
VI. YIELDS
Annual fee $4200.00 Per Fund
VII. ON LINE ACCESS CHARGE
Monthly Flat Fee $80.00 Per Fund
Monthly Usage Fee $50.00 Per Hour
VIII. EARNINGS CREDIT
A balance credit will be applied against the above fees (excluding Out-of-
Pocket expenses). The credit is based on 50% of the average 90 day
Treasury Bill rate for the month, times the average collected balance in
the custodian demand deposit account for the month billed.
IX. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiations. Fees for fund
administration activities, SaFire financial reporting, and other special
items will be negotiated separately.
<PAGE>
X. OUT OF POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out of pocket fees include, but are not
limited to the following:
- Telephone
- Wire charges ($5.25 in and $5.00 out)
- Split Wires ($1.08 per fund)
- Postage and Insurance
- Courier Service
- Duplicating
- Legal Fees
- Supplies Related to Fund Records
- Rush Transfer ($8 each)
- Transfer Fees
- Sub-Custodian Charges
- Price Waterhouse Audit Letter
FRANK RUSSELL INVESTMENT COMPANY STATE STREET BANK TRUST COMPANY
By: /s/ Margaret Barclay By: /s/ Nancy Grady
------------------------------- --------------------------------
Margaret Barclay Nancy Grady
Title: Director-Finance & Operations Title: Vice President
Date: April 18, 1994 Date: April 6, 1994
<PAGE>
ADDENDUM A
FRIC Equity I
FRIC Equity II
FRIC Equity III
FRIC Fixed Income I
FRIC Fixed Income II
FRIC Fixed Income III
FRIC Equity Q
FRIC International Fund
FRIC International Securities Fund
FRIC Diversified Equity Fund
FRIC Real Estate Securities Fund
FRIC Special Growth Fund
FRIC Equity Income
FRIC Diversified Bond Fund
FRIC Volatility Constrained Bond Fund
FRIC Limited Volatility Tax Free
FRIC Quantitative Equity Fund
FRIC Multistrategy Fund
FRIC Money Market Fund
FRIC U.S. Money Market Fund
FRIC Tax Exempt Money Market Fund
<PAGE>
EXHIBIT 99-9(a)(1)
TRANSFER AND DIVIDEND DISBURSING AGENCY AGREEMENT
AGREEMENT made as of this 1st day of April, 1988 by and between FRANK RUSSELL
INVESTMENT COMPANY, a Maryland corporation having its principal place of
business at First Interstate Plaza, Tacoma, Washington 98402 (hereinafter
called the "Investment Company") and FRANK RUSSELL INVESTMENT MANAGEMENT
COMPANY, a Washington corporation having its principal place of business at
First Interstate Plaza, Tacoma, Washington 98402 (hereinafter called "Firm." or
"Transfer Agent").
WITNESSETH THAT:
WHEREAS, Investment Company (i) is a diversified, open-end management investment
company of the "series" type and is registered as such under the Investment
Company Act of 1940, as amended, (ii) offers shares of classes of capital stock
identified in Schedule A with each class evidencing an interest in a separate
portfolio of investment securities (each of which is herein referred to as a
"Fund"), and may subsequently offer shares of additional Funds to be organized
and made subject to the provisions of this Agreement in accordance with
paragraph 26 hereof; and
WHEREAS, Investment Company desires to retain the Transfer Agent to render
transfer agency and dividend disbursing agency services to the Investment
Company and the Transfer Agent has agreed to act as Transfer Agent of the
Investment Company and as its Dividend Disbursing Agent;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto, intending to be legally bound, do hereby agree as
follows:
FRIMCo. is hereby appointed Transfer Agent for the Stock of the Investment
Company and shall act as Plan Agent if one or more Plans exist for shareholders
of the Investment Company under the following terms and conditions:
DOCUMENTS
---------
1. In connection with the appointment of FRIMCo. as Transfer Agent, the
Investment Company shall file with FRIMCo. the following documents:
A. Certified copies of the Articles of Incorporation of the Investment
Company and all amendments thereto;
B. A certified copy of the Bylaws of the Investment Company as amended to
date;
C. A copy of the resolution of the Board of Directors of the Investment
Company authorizing the Agreement;
D. Specimens of all forms of outstanding and new stock certificates in
the forms approved by the Board of Directors of the Investment Company
with a certificate of the Secretary of the Investment Company as to
such approval;
E. All account application forms and other documents relating to
shareholder's accounts;
<PAGE>
F. Copies of all documents relating to plans instituted by the Investment
Company, including periodic investment and withdrawal plans, for which
FRIMCo. is to act as Plan Agent;
G. An opinion of counsel for the Investment Company with respect to the
validity of the Stock, the number of shares authorized, the status of
redeemed shares and the number of shares with respect to which a
Registration Statement has been filed and is in effect.
FURTHER DOCUMENTATION
---------------------
2. The Investment Company will also furnish from time to time the following
documents:
A. Each resolution of the Board of Directors of the Investment Company
authorizing the original issue of its shares;
B. Each Registration Statement filed with the Securities and Exchange
Commission and amendments thereof and orders relating thereto in
effect with respect to the sale of shares of the Investment Company;
C. A certified copy of each amendment to the Articles of Incorporation
and the By-Laws of the Investment Company;
D. Certified copies of each resolution of the Board of Directors
authorizing officers to give instructions to FRIMCo.;
E. Specimens of all new stock certificates accompanied by Board of
Directors resolutions approving such forms;
F. Such other certificates, documents or opinions which FRIMCo. may, in
its discretion, deem necessary or appropriate in the proper
performance of its duties.
<PAGE>
AUTHORIZED SHARES
-----------------
3. The Investment Company certifies to FRIMCo. that as of the close of
business on the date of the Agreement, it has authorized, shares of its
Stock, as stated in the then current Prospectus and Statement of Additional
Information, and certifies that by virtue of its Articles of Incorporation
and the provisions of the law of the state of its incorporation shares of
its Stock which are redeemed by the Funds from their holders are restored
to the status of authorized and unissued shares.
TRANSFER AGENT TO REGISTER SHARES
---------------------------------
4. FRIMCo. shall record issues of shares of the Stock of the Funds. Except as
specifically agreed in writing between FRIMCo. and the Investment Company,
FRIMCo. shall have no obligation, when crediting shares or countersigning
and issuing certificates for shares, to take cognizance of any other laws
relating to the issue and sale of such shares.
TRANSFER AGENT TO RECORD TRANSFER
---------------------------------
5. FRIMCo., upon receipt of proper instructions for transfer and surrender to
it of certificates, if any, in proper form for transfer, is authorized to
transfer on the records of the Funds maintained by it from time to time
shares of the Fund's Stock, and upon cancellation of surrendered
certificates, if any, to credit a like amount of shares to the transferee
and to countersign, issue and deliver new certificates if requested.
STOCK CERTIFICATES
------------------
6. The Investment Company shall supply FRIMCo. with a sufficient supply of
blank stock certificates and from time to time shall renew such supply upon
request of FRIMCo. Such blank stock certificates shall be properly signed,
manually or by facsimile, if authorized by the Investment Company, and
shall bear the corporate seal or facsimile thereof of the Investment
Company; and notwithstanding the death, resignation or removal of any
officers of the Investment Company authorized to sign certificates of
stock, FRIMCo. may continue to countersign certificates which bear the
manual or facsimile signature of such officer until otherwise directed by
the Investment Company.
RECEIPT OF FUNDS
----------------
7. Upon receipt at the office designated by FRIMCo. of any check or other
drawn or endorsed to it as transfer agent for the Investment Company or as
plan agent for any shareholder of the Funds or otherwise identified as
being for the account of the Funds and in the case of a new account
accompanied by a new account application or sufficient information to
establish an account, FRIMCo. shall stamp the check or other order with the
date of receipt, shall forthwith process the same for collection and, as of
the opening of business on the second business day following receipt of
such check or other order, shall credit federal funds to the Funds in the
face amount of the check or other instrument and shall deposit the amount
due the Funds to the Custodial account of the Funds. Upon receipt of funds
through the Federal Reserve Wire System or conversion into federal funds of
funds transmitted by other bank wire transfer systems, FRIMCo. shall notify
the Funds of such deposits, such notification to be given on daily basis.
FRIMCo. shall credit the shareholder's account with number of shares
purchased according to the price of the Funds shares in effect for such
purchases as set forth in the Investment Company's then current prospectus.
<PAGE>
ISSUE OF SHARE CERTIFICATES
---------------------------
8. If an investor requests a share certificate, Transfer Agent shall
countersign and mail by first class mail, a share certificate to the
investor at his address as set forth on the transfer books of the Funds,
subject to any instructions for delivery of certificates which the
Investment Company may give to FRIMCo. and subject to the limitation that
no certificates representing newly purchased shares shall be mailed to the
investor until the cash purchase price of such shares has been deposited in
the bank account of the Funds maintained by the Custodian.
RETURNED CHECKS
---------------
9. In the event that any check or other order for the payment of money is
returned unpaid for any reason, FRIMCo. shall:
A. Give prompt notification to the Investment Company of the
nonpayment of said check.
B. In the absence of other instructions from the Investment Company, take
such steps as may be necessary to cancel promptly any shares purchased
on the basis of such returned check and shall cancel accumulated
dividends for such account.
NOTICE OF DISTRIBUTION
----------------------
10. The Investment Company shall promptly inform FRIMCo. of the declaration of
any dividend or distribution on account of its Stock.
DISTRIBUTIONS
-------------
11. FRIMCo. shall act as Dividend Disbursing Agent for the Investment Company,
and, as such, in accordance with the provisions of the Investment Company's
Articles of Incorporation and then current Prospectus and Statement of
Additional Information shall prepare and mail or credit income and capital
gain payments to investors. As the Dividend Disbursing Agent it shall, on
or before the payment date of any such dividend or distribution, notify the
Custodian of the estimated amount required to pay any portion of said
dividend or distribution which is payable in cash, and the Investment
Company agrees that on or before the payment date of such distribution, it
shall instruct the Custodian to make available to the Dividend Disbursing
Agent sufficient funds for the cash amount to be paid out. If an investor
is entitled to receive additional shares by virtue of any such distribution
or dividend, appropriate credits will be made to his account and/or
certificates delivered where requested.
<PAGE>
REDEMPTIONS
-----------
12. FRIMCo. shall process each order for the redemption of shares accepted by
it on behalf of the Funds from or on behalf of an investor and shall mail
to the investor a confirmation showing trade date, number of full and
fractional shares redeemed (in the case of a fractional share, rounded to
three decimal places), the price per share and the total redemption
proceeds. In the event of a complete redemption, such confirmation shall
show, in addition, the amount of accumulated dividends included in such
total redemption proceeds not previously reported to the investor in a
monthly statement and the total distributions for the year to date. FRIMCo.
shall either (a) prepare, affix the appropriate facsimile signature to,
address and mail a check in the appropriate amount to the appropriate
person or, (b) in the event redemption proceeds are to be wired through the
Federal Reserve Wire system or by bank wire cause such proceeds to be wired
in federal funds to the bank or trust company account designated by the
investor for receiving such proceeds. The requirements as to instruments of
transfer and other documentation, the applicable redemption price and the
time of payment shall be as provided in the then currently effective
prospectus, subject to such supplemental requirements consistent with such
prospectus as may be established by mutual agreement between the Investment
Company and FRIMCo. If FRIMCo. or the Investment Company determines that a
request for redemption does not comply with the requirements for
redemption, FRIMCo. shall promptly so notify the investor, together with
the reason therefor, and shall effect such redemption at the price in
effect at the time of receipt of documents complying with said standards.
FRIMCo. shall notify the Custodian and the Investment Company on each
business day of the amount of cash required to meet payments made pursuant
to the provisions of this paragraph and the Investment Company shall
instruct the Custodian to make available from time to time sufficient funds
therefor in the liquidation account of the Funds.
Procedures and standards for redemptions in kind and for effecting and accepting
redemption orders from investors by telephone shall be established by mutual
agreement between FRIMCo. and the Investment Company consistent with the then
current prospectus.
The Transfer Agent is authorized, upon receipt of Written Instructions from the
Investment Company, to make payment upon redemption of shares without a
signature guarantee. The Investment Company hereby agrees to indemnify and hold
the Transfer Agent, its successors and assigns, harmless of and from any and all
expenses, damages, claims, suits, liabilities, actions, demands, losses
whatsoever arising out of or in connection with a payment by the Transfer Agent
upon redemption of shares without a signature guarantee pursuant to proper
Written Instructions if such expense, damage, claim, suit, etc. is not the
result of negligence or willful misconduct by the Transfer Agent and upon the
request of the Transfer Agent the Investment Company shall assume the entire
defense of any action, suit claims subject to the foregoing indemnity.
The authority of FRIMCo. to perform its responsibilities under this paragraph 12
shall be suspended upon receipt of notification by it of the suspension of the
determination of the Fund's net asset value.
WITHDRAWAL PLANS
----------------
13. FRIMCo. shall process withdrawal orders in accordance with the terms of any
withdrawal plans instituted by the Investment Company and duly executed by
investors. Payments upon such withdrawal orders and redemptions of shares
held in withdrawal plan accounts for such payments shall be made at such
times as the Investment Company may determine with the approval of FRIMCo.
<PAGE>
TAX RETURNS
-----------
14. FRIMCo. shall prepare, file with the Internal Revenue Service and with the
appropriate State Agencies, and, if required, mail to investors such
returns for reporting dividends and distributions paid as are required to
be so filed and mailed, and shall withhold such sums as are required to be
withheld under applicable Federal and State income tax laws, rules and
regulations.
BOOKS AND RECORDS
-----------------
15. FRIMCo. shall maintain records showing for each investor's account the
following:
A. Names, addresses and tax identifying numbers;
B. Number of shares held;
C. Historical information regarding the account of each shareholder,
including dividends paid and date and price for all transactions;
D. Any stop or restraining order placed against the account;
E. Information with respect to withholdings in the case of a foreign
account;
F. Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current maintenance of
the account;
G. Certificate numbers and denominations for any shareholder holding
certificates;
H. Any information required in order for FRIMCo. to perform the
calculations contemplated or required by this Agreement.
Any such records required to be maintained by Rule 31a-1 of the General Rules
and Regulations under the Investment Company Act of 1940 shall be preserved for
the periods prescribed in Rule 31a-2 of said rules as specifically noted below.
Such record retention shall be at the expense of the Investment Company and
records may be inspected by the Investment Company at reasonable times. FRIMCo.
may, at its option at any time, and shall forthwith upon the Investment
Company's demand, turn over to the Investment Company and cease to retain in
FRIMCo.'s files, records and documents created and maintained by FRIMCo.
pursuant to this Agreement, which are no longer needed by FRIMCo. in performance
of its services or for its protection. If not so turned over to the Investment
Company, such records and documents will be retained by FRIMCo. for six years
from the year of creation, during the first two of which such documents will be
in readily accessible form. At the end of the six year period, such records and
documents will either be turned over to the Investment Company, or destroyed in
accordance with the Investment Company's authorization.
INSPECTION OF RECORDS
---------------------
16. In case of any request or demand for the inspection of the share records of
the Investment Company, the Transfer Agent shall immediately notify the
Investment Company and secure instructions as to permitting or refusing
such inspection. All records of the Investment Company are confidential and
will not be released to any party prior to notice to and authorization by
Investment Company unless required by applicable law or regulations,
provided that the Transfer Agent may exhibit such records to any
<PAGE>
person in any case where it is advised by its counsel that it may be held
liable for failure so to do pursuant to any valid court order or decree.
INFORMATION TO BE FURNISHED TO THE INVESTMENT COMPANY
-----------------------------------------------------
17. FRIMCo. shall furnish to the Investment Company periodically as agreed upon
the following information:
A. A copy of the daily transaction register;
B. Dividend and reinvestment blotters;
C. The total number of shares distributed in each state for "blue
sky" purposes as determined according to instructions delivered
from time to time by the Investment Company to FRIMCo.
OTHER INFORMATION TO THE INVESTMENT COMPANY
-------------------------------------------
18. FRIMCo. shall furnish to the Investment Company such other information,
including shareholder lists, and statistical information as may be agreed
upon from time to time.
CORRESPONDENCE
--------------
19. FRIMCo. shall answer correspondence from shareholders relating to their
share accounts and such other correspondence as may from time to time be
mutually agreed upon.
PROXIES
-------
20. FRIMCo. shall mail such proxy cards and other material supplied to it by
the Investment Company in connection with shareholder meetings of the Funds
and shall receive, examine and tabulate returned proxies and certify the
vote of the Funds.
<PAGE>
FEES AND CHARGES
----------------
21. FRIMCo. shall receive such compensation from the Investment Company for its
services as the Investment Company's Transfer and Dividend Agent, as Plan
Agent for shareholders of the Investment Company, and for its other duties
pursuant hereto as may be agreed from time to time, and shall be reimbursed
for the cost of any and all forms, including blank checks and proxies, used
by it in communicating with shareholders of the Funds, or especially
prepared for use in connection with its actions hereunder, as well as the
cost of postage, telephone and telegraph used in communicating with
shareholders of the Funds, it being agreed that FRIMCo., prior to ordering
any forms in such supply as it estimates will be adequate for more than two
years use, shall obtain the written consent of the Investment Company. All
forms for which FRIMCo. has received reimbursement from the Investment
Company shall be and remain the property of the Investment Company until
used.
COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS
--------------------------------------------------
22. The Investment Company assumes full responsibility for insuring that the
contents of each Prospectus and Statement of Additional Information of the
Investment Company complies with all applicable requirements of the
Securities Act 1933, as amended, the Investment Company Act of 1940, as
amended, and any laws, rules and regulations of governmental authorities
having jurisdiction.
INDEMNIFICATION
---------------
23. The Investment Company shall indemnify and hold FRIMCo. harmless from all
loss, cost, damage, and expense, incurred by it resulting from any claim,
demand, action or suit arising directly or indirectly out of or in
connection with the performance of its duties hereunder as Transfer and
Dividend Disbursing Agent and Plan Agent, or as a result of acting upon any
instruction believed by it to have been executed by a duly authorized
officer of the Investment Company, or upon any information, data, records
or documents provided FRIMCo. or its agents by computer tape, telex, CRT
data entry or other similar means authorized by the Investment Company,
provided that this indemnification shall not apply to actions or omissions
of FRIMCo. in cases of its own willful misconduct or negligence. In order
that the indemnification provision contained in this paragraph 23 shall
apply, however, it is understood that if in any case the Investment Company
may be asked to indemnify or save FRIMCo. harmless, the Investment Company
shall be fully and promptly advised of all pertinent facts concerning the
situation in question, and it is further understood that FRIMCo. will use
all reasonable care to identify and notify the Investment Company promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification against the Investment
Company. The Investment Company shall have the option to defend FRIMCo.
against any claim which may be the subject of this indemnification, and in
the event that the Investment Company so elects it will so notify FRIMCo.,
and thereupon the Investment Company shall take over complete defense of
the claim, and FRIMCo. shall in such situations incur no further legal or
other expenses for which it shall seek indemnification under this
paragraph. FRIMCo. shall in no case confess any claim or make any
compromise in any case in which the Investment Company will be asked to
indemnify FRIMCo. except with the Investment Company's prior written
consent.
FURTHER ACTIONS
---------------
<PAGE>
24. Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
AMENDMENT AND TERMINATION
-------------------------
25. This Agreement may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement may be terminated at
any time by one hundred twenty (120) day's written notice given by one
party to the other .
ADDITIONAL PROVISIONS
---------------------
26. In the event that the Investment Company establishes additional Funds with
respect to which it desires to have FRIMCo. render services as Transfer
Agent, Dividend Disbursing Agent and Plan Agent under the terms hereof, it
shall so notify FRIMCo. in writing, and if FRIMCo. agrees in writing to
provide such services, such Fund or Funds shall become subject to all
provisions contained herein.
ASSIGNMENT
----------
27. This Agreement shall extend to and shall be binding upon the parties hereto
and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Investment Company without the
written consent of the Transfer Agent or by the Transfer Agent without the
written consent of the Investment Company.
GOVERNING LAW
-------------
28. This Agreement shall be governed by the laws of the State of Washington.
EXECUTED under seal as of the day and year first above written:
ATTEST: FRANK RUSSELL INVESTMENT COMPANY
/s/ Phil Fina /s/ Lynn Anderson
- ----------------------------------- ------------------------------------
Phil Fina, Secretary Lynn Anderson, President
ATTEST: FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
/s/ Michael Caccese /s/ Lynn Anderson
- ----------------------------------- ------------------------------------
Michael Caccese, Secretary Lynn Anderson, President
<PAGE>
SCHEDULE A
FRANK RUSSELL INVESTMENT COMPANY
EQUITY I
EQUITY II
EQUITY III
EQUITY Q
INTERNATIONAL
FIXED INCOME I
FIXED INCOME II
MONEY MARKET
DIVERSIFIED EQUITY
SPECIAL GROWTH
EQUITY INCOME
QUANTITATIVE EQUITY
INTERNATIONAL SECURITIES
DIVERSIFIED BOND
VOLATILITY CONSTRAINED BOND
LIMITED VOLATILITY TAX-FREE
U.S. GOVERNMENT MONEY MARKET
TAX FREE MONEY MARKET
<PAGE>
SCHEDULE B
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
FEE SCHEDULE
FOR
FRANK RUSSELL INVESTMENT COMPANY
. Shareholder Services $15.00 per Transaction
--------------------
oo Includes: Purchases, redemptions, exchanges,
transfers, adjustments
oo Excludes: Dividends and Capital Gain activity
. Out of Pocket Expenses Cost:
----------------------
oo Proxies issued and tabulated for special meetings
oo Counsel fees, forms, magnetic tape shipments, postage, stationery,
computer paper, microfiche, microfilm, checks, wires incoming and
outgoing, telephone, telecommunication connection to system, folding,
manual insertion, bulk mailing and additional inserts with
statements/checks
oo Expenses incurred to satisfy all governmental legislation and
regulations
oo Any other special or extraordinary requirements as mutually agreed
upon
<PAGE>
EXHIBIT 99-9(a)(2)
LETTER AGREEMENT
and
AMENDED SCHEDULE A
May 1, 1989
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 26 of the Transfer and Dividend Disbursing Agency Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company, dated April 1, 1988, the Frank Russell Investment Company advises you
that it is creating a new fund to be named the Real Estate Securities Fund (the
"Fund") and that the Fund desires for Frank Russell Investment Management
Company to serve as the Transfer and Dividend Disbursing Agent with respect to
the Fund pursuant to the terms and conditions of the Transfer and Dividend
Disbursing Agency Agreement. The Fund also desires to amend Schedule A of the
Transfer and Dividend Disbursing Agency Agreement to add the Fund. The fees to
be charged by the Administrator to the Fund in return for its services are the
same as those set forth in the Transfer and Dividend Disbursing Agency
Agreement.
Please indicate your acceptance to act as Transfer and Dividend Disbursing Agent
to the Real Estate Securities Fund and of the amendment of Schedule A by
executing the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Vice President - Operations
Accepted this 25th day of April, 1989
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/ Thomas A. Early
-------------------------------
Thomas A. Early
Vice President and Chief Financial Services Counsel
<PAGE>
EXHIBIT 99-9(a)(3)
LETTER AGREEMENT
and
AMENDED SCHEDULE A
August 24, 1992
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Section 26 of the Transfer and Dividend Disbursing Agency Agreement
between Frank Russell Investment Company and Frank Russell Investment Management
Company, dated April 1, 1988, the Frank Russell Investment Company advises you
that it is creating three new funds to be named the Fixed Income III,
Multistrategy Bond and Emerging Markets Funds (the "Funds") and that the Funds
desires for Frank Russell Investment Management Company to serve as the Transfer
and Dividend Disbursing Agent with respect to the Funds pursuant to the terms
and conditions of the Transfer and Dividend Disbursing Agency Agreement. The
Funds also desires to amend Schedule A of the Transfer and Dividend Disbursing
Agency Agreement to add the Funds. The fees to be charged by the Administrator
to the Funds in return for its services are the same as those set forth in the
Transfer and Dividend Disbursing Agency Agreement.
Please indicate your acceptance to act as Transfer and Dividend Disbursing Agent
to the Fixed Income III, Multistrategy Bond and Emerging Markets Funds and of
the amendment of Schedule A by executing the acceptance copy of this letter
agreement and returning it to the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ George W. Weber
-------------------------------
George W. Weber
Director of Operations
Accepted this 24th day of August, 1992
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By: /s/ George W. Weber
-------------------------------
Director of Operations
<PAGE>
EXHIBIT 99-9(b)
SAMPLE BANK CONTRACT
- --------------------
Last Revised 08/06/85
Mailed to Client:
Effective Date:
(Name of Bank)
(Address of Bank)
Attention: (Name and Title)
Gentlemen:
___________ ("Bank") is a banking institution organized under the laws of (State
or U.S.) Bank serves as a trustee, co-trustee, and/or discretionary investment
manager for assets of employee benefit plans qualified under Section 401 et.
seq. of the Internal Revenue Code and subject to the provisions of the Employee
Retirement Income Security Act ("ERISA"); and for assets of charitable
foundations, endowment funds and individuals. All such assets are referred to
herein as "trust assets", and the beneficial owners (or individuals responsible
for acting on their behalf) of trust assets are referred to herein as "trust
customers". In these capacities, Bank is responsible for evaluating and
defining the investment needs and objectives of its trust customers, and for
allocating assets and for selecting portfolio investment suitable to achieve
those objectives.
Frank Russell Investment Management Company ("Management Company") is an
investment advisor registered under the Investment Advisers Act of 1940.
Management Company serves as the manager for Frank Russell Investment Company
("Investment Company"), an open-end management investment company which has
registered as such under the Investment Company Act of 1940. Investment Company
offers shares of fifteen separate series and may offer shares of additional
series in the future ("Funds"), each with its own investment objectives and
strategies. The Funds currently being offered are:
<TABLE>
<CAPTION>
EXTERNAL FEE FUNDS INTERNAL FEE FUNDS
------------------ ------------------
<S> <C>
Equity I Diversified Equity
Equity II Special Growth
Equity III Equity Income
Fixed Income I Diversified Bond
Fixed Income II Volatility Constrained Bond
International International Securities
Money Market Limited Volatility Tax Free
U.S. Government Money Market
</TABLE>
Currently each Fund, other than Money Market Fund and U.S. Government Money
Market Fund, currently is managed by two or more investment managers evaluated
and monitored by Frank Russell Company and selected by Management Company.
Management Company is a wholly owned subsidiary of Frank Russell Company, which
has been principally engaged in the business of providing comprehensive asset
management consulting services to a limited number of institutional clients with
substantial assets available for investment. These services include: (i)
assisting a client in defining its investment objectives ("objective setting");
(ii) selecting categories of assets to meet those objectives ("asset
allocation"); and (iii) conducting extensive quantitative and qualitative
research of domestic and foreign money managers, monitoring their performance,
and recommending discretionary money managers
<PAGE>
("manager selection") to invest the categories of assets in accordance with the
"multi-style, multi-manager diversification" techniques and strategies developed
by Frank Russell Company. Through a consulting relationship Management Company
and Investment Company have access to Frank Russell Company's research
facilities and staff.
Multi-style, multi-manager diversification is feasible only for sizable pools of
assets with adequate resources to support the manager selection effort, and to
access and allocate assets cost-effectively among multiple managers. Investment
Company was organized to provide a cost-effective means for a fiduciary to
invest assets which the fiduciary has determined are suitable for multi-style,
multi-manager investment. Shares of Investment Company are offered currently
only to individuals and institutions accepted as clients by Management Company.
Management Company is willing to provide objective setting, asset allocation,
and other services and assistance to Bank, and to provide a means, through
Investment Company shares, for Bank to access the manager selection, and the
multi-style, multi-manager diversification techniques and strategies developed
by Frank Russell Company.
Bank desires to obtain Management Company's assistance in developing procedures
and programs for the Bank to utilize in applying the objective setting and asset
allocation techniques to trust assets and other services, and to have access to
shares of Investment Company as a means to invest trust assets using multi-
style, mutli-manager diversification where Bank determines, in its sole
discretion (or in conjunction with its co-trustee(s), if any, that it is
appropriate to invest trust assets in that manner.
Therefore, Management Company and Bank agree as follows:
1. ASSET MANAGEMENT SERVICES. To the extent requested reasonably by the Bank
during the period this Agreement is in effect, Management Company will
provide to Bank the following asset management services:
A. Personnel of Management Company will meet as necessary at Bank's
principal offices with Bank personnel for the principal purposes of
(1) developing procedures and programs for Bank personnel to use in
applying objective setting and asset allocation techniques to trust
customer assets; (2) developing procedures and programs for Bank
personnel to use in reviewing current and anticipated trust assets
available for investment, and the financial requirements of and other
information concerning trust customers relevant to setting objectives
and allocating trust assets; (3) reviewing Bank's use of the asset
allocation techniques; (4) assisting Bank in the integration of the
Bank's ability to utilize the multi-style, multi-manager
diversification technology into the Bank's marketing program for its
trust services; and (5) providing such other assistance as Bank may
reasonably request.
B. Personnel of Management Company will attend meetings with trust
customers for the limited purpose of explaining the reasons for and
objectives of the asset allocation techniques and multi-style, multi-
manager diversification, and the nature and operations of Investment
Company.
C. Management Company will provide Bank with, or assist Bank in the
development and preparation of, reports and analyses concerning
specific customer's accounts.
<PAGE>
Management Company and Bank acknowledge and specifically agree that
Management Company and its affiliates shall have no authority to exercise
any discretion or control over the management of any trust assets.
Moreover, it is agreed that Management Company shall not provide services
to any particular trust customer with respect to any particular trust
assets, either directly or indirectly. Management Company acknowledges
that it is not undertaking to serve and shall not serve as an investment
manager (as defined in ERISA) with respect to the trust assets of any trust
customer, nor is it undertaking to render any specific services to any
trust customer or to any employee benefit plan maintained by a trust
customer. Management Company's authority and responsibility is solely to
assist the Bank's personnel in asset allocation techniques and related
matters, to give advice to the Bank, and to make available shares of the
Investment Company as provided in this Agreement. The Bank shall have sole
and exclusive authority and responsibility for dealing with the trust
assets and trust customers.
2. INVESTMENT COMPANY SHARES. When Bank has determined, in its sole
discretion (or in conjunction with its co-trustee(s), if any), that shares
of one or more of the Funds are suitable for acquisition for the account of
a trust customer, Management Company shall cause Investment Company to sell
shares of the Fund(s) to Bank in its fiduciary capacity on the terms and
subject to the conditions and restrictions set forth in the Investment
Company's current prospectus effective at the time of purchase. As a
shareholder of Investment Company, Bank will receive:
A. Bi-weekly reports showing each Fund's net asset value and investment
performance relative to prior periods and to appropriate indices and
comparative groups.
B. Monthly reports showing each Fund's principal securities holdings.
C. Quarterly reports showing each Fund's investment portfolio and
investment performance as of the end of each quarter.
D. Semi-annual reports, prepared in accord with generally accepted
accounting principals, showing each Fund's financial condition and
investment portfolio. The annual report shall be audited by
independent public accountants.
E. Such other reports as Investment Company shall prepare for its
shareholders or Management Company shall prepare for its clients.
3. FEES TO MANAGEMENT COMPANY. For the services provided by Management
Company, Bank agrees to pay to Management Company the fees specified in
Schedule A of this Agreement at the times set forth in Schedule A.
4. INFORMATION AND CONFIDENTIALITY. Management Company and Bank shall supply
to each other on a timely basis such information as is necessary for each
party to discharge its regulatory reporting obligations. Subject to the
right of each party to comply with applicable law, including any demand of
any regulatory or taxing authority having jurisdiction over it, the parties
hereto shall treat as confidential all information pertaining to the
relationships established by this Agreement.
5. ASSIGNMENT. No assignment (including, in the case of Management Company, an
assignment as defined in Section 202(a)(1) of the Advisors Act) of
<PAGE>
this Agreement shall be made by either party hereto without the written
consent of the other, and this Agreement shall terminate automatically in
the event that it is assigned; provided, however, that the consent of
Management Company shall not be required for any assignment or transfer of
this Agreement by Bank to its successor by merger, consolidation, sale of
assets, or other form of business combination.
6. EFFECTIVE DATE AND DURATION OF AGREEMENT. This Agreement shall become
effective on the Effective Date set forth on page 1 and shall continue in
effect until terminated by either party as provided herein; provided,
however, that Management Company and Investment Company shall have no
obligation to make shares of Investment Company available to Bank during
any period when the Investment Company's registration statement under the
Securities Act of 1933 or applicable state securities laws is not
effective. This Agreement may be terminated by each of the parties under
the following circumstances and in the following manner:
A. By Bank. Bank may terminate this Agreement at any time without
penalty by giving 90 days written notice to Management Company.
B. By Management Company.
1. Management Company may terminate this Agreement at any time
without penalty by giving 90 days' written notice to Bank.
2. Management Company may terminate this Agreement at any time
without penalty upon 3 days' written notice to Bank if the fees
due to Management Company are not paid at the time specified in
Schedule A. Upon Management Company's termination of this
Agreement pursuant to this provision, Bank agrees to redeem
within 30 days all shares of Investment Company's External Fee
Funds held for trust customers.
A. Effects of Termination.
1. Upon termination of this Agreement by either party, Bank shall no
longer be entitled to receive the services provided by Management
Company pursuant to Section 1 or to purchase additional shares
(other than by reinvestment of income dividends or capital gains
distributions) pursuant to Section 2, but Bank may continue to
hold shares of Investment Company held by Bank on the termination
date, subject to Bank's payment of Management Company's fees at
the time specified in Schedule A, and to Bank's agreement to
redeem all shares if the Agreement is terminated pursuant to the
provisions of Section 6(B)(2).
2. Upon termination by the Bank of this Agreement, it agrees that
for one year following the date of termination Bank will not (a)
organize or operate any arrangement or commingled investment
vehicle using any money manager serving the Investment Company at
the time of termination, or (b) use its authority or
relationships to cause its trust customers' accounts to
participate in any arrangement or commingled investment vehicle
using multiple money managers if a majority of the
<PAGE>
money managers involved in the arrangement or commingled
investment vehicle were serving Management Company or any one of
the Investment Company's Funds at the time of termination.
7. AMENDMENT. This Agreement may be amended at any time by written agreement
between Bank and Management Company.
8. DELIVERY OF DOCUMENTS. Bank hereby acknowledges receipt of Investment
Company's prospectuses dated __________________, and a copy of Part II of
Management Company's Form ADV as currently on file with the Securities and
Exchange Commission.
9. APPLICABLE LAW. To the extent that state law shall not have been preempted
by the provisions of any laws of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement shall
be administered, construed, and enforced according to the laws of the State
of Washington.
10. LIMITATION OF LIABILITY. The Master Trust Agreement dated July 26, 1984,
as amended from time to time, establishing the Investment Company, which is
hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name Frank Russell
Investment Company means the Trustees from time to time serving (as
Trustees but not personally) under said Master Trust Agreement. It is
expressly acknowledged and agreed that the obligations of the Investment
Company hereunder shall not be binding upon any of the shareholders,
Trustees, officers, employees or agents of the Investment Company,
personally, but shall bind only the trust property of the Investment
Company, as provided in its Master Trust Agreement.
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By: /s/ Don G. Powell
--------------------------------
Don G. Powell, President
Accepted:
(NAME IN CAPS)
By:
-------------------------------
<PAGE>
EXHIBIT 99-9(c)
SAMPLE NON-BANK CONTRACT
- ------------------------
EXTERNAL FEE
Last Revised: 05/29/85
(DATE) Mailed to Client:
Effective Date:
(NAME AND ADDRESS OF CLIENT)
Attention: (PERSON TO WHOM SENT)
Re: Asset Management Services Agreement
Gentlemen:
Frank Russell Investment Management Company ("Management Company") is registered
as an investment adviser under the Investment Advisers Act of 1940. Management
Company is a wholly-owned subsidiary of Frank Russell Company, which has been
primarily engaged, since 1970, in providing asset management consulting services
to large institutional investment accounts.
Management Company serves as the manager of Frank Russell Investment Company
("Investment Company"), and is primarily engaged in the business of providing
asset management consulting services which include: assisting a client in
defining its investment objectives ("objective setting"); selecting categories
of assets to meet those objectives ("asset allocation services"); and,
conducting extensive quantitative and qualitative research of domestic and
international money managers, and recommending discretionary money managers to
invest the categories of assets in accordance with the general objectives and
more refined techniques and strategies implemented by Management Company
("manager research and selection"). Through a consulting relationship
Management Company has access to Frank Russell Company's research facilities.
Investment Company is an open-end management company registered under the
Investment Company Act of 1940 ("Investment Company Act"). Investment Company
has registered its shares under the Securities Act of 1933 ("Securities Act")
and currently offers shares of fifteen separate series ("Funds"), each with its
own investment objectives and strategies. Investment Company is a means for the
investment of assets on a commingled basis where the Management Company's
"multi-style, multi-manager diversification" investment services are
appropriate. Shares of the Funds are offered only to individuals and
institutions accepted as clients by Management Company.
(NAME OF CLIENT) desires to utilize Management Company's objective setting and
asset allocation services, and to have access to a means to invest assets of
(NAME OF FUND OR ACCOUNT TO BE INVESTED: GENERAL DESCRIPTION OF NATURE OF THE
ACCOUNT) using multi-style, multi-manager diversification. Management Company
is willing to provide its objective setting and asset allocation services, and
to provide a means to use multi-style, multi-manager diversification services
through investment in shares of the Funds.
Therefore, Management Company and (NAME OF CLIENT) agree as follows:
1. SERVICES PROVIDED BY THE COMPANY. Management Company will provide the
following asset management services to you:
A. Initially, personnel from Management Company will meet as necessary
with your personnel for the principal purposes of providing objective
setting and asset
<PAGE>
allocation services including (i) reviewing the current and
anticipated assets available for investment and the financial
requirements of and other information relevant to setting investment
objectives; and (ii) assisting you in defining investment objectives;
and (iii) developing an investment program utilizing the Funds as
investment vehicles to seek to achieve the investment objectives.
B. Thereafter, personnel from Management Company will conduct not less
than (NUMBER OF MEETINGS) meetings per year at your principal office
to review the investment programs which Management Company has
implemented for Investment Company and the investment results of
Investment Company and your account, and to provide such other
assistance with respect to the investment of the assets you shall
reasonably request.
2. AVAILABILITY OF INVESTMENT COMPANY SHARES. When you have determined that
shares of one or more of the Funds are suitable for acquisition, Management
Company shall cause Investment Company to sell shares of the Fund(s) to you
on the terms and subject to the conditions and restrictions set forth in
the Investment Company's prospectus effective at the time of purchase.
3. REPORTS.
A. As a shareholder of Investment Company, you will receive semi-annual
reports showing each Fund's financial condition, investment portfolio
and investment performance as of the end of the period. The annual
financial statements will be audited by independent public
accountants.
B. Management Company will also provide you with such other reports and
analyses concerning the investment performance of (NAME OF FUND OR
ACCOUNT TO BE INVESTED) as you shall reasonably request.
4. FEES TO MANAGEMENT COMPANY. For the services provided by Management
Company, you agree to pay to Management Company, within 30 days after the
end of each calendar quarter a quarterly fee equal to the sum of the
amounts computed by applying the following quarterly percentage rates to
the average assets of (NAME THE FUND OR ACCOUNT) invested in shares of the
Investment Company's Funds:
<PAGE>
<TABLE>
<CAPTION>
Annualized Rate Quarterly Rate Funds
--------------- -------------- -----
<S> <C> <C>
0.50% 0.125 % Money Market
1.00% 0.25 % Equity I, Equity III, Fixed
Income I and Fixed Income II
1.15% 0.2875% Equity II and International
</TABLE>
"Average Assets" shall be determined by computing the average of the
following four sums: the value of your assets invested in each of the
Funds on the last business day of each of the three months comprising the
calendar quarter and on the last business day of the preceding calendar
quarter.
In the event of a redemption during a calendar quarter of Investment
Company shares representing substantially all of your assets, the quarterly
fee, pro-rated to the date of redemption, shall become payable immediately
to Management Company. When determining the pro-rated fee: "Average
assets" shall be determined by computing the average of the following sums:
the value of your assets invested in each of the Funds on the last business
day of the preceding calendar quarter, and on the business day immediately
prior to the redemption date; and the fee rate shall be determined by
multiplying the quarterly fee rate times the ratio of the number of days in
the quarter prior to the redemption to the number of days in the quarter.
You hereby appoint Management Company as your agent and irrevocably
authorize Management Company to redeem at the then current net asset value
a sufficient number of shares of Investment Company and to retain the
proceeds of such redemption to pay fees owed to Management Company if you
have not paid said fees at the times set forth above; provided, however,
that Management Company shall give you three days' written notice of its
intention to do so.
5. ASSIGNMENT. No assignment of this Agreement shall be made by either party
hereto, and Management Company shall not make an "assignment" of this
Agreement as that term is defined in Section 202(a)(1) of the Investment
Advisers Act of 1940, without the written consent of the other party, and
this Agreement shall terminate automatically in the event that it is
assigned.
6. EFFECTIVE DATE AND DURATION OF AGREEMENT. This Agreement shall become
effective on the date set forth on page 1, and shall continue in effect
until terminated by either party as provided in Section 7, below; provided,
however, that Management Company shall have no obligation to make shares of
Investment Company available to you during any period in which the
Investment Company's registration statement under the Securities Act or
applicable state securities registration laws is not effective.
7. TERMINATION AND AGREEMENTS UPON TERMINATION. This Agreement may be
terminated by either party under the following circumstances and in the
following manner:
A. You may terminate this Agreement at any time without penalty upon
written notice to Management Company. In addition, Section 22(e) of
the Investment Company Act prohibits the Investment Company from
suspending the right of redemption of its shares except under
specified circumstances; accordingly, a complete or substantially
complete redemption of shares of Investment Company
<PAGE>
held by you shall be treated as and result in your immediate
termination of the Agreement.
B. Management Company may terminate this Agreement at any time without
penalty upon 30 days' written notice to you.
C. Upon either party's termination of this Agreement pursuant to Section
7(A) and (B) above, you agree to redeem within 30 days all shares of
Investment Company which you hold; and in the event you fail to do so,
you hereby irrevocably appoint Management Company as your agent and
authorize Management Company to effect such redemption and transmit
the proceeds, less any fees which you then owe to Management Company.
8. AMENDMENT. This agreement may be amended at any time by written agreement
between you and Management Company.
9. DELIVERY OF DOCUMENTS. You hereby acknowledge receipt of Investment
Company's prospectus date __________, and Part II of Management Company's
Form ADV as currently on file with the Securities and Exchange Commission.
10. APPLICABLE LAW. To the extent that state law shall not have been preempted
by the provisions of any laws of the United States heretofore or
hereinafter enacted, as the same may be amended from time to time, this
Agreement shall be administered, construed, and enforced according to the
laws of the State of Washington.
11. LIMITATION OF LIABILITY. The Master Trust Agreement dated July 26, 1984,
as amended from time to time, establishing the Investment Company, which is
hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name Frank Russell
Investment Company means the Trustees from time to time serving (as
Trustees but not personally) under said Master Trust Agreement. It is
expressly acknowledged and agreed that the obligations of the Investment
Company hereunder shall not be binding upon any of the shareholders,
Trustees, officers, employees or agents of the Investment Company,
personally, but shall bind only the trust property of the Investment
Company, as provided in its Master Trust Agreement.
<PAGE>
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By:
-------------------------------
Don G. Powell, President
Accepted:
(NAME IN CAPS)
By:
-------------------------------
<PAGE>
EXHIBIT 99-9(c)
SAMPLE NON-BANK CONTRACT
INTERNAL FEE
Last Revised: 05/29/85
(Date) Mailed to Client:
Effective Date:
(Name and Address of Client)
Attention: (Person to whom sent)
Re: Asset Management Services Agreement
Gentlemen:
Frank Russell Investment Management Company ("Management Company") is registered
as an investment adviser under the Investment Advisers Act of 1940. Management
Company is a wholly-owned subsidiary of Frank Russell Company, which has been
primarily engaged, since 1970, in providing asset management consulting services
to large institutional investment accounts.
Management Company serves as the manager of Frank Russell Investment Company
("Investment Company"), and is primarily engaged in the business of providing
asset management consulting services which include: assisting a client in
defining its investment objectives ("objective setting"); selecting categories
of assets to meet those objectives ("asset allocation services"); and,
conducting extensive quantitative and qualitative research of domestic and
international money managers, and recommending discretionary money managers to
invest the categories of assets in accordance with the general objectives and
more refined techniques and strategies implemented by Management Company
("manager research and selection"). Through a consulting relationship
Management Company has access to Frank Russell Company's research facilities.
Investment Company is an open-end management company registered under the
Investment Company Act of 1940 ("Investment Company Act"). Investment Company
has registered its shares under the Securities Act of 1933 ("Securities Act")
and currently offers shares of fifteen separate series ("Funds"), each with its
own investment objectives and strategies. Investment Company is a means for the
investment of assets on a commingled basis where the Management Company's
"multi-style, multi-manager diversification" investment services are
appropriate. Shares of the Funds are offered only to those individuals and
institutions accepted as clients by Management Company.
(NAME OF CLIENT) desires to utilize Management Company's objective setting and
asset allocation services, and to have access to a means to invest assets of
(NAME OF FUND OR ACCOUNT TO BE INVESTED: GENERAL DESCRIPTION OF NATURE OF THE
ACCOUNT) using multi-style, multi-manager diversification. Management Company
is willing to provide its objective setting and asset allocation services, and
to provide a means to use multi-style, multi-manager diversification services
through investment in shares of the Funds.
Therefore, Management Company and (NAME OF CLIENT) agree as follows:
1. SERVICES PROVIDED BY THE COMPANY. Management Company will provide the
following asset management services to you:
A. Initially, personnel from Management Company will meet as necessary
with your personnel for the principal purposes of providing objective
setting and asset allocation services including (I) reviewing the
current and anticipated assets available for investment and the
financial requirements of and other information relevant to setting
investment objectives; and (ii) assisting
<PAGE>
you in defining investment objectives; and (iii) developing an
investment program utilizing the Funds as investment vehicles to seek
to achieve the investment objectives.
B. Thereafter, personnel from Management Company will conduct not less
than (NUMBER OF MEETINGS) meetings per year at your principal office
to review the investment programs which Management Company has
implemented for Investment Company and the investment results of
Investment Company and your account, and to provide such other
assistance with respect to the investment of the assets you shall
reasonably request.
2. AVAILABILITY OF INVESTMENT COMPANY SHARES. When you have determined that
shares of one or more of the Funds are suitable for acquisition, Management
Company shall cause Investment Company to sell shares of the Fund(s) to you
on the terms and subject to the conditions and restrictions set forth in
the Investment Company's prospectus effective at the time of purchase.
3. REPORTS.
A. As a shareholder of Investment Company, you will receive semi-annual
reports showing each Fund's financial condition, investment portfolio
and investment performance as of the end of the period. The annual
financial statements will be audited by independent public
accountants.
B. Management Company will also provide you with such other reports and
analyses concerning the investment performance of (NAME OF FUND OR
ACCOUNT TO BE INVESTED) as you shall reasonably request.
4. ASSIGNMENT. No assignment of this Agreement shall be made by either party
hereto, and Management Company shall not make an "assignment" of this
Agreement as that term is defined in Section 202(a)(1) of the Investment
Advisers Act of 1940, without the written consent of the other party, and
this Agreement shall terminate automatically in the event that it is
assigned.
5. EFFECTIVE DATE AND DURATION OF AGREEMENT. This Agreement shall become
effective on the date set forth on page 1, and shall continue in effect
until terminated by either party as provided in Section 7, below; provided,
however, that Management Company shall have no obligation to make shares of
Investment Company available to you during any period in which the
Investment Company's registration statement under the Securities Act or
applicable state securities registration laws is not effective.
6. TERMINATION AND AGREEMENTS UPON TERMINATION. This Agreement may be
terminated by either party under the following circumstances and in the
following manner:
You may terminate this Agreement at any time without penalty upon written
notice to Management Company. In addition, Section 22(e) of the Investment
Company Act prohibits the Investment Company from suspending the right of
redemption of its shares except under specified circumstances; accordingly,
a complete or substantially complete redemption of shares of Investment
Company held by you shall be treated as and result in your immediate
termination of the Agreement.
Management Company may terminate this Agreement at any time without penalty
upon 30 days' written notice to you.
7. AMENDMENT. This agreement may be amended at any time by written agreement
between you and Management Company.
8. DELIVERY OF DOCUMENTS. You hereby acknowledge receipt of Investment
Company's prospectus dated _________________________________ and Part II of
Management Company's Form ADV as currently on file with the Securities and
Exchange Commission.
9. APPLICABLE LAW. To the extent that state law shall not have been preempted
by the provisions of any laws of the United States heretofore or hereafter
enacted, as the same may be
<PAGE>
amended from time to time, this Agreement shall be administered, construed,
and enforced according to the laws of the State of Washington.
10. LIMITATION OF LIABILITY. The Master Trust Agreement dated July 26, 1984,
as amended from time to time, establishing the Investment Company, which is
hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name Frank Russell
Investment Company means the Trustees from time to time serving (as
Trustees but not personally) under said Master Trust Agreement. It is
expressly acknowledged and agreed that the obligations of the Investment
Company hereunder shall not be binding upon any of the shareholders,
Trustees, officers, employees or agents of the Investment Company,
personally, but shall bind only the trust property of the Investment
Company, as provided in its Master Trust Agreement.
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By:
--------------------------------
, President
Accepted:
(NAME IN CAPS)
By:
-------------------------------
<PAGE>
EXHIBIT 99-9(d)
CONSULTING AGREEMENT
FRANK RUSSELL INVESTMENT COMPANY
THIS AGREEMENT made this 24th day of January, 1986 between and among Frank
Russell Investment Company, a Massachusetts business trust (hereafter the
"Trust"); Frank Russell Investment Management Company, a corporation organized
under the laws of the State of Washington (hereafter "Manager"); and Frank
Russell Company, a corporation organized under the laws of the State of
Washington (hereafter "Consultant"):
WITNESSETH
----------
WHEREAS the Trust is a diversified management investment company registered
under the Investment Company Act of 1940 ("1940 Act"), currently offering shares
of fifteen investment funds with different investment objectives and policies
("Sub-Trusts"), and uses one or more money managers to select portfolio
securities; and
WHEREAS Manager has agreed to provide all management and administrative services
to the Trust, including but not limited to the recommendation of money
manager(s) for each of the Sub-Trusts, and to act as a discretionary money
manager, and has also agreed to provide asset management services to
shareholders of the Trust; and
WHEREAS Consultant is the sole stockholder of Manager, is registered as an
investment advisor under the Investment Advisors Act of 1940, and is primarily
engaged in the business of consulting with the sponsors of large pools of assets
concerning the management and investment of those assets including the selection
of investment managers for those pools ("asset management consulting services");
and
WHEREAS the Trust and Manager believe that Consultant's asset management
consulting services provide reasonable and essential assistance to the Trust in
conducting its operations and to Manager in discharging its responsibilities to
the Trust and its shareholders, and desire to obtain Consultant's asset
management consulting services on the terms and conditions set forth in this
Agreement; and
WHEREAS Consultant is willing to provide its asset management consulting
services to the Trust and Manager on the terms and conditions set forth in this
Agreement:
NOW THEREFORE, in consideration of the mutual agreements herein made, the
Trust, Consultant, and Manager agree as follows:
1. Employment of Consultant. Trust and Manager hereby employ Consultant
to provide the asset management consulting services set forth in
Section 2 of this Agreement.
2. Services of Consultant. Consultant shall provide to the Trust and to
Manager:
A. Asset allocation modeling systems, including access to
Consultant's computer facilities.
B. Advice and techniques relating to investment objective planning,
including targeting long-term rates of return and risk levels.
C. Research and recommendations concerning potential money managers
for the Trust.
D. Monitoring and periodic re-evaluation of existing money managers
for the Trust.
E. Preparation of Portfolio Activity Reports for each portfolio of
the Sub-Trusts, which reports measure and analyze various aspects
of the portfolios and results achieved, and include the recording
of
<PAGE>
portfolio transactions, capital changes, income receipts, and
other transactions; and of Analysis of International Management
reports for each international portfolio of the Sub-Trust.
Consultant shall provide the Trust and Manager with such research
reports, investment policy statements and other materials supporting
the advice and recommendations of Consultant with respect to the
foregoing as they may reasonably request. At the request of the Trust
or Manager, Consultant will consult with the Trust or Manager with
respect to any recommendation made by Consultant and, in general, with
respect to the accounts of shareholders of the Sub-Trusts.
3. Acceptance and Appointment; Standard of Performance. Consultant
hereby accepts its appointment as a consultant and agrees to use its
best professional judgment to make timely reports and recommendations
to the Trust and Manager with respect to the management of the
accounts of the shareholders and of the Sub-Trust. Consultant agrees
that in providing services hereunder it shall adhere to the same
standards of care and conduct with respect to the Trust as it does for
each of its other consulting clients.
4. Services of Consultant to Other Clients. It is understood that
Consultant performs substantially the same type of consulting services
for other clients. Subject to the provisions of paragraph 3 hereof,
the Trust and Manager agree that Consultant may give advice and take
action with respect to any of its other clients which may differ from
advice given, or the timing or nature of action taken, with respect to
the Trust, so long as it is the Consultant's policy, to the extent
practical, to provide its services and submit its recommendations over
a period of time on a timely, fair, and equitable basis relative to
other clients. Without limiting the foregoing, it is understood that
Consultant shall not have any obligation to recommend any money
manager for employment or termination by the Trust which Consultant,
its principals, affiliates, or employees may recommend for the account
of any other client, if in the opinion of Consultant such
recommendation appears at that time to be unnecessary, unsuitable, or
undesirable for the Trust.
5. Fees for Consulting Services. The compensation of Consultant for its
services under Section 2 of this Agreement shall be paid by Manager;
provided, however that the Trust and Sub-Trusts shall pay the expenses
of the reports identified in Section 2(E).
6. Amendment. This Agreement may be amended at any time by written
agreement between and among Consultant, the Trust, and Manager,
subject to the Trust obtaining such approvals as may be required by
the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written above
and shall continue in effect as to each Sub-Trust until April 30,
1987. The Agreement is renewable annually thereafter for
successive one year periods: (1) by a vote of a majority of the
Trustees of the Trust; or (2) as to each Sub-Trust, by a vote of
a
<PAGE>
majority of the outstanding voting securities of that Sub-Trust,
and in either case by a vote of a majority of the Trustees who
are not parties to the Agreement or interested persons of any
parties to the Agreement (other than as Trustees of the Trust)
cast in person at a meeting called for purposes of voting on the
Agreement; provided, however, that if the shareholders of any one
or more Sub-Trusts fail to approve the Agreement as provided
herein, the Consultant may continue to serve in such capacity in
the manner and to the extent permitted by the 1940 Act and the
Rules and Regulations thereunder.
B. This Agreement:
(1) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust
or, as to any Sub-Trust, by vote of a majority of the
outstanding voting securities of the Sub-Trust, on 60 days'
written notice to the Consultant;
(2) shall immediately terminate in the event of its assignment;
and
(3) may be terminated by the Consultant on 60 days' written
notice to the Trust.
C. As used in this Section 7, the terms of "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms
in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed postpaid, to the other party
at any office of such party.
8. Applicable Law. To the extent that State law shall not have been
preempted by the provisions of any other laws of the United States
heretofore or hereafter enacted, as the same may be amended from time
to time, this Agreement shall be administered, construed, and enforced
according to the laws of the State of Washington.
9. Liabilities of the Consultant. In the absence of willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or
duties hereunder or on the part of the Consultant, the Consultant
shall not be subject to liability to the Trust or to any shareholder
of the Trust for any act or omission in the course of, or connected
with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security.
10. Limitation of Liability. The Master Trust Agreement dated July 26,
1984, as amended from time to time, establishing the Trust, which is
hereby referred to and a copy of which is on file with the Secretary
of The Commonwealth of Massachusetts, provides that the name Frank
Russell Investment Company means the Trustees from time to time
serving (as Trustees but not personally) under said Master Trust
Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust
<PAGE>
hereunder shall not be binding upon any of the shareholders, Trustees,
officers, employees or agents of the Trust, personally, but shall bind
only the trust property of the Trust, as provided in its Master Trust
Agreement. The execution and delivery of this Agreement have been
authorized by the Trustees of the Trust and signed by the President of
the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust
property of the Trust as provided in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT COMPANY
/s/ Philp J. Fina By: /s/ Don G. Powell
- ----------------------------------- --------------------------------
Philip J. Fina, Secretary Don G. Powell, President
FRANK RUSSELL COMPANY
/s/ Philp J. Fina By: /s/ George F. Russell
- ----------------------------------- --------------------------------
Philip J. Fina, Secretary George F. Russell, Jr., President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
/s/ Philp J. Fina By: /s/ Don G. Powell
- ----------------------------------- --------------------------------
Philip J. Fina, Secretary Don G. Powell, President
<PAGE>
CONSULTING SERVICES AGREEMENT
SCHEDULE A
----------
Effective January 24, 1986
Pursuant to the provisions of Section 5, Manager shall pay Consultant a
quarterly consulting fee equal to 1/4 of the following annual amounts:
Annual Fee
- ----------
$165,000 Consulting fee for asset modeling for clients and United States
investment allocation and advisor evaluation.
15,000 Consulting fee for asset modeling for international investment
allocation and advisor evaluation.
On each July 1, the US consulting fee shall be increased or decreased by $10,000
for each $100,000 asset level which Trust's assets have increased or decreased,
respectively, during the preceding calendar year as measured by Trust's assets
on the first and the last day of the preceding calendar year.
Pursuant to the provisions of Section 5, the Trust shall pay Consultant a
quarterly fee equal to 1/4 of the following annual amounts for the following
reports:
$ 5,400 Per U.S. Portfolio PAR report
13,000 Per International portfolio PAR report
2,000 Per AIM report for an international portfolio
The annual fee shall be pro-rated as portfolios are added to or deleted from the
reporting systems.
FRANK RUSSELL COMPANY FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By: /s/ George F. Russell By: /s/ Don G. Powell
------------------------------- --------------------------------
George F. Russell, Jr., Don G. Powell, President
President
FRANK RUSSELL INVESTMENT COMPANY
By: /s/ Don G. Powell
-------------------------------
Don G. Powell, President
<PAGE>
Exhibit 99-9(f)
Contract Mailed:
Effective Date:
Termination Date: April 30,
Fund(s):
Mr.
Re: Frank Russell Investment Company Portfolio Management Contract
Dear Mr. :
Frank Russell Investment Company ("Investment Company"), a Massachusetts
business trust, is a diversified open-end management investment company of the
series type registered as an investment company under the Investment Company Act
of 1940 ("Act"), and subject to the rules and regulations promulgated
thereunder. The Investment Company is a so-called "series" company which issues
shares evidencing beneficial interests in separate investment portfolios, each
with different investment objectives and policies ("Funds").
Frank Russell Investment Management Company ("FRIMCo") acts as the manager
and administrator of the Investment Company pursuant to the terms of a
Management Agreement, and is an "investment adviser" to the Investment Company
as defined in Section 2(a)(20) of the Act. FRIMCo is responsible for the day-to-
day management and administration of the Investment Company and for the
coordination of investment of each Fund's assets in portfolio securities.
However, specific portfolio purchases and sales for each Fund's investment
portfolio, or a portion thereof, are to be made by portfolio management
organizations recommended and selected by FRIMCo, and appointed by, and subject
to the approval of, the Board of Trustees of the Investment Company.
1. Appointment as a Money Manager. Investment Company being duly
authorized hereby appoints and employs you ("Money Manager") as a discretionary
money manager to the Investment Company's Fund(s) designated above, on the terms
and conditions set forth herein, for those assets of the Fund(s) which FRIMCo,
as a fiduciary for Investment Company,
<PAGE>
determines to assign to you (those assets being referred to for the Fund(s)
individually and collectively as the "Fund Account").
2. Acceptance of Appointment; Standard of Performance. Money Manager
accepts the appointment as a discretionary money manager and agrees to use its
best professional judgment to make timely investment decisions for the
Investment Company with respect to the investments of the Fund Account in
accordance with the provisions of this Contract.
3. Portfolio Management Services of Money Manager. Money Manager is
hereby employed and authorized to select portfolio securities for investment by
the Fund(s), to determine to purchase and sell securities of the Fund Account,
and upon making any purchase or sale decision, to place orders for the execution
of such portfolio transactions in accordance with paragraphs 5 and 6 hereof and
Exhibit A hereto (as amended from time to time). In providing portfolio
management services to the Fund Account: Money Manager shall be subject to such
investment restrictions as are set forth in the Act and Rules thereunder, the
supervision and control of the Board of Trustees of the Investment Company, such
specific instructions as the Board may adopt and communicate to Money Manager,
the investment objectives, policies and restrictions of the Fund furnished
pursuant to paragraph 4, and instructions from FRIMCo; and Money Manager shall
maintain on behalf of the Investment Company the records listed in Exhibit B
hereto (as amended from time to time). At Investment Company's reasonable
request, Money Manager will consult with Investment Company or with FRIMCo, with
respect to any decision made by it with respect to the investments of the Fund
Account.
4. Investment Objectives, Policies and Restrictions. The Investment
Company shall provide Money Manager with a statement of the investment
objectives and policies of the Fund Account and any specific investment
restrictions applicable thereto as established by Investment Company, including
those set forth in its Prospectus as amended from time to time. Investment
Company retains the right, on written notice to Money Manager from the
Investment Company or FRIMCo, to modify any such objectives, policies or
restrictions in any manner at any time.
5. Transaction Procedures. All transactions will be consummated by payment
to or delivery by State Street Bank & Trust Company (the "Custodian"), or such
depositories, or agents, as may be designated by the Custodian, as custodian for
the Investment Company, of all cash and/or securities due to or from the Fund
Account, and Money Manager shall not have possession or custody thereof or any
responsibility or liability with respect thereto. Money Manager shall advise
Custodian and confirm in writing to Investment Company all investment orders for
the Fund Account placed by it with brokers and dealers at the time and in the
manner and as set forth in Exhibit A hereto (as amended from time to time).
Investment Company shall issue to the Custodian such instructions as may be
appropriate in connection with the settlement of any transaction initiated by
Money Manager. Investment Company shall be responsible for all custodial
arrangements and the payment of all custodial charges and fees, and upon giving
proper instructions to the Custodian, Money Manager shall have no responsibility
or liability with respect to custodial arrangements or the acts, omissions or
other conduct of the Custodian.
6. Allocation of Brokerage. Money Manager shall have authority and
discretion to select brokers and dealers to execute portfolio transactions
initiated by Money Manager, and for the selection of the markets on/in which the
transaction will be executed.
A. In doing so, the Money Manager's primary objective shall be to
seek to select a broker-dealer that can be expected to obtain the best net price
and execution for the Investment Company. However, this responsibility shall not
be deemed to obligate the Money Manager to solicit competitive bids for each
transaction; and Money Manager shall have no
<PAGE>
obligation to seek the lowest available commission cost to Investment Company,
so long as Money Manager believes in good faith, based upon its knowledge of the
capabilities of the firm selected, that the broker or dealer can be expected to
obtain the best price on a particular transaction and that the commission cost
is reasonable in relation to the total quality and reliability of the brokerage
and research services made available by the broker to Money Manager viewed in
terms of either that particular transaction or of Money Manager's overall
responsibilities with respect to its clients, including the Investment Company,
as to which Money Manager exercises investment discretion, notwithstanding that
Investment Company may not be the direct or exclusive beneficiary of any such
services or that another broker may be willing to charge Investment Company a
lower commission on the particular transaction.
B. Investment Company shall retain the right to request that
transactions giving rise to brokerage commissions, in an amount to be agreed
upon by Investment Company and Money Manager, shall be executed by brokers and
dealers which provide brokerage or research services to the Investment Company
or FRIMCo, or as to which an ongoing relationship will be of value to Investment
Company in its management of the Fund(s), which services and relationship may,
but need not, be of direct benefit to the Fund Account, so long as (i) the Money
Manager believes in good faith, based upon its knowledge of the capabilities of
the firm selected, that the broker or dealer can be expected to obtain the best
price on a particular transaction and (ii) the Investment Company determines
that the commission cost is reasonable in relation to the total quality and
reliability of the brokerage and research services made available to Investment
Company, or to FRIMCo for the benefit of its clients for which it exercises
investment discretion, notwithstanding that the Fund Account may not be the
direct or exclusive beneficiary of any such service or that another broker may
be willing to charge Investment Company a lower commission on the particular
transaction.
C. Money Manager agrees that it will not execute any portfolio
transactions with a broker or dealer which is an "affiliated person" (as defined
in the Act) of the Investment Company or of any Money Manager for the Investment
Company without the prior written approval of the Investment Company. Investment
Company agrees that it will provide Money Manager with a list of brokers and
dealers which are "affiliated persons" of the Investment Company and its Money
Managers.
D. As used in this paragraph 6, "brokerage and research services"
shall have the meaning defined in Section 28(e)(3) of the Securities Exchange
Act of 1934.
7. Proxies. Unless FRIMCo gives written instructions to the contrary,
Money Manager shall vote all proxies solicited by or with respect to the issuers
of securities in which assets of the Fund Account may be invested. Money Manager
shall use its best good faith judgment to vote such proxies in a manner which
best serves the interests of the Company's shareholders.
8. Reports to Money Manager. Investment Company shall provide Money
Manager with such periodic reports concerning the status of the Fund Account as
Money Manager may reasonably request.
9. Fees for Services. The compensation of Money Manager for its services
under this Contract shall be calculated and paid by FRIMCo, acting as a
fiduciary for Investment Company with respect to the Internal Fee Funds, and for
shareholders with respect to the External Fee Funds, in accordance with the
attached Exhibit C. To the extent that the Investment Company, as principal,
has discharged or been relieved of, its duty to pay over to FRIMCo, by reason of
its payment of FRIMCo, in its capacity as a fiduciary for Investment Company,
any or all amounts payable to the Money Manager, the Money Manager agrees to
look to the agent for payment of
<PAGE>
amounts payable to Money Manager hereunder. Money Manager hereby agrees to
contact the Secretary of the Investment Company if payment is not received from
FRIMCo.
10. Other Investment Activities of Money Manager. Investment Company
acknowledges that Money Manager, or one or more of its affiliates, may have
investment responsibilities or render investment advice to, or perform other
investment advisory services for, other individuals or entities ("Affiliated
Accounts"). Subject to the provisions of paragraph 2 hereof, Investment Company
agrees that Money Manager or its affiliates may give advice or exercise
investment responsibility and take such other action with respect to other
Affiliated Accounts which may differ from advice given or the timing or nature
of action taken with respect to the Fund Account, provided that Money Manager
acts in good faith, and provided, further, that it is Money Manager's policy to
allocate, within its reasonable discretion, investment opportunities to the Fund
Account over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Fund Account and any specific investment restrictions applicable thereto.
Investment Company acknowledges that one or more of the Affiliated Accounts may
at any time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Fund Account may have an interest from
time to time, whether in transactions which may involve the Fund Account or
otherwise. Money Manager shall have no obligation to acquire for the Fund
Account a position in any investment which any Affiliated Account may acquire,
and the Investment Company shall have no first refusal, coinvestment or other
rights in respect of any such investment, either for the Fund Account or
otherwise.
11. Certificate of Authority. Investment Company, FRIMCo and Money Manager
shall furnish to each other from time to time certified copies of the
resolutions of their Board of Directors, Board of Trustees or executive
committee evidencing the authority of officers and employees who are authorized
to act on behalf of Investment Company, Fund Account, FRIMCo and/or Money
Manager.
12. Limitation of Liability. Money Manager shall not be liable for any
action taken, omitted or suffered to be taken by it in its reasonable judgment,
in good faith and believed by it to be authorized or within the discretion or
rights or powers conferred upon it by this Contract, or in accordance with (or
in the absence of) specific directions or instructions from Investment Company;
provided, however, that such acts or omissions shall not have resulted from
Money Manager's willful misfeasance, bad faith or gross negligence, violation of
the standard of care established by and applicable to Money Manager in its
actions under this Contract, or breach of its duty or of its obligations
hereunder.
13. Confidentiality. Subject to the right of each Money Manager and
Investment Company to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction over it, the parties hereto
shall treat as confidential all information pertaining to the Fund Account and
the actions of each Money Manager and Investment Company in respect thereof.
14. Assignment. No assignment, as that term is defined in Section 2(a)(4)
of the Act, of this Contract shall be made by Money Manager, and this Contract
shall terminate automatically in the event that it is assigned. Money Manager
shall notify Investment Company in writing sufficiently in advance of any
proposed change of control, as defined in Section 2(a)(9) of the Act, as will
enable Investment Company to consider whether an assignment as defined in
Section 2(a)(4) of the Act will occur, and to take the steps necessary to enter
into a new Contract with Money Manager.
<PAGE>
15. Representations, Warranties and Agreements of the Company. The
Investment Company represents, warrants and agrees that:
A. Money Manager has been duly appointed by the Board of Trustees of
the Investment Company to provide investment services to the Fund Account as
contemplated hereby.
B. Investment Company will deliver to Money Manager a true and
complete copy of its current prospectus as effective from time to time, such
other documents or instruments governing the investments of Fund Account, and
such other information as is necessary for Money Manager to carry out its
obligations under this Contract.
C. The organization of the Investment Company and the conduct of the
business of Fund(s) and the Fund Account as contemplated by this Contract,
complies, and shall at all times comply, with the requirements imposed upon the
Investment Company by applicable law.
16. Representations, Warranties and Agreements of Money Manager. Money
Manager represents, warrants and agrees that:
A. Money Manager is registered as an "investment adviser" under the
Investment Advisers Act of 1940 ("Advisers Act"); or it is a "bank" as defined
in Section 202(a)(2) of the Advisers Act or an "insurance company" as defined in
Section 202(a)(12) of the Advisers Act.
B. Money Manager will maintain, keep current and preserve on behalf
of the Investment Company, in the manner required or permitted by the Act, the
records identified in Exhibit B. Money Manager agrees that such records (other
than those required by No. 4 of Exhibit B) are the property of the Investment
Company, and will be surrendered to the Investment Company promptly upon
request.
C. Money Manager will adopt a written code of ethics complying with
the requirements of Rule 17j-1 under the Act, will provide to the Investment
Company a copy of the code of ethics and evidence of its adoption, and will make
such reports to the Investment Company as required by Rule 17j-1 under the Act.
D. Money Manager will notify the Investment Company of any changes
in the membership of its partnership within a reasonable time after such change.
E. Money Manager is not, except as set forth in Exhibit E hereto,
and will not become a party to any noncompete agreement or any other agreement,
arrangement, or understanding that would restrict, limit, or otherwise interfere
with the ability of FRIMCo or the Investment Company to employ or engage any
person or organization, now or in the future, to manage the Fund Account, any
other Investment Company assets, or any other assets managed by FRIMCo.
17. Amendment. This Contract may be amended at any time, but only by
written agreement between Money Manager and Investment Company, which amendment,
other than amendments to Exhibits A and B, must be approved by the Board of
Trustees of the Investment Company in the manner required by the Act.
18. Effective Date; Term. This Contract shall become effective for the
Fund(s) on the effective date set forth on page 1 of this Contract, and shall
continue in effect until the termination date set forth on page 1 of this
Contract. Thereafter, the Contract shall continue in effect for successive
annual periods only so long as its continuance has been specifically
<PAGE>
approved at least annually by the Board of Trustees of the Investment Company in
the manner required by the Act.
19. Termination. This Contract may be terminated by either party hereto,
without the payment of any penalty, immediately upon written notice to the other
party, but any such termination shall not affect the status, obligations, or
liabilities of any party hereto to the other.
20. Applicable Law. To the extent that state law shall not have been
preempted by the provisions of any laws of the United States heretofore or
hereafter enacted, as the same may be amended from time to time, this Contract
shall be administered, construed, and enforced according to the laws of the
State of Washington.
21. Notice of Liability Letter. Money Manager will notify, in writing, any
organization with whom it places orders for the execution of Investment Company
portfolio transactions that the organization will be: (i) executing portfolio
transactions of a Massachusetts business trust; and (ii) that the Investment
Company's Master Trust Agreement contains an express disclaimer of shareholder,
officer or Trustee liability for acts or obligations of the Investment Company
and requires that all obligations of the Investment Company be satisfied out of
its assets. Mailing a notice substantially similar to Exhibit D will be deemed
to be compliance with this section.
22. Limitation of Liability. The Master Trust Agreement dated July 26,
1984, as amended from time to time, establishing the Investment Company, which
is hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name Frank Russell Investment
Company means the Trustees from time to time serving (as Trustees but not
personally) under said Master Trust Agreement. It is expressly acknowledged and
agreed that the obligations of the Investment Company hereunder shall not be
binding upon any of the shareholders, Trustees, officers, employees or agents of
the Investment Company, personally, but shall bind only the trust property of
the Investment Company, as provided in its Master Trust Agreement. The execution
and delivery of this Agreement have been authorized by the Trustees of the
Investment Company and signed by the President of the Investment Company, acting
as such, and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Investment Company as provided in its Master
Trust Agreement.
<TABLE>
<S> <C>
(Money Manager) Frank Russell Investment Company
Frank Russell Investment Management Company,
as a fiduciary for Frank Russell Investment
Company
BY: BY:
------------------------------- --------------------------------
Lynn L. Anderson
President
DATE: DATE:
----------------------------- ------------------------------
</TABLE>
EXHIBITS: A. Operational Procedures (including Schedules 1, 2 and 3).
<PAGE>
B. Recordkeeping Requirements.
C. Fee Schedule.
D. Notice of Liability Letter.
E. Description of Portfolio Manager's Non-Compete Agreement.
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
PORTFOLIO MANAGEMENT CONTRACT
EXHIBIT A
OPERATIONAL PROCEDURES
A Money Manager ("MM") for Frank Russell Investment Company ("Investment
Company") should abide by certain rules and procedures in order to minimize
operational problems. MM will be required to have various records and files (as
required by regulatory agencies) at their offices. MM will have to maintain a
certain flow of information to State Street Bank & Trust Company ("SSB"), the
custodian bank for Investment Company.
MM will be required to furnish SSB with daily information as to executed trades.
SSB should receive this data no later than the morning following the day of the
trade. The necessary information should be transmitted to SSB (1) via facsimile
machine (the direct line to the facsimile machine is 617-985-3999) or (2) via an
electronic communications system ("System") approved by SSB that meets the
following criteria:
. The System must provide a method by which State Street can reasonably
ensure that each communication received by it through the System
actually originated from the MM.
. Only persons properly authorized by MM's senior operations officer shall
be authorized to access the System and enter information, and MM must
employ reasonable procedures to permit only authorized persons to have
access to the System.
. MM will create separate System files containing the daily executed
securities trade information with respect to each Investment Company
portfolio it manages, or MM will transmit separately the trades for each
such portfolio.
. SSB, through System or otherwise, will provide to MM prompt
certification or acknowledgment of SSB's receipt of each transmission by
MM of executed trade information.
. If the System malfunctions, MM will transmit all trade information via
facsimile transmission.
Upon receipt of brokers' confirmations, MM or SSB will be required to notify the
other party if any differences exist. The reporting of trades by the MM to SSB
must include the following:
. Purchase or Sale
. Security name
. Number of shares or principal amount
. Price per share or bond
. Commission rate per share or bond, or if a net trade
. Executing broker
. Trade date
. Settlement date
. If security is not eligible for DTC
. This information can be reported using your forms, if applicable
<PAGE>
When opening accounts with brokers for Investment Company, the account should be
a cash account. No margin accounts are to be maintained. The broker should be
advised to use SSB IDC's ID system number (No. 20997) to facilitate the receipt
of information by SSB. If this procedure is followed, DK problems will be held
down to a minimum and additional costs of security trades will not become an
important factor in doing business. Delivery and receipt instructions are
attached as Schedule 2.
MM will be required to submit to SSB a daily trade authorization report, either
through a System or, if a facsimile transmission is used, on a form signed by
two authorized individuals prior to settlement date and a list of authorized
persons with specimen signatures must have previously been sent to SSB (see
Schedule 3). The daily trade authorization report will contain information on
which SSB can rely to either accept delivery or deliver out of the account,
securities as per MM trades. If facsimile transmission is used, a preprinted
form will be supplied to MM by Investment Company, or MM can use an equivalent
form acceptable to SSB and Investment Company.
<PAGE>
SCHEDULE 1
Reserved for future use.
<PAGE>
SCHEDULE 2
Mailing Instructions and Delivery Instructions:
Confirmation Instructions (Copy of Broker Advice):
State Street Bank and Trust Company
Mutual Fund Services
1776 Heritage Drive (A4E)
North Quincy, MA 02171
Attn: Fund Name/Fund Number
For the account of Frank Russell Investment Company
(FUND NAME)
Delivery Instructions:
All DTC Eligible Securities:
Depository Trust Company (DTC) #997 Custodian Services
#20997 Agent Bank
All Ineligible DTC Securities (i.e., Commercial Paper)
State Street Bank and Trust Company
State Street Boston-Securities Corp.
61 Broadway
Main Concourse Level
New York, NY 10006
"VS Payment" (Federal Funds on Commercial Paper Only)
For the account of Frank Russell Investment Company
(FUND NAME)
All Government Issues:
Delivered through Book Entry of Federal Reserve
Bank to: State St Bos/Spec/Fund Name/Fund #
(VS Payment Federal Funds)
Foreign Holdings:
Please confer with Brad Payne, State Street Bank,
(Phone: 617-985-5389) to obtain delivery instructions
of the State Street Global Custody Network
<PAGE>
SCHEDULE 3
Example of Authorized Signature Letter
--------------------------------------
(To Be Typed on Your Letterhead)
[DATE]
State Street Bank and Trust
Mutual Fund Services
1776 Heritage Drive (A4E)
North Quincy, MA 02171
Attention: Frank Russell Investment Company Funds
RE: Persons Authorized To Execute Trades For Fund
--------------------
The following list of individuals are authorized to execute and report trade
instructions on behalf of the Fund. Should there be any changes to the
authorized persons listed below, we will notify you immediately of those
changes.
NAME SIGNATURE
---- ---------
Sincerely yours,
[Money Manager]
<PAGE>
EXHIBIT B
RECORDS TO BE MAINTAINED BY MONEY MANAGER
*1. A record of each brokerage order, and all other portfolio purchases and
sales, given by Money Manager or on behalf of the Investment Company for,
or in connection with, the purchase or sale of securities, whether executed
or unexecuted. Such records shall include:
A. The name of the broker,
B. The terms and conditions of the order, and of any modification or
cancellation thereof,
C. The time of entry or cancellation,
D. The price at which executed,
E. The time of receipt of report of execution, and
F. The name of the person who placed the order on behalf of the
Investment Company (1940 Act Rule, 31a-1(b)(5) and (6)).
*2. A record for each fiscal quarter, completed within ten (10) days after the
end of the quarter, showing specifically the basis or bases upon which the
allocation of orders for the purchase and sale of portfolio securities to
brokers or dealers, and the division of brokerage commissions or other
compensation on such purchase and sale orders. The record:
A. Shall include the consideration given to:
(i) the sale of shares of the Company
(ii) the supplying of services or benefits by brokers or dealers to:
(a) The Investment Company,
(b) The Investment Management Company,
(c) Yourself (i.e., the Money Manager), and
(d) Any person other than the foregoing
(iii) Any other considerations other than the technical qualifications
of the brokers and dealers as such.
B. Shall show the nature of the services or benefits made available.
C. Shall describe in detail the application of any general or specific
formula or other determinant used in arriving at such allocation of
purchase and sale orders and such division of brokerage commissions or
other compensation.
D. The identities of the persons responsible for making the determination
of such allocation and such division of brokerage commissions or other
compensation (1940 Act, Rule 31a-1(b)(9)).
*3. A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of
portfolio securities. Where an authorization is made by a committee or
group, a record shall be kept of the names of its members who participate
in the authorization. There shall be retained as part of this record any
memorandum, recommendation, or instruction supporting or authorizing the
<PAGE>
purchase or sale of portfolio securities (1940 Act, Rule 31a-1(b)(10)) and
such other information as is appropriate to support the authorization.**
*4. Such accounts, books and other documents as are required to be maintained
by registered investment advisers by rule adopted under Section 204 of the
Investment Advisers Act of 1940, to the extent such records are necessary
or appropriate to record Money Manager's transactions with the Investment
Company. (1940 Act, Rule 31a-1(f)).
- ---------------------------------
* Maintained as property of the Company pursuant to 1940 Act Rule 31a-3(a).
** Such information might include: the current Form 10-K, annual and quarterly
reports, press releases, reports by analysts and from brokerage firms
(including their recommendations, i.e., buy, sell, hold), and any internal
reports or portfolio manager reviews.
<PAGE>
EXHIBIT C
FEES FOR INVESTMENT MANAGEMENT SERVICES
MANAGER NAME
FUND NAME
For investment management services provided to the Fund Account under this
Agreement, Frank Russell Investment Management Company ("FRIMCo") as a fiduciary
for Investment Company shall pay Investment Manager a fee determined by
multiplying the Average Total Net Assets by the Applicable Percentage as defined
below. All fees shall be calculated and paid quarterly in arrears. Fees for
partial periods shall be prorated for the portion of the period for which
services were rendered. Fees for individual accounts shall be determined by
dividing the Average Account Net Assets by the Average Total Net Assets and
multiplying by the fee calculated above.
b.p. on the first $
------- -------------------
b.p. on the next $
------- -------------------
b.p. on the next $
------- -------------------
b.p. on all amounts thereafter
-------
(expressed as annualized rates)
For purposes of this Exhibit:
"Average Account Net Assets" for any quarter shall mean the average of the
assets in the Fund Account as reported by the custodian for the last business
day of each month ended in the calendar quarter.
"Average Total Net Assets" for any quarter shall mean the sum of the Average
Account Net Assets and the average for the same quarter of all other assets in
other accounts (calculated in the same manner as Average Account Net Assets)
managed by Investment Manager for the Frank Russell Group of Companies which use
a substantially equivalent investment strategy to that employed by Investment
Manager for the Fund Account as specified in Section 4 of this Agreement.
If the Investment Manager manages such other accounts, as defined above, and the
fee is based on the aggregate total value of those accounts, the Investment
Manager must include the value of each such other account on any investment
management invoice.
"Frank Russell Group of Companies" shall mean FRIMCo and any affiliated company
which controls, is controlled by or is under common control with FRIMCo.
INVESTMENT MANAGEMENT COMPANY
Portfolio Management Contract
DATE
<PAGE>
EXHIBIT D
Gentlemen:
Frank Russell Investment Company, a Massachusetts business trust (the "Trust")
and an SEC-registered investment company, has requested that I correspond with
you concerning purchases and/or sales of the Trust's portfolio instruments that
will be made on behalf of the Trust with your organization.
The Trust is required under its Master Trust Agreement to inform you that
although the Trust is organized as a Massachusetts business trust, the Trust's
Master Trust Agreement contains an express disclaimer of shareholder, officer
and trustee liability for acts or obligations of the Trust and requires that all
obligations of the Trust be satisfied out of its assets. The purpose of this
disclaimer is for the Trust's shareholders, officers and Trustees to have the
same protection against being liable for the Trust's obligations as
shareholders, officers and Directors of a corporation. The responsibility of the
Trust for its transactions with you is not changed by this notice. No action is
needed on your part in response to this notice.
Should you have any questions concerning the information contained herein,
please contact Gregory J. Lyons, Associate General Counsel of the Trust, at
(206) 596-2406.
Sincerely yours,
<PAGE>
EXHIBIT E
DESCRIPTION OF PORTFOLIO MANAGER'S NON-COMPETE AGREEMENT, IF ANY.
<PAGE>
EXHIBIT 99-11(b)
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary or
any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-fact,
each with the power of substitution, for him or her in any and all capacities,
to sign any amendments to Securities and Exchange Commission registration
statements of Frank Russell Investment Company, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ Lynn L. Anderson
- -----------------------------------
Lynn L. Anderson
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ Paul E. Anderson
- -----------------------------------
Paul E. Anderson
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ Paul Anton
- -----------------------------------
Paul Anton, PhD
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ William E. Baxter
- -----------------------------------
William E. Baxter
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ Lee C. Gingrich
- -----------------------------------
Lee C. Gingrich
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ Eleanor W. Palmer
- -----------------------------------
Eleanor W. Palmer
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
LIMITED POWER OF ATTORNEY
WITH RESPECT TO
AMENDMENTS TO S.E.C. REGISTRATION STATEMENTS OF
FRANK RUSSELL INVESTMENT COMPANY
Know all men by these presents that the undersigned hereby constitutes and
appoints the President, the Treasurer, any Assistant Treasurer, the Secretary,
or any Assistant Secretary of FRIC, and each of them, his or her attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to Securities and Exchange Commission
registration statements of Frank Russell Investment Company, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
/s/ George F. Russell, Jr.
- -----------------------------------
George F. Russell, Jr.
Trustee:
Frank Russell Investment Company
January 15, 1996
<PAGE>
EXHIBIT 99-13
October 5, 1981
Mr. Alfred C. Morley, President
Frank Russell Investment Company
1250 First Interstate Plaza
Tacoma, WA 98402
Re: Minimum Critical Capital Required by Section 14(a) of Investment Company
Act of 1940
Dear Mr. Morley:
On October 5, 1981 we have purchased 100,000 shares of Frank Russell Investment
Company's Money Market Fund to provide Frank Russell Investment Company with the
minimum capital required by the Act. This purchase has been made for investment
purposes without any present intention of redeeming or reselling the shares.
Sincerely yours,
/s/ George F. Russell, Jr.
- -----------------------------------
George F. Russell, Jr.
GFR:jb
cc: Jeannette R. Kirschman, Treasurer
<PAGE>
EXHIBIT 99.24(a)
Equity Balanced Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- --------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 80.9%
Diversified Equity Fund 22,124 $ 965,494
Quantitative Equity Fund 26,217 964,263
Real Estate Securities Fund 5,205 160,614
Special Growth Fund 7,097 324,497
-----------
2,414,868
-----------
International Equities - 26.8%
Emerging Markets Fund 13,628 160,677
International Securities Fund 11,704 640,069
-----------
800,746
-----------
Total Investments - 107.7%
(identified cost $3,432,889)(a) 3,215,614
-----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,709
Other assets 69,218
Bank overdraft (129,389)
Other liabilities (Note 4) (200,990)
-----------
Total Other Assets and Liabilities, Net - (7.7%) (230,452)
-----------
Net Assets - 100.0% $ 2,985,162
===========
</TABLE>
<TABLE>
<CAPTION>
Market
Value
--------
<S> <C>
Net Assets consist of:
Accumulated distributions in excess
of net investment income $ (800)
Accumulated distributions in excess
of net realized gains (40,022)
Unrealized appreciation (depreciation)
on investments (217,275)
Shares of beneficial interest 3,381
Additional paid-in capital 3,239,878
-----------
Net Assets $ 2,985,162
===========
Net Asset Value, offering and redemption price
per share ($2,985,162 divided by 338,132 shares
of $.01 par value shares of beneficial
interest outstanding) $ 8.83
===========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements
8 Equity Balanced Strategy Fund
<PAGE>
Equity Balanced Strategy Fund
Statement of Operations
For the Period September 30, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ..................................... $ 9,147
Expenses (Notes 2 and 4):
Management fees .................................................. $ 1,140
Professional fees ................................................ 11,242
Registration fees ................................................ 48,806
Shareholder servicing fees ....................................... 1,064
Amortization of deferred organization expenses ................... 1,648
Miscellaneous .................................................... 100
---------
Expenses before reductions ....................................... 64,000
Expense reductions (Note 4) ...................................... (62,936)
---------
Total Expenses ............................................................... 1,064
-----------
Net investment income ............................................................ 8,083
-----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ...................................................... (40,012)
Capital gain distributions from Underlying Funds ................. 242,030 202,018
---------
Net change in unrealized appreciation or depreciation of investments.............. (217,275)
-----------
Net gain (loss) on investments ................................................... (15,257)
-----------
Net increase (decrease) in net assets resulting from operations .................. $ (7,174)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Balanced Strategy Fund 9
<PAGE>
Equity Balanced Strategy Fund
Statement of Changes in Net Assets
For the Period September 30, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.................................................................... $ 8,083
Net realized gain (loss)................................................................. 202,018
Net change in unrealized appreciation or depreciation.................................... (217,275)
-----------
Net increase (decrease) in net assets resulting from operations........................ (7,174)
-----------
From Distributions to Shareholders:
Net investment income.................................................................... (8,083)
In excess of net investment income....................................................... (79,767)
Net realized gain on investments......................................................... (163,073)
-----------
Total Distributions to Shareholders.................................................... (250,923)
-----------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5).............. 3,243,259
-----------
Total Net Increase (Decrease) in Net Assets................................................ 2,985,162
Net Assets
Beginning of period...................................................................... --
-----------
End of period (including accumulated distributions in excess of
net investment income of $800)......................................................... $ 2,985,162
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 Equity Balanced Strategy Fund
<PAGE>
Equity Balanced Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
-------------
<S> <C>
Net Asset Value, Beginning of Period ............................ $ 10.00
-------------
Income From Investment Operations:
Net investment income ........................................ .09
Capital gain distributions from Underlying Funds ............. 2.73
Net realized and unrealized gain (loss) on investments ....... (3.06)
-------------
Total Income From Investment Operations ................... (.24)
-------------
Less Distributions:
Net investment income ........................................ (.09)
In excess of net investment income ........................... (.24)
Net realized gain on investments ............................. (.60)
-------------
Total Distributions ....................................... (.93)
-------------
Net Asset Value, End of Period .................................. $ 8.83
=============
Total Return (%)(a) ............................................. (2.42)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ..................... 2,985
Ratios to average net assets (%):
Operating expenses, net (b)(c) ............................ .25
Operating expenses, gross (c)(d) .......................... 358
Net investment income (d) ................................. .45
Portfolio turnover rate (%)(b) ............................... 48.30
</TABLE>
* For the period September 30, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 30, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Equity Balanced Strategy Fund 11
<PAGE>
Aggressive Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- --------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 61.7%
Diversified Equity Fund 27,156 $1,185,069
Quantitative Equity Fund 32,180 1,183,567
Real Estate Securities Fund 9,126 281,631
Special Growth Fund 13,688 625,818
----------
3,276,085
----------
International Equities - 25.4%
Emerging Markets Fund 23,897 281,745
International Securities Fund 19,497 1,066,282
----------
1,348,027
----------
Bonds - 19.1%
Multistrategy Bond Fund 98,877 1,014,483
----------
Total Investments - 106.2%
(identified cost $5,950,702)(a) 5,638,595
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,478
Other assets 108,296
Bank overdraft (154,179)
Other liabilities (Note 4) (315,916)
----------
Total Other Assets and Liabilities, Net - (6.2%) (331,321)
----------
Net Assets - 100.0% $5,307,274
==========
</TABLE>
<TABLE>
<CAPTION>
Market
Value
--------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 2,716
Accumulated distributions in excess of
net realized gains (68,480)
Unrealized appreciation (depreciation)
on investments (312,107)
Shares of beneficial interest 5,805
Additional paid-in capital 5,679,340
----------
Net Assets $5,307,274
==========
Net Asset Value, offering and redemption price
per share: ($5,307,274 divided by 580,464
shares of $.01 par value shares of beneficial
interest outstanding) $ 9.14
==========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
12 Aggressive Strategy Fund
<PAGE>
Aggressive Strategy Fund
Statement of Operations
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................. $ 24,429
Expenses (Notes 2 and 4):
Management fees .................................................... $ 1,727
Professional fees .................................................. 13,368
Registration fees .................................................. 49,109
Shareholder servicing fees ......................................... 1,651
Amortization of deferred organization expenses ..................... 1,878
Miscellaneous ...................................................... 100
----------
Expenses before reductions ......................................... 67,833
Expense reductions (Note 4) ........................................ (66,182)
----------
Total Expenses ..................................................................... 1,651
------------
Net investment income .................................................................. 22,778
------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................ (68,437)
Capital gain distributions from Underlying Funds ................... 372,848 304,411
----------
Net change in unrealized appreciation or depreciation of investments ................... (312,107)
------------
Net gain (loss) on investments ......................................................... (7,696)
------------
Net increase (decrease) in net assets resulting from operations ........................ $ 15,082
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Aggressive Strategy Fund 13
<PAGE>
Aggressive Strategy Fund
Statement of Changes in Net Assets
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income...................................................................... $ 22,778
Net realized gain (loss)................................................................... 304,411
Net change in unrealized appreciation or depreciation...................................... (312,107)
-----------
Net increase (decrease) in net assets resulting from operations.......................... 15,082
-----------
From Distributions to Shareholders:
Net investment income...................................................................... (22,778)
In excess of net investment income......................................................... (119,617)
Net realized gain on investments........................................................... (250,558)
-----------
Total Distributions to Shareholders...................................................... (392,953)
-----------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5)................ 5,685,145
-----------
Total Net Increase (Decrease) in Net Assets.................................................. 5,307,274
Net Assets
Beginning of period........................................................................ --
-----------
End of period (including undistributed net investment income of $2,716).................... $ 5,307,274
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 Aggressive Strategy Fund
<PAGE>
Aggressive Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
----------
<S> <C>
Net Asset Value, Beginning of Period........................... $ 10.00
----------
Income From Investment Operations:
Net investment income........................................ .10
Capital gain distributions from Underlying Funds............. 1.66
Net realized and unrealized gain (loss) on investments....... (1.77)
----------
Total Income From Investment Operations.................... (.01)
----------
Less Distributions:
Net investment income........................................ (.10)
In excess of net investment income........................... (.21)
Net realized gain on investments............................. (.54)
----------
Total Distributions........................................ (.85)
Net Asset Value, End of Period................................. $ 9.14
==========
Total Return (%)(a)............................................ (.19)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..................... 5,307
Ratios to average net assets (%):
Operating expenses, net (b)(c)............................. .25
Operating expenses, gross (c)(d)........................... 2.88
Net investment income (d).................................. .97
Portfolio turnover rate (%)(b)............................... 56.88
</TABLE>
* For the period September 16, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 16, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Aggressive Strategy Fund 15
<PAGE>
Balanced Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
----------- ----------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 44.1%
Diversified Equity Fund 13,687 $ 597,294
Quantitative Equity Fund 16,231 596,990
Real Estate Securities Fund 6,013 185,556
Special Growth Fund 4,122 188,468
----------
1,568,308
----------
International Equities - 17.6%
Emerging Markets Fund 9,488 111,860
International Securities Fund 9,397 513,949
----------
625,809
----------
Bonds - 42.3%
Diversified Bond Fund 39,232 919,195
Multistrategy Bond Fund 57,004 584,857
----------
1,504,052
Total Investments - 104.0%
(identified cost $3,862,686)(a) 3,698,169
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,478
Other assets 34,224
Liabilities (Note 4) (208,375)
----------
Total Other Assets and Liabilities, Net-(4.0%) (143,673)
----------
Net Assets - 100.0% $3,554,496
==========
<CAPTION>
Market
Value
-----------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 5,633
Accumulated distributions in excess of
net realized gains (16,916)
Unrealized appreciation (depreciation)
on investments (164,517)
Shares of beneficial interest 3,756
Additional paid-in capital 3,726,540
-----------
Net Assets $ 3,554,496
===========
Net Asset Value, offering and redemption price per share:
($3,554,496 divided by 375,568 shares of $.01 par value
shares of beneficial interest outstanding) $ 9.46
===========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
16 Balanced Strategy Fund
<PAGE>
Balanced Strategy Fund
Statement of Operations
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................. $ 22,231
Expenses (Notes 2 and 4):
Management fees ........................................................ $ 1,187
Professional fees ...................................................... 12,044
Registration fees ...................................................... 48,934
Shareholder servicing fees ............................................. 1,150
Amortization of deferred organization expenses ......................... 1,878
Miscellaneous .......................................................... 100
-----------
Expenses before reductions ............................................. 65,293
Expense reductions (Note 4) ............................................ (64,143)
-----------
Total Expenses ..................................................................... 1,150
-----------
Net investment income .................................................................. 21,081
-----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................................ (16,936)
Capital gain distributions from Underlying Funds ....................... 191,533 174,597
-----------
Net change in unrealized appreciation or depreciation of investments ................... (164,517)
-----------
Net gain (loss) on investments ......................................................... 10,080
-----------
Net increase (decrease) in net assets resulting from operations ........................ $ 31,161
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Balanced Strategy Fund 17
<PAGE>
Balanced Strategy Fund
Statement of Changes in Net Assets
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income....................................................................... $ 21,081
Net realized gain (loss).................................................................... 174,597
Net change in unrealized appreciation or depreciation....................................... (164,517)
--------------
Net increase (decrease) in net assets resulting from operations........................... 31,161
--------------
From Distributions to Shareholders:
Net investment income....................................................................... (21,081)
In excess of net investment income.......................................................... (56,712)
Net realized gain on investments............................................................ (129,168)
--------------
Total Distributions to Shareholders....................................................... (206,961)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5)................. 3,730,296
--------------
Total Net Increase (Decrease) in Net Assets................................................... 3,554,496
Net Assets
Beginning of period......................................................................... --
--------------
End of period (including undistributed net investment income of $5,633)..................... $ 3,554,496
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 Balanced Strategy Fund
<PAGE>
Balanced Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
------------
<S> <C>
Net Asset Value, Beginning of Period ......................... $ 10.00
------------
Income From Investment Operations:
Net investment income ...................................... .09
Capital gain distributions from Underlying Funds ........... .85
Net realized and unrealized gain (loss) on investments ..... (.83)
------------
Total Income From Investment Operations .................. .11
------------
Less Distributions:
Net investment income ...................................... (.09)
In excess of net investment income ......................... (.15)
Net realized gain on investments ........................... (.41)
------------
Total Distributions ...................................... (.65)
------------
Net Asset Value, End of Period ............................... $ 9.46
============
Total Return (%)(a) .......................................... 1.04
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ................... 3,554
Ratios to average net assets (%):
Operating expenses, net (b)(c) ........................... .25
Operating expenses, gross (c)(d) ......................... 4.03
Net investment income (d) ................................ 1.30
Portfolio turnover rate (%)(b) ............................. 29.58
</TABLE>
* For the period September 16, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 16, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Balanced Strategy Fund 19
<PAGE>
Moderate Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- ----------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 30.6%
Diversified Equity Fund 1,028 $ 44,865
Quantitative Equity Fund 1,218 44,795
Real Estate Securities Fund 650 20,051
Special Growth Fund 179 8,188
----------
117,899
----------
International Equities - 11.4%
Emerging Markets Fund 691 8,150
International Securities Fund 654 35,765
----------
43,915
----------
Bonds - 61.5%
Diversified Bond Fund 4,502 105,478
Volatility Constrained Bond Fund 6,881 131,144
----------
236,622
----------
Total Investments - 103.5%
(identified cost $411,829)(a) 398,436
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,744
Other assets 37,716
Liabilities (Note 4) (81,769)
----------
Total Other Assets and Liabilities, Net - (3.5%) (13,309)
----------
Net Assets - 100.0% $ 385,127
==========
<CAPTION>
Market
Value
----------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 1,191
Accumulated distributions in excess of
net realized gains (438)
Unrealized appreciation (depreciation)
on investments (13,393)
Shares of beneficial interest 401
Additional paid-in capital 397,366
----------
Net Assets $ 385,127
==========
Net Asset Value, offering and redemption price per share
($385,127 divided by 40,074 shares of $.01 par value
shares of beneficial interest outstanding) $ 9.61
==========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
20 Moderate Strategy Fund
<PAGE>
Moderate Strategy Fund
Statement of Operations
For the Period October 2, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ..................................... $ 2,562
Expenses (Notes 2 and 4):
Management fees .................................................... $ 151
Professional fees .................................................. 6,822
Registration fees .................................................. 48,301
Shareholder servicing fees ......................................... 141
Amortization of deferred organization expenses ..................... 1,613
Miscellaneous ...................................................... 50
--------
Expenses before reductions ......................................... 57,078
Expense reductions (Note 4) ........................................ (56,937)
--------
Total Expenses ............................................................... 141
---------
Net investment income .......................................................... 2,421
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................ (439)
Capital gain distributions from Underlying Funds ................... 13,286 12,847
--------
Net change in unrealized appreciation or depreciation of investments ............. (13,393)
---------
Net gain (loss) on investments ................................................... (546)
---------
Net increase (decrease) in net assets resulting from operations .................. $ 1,875
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Moderate Strategy Fund 21
<PAGE>
Moderate Strategy Fund
Statement of Changes in Net Assets
For the Period October 2, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ..................................................... $ 2,421
Net realized gain (loss) .................................................. 12,847
Net change in unrealized appreciation or depreciation ..................... (13,393)
---------
Net increase (decrease) in net assets resulting from operations ......... 1,875
---------
From Distributions to Shareholders:
Net investment income ..................................................... (2,421)
In excess of net investment income ........................................ (2,985)
Net realized gain on investments .......................................... (9,109)
---------
Total Distributions to Shareholders ..................................... (14,515)
---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5) 397,767
---------
Total Net Increase (Decrease) in Net Assets ................................. 385,127
Net Assets
Beginning of period ....................................................... --
---------
End of period (including undistributed net investment income of $1,191) ... $ 385,127
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
22 Moderate Strategy Fund
<PAGE>
Moderate Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
-----------
<S> <C>
Net Asset Value, Beginning of Period ........................... $ 10.00
-----------
Income From Investment Operations:
Net investment income ........................................ .07
Capital gain distributions from Underlying Funds ............. .38
Net realized and unrealized gain (loss) on investments ....... (.46)
----------
Total Income From Investment Operations .................... (.01)
----------
Less Distributions:
Net investment income ........................................ (.07)
In excess of net investment income ........................... (.07)
Net realized gain on investments ............................. (.24)
----------
Total Distributions ........................................ (.38)
----------
Net Asset Value, End of Period ................................. $ 9.61
==========
Total Return (%)(a) ............................................ (.06)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ..................... 385
Ratios to average net assets (%):
Operating expenses, net (b)(c) ............................. .25
Operating expenses, gross (c)(d) ........................... --
Net investment income (e) .................................. 1.01
Portfolio turnover rate (%)(b) ............................... 9.66
</TABLE>
* For the period October 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 2, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio is not meaningful due to the Fund's short period of operation.
(e) The ratio has not been annualized due to the Fund's short period of
operation.
Moderate Strategy Fund 23
<PAGE>
Conservative Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- ---------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 16.7%
Diversified Equity Fund 27 $ 1,182
Quantitative Equity Fund 38 1,414
Real Estate Securities Fund 39 1,189
---------
3,785
---------
International Equities - 6.2%
Emerging Markets Fund 20 239
International Securities Fund 21 1,162
---------
1,401
---------
Bonds - 79.2%
Diversified Bond Fund 176 4,125
Volatility Constrained Bond Fund 723 13,789
---------
17,914
Total Investments - 102.1%
(identified cost $23,440)(a) 23,100
Other Assets and Liabilities,
Net - (2.1%) (480)
---------
Net Assets - 100.0% $ 22,620
=========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
24 Conservative Strategy Fund
<PAGE>
Conservative Strategy Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C>
Assets
Investments at market (identified cost $23,440)(Note 2) ............... $ 23,100
Receivable from manager (Note 4) ...................................... 72,645
---------
Total Assets ...................................................... 95,745
Liabilities
Payables:
Accrued fees to affiliates (Note 4) ...................... $ 66,072
Other accrued expenses ................................... 7,053
---------
Total Liabilities ................................................. 73,125
---------
Net Assets ............................................................ $ 22,620
=========
Net Assets consist of:
Undistributed net investment income ................................... $ 78
Unrealized appreciation (depreciation) on investments ................. (340)
Shares of beneficial interest ......................................... 23
Additional paid-in capital ............................................ 22,859
---------
Net Assets ............................................................ $ 22,620
=========
Net Asset Value, offering and redemption price per share:
($22,620 divided by 2,289 shares of $ 01 par value
shares of beneficial interest outstanding) ............................ $ 9.88
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Conservative Strategy Fund 25
<PAGE>
Conservative Strategy Fund
Statement of Operations
For the Period November 7, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................... $ 157
Expenses(Notes 2 and 4):
Management fees .............................................................. $ 8
Professional fees ............................................................ 6,523
Registration fees ............................................................ 48,237
Shareholder servicing fees ................................................... 8
Amortization of deferred organization expenses ............................... 32,357
Miscellaneous ................................................................ 51
--------
Expenses before reductions ................................................... 87,184
Expense reductions (Note 4) .................................................. (87,176)
--------
Total Expenses ......................................................................... 8
--------
Net investment income ...................................................................... 149
--------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from capital gain distributions from Underlying Funds.............. 501
Net change in unrealized appreciation or depreciation of investments ....................... (340)
--------
Net gain (loss) on investments ............................................................. 161
--------
Net increase (decrease) in net assets resulting from operations ............................ $ 310
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26 Conservative Strategy Fund
<PAGE>
Conservative Strategy Fund
Statement of Changes in Net Assets
For the Period November 7, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ...................................................... $ 149
Net realized gain (loss) ................................................... 501
Net change in unrealized appreciation or depreciation ...................... (340)
--------
Net increase (decrease) in net assets resulting from operations .......... 310
--------
From Distributions to Shareholders:
Net investment income ...................................................... (149)
In excess of net investment income ......................................... (72)
Net realized gain on investments ........................................... (351)
--------
Total Distributions to Shareholders ...................................... (572)
--------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5). 22,882
--------
Total Net Increase (Decrease) in Net Assets .................................. 22,620
Net Assets
Beginning of period ........................................................ --
--------
End of period (including undistributed net investment income of $78) ....... $ 22,620
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Conservative Strategy Fund 27
<PAGE>
Conservative Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
----------
<S> <C>
Net Asset Value, Beginning of Period .............................. $ 10.00
---------
Income From Investment Operations:
Net investment income ........................................... .07
Capital gain distributions from Underlying Funds ................ .23
Net realized and unrealized gain (loss) on investments .......... (.16)
---------
Total Income From Investment Operations ....................... .14
---------
Less Distributions:
Net investment income ........................................... (.07)
In excess of net investment income .............................. (.03)
Net realized gain on investments ................................ (.16)
---------
Total Distributions ........................................... (.26)
---------
Net Asset Value, End of Period .................................... $ 9.88
=========
Total Return (%)(a) ............................................... 1.36
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................ 23
Ratios to average net assets (%):
Operating expenses, net (b)(c) ................................ .25
Operating expenses, gross (c)(d) .............................. --
Net investment income (e) ..................................... .67
Portfolio turnover rate (%)(b) .................................. 0.00
</TABLE>
* For the period November 7, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period November 7, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio is not meaningful due to the Fund's short period of operation.
(e) The ratio has not been annualized due to the Fund's short period of
operation.
28 Conservative Strategy Fund
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on five LifePoints(R) Funds, each of which
has distinct investment objectives and strategies. The Investment Company is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. It is organized and
operates as a Massachusetts business trust under an amended master trust
agreement dated July 26, 1984. The Investment Company's master trust
agreement permits the Board of Trustees to issue an unlimited number of full
and fractional Class E shares of beneficial interest at a $.01 par value. The
Investment Company has available Class D shares of the Fund as of August 18,
1997; however, shares have not been offered on this class as of the date of
these financial statements.
Each of the LifePoints Funds allocates its assets by investing in a
combination of Class S shares of the Investment Company's portfolios (the
"Underlying Funds"). Each of the LifePoints Funds will adjust its investments
within set limits based on Frank Russell Investment Management Company's
("FRIMCo" or "Manager") 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 percentages specified
below: LifePoints(R) Funds
<TABLE>
<CAPTION>
Asset Allocation Ranges
--------------------------------------------------------------------
Equity
Balanced Aggressive Balanced Moderate Conservative
Strategy Strategy Strategy Strategy Strategy
Asset Class/Underlying Funds Fund Fund Fund Fund Fund
- ---------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equities
US Equities
Diversified Equity 30% 21% 16% 11% 5%
Special Growth 10 11 5 2 -
Quantitative Equity 30 21 16 11 6
Real Estate Securities 5 5 5 5 5
International Equities
International Securities 20 19 14 9 5
Emerging Markets 5 5 3 2 1
Bonds
Diversified Bond - - 25 27 18
Volatility Constrained Bond - - - 33 60
Multistrategy Bond - 18 16 - -
</TABLE>
Objectives of the Underlying Funds:
Diversified Equity Fund: To provide income and capital growth by investing
principally in equity securities.
Special Growth Fund: 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.
Quantitative Equity Fund: 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.
Real Estate Securities Fund: To achieve a high level of total return
generated through above-average current income, while maintaining the
potential for capital appreciation by investing primarily in the equity
securities of companies in the real estate industry.
Notes to Financial Statements 29
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
International Securities Fund: 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.
Emerging Markets Fund: To maximize total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from developed market international portfolios.
Diversified Bond Fund: To provide effective diversification against equities
and a stable level of cash flow by investing in fixed-income securities.
Volatility Constrained Bond Fund: To preserve capital and generate current
income consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
Multistrategy Bond Fund: 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.
Financial statements of the Underlying Funds can be obtained by calling the
Office of Shareholder Inquiries at (800) RUSSEL4, (800) 787-7354.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
followed by the Funds in the preparation of these financial statements.
Security valuation: Investments in Underlying Funds are valued at the net
asset value per share of each Underlying Fund as of the close of regular
trading on the New York Stock Exchange. Short-term investments having a
maturity of sixty days or less are valued at amortized cost.
Investment transactions: Securities transactions of the Underlying Funds are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of specific identified cost.
Investment income: Distributions of income and capital gains from the
Underling Funds are recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds.
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
--------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Equity Balanced Strategy $ 3,432,889 $ -- $ (217,275) $ (217,275)
Aggressive Strategy 5,950,702 -- (312,107) (312,107)
Balanced Strategy 3,862,686 437 (164,954) (164,517)
Moderate Strategy 411,829 192 (13,585) (13,393)
Conservative Strategy 23,440 16 (356) (340)
</TABLE>
30 Notes to Financial Statements
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
Dividends and distributions to shareholders: Income dividends are generally
declared and paid quarterly. Capital gain distributions are generally
declared and paid annually. An additional distribution may be paid by the
Funds to avoid imposition of federal income tax on any remaining
undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from GAAP. As a result, net investment income and net realized
gain (or loss) from investment transactions for a reporting period may differ
significantly from distributions during such period. The differences between
tax regulations and GAAP relate primarily to certain securities sold at a
loss. Accordingly, the Funds may periodically make reclassifications among
certain of their capital accounts without impacting their net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized
Income Gain (Loss)
---------------- ---------------
<S> <C> <C>
Equity Balanced Strategy $ 78,967 $ (78,967)
Aggressive Strategy 122,333 (122,333)
Balanced Strategy 62,345 (62,345)
Moderate Strategy 2,985 (2,985)
Conservative Strategy 150 (150)
</TABLE>
Expenses: The Funds incur shareholder servicing fees, management fees, and
other operating expenses other than those expressly assumed by FRIMCo.
Certain expenses not directly attributable to any one Fund but applicable to
all Funds, such as Trustee fees, insurance, legal and other expenses will be
allocated to each Fund based on each Fund's net assets. Expenses included in
the accompanying financial statements reflect the expenses of each Fund and
do not include any expenses associated with the Underlying Funds.
Deferred organization expenses: Organization and initial registration costs
of the Equity Balanced Strategy Fund, Aggressive Strategy Fund, Balanced
Strategy Fund, and Moderate Strategy Fund have been deferred and are being
amortized over 60 months on a straight-line basis.
3. Investment Transactions
Securities: During the period ended December 31, 1997, purchases and sales of
the Underlying Funds were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Equity Balanced Strategy $ 3,674,885 $ 201,985
Aggressive Strategy 6,454,589 435,450
Balanced Strategy 4,031,433 151,810
Moderate Strategy 418,874 6,606
Conservative Strategy 23,440 --
</TABLE>
4. Related Parties
Manager: The Investment Company has an investment advisory agreement with the
Manager under which the Manager directs the investments of the Fund in
accordance with its investment objectives, policies, and limitations. The
Funds are charged a fee by the Manager equal to 0.25% of average daily net
assets. For the period ended December 31, 1997, the Manager voluntarily
agreed to waive the management fee of 0.25% of average daily net assets.
The manager has voluntarily agreed to reimburse the Funds for all expenses
excluding manager fees and shareholder servicing fees.
Notes to Financial Statements 31
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
The waivers and reimbursements as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Management Reimbursed Total Expense
Fees Waived by FRIMCo Reductions
-------------- ---------- ---------------
<S> <C> <C> <C>
Equity Balanced Strategy $ 1,140 $ 61,796 $ 62,936
Aggressive Strategy 1,727 64,455 66,182
Balanced Strategy 1,187 62,956 64,143
Moderate Strategy 151 56,786 56,937
Conservative Strategy 8 87,168 87,176
</TABLE>
Transfer agent: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company. The Funds were not charged a fee
for this service for the period ended December 31, 1997.
Distributor and Shareholder Servicing: Pursuant to the Distribution Agreement
with Investment Company, Russell Fund Distributors, Inc. ("Distributor"), a
wholly owned subsidiary of the Administrator, serves as distributor for all
Investment Company portfolio shares, including the Funds.
The Investment Company has adopted a Shareholder Services Plan ("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 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 0.25% of the average daily net assets of a LifePoints Fund's
Shares.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Other Fees
Payable to Shareholder
Manager Servicing Fees Totals
------------ -------------- ------------
<S> <C> <C> <C>
Equity Balanced Strategy $ 54,732 $ 1,064 $ 55,796
Aggressive Strategy 50,356 1,651 52,007
Balanced Strategy 51,854 1,150 53,004
Moderate Strategy 60,007 141 60,148
Conservative Strategy 66,064 8 66,072
------------ -------------- ------------
$ 283,013 $ 4,014 $ 287,027
============ ============== ============
</TABLE>
Receivable from Manager for reimbursement of expenses as of December 31, 1997
were as follows:
<TABLE>
<S> <C>
Equity Balanced Strategy $ 35,941
Aggressive Strategy 34,224
Balanced Strategy 34,224
Moderate Strategy 36,206
Conservative Strategy 72,645
------------
$ 213,240
============
</TABLE>
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the period ended December
31, 1997, and were allocated to each Fund on a pro rata basis, including 23
other affiliated funds not represented herein. The LifePoints Funds have been
reimbursed by FRIMCo for this expense.
32 Notes to Financial Statements
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
5. Fund Share Transactions
Share transactions for the period ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Shares Dollars
------------ ------------
<S> <C> <C>
Equity Balanced Strategy (b)
Proceeds from Shares Sold 313,780 $ 3,028,465
Proceeds from reinvestment
of distributions 27,548 244,906
Payments for shares redeemed (3,196) (30,112)
------------ ------------
Total net increase (decrease) 338,132 $ 3,243,259
============ ============
Aggressive Strategy (a)
Proceeds from Shares Sold 552,413 $ 5,431,416
Proceeds from reinvestment
of distributions 35,751 329,624
Payments for shares redeemed (7,700) (75,895)
------------ ------------
Total net increase (decrease) 580,464 $ 5,685,145
============ ============
Balanced Strategy (a)
Proceeds from Shares Sold 358,855 $ 3,571,839
Proceeds from reinvestment
of distributions 19,490 185,933
Payments for shares redeemed (2,777) (27,476)
------------ ------------
Total net increase (decrease) 375,568 $ 3,730,296
============ ============
Moderate Strategy (c)
Proceeds from Shares Sold 39,036 $ 387,800
Proceeds from reinvestment
of distributions 1,213 11,694
Payments for shares redeemed (175) (1,727)
------------ ------------
Total net increase (decrease) 40,074 $ 397,767
============ ============
Conservative Strategy (d)
Proceeds from Shares Sold 2,231 $ 22,309
Proceeds from reinvestment
of distributions 58 573
------------ ------------
Total net increase (decrease) 2,289 $ 22,882
============ ============
</TABLE>
(a) For the period September 16, 1997 (commencement of sale of shares) to
December 31, 1997.
(b) For the period September 30, 1997 (commencement of sale of shares) to
December 31, 1997.
(c) For the period October 2, 1997 (commencement of sale of shares) to
December 31, 1997.
(d) For the period November 7, 1997 (commencement of sale of shares) to
December 31, 1997.
6. Beneficial Interest
As of December 31, 1997 the following Funds have one or more shareholders
with beneficial interest of greater than 10% of the total outstanding shares
of each respective Fund: Equity Balanced Strategy 24.8%, and 16.7%,
Aggressive Strategy 19.2% and 11.6%, Balanced Strategy 27.6%, Moderate
Strategy 27.3%, 19.0%, and 17.7%, and Conservative Strategy 98.5%.
Notes to Financial Statements 33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 32
<NAME> AGGRESSIVE STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-16-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,685
<SHARES-COMMON-STOCK> 580
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 68
<ACCUM-APPREC-OR-DEPREC> (312)
<NET-ASSETS> 5,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 24
<EXPENSES-NET> 2
<NET-INVESTMENT-INCOME> 23
<REALIZED-GAINS-CURRENT> 304
<APPREC-INCREASE-CURRENT> (312)
<NET-CHANGE-FROM-OPS> 15
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23
<DISTRIBUTIONS-OF-GAINS> 370
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 552
<NUMBER-OF-SHARES-REDEEMED> 8
<SHARES-REINVESTED> 36
<NET-CHANGE-IN-ASSETS> 5,307
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68
<AVERAGE-NET-ASSETS> 2,355
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> .10
<PER-SHARE-DISTRIBUTIONS> .75
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.14
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 33
<NAME> BALANCED STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-16-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,730
<SHARES-COMMON-STOCK> 376
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 17
<ACCUM-APPREC-OR-DEPREC> (165)
<NET-ASSETS> 3,554
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 22
<EXPENSES-NET> 1
<NET-INVESTMENT-INCOME> 21
<REALIZED-GAINS-CURRENT> 175
<APPREC-INCREASE-CURRENT> (165)
<NET-CHANGE-FROM-OPS> 31
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21
<DISTRIBUTIONS-OF-GAINS> 186
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 359
<NUMBER-OF-SHARES-REDEEMED> 3
<SHARES-REINVESTED> 19
<NET-CHANGE-IN-ASSETS> 3,554
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65
<AVERAGE-NET-ASSETS> 1,619
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .09
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .56
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.46
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 34
<NAME> MODERATE STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-02-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 398
<SHARES-COMMON-STOCK> 40
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13)
<NET-ASSETS> 385
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 3
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 2
<REALIZED-GAINS-CURRENT> 13
<APPREC-INCREASE-CURRENT> (13)
<NET-CHANGE-FROM-OPS> 2
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2
<DISTRIBUTIONS-OF-GAINS> 12
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 385
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57
<AVERAGE-NET-ASSETS> 240
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> (0.08)
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .31
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 35
<NAME> CONSERVATIVE STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> NOV-07-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 23
<INVESTMENTS-AT-VALUE> 23
<RECEIVABLES> 73
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 96
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73
<TOTAL-LIABILITIES> 73
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23
<SHARES-COMMON-STOCK> 2
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 23
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<NET-CHANGE-IN-ASSETS> 23
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<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87
<AVERAGE-NET-ASSETS> 22
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .19
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000351601
<NAME> FRANK RUSSELL INVESTMENT COMPANY
<SERIES>
<NUMBER> 31
<NAME> EQUITY BALANCED STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-30-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,243
<SHARES-COMMON-STOCK> 338
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 40
<ACCUM-APPREC-OR-DEPREC> (217)
<NET-ASSETS> 2,985
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 9
<EXPENSES-NET> 1
<NET-INVESTMENT-INCOME> 8
<REALIZED-GAINS-CURRENT> 202
<APPREC-INCREASE-CURRENT> (217)
<NET-CHANGE-FROM-OPS> (7)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 88
<DISTRIBUTIONS-OF-GAINS> 163
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 314
<NUMBER-OF-SHARES-REDEEMED> 3
<SHARES-REINVESTED> 28
<NET-CHANGE-IN-ASSETS> 2,985
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 64
<AVERAGE-NET-ASSETS> 1,786
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .09
<PER-SHARE-GAIN-APPREC> (.33)
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .84
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.83
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
